Singapore Regulator Reviews Regulatory Requirements for Unlisted Margined Derivatives Offered to Retail Investors

The Monetary Authority of Singapore (MAS) has issued a consultation paper on proposed enhancements to the regulatory requirements for unlisted margined derivatives.

The proposals aim to address the specific risks posed by unlisted margined derivatives such as contracts for differences (CFDs) and leveraged foreign exchange products (LFX), which are currently available to retail investors.  Retail investors who trade in CFDs and LFX are exposed to considerable risks, given the leveraging effect of margin trading on potential losses.  The unlisted nature of such products further subjects investors to counterparty risks since they do not trade through an exchange which has a central clearing house to guarantee the settlement obligations to investors.  Instead, investors are exposed to the creditworthiness and operational risks of the derivative product dealer.  In the event of a default, they may not have recourse to transfer their positions or recover their moneys in their trading accounts.

The proposed regulatory enhancements seek to afford better protection to retail investors who participate in the CFDs and LFX markets by addressing specific risks. The proposed measures aim to:   

i) Enhance credit risk management  by derivative product dealers and mitigate the risk of over-leveraging by retail investors;

ii) Ensure derivative dealers are adequately capitalised and financially sound in the operation of their business;

iii) Enhance the protection and recovery of retail investors’ moneys and assets in the event of insolvency of the dealer; and

iv) Enhance risk disclosure to retail investors to better highlight the specific risks associated with trading unlisted margined derivatives so as to help them make informed decisions on the suitability of such products.

Mr Lee Chuan Teck, Assistant Managing Director for Capital Markets, said, “The proposed enhancements will increase the level of protection for investors and facilitate faster recovery of their funds should the intermediary default.  MAS strongly encourages consumers seeking financial services to deal only with persons regulated by MAS. Entities overseas may offer lower margin requirements but investors trading with them will not be protected under laws administered by MAS.”

MAS invites interested parties to provide their views and comments.  Details of the proposals are contained in the consultation paper available on MAS’ website. The consultation period will end on 2 July 2012.