Tuesday, April 10, 2012

US Hedge Fund Industry Applauds Singaporean Efforts at Cross-Border Harmonization of OTC Derivatives Regulation

The US hedge fund association commended the Monetary Authority of Singapore for encouraging cross-border efficiency and consistency with its proposed regulation of OTC derivatives. In a letter to the MAS, the Managed Funds Association said it greatly appreciated the Authority’s consideration of ongoing international development and the efforts of other countries to implement their G-20 commitments to regulate OTC derivatives, as well as the Authority’s ongoing work on OTC derivative reforms carried out by the Financial Stability Board and various international bodies.

The MFA supports an internationally coordinated approach to regulation that ensures consistent regulation and reflects the global nature of the OTC derivatives market. While recognizing that the Singapore regulatory regime for OTC derivatives may need to diverge from other jurisdictions, the MFA strongly encouraged Singapore policymakers to continue maintaining an open dialogue with their global counterparts and actively work toward developing harmonized regulations.

Concretely, the MFA strongly supports the Authority’s decision not to require market participants to centrally clear only with domestic central counterparties. The MFA agrees with MAS that such a requirement may result in fragmentation of liquidity and reduction of benefits of central clearing. The association also supports the MAS’s willingness to authorize overseas recognized clearing houses to the extent they are subject to comparable obligations in their home jurisdiction, their home regulator has signed a memorandum of understanding with the MAS, and they submit to a self-assessment report on a regular basis.

The MAS proposes to require backloading of outstanding derivative contracts with remaining maturity of more than one year for products which are subject to mandatory central clearing in response to recommendations from the Financial Stability Board. While the MFA supports the proposed clearing mandate as well as mandatory access to clearing, the association requested that the MAS reconsider this requirement because the costs of such a requirement exceed the benefits of mandating clearing of those transactions. To comply with such a requirement, market participants would have to enter into costly renegotiations of trade terms, which are difficult to accomplish during the life of the trade, or it could force market participants to have to terminate certain trades.

The association also believes that mandating backloading is unnecessary from a systemic risk perspective, since implementation of the clearing mandate for new transactions will allow the MAS to meet its obligation to reduce systemic risk, and since some market participants will choose voluntarily to backload trades. In addition, it is important that MAS not require backloading in order to ensure international harmonization of regulations. In this context, the MFA noted that legislators and regulators in the U.S. and the European Union have exempted existing derivative transactions from their respective clearing mandates. Section 763(a) of the Dodd-Frank Act exempts swaps entered into before the date of the enactment of the Dodd-Frank Act from the mandatory clearing requirements if those swaps are reported pursuant to the provisions in the Act.

The MAS discusses the indemnity that U.S. regulators require from foreign regulators requesting data from a trade repository licensed in its jurisdiction, as well as the Authority’s decision not to require a similar indemnity from foreign regulators accessing data maintained by approved or recognized overseas trade repositories. While the MFA supports foreign regulators having appropriate access to transaction data maintained by trade repositories for purposes of monitoring and regulating systemic risk, the association is concerned about foreign regulators having unlimited access to the data.

As a result, the MFA urged the authority to establish policies and procedures limiting access only to a foreign regulator that is acting clearly within the scope of the regulator’s authority and for a well-defined regulatory purpose. The MAS is also urged to actively participate in facilitating appropriate access limitations and confirming a foreign regulator’s relevant authority in connection with any data request. The MFA believes that these measures would appropriately protect the proprietary nature of market data without constraining other regulators’ legitimate needs to receive data necessary to oversee the financial system. In this context, the MFA noted that SEC Release No. IA-3308 setting up reporting by investment advisers to private funds and commodity trading advisors on Form PF discusses the controls and systems that the SEC and CFTC are developing to protect the confidential data that they will collect.

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