Securities and Financial Services Regulation
| Date | 01 December 2015 |
| Published date | 01 December 2015 |
| Author | Hans TJIO LLM (Harvard), MA (Cambridge); Advocate and Solicitor (Singapore), Barrister (Middle Temple); Professor, Faculty of Law, National University of Singapore; Co-Director, Centre for Banking & Finance Law. |
| Citation | (2015) 16 SAL Ann Rev 615 |
25.1 There were about ten cases in the past year in the area of what can broadly be termed capital markets regulation (including those heard by the State Courts, given that financial regulation often creates criminal offences that are first heard there). Following convention, these can largely be further classified into the following categories: markets and exchange regulation; licensing of intermediaries and conduct of business rules; issuer regulation and securities offerings; insider trading and market abuse. A couple of these cases will be analysed in some detail, with the rest summarised towards the end of this SAL Ann Rev, which will also contain discussion of relevant rule changes that have been made or proposed by the Monetary Authority of Singapore (‘MAS’).
25.2 Under the Securities and Futures Act (Cap 289, 2006 Rev Ed) (‘SFA’), the meaning of ‘securities’ includes over-the-counter (‘OTC’) derivatives based on shares, debentures etc, but not those derived from other financial products like commodities. In contrast, the definition of ‘futures contracts’ in the SFA is linked to business rules of an exchange or market. The relevant provisions are set out here (note that there are actually two definitions of ‘futures contract’ in the SFA, the first of which is only used in the definition of a ‘futures market’ and hence leaves out the link to an exchange or market due to circularity problems – the concern here is consequently with the general definition that is used for the other provisions in the SFA):
[2.—(1)] “futures contract” means —
…
(b) for the purposes of any other provision in this Act —
(i) a contract the effect of which is that —
(A) one party agrees to deliver a specified commodity, or a specified quantity of a specified commodity, to another party at a specified future time and at a specified price payable at that time pursuant to the terms and conditions set out in the business rules of a futures market or pursuant to the business practices of a futures market; or
(B) the parties will discharge their obligations under the contract by settling the difference between the value of a specified quantity of a specified commodity agreed at the time of the making of the contract and at a specified future time, such difference being determined in accordance with the business rules or practices of the futures market at which the contract is made,
and includes a futures option transaction, but does not include such contract or class of contracts as the Authority may prescribe; or
(ii) such other contract or class of contracts as the Authority may prescribe;
25.3 In turn, Pt I of the First Sched of the SFA provides that:
2.—(1) In this Act, “futures market” means a place at which, or a facility (whether electronic or otherwise) by means of which, offers or invitations to sell, purchase or exchange futures contracts are regularly made on a centralised basis, being offers or invitations that are intended or may reasonably be expected to result, whether directly or indirectly, in the acceptance or making, respectively, of offers to sell, purchase or exchange futures contracts (whether through that place or facility or otherwise).
(2) For the purposes of this Act, “futures market” does not include
—
(a) a place or facility used by only one person —
(i) to regularly make offers or invitations to sell, purchase or exchange futures contracts; or
(ii) to regularly accept offers to sell, purchase or exchange futures contracts; or
(b) a place or facility that enables persons to negotiate material terms (in addition to the price) of, and enter into transactions in, futures contracts, where the material terms (in addition to the price) of futures contracts are discretionary and not predetermined by the rules or practices of the place or facility.
There is consequently presently no general meaning covering all OTC derivatives in the SFA as those OTC derivatives based on most commodities are neither ‘securities’ nor ‘futures contracts’. The 2013 amendments to the SFA introduced a general meaning of ‘derivatives contract’ only for the purposes of regulating trade repositories and clearing houses (pursuant to G20 proposals for this in the light of the global financial crisis (see para 25.5 below)). Consequently, challenges remain in terms of the regulation of many OTC derivatives under the SFA in terms of licensing, issuer and product disclosure, and market misconduct.
25.4 In TMT Asia Ltd v BHP Billiton Marketing AG (Singapore Branch)[2015] 2 SLR 540 (‘TMT Asia’), the relevant OTC product was forward freight agreements (‘FFAs’) which were traded by participants using multilateral trading facilities. FFAs were in effect contracts of differences in which one party agreed to pay a fixed rate of notional freight while the other party agreed to pay a rate derived from an index, with the parties settling the difference at the end of a specified period depending on the movement of the index in relation to the fixed rate under the FFA. The plaintiff shipping company purchased FFAs based on the Baltic Capesize Index Time Charter Basket Average 4 Routes (which was itself referenced on a number of indices including the Baltic Capesize Index). The plaintiff alleged that the defendants, which were part of one of the world's largest group of companies engaged in the exploitation and sale of natural resources, abused their dominant position in the global market for chartering Capesize bulk carriers (which are vessels above 150,000 DWT) for the transportation of dry bulk cargoes by manipulating the market for FFAs. The allegation was that the defendants and their related companies had procured so many contracts for fixtures of Capesize vessels that the freight rates on the Baltic Capesize Index rose sharply. The plaintiff alleged that this was done artificially and did not reflect the true underlying business demand for such vessels on the routes operated by the defendants and their related companies, which freight prices in turn influenced the prices on the routes captured by the Baltic Capesize Index. The plaintiff claimed it had suffered loss and claimed civil compensation under s 234 of the SFA (which is different from the civil penalty obtained by the MAS under s 232 (discussed at paras 25.32–25.33 below). This allows contemporaneous investors to claim for losses suffered due to market misconduct, the relevant one here being s 208 of the SFA in relation to manipulating the price of futures contracts and cornering the market (note that there is no equivalent of cornering in the securities markets).
25.5 Although this was an application for summary judgment, there is important discussion of whether due to changes in the nature of the market and trading systems, some OTC derivatives involving non-securities like most commodities should now be considered futures contracts (which present definition as we have seen seems to be bound to an exchange or more formalised market, and this appeared to be the MAS's views expressed in various guidance material, which warrants some deference: see Hans Tjio, ‘The Not So Collective Investment Scheme’[2015] LMCLQ 451 at 461). Judith Prakash J (at [24]) succinctly dealt with the plaintiff's submission, which was that the MAS Guidelines on the Regulation of Markets 2005 and other related consultation papers were all issued prior to the 2008 global financial crisis, and that things may now be different. Since then the G20 recommendation is for these derivatives to be centrally reported, cleared and exchange traded where appropriate. In a sense, Prakash J's judgment serves as a precursor to the changes the MAS has now proposed to the various financial product definitions, which will be discussed further (see paras 25.8–25.9 below).
25.6 In TMT Asia, the assistant registrar had summarily dismissed the claim as it was held that the FFAs were not futures contracts. After filing its appeals, the plaintiff made an application for leave to amend its statement of claim to, inter alia, state that the FFAs were purchased on an OTC market through brokers utilising multilateral trading facilities (which had online dealing screens and electronic facilities on which offers were regularly made on a centralised basis) and the FFAs were cleared on the Singapore Exchange (‘SGX’) (although the latter should possibly be a neutral point as the present position is that, although they may, under the SFA, have to be cleared, they do not have to be traded through an exchange). Prakash J allowed the appeals as they enabled the question of whether the multilateral trading facilities constituted a futures market to be determined and this did not prejudice the defendants given that the nature of the facility had all along been accepted by the parties. She also reversed the assistant registrar's holding on the basis that the issue of whether the FFAs were futures contracts dealt with on a futures market was not suitable for summary determination. There was much public and third party interest involved. For example, the consequences for anyone operating a futures market, including one by foreign operators, may be for it to be required to be recognised by the MAS as ‘an approved exchange’ or ‘a recognised market operator’ under the SFA or be exempted from such.
25.7 Specifically, Prakash J thought that one point that had to be addressed at trial was the issue of whether the material terms of the FFAs that were traded OTC were ‘predetermined by the rules or practices’ of the multilateral trading facilities on which they were traded, as there is a specific exclusion of such from the meaning of a ‘futures market’ in para 2(2)(b) of the First Sched of the SFA. Consequently, there was a possible s 208 SFA breach, alongside a possible tort of deceit. In the latter case, Prakash J...
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