Securities and Financial Services Regulation

• Date: 01 December 2016
• Published date: 01 December 2016
• Author: Hans TJIO LLM (Harvard), MA (Cantab); Advocate and Solicitor (Singapore); Barrister (Middle Temple); Professor, Faculty of Law, National University of Singapore; Co-Director, Centre for Banking & Finance Law.
• Citation: (2016) 17 SAL Ann Rev 639
• Publication year: 2016

25.1 There were fewer cases in 2016 (as compared to 2015) which involved securities regulation broadly understood. The area not being clearly defined can be seen in the fact that it only came about when Prof Louis Loss put together the first book on the area (which he first termed) in 1951,1 drawing strands from disparate areas of finance law.2 In Singapore, this is also attested to by the fact that the most important case discussed here is that of Vintage Bullion DMCC v Chan Fook Yuen,3 which was about whether certain financial assets were held by a financial institution on trust for its investors or fell for distribution to its unsecured investors. Yet, it falls within the rubric of the regulation of securities market intermediaries. As securities regulation also covers areas where private ordering interacts with formal regulation, there is also some discussion at the end of this review of both contractual arrangements made in the shadow of listing and business rules.

Licensing and conduct of business rules

Trust accounts

25.2 As the first instance decision, MF Global Singapore Pte Ltd v Vintage Bullion DMCC4 (“MF Global”), was discussed in detail in a previous review,5 only the salient facts of the case will be offered here. The legal issue was whether certain sums of money that had been left with a capital markets services licensee, MF Global Singapore Ltd (“MFGS”), which went into provisional liquidation after its ultimate parent, MF Global Holdings Ltd, filed a voluntary petition for relief under Bankruptcy Code 11,6 were held on trust for Vintage, who brought an action on behalf of itself and a number of MFGS customers. These assets started out as customer margins that were not “onward-

placed”7 but kept in customer segregated accounts, pooled together (although MFGS accounted distinctly for each customer's fund) and in addition mixed with some of MFGS own funds (which MFGS was allowed to do, for example, under reg 21 of the Commodity Trading Regulations 20018 (“CTR”) and reg 23 of the Securities and Futures (Licensing and Conduct of Business) Regulations9 (“SFR”)). Until the customer accounts were closed out, there was nothing due under the master trading agreement (except the initial margins) and they were considered “open” with either unrealised profits or unrealised losses. After close-out, sums owed to their customers were considered “forward value” but, under the terms of the account, MFGS's obligation to pay the quantified amounts only arose on the value date, which was usually two days after close-out. From this point on, it formed part of the ledger balance.

25.3 At first instance, Hoo Sheau Peng JC found that both the Securities and Futures Act10 (“SFA”, for leveraged foreign exchange (“FX”) trading) and the Commodity Trading Act11 (for spot bullion trading), while creating statutory trusts of “moneys” in a margin trading account, did not cover the unrealised profits and realised forward value but only the ledger balance. The judge said that the unrealised profits and realised forward value “do not fall within Parliament's intended scope of protection”.12

25.4 The Court of Appeal agreed that the unrealised profit was not held on trust but reversed the High Court's decision and found that the amounts represented by the forward value were.13 In examining both the requirements for the creation of statutory and express trusts in the corporate and financial context, Andrew Phang Boon Leong JA held that it was not disputed that the initial sums paid over as margin were held on trust as required by the CTR and SFR. Though, the dispute was over profits that arose pursuant to bullion and leveraged FX transactions. The Court of Appeal recognised that unrealised profits were those outstanding on transactions of differences that had not been closed. The client was still speculating at this stage. However, once the position was closed, any profit crystallised into a forward value. Phang JA also noted that there were sufficient funds kept at all times in customer segregated accounts to cover both the unrealised profits and forward value even though there had been some commingling with the company's own

funds (which was authorised by the statute to prevent under-margining or under-funding) and, so, there was no transfer as such that was necessary when a position was closed. Further, the “Sec Fund Statements” that were prepared daily (and that were part of a prescribed form which the firm submitted to the Monetary Authority of Singapore, “MAS”, quarterly) listed under “Amount to be Segregated” included not only the ledger balance but also the forward value and unrealised profits. Phang JA, thus, recognised that:14

… The key question in these appeals is therefore whether the sums representing Unrealised Profits and Forward Value segregated by the Company and placed in the Customer Segregated Accounts constituted the residual financial interest of the Company (which were advanced merely to prevent under-margining of the Customers' accounts), or whether they were moneys segregated in recognition of the beneficial ownership of the Customers in these sums. [emphasis in original]

25.5 The Court of Appeal first disposed of the liquidator's argument that, as the subject matter of the trust was the chose in action requiring the customer to sue the company, having the company hold the chose as trustee was impossible as it would be required to sue itself to enforce the chose. It was the subject matter of the chose, that is, the money that was held on trust and that to think otherwise was to unnecessarily complicate the issue. Next, analysing both the CTR and SFR, Phang JA thought that it was quite clear that statutory trusts were intended to be created over money “accruing to the customer” or “received on account of its customer” (under reg 21(1)(b) of the CTR and reg 16(1)(b) of the SFR) or “belonging to that customer” (in reg 21(1)(a), reg 22(1) of the CTR and reg 16(1)(a) of the SFR). While unrealised profits constituted the “residual financial interest” of the company as they were still notional and uncertain, the Court of Appeal disagreed with the court below and found that the forward value fell under the statutory trust as the main idea captured in the statutory phrase “accruing” was similar to that of being “legally entitled” (following Pinetree Resort Pte Ltd v Comptroller of Income Tax15 and ABD Pte Ltd v Comptroller of Income Tax).16 Sums “received on account of its customer” under the SFR could also not arise before the customer was legally entitled to the money, and so the sole question really was whether the moneys had “accrued to” the customer. This, it had, as those numbers had been finalised once the positions were closed even though the customer had no right to

withdraw the sums till the value date. Phang JA thought that “the Judge conflated the concept of ‘accrual’ with that of ‘payment’”.17

25.6 The Court of Appeal also thought that a statutory trust does not have the same characteristics as a common law trust, and may well be in the nature of a purpose trust (which it would have been here if it came about at the time the moneys were received or accrued and before segregation) and so, it favoured the need for segregation without fully deciding the point.18 In its consideration of the express trust, which the Court of Appeal thought relevant only for the unrealised profits given its finding that there was a statutory trust over the forward value, it was held that there was insufficient certainty of subject matter given its notional and fluctuating nature.19 According to Phang JA, “segregation is a necessary but not a sufficient condition to give rise to an express trust over the Sums in favour of the Customers”.

25.7 Perhaps because of the decision at first instance in MF Global, MAS issued a consultation paper.20 One proposal was for a “customer's moneys” under the CTR and SFR to expressly include contractual rights arising from transactions entered into by a holder of a capital markets services licence on behalf of or with its customers. It is not clear whether the amendments are still necessary in light of the Court of Appeal decision, and whether it is intended to include those rights represented by the unrealised profits as it also states that it does not propose to change the definition of “customer's assets” given that “mark-to-market accruals and other contractual rights owed by the CMS licensee to the customer are typically met with cash instead of assets”.21

Derivative-trading and security-lending and borrowing

25.8 The concern of this part is with the use of misleading labels, which are important as an organising tool due to the enormous amounts of information that are inserted in some modern-day financial instruments. The problem with this is that the volume, and complexity,

of some of the information (much of which may be unnecessary as well – there are echoes here of tax schemes and artificial pre-ordained transactions)22 is such that both investors and regulators end up having to utilise stereotypes in their decision-making. Where investors are concerned, labels may mask the inherent risks involved. Without any real standardisation in many over-the-counter financial products, in particular, attaching labels to them only serves to obfuscate terms within the documentation.

25.9 Characterisation is crucial when it pertains to the validity of a transaction. So, for example, the distinction between whether a contract creates an indemnity or guarantee could be determinative of a dispute because s 6 of the Civil Law Act23 states that a guarantee must be in writing or evidenced in writing. However, where writing is not an issue, it can be argued that characterisation is not necessary. While it is true that an indemnity is harder to be discharged, that is an internal contractual issue. When this is not a major issue, it is submitted that the focus should be on the...