Case Note

Citation(2017) 29 SAcLJ 518
Date01 December 2017
Published date01 December 2017

RECENT DEVELOPMENTS ON THE PROTECTION OF CUSTOMERS' MONEYS THROUGH SEGREGATION AND TRUST OBLIGATIONS

Vintage Bullion DMCC v Chay Fook Yuen

[2016] 4 SLR 1248

A key plank of the regulatory regime for the protection of customers' moneys in Singapore is the requirement to segregate customers' moneys and the imposition of a statutory trust on such segregated moneys. There have been significant recent developments in this area of law. In particular, the Court of Appeal has recently interpreted, for the first time, the scope of the segregation and statutory trust obligations of capital market services licence holders and commodity brokers. The Monetary Authority of Singapore has also released a consultation paper proposing various enhancements to the regulatory regime governing the protection of customer moneys. This article seeks to explain and comment on these recent developments.

I. Introduction

1 The importance of protecting customers' moneys has come into the spotlight following the collapse of international financial institutions such as Lehman Brothers and MF Global. One key plank of how customers' moneys is protected in various jurisdictions is the requirement for segregation of customers' moneys, coupled with the imposition of a statutory trust over such segregated moneys.1 The twin concepts of segregation and the imposition of a statutory trust complement each other, and it is only when “both elements are present”

that they “give the complete protection against the risk of the firm's insolvency that the [customer] requires”.2

2 Locally, there have been two significant recent developments which impact on the scope of the segregation and trust obligations of capital market services (“CMS”) licence holders and commodity brokers. The first concerns the interpretation of the law as it currently stands. In Vintage Bullion DMCC v Chay Fook Yuen3 (“Vintage v MFGS”), the Court of Appeal interpreted, for the first time, the segregation and trust obligations imposed by the Securities and Futures Act4 (“SFA”), Securities and Futures (Licensing and Conduct of Business) Regulations5 (“SFR”), Commodity Trading Act6 (“CTA”) and Commodity Trading Regulations7 (“CTR”). The second relates to proposals to change the law. In its Consultation Paper on Enhancements to Regulatory Requirements on Protection of Customer's Moneys and Assets8 (“MAS Consultation Paper”), the Monetary Authority of Singapore (“MAS”) set out various proposed enhancements to the regulatory regime governing the protection of customer moneys, which take into account the international standards promulgated by the International Organization of Securities Commission9 (“IOSCO”) and the Financial Stability Board,10 and several of the proposed enhancements would change the scope of the segregation and trust obligations imposed on CMS licence holders.11 This article seeks to explain and comment on these two recent developments.

II. Overview of recent developments
A. Court of Appeal's decision

3 Vintage v MFGS involved two applications under s 310 of the Companies Act12 for the court to “determine any question arising in the winding up of a company”. The central question to be determined in both applications was how three forms of profits which arose from over-the-counter leveraged foreign exchange (“LFX”) and leveraged commodity (“LC”) transactions which customers had conducted with MF Global Singapore (“MFGS”) should be treated, namely, whether each form of profits constituted proprietary moneys belonging to customers or mere unsecured claims provable against MFGS' estate. In the main application, Vintage Bullion DMCC (“Vintage”) acted as representative of all customers who had profits arising out of LFX and LC transactions conducted with MFGS.

4 The three forms of profits at issue arose in the following manner. The customers would initiate an LFX or LC transaction by entering into an initial trade. While the position remained “open”, if the underlying currency or reference commodity favoured the customer, the customer would have the first form of profit, “Unrealised Profits”. Subsequently, when the customer closed out his position by entering into a final trade, any Unrealised Profits he had would crystallise into the second form of profit, “Forward Value”. The Forward Value came with a “Value Date”, which was contractually defined as the date on which “the respective obligations of the parties … [were] to be performed”. On this Value Date, the customer would be entitled to the third form of profit, “Ledger Balance”, which the customer was contractually entitled to withdraw. The three forms of profits were recorded in statements of account which MFGS issued on a daily basis to its customers (“daily statements”). The aggregate of a customer's Unrealised Profits, Forward Value and Ledger Balance was described in the daily statements as the customer's “Total Account Equity”.

5 It was common ground between the parties that Ledger Balance (as well as any margin which MFGS received from its customers) constituted proprietary moneys belonging to the customers. However, it was found as a fact that MFGS had segregated not just its customers' Ledger Balance (and margin) in the customer segregated bank accounts,13 but it had also placed its own funds in these bank accounts to

ensure that, at all times, there were sufficient funds to cover its customers' Unrealised Profits and Forward Value. Put another way, moneys equivalent to all of its customers' Total Account Equity was, at all material times, maintained in the customer segregated bank accounts. MFGS ensured this by preparing daily segregation fund statements (“Seg Fund Statements”) which compared the actual funds segregated and the Total Account Equity of all of its customers to determine if there was an excess or deficiency of funds in segregation. The Seg Fund Statements prepared by MFGS were modelled on one page from an MAS prescribed form, “Form 1”.14

6 The legal issue which the court had to determine was whether a statutory trust arose over the moneys segregated by MFGS to cover its customers' Unrealised Profits and Forward Value.15 Liquidators of MFGS contended that these moneys were MFGS' own residual financial interest, which was simply an “operational float” it maintained in the customer segregated bank accounts, whereas Vintage contended that a statutory trust arose over these moneys by virtue of the SFR and CTR. In this regard, it is important to distinguish between the physical moneys segregated and the choses of action which the customers had against MFGS in respect of their Unrealised Profits and Forward Value. The liquidators of MFGS had sought to contend that what Vintage was seeking was a trust over the choses of action (which they contended was not possible under Singapore law as it would require the trustee to sue itself to enforce the chose), but this contention was rejected by the Court of Appeal. The Court of Appeal held that the real question was whether MFGS held the “subject matter” of the choses in action in trust, which was the physical moneys in the customer segregated bank accounts sufficient to cover the aggregate value of the customers' Unrealised Profits and Forward Value.16

7 Whether a statutory trust arose over each of the three forms of profits essentially turned on an interpretation of the scope of reg 16 of the SFR (in the case of the LFX transactions) and reg 21 of the CTR (in the case of the LC transactions); and in particular an interpretation of the words “received on account of” (as used in reg 16 of the SFR) and “accruing” (as used in reg 21 of the CTR). Regulation 16(1)(a) of the SFR provided that a CMS licence holder “shall treat and deal with all moneys received on account of its customer as belonging to that customer”;17 and reg 21(1)(a) of the CTR provides that a commodity broker shall “treat and deal with all money … received by him from a customer … or accruing to a customer as a result of trading, as belonging to that customer”.18

8 In the High Court, it was held that the Unrealised Profits and Forward Value, which arose from the LFX and LC transactions were not moneys “received on account of” the customers or moneys “accruing” to them as these moneys had not “come home” to the customers given that they did not have a right to receive actual money from MFGS prior to the Value Date.19 In contrast, as a customer's Ledger Balance was due and payable such that he had a “right to receive money immediately from MFGS”, in so far as there was segregation of moneys corresponding to a customers' Ledger Balance, these moneys would be impressed with a statutory trust.20

9 On appeal, the Court of Appeal held that, contrary to the High Court's ruling, Forward Value did fall within the scope of the terms “received on account of” and “accruing”. The crux of the court's reasoning was that a sum is “received on account of” a customer or “accrues to” a customer within the meaning of the SFR and CTR respectively when the customer is “legally entitled” to the sum in question.21 A customer will be “legally entitled” to a sum when he has completed what he needs to do to earn the sum, and this does not turn on whether the sum is due and payable.22 The customers were legally entitled to their Forward Value as these were “crystallised” profits premised on transactions that had been closed or concluded.23 As such, the customers were already legally entitled to these sums notwithstanding

that they could not withdraw the same until the Value Date. The Court of Appeal thought that the High Court had conflated the concept of “accrual” and “payment” in holding that Forward Value was not subject to a statutory trust.24 The Court of Appeal went on to find that MFGS had segregated funds to cover both the Forward Value and Ledger Balance of its customers “such that the [c]ustomers would be able to assert proprietary rights to those funds against [MFGS] in the context of...

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