Singapore: MAS Consults On Proposed Regulations To Enhance The Resolution Regime For Financial Institutions In Singapore

Last Updated: 24 July 2018
Article by Eric Chan
Most Read Contributor in Singapore, September 2018

On 16 July 2018, the Monetary Authority of Singapore ("MAS") issued a consultation paper ("Consultation Paper") inviting comments on the proposed amendments to certain regulations issued under the Monetary Authority of Singapore Act ("MAS Act"). The Consultation Paper also introduced a new set of regulations under the Deposit Insurance and Policy Owners' Protection Schemes Act, as part of MAS's review of the resolution regime for financial institutions in Singapore, and follows the Monetary Authority of Singapore (Amendment) Act 2017 ("MAS Amendment Act") passed in July 2017.

PROPOSED AMENDMENTS TO THE MONETARY AUTHORITY OF SINGAPORE (CONTROL AND RESOLUTION OF FINANCIAL INSTITUTIONS) REGULATIONS 2013 ("MAS(CRFI)R")

The MAS(CRFI)R serves to supplement the MAS Act in relation to the MAS's control and resolution powers over financial institutions as provided in Parts IVA and IVB of the MAS Act.

(a) Temporary stays on termination rights

Presently, MAS can temporarily stay the termination rights of counterparties to financial and non-financial contracts entered into with a pertinent financial institution or insurer over which MAS has exercised its resolution powers.

Excluded entities

MAS is proposing to exempt central banks, designated payment systems, approved clearing houses, recognised clearing houses and depositories from the operation of the temporary stay. This follows its earlier response to feedback on proposed enhancements to the resolution regime for financial institutions in Singapore dated 29 April 2016 ("2016 Response"), where it had stated that it was not its intention to affect the operations of any central bank in performing its mandate, the smooth functioning of financial markets, nor the safe and orderly operations of designated payment systems under the Payment and Settlement Systems (Finality and Netting) Act (Cap. 231) through the exercise of its resolution powers.

Contractual recognition requirement for contracts governed by foreign law

MAS is proposing to include a contractual recognition requirement for a qualifying pertinent financial institution to ensure that certain contracts governed by foreign laws contain enforceable provisions whereby the exercise of termination rights may be subject to MAS's temporary stay powers. This is to mitigate the risk of a foreign court not recognising and giving effect to the temporary stay powers that MAS will have under Singapore law.

The above contractual recognition requirement will apply to the following qualifying pertinent financial institutions and their related entities:

  • banks;
  • financial holding companies;
  • an operator or settlement institution of a designated payment system under the Payment Systems (Oversight) Act;
  • an approved exchange, a recognised market operator, a licensed trade repository, an approved clearing house, a recognised clearing house, an approved holding company, a holder of a capital markets services licence, or a depository under the Securities and Futures Act; and
  • an insurer licensed under the Insurance Act (Cap. 142).
  • Nonetheless, contracts entered into by qualifying pertinent financial institutions with central banks, designated payment systems, approved clearing houses, recognised clearing houses, and depositories will be excluded from this requirement.

(b) Statutory bail-in regime

The statutory bail-in regime allows MAS to write down or convert into equity, all or part of unsecured subordinated debt and unsecured subordinated loans which are issued or contracted after the effective date of the bail-in regime. It also gives MAS the power to bail in contingent convertible instruments and contractual bail-in instruments whose terms have not been triggered prior to entry into resolution, and which are issued or contracted after the effective date of the bail-in regime.

MAS is proposing to amend Part III of the MAS(CRFI)R to prescribe Singapore-incorporated banks and bank holding companies as entities subject to the statutory bail-in regime. Unsecured subordinated liabilities and contractual bail-in instruments issued or contracted after the effective date of the bail-in regime will also be prescribed as eligible instruments within scope of MAS's statutory bail-in powers. The information to be specified in the bail-in certificate that is to be issued by the Minister in the event that the Minister approves a bail-in of eligible instruments will also be prescribed in the MAS(CRFI)R.

To complement the statutory bail-in regime, MAS intends to amend the MAS(CRFI)R to require contractual recognition provisions for liabilities which fall within the scope of its statutory bail-in powers but which are governed by foreign laws. As a result, Singapore-incorporated banks and bank holding companies will be required to provide an independent legal opinion setting out the enforceability of the contractual recognition provisions. They will also be required to disclose, on the front cover of any offering document related to an eligible instrument, what the consequences of a bail-in are for debt holders of liabilities that are within the scope of the statutory bail-in regime.

(c) Creditor compensation framework

MAS is also proposing to amend Part III of the MAS(CRFI)R to clarify aspects of the creditor compensation framework (which was earlier introduced by the MAS Amendment Act). This will include the following:

  • criteria for the appointment of a valuer (where such valuer will determine whether each creditor or shareholder is eligible for compensation and any eligible compensation amount);
  • the valuation principles which the valuer is to follow;
  • the scope of financial institutions covered by the framework;
  • the form, manner and timing for payment of compensation;
  • the procedure for recovery of compensation paid in excess or error; and
  • the information that a valuer is required to specify in the valuation report setting out the valuer's decision on whether each creditor or shareholder is eligible for compensation and any eligible compensation amount.

PROPOSED AMENDMENTS TO THE MONETARY AUTHORITY OF SINGAPORE (SAFEGUARDS FOR COMPULSORY TRANSFER OF BUSINESS, AND EXEMPTION FROM MORATORIUM PROVISIONS) REGULATIONS 2018 ("MAS SAFEGUARD REGULATIONS")

The MAS Safeguard Regulations came into force on 30 March 2018 to provide, among other things, safeguards against partial transfers and safeguards for secured liabilities, should MAS exercise its resolution powers under the MAS Act.

(a) Repealing of MAS Safeguard Regulations

MAS intends to repeal the MAS Safeguard Regulations, and consolidate the safeguards therein into the MAS(CRFI)R instead, to bring all resolution-related regulations into the same instrument.

(b) Safeguards on covered bond programmes

MAS is proposing to introduce safeguards to protect the integrity of covered bond programmes, along with the existing safeguards provided under the MAS Safeguard Regulations. This is to provide certainty to counterparties, since covered bond programmes can be affected by the exercise of powers to carry out a partial transfer of business.

PROPOSED NEW REGULATIONS TO BE ISSUED UNDER THE DEPOSIT INSURANCE AND POLICY OWNERS' PROTECTION SCHEMES ACT

(a) Resolution funding arrangements

Finally, MAS is proposing to issue new regulations on the valuation principles for calculating an "equivalent cost", where the Deposit Insurance Fund is used to provide temporary liquidity support for the resolution of a Deposit Insurance Scheme Member. This "equivalent cost" criterion aims to cap the amount that can be drawn upon from the Deposit Insurance Fund, to the amount that could have been paid out to the Deposit Insurance Scheme Member's depositors, if that Deposit Insurance Scheme Member had failed.

The proposed valuation principles are as follows:

  • the valuer should assume that the provision of any extraordinary public financial support to the Deposit Insurance Scheme Member under resolution would not have been made available in a depositor pay-out situation; and
  • the valuer should assume that the Deposit Insurance Scheme Member would have been wound up in Singapore winding-up proceedings, and that the creditor hierarchy regime under Singapore law would apply.

MAS also indicated that it will consult at a later date on other resolution funding regulations such as who to impose ex post levies on, how to share the funding cost among them, and late payment fees.

CONSULTATION PERIOD

The consultation closes on 16 August 2018.

A copy of the Consultation Paper can be assessed here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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