Brexit relief aids Singapore on EU swaps trading equivalence

Sources say decision imminent, but Singapore venues may still face EU licensing requirements

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The European Commission’s (EC) long-awaited equivalence decision on Singapore’s swaps trading venues could come within the next few weeks, helping to maintain a global liquidity pool that includes Asian and European players, according to three people familiar with the situation.

Equivalence will also ease the way for the Monetary Authority of Singapore to implement its own trading obligation, which will require market participants to trade affected instruments on a Singapore-regulated or equivalent venue. Without equivalence, a local trading obligation would prevent Singapore-based participants from trading global instruments in the European Union, splitting European and Asian liquidity pools.

A spokeswoman for the MAS tells Risk.net, “the EU intends to adopt an equivalence decision to recognise a list of organised markets established in Singapore”, without indicating a possible timeline or elaborating.

The EC and MAS issued a joint statement on February 20, which indicated an equivalence decision was still in the pipeline.

The spokeswoman did not comment on the timeline for Singapore’s own trading obligation.

The EU decision to grant swaps equivalence under the second Markets in Financial Instruments Directive (Mifid II) to Singapore had been widely expected last year. But, as Risk.net reported at the time, the whole concept became subject to political debate around Brexit, with EU lawmakers seeking to toughen the equivalence framework to cope with the UK’s impending role as a large offshore financial centre for Europe.

…if a Singapore venue tries to onboard a firm located in a particular EU member state, it will have to make sure it complies with any licensing requirements under the national rules of that member state
Nathaniel Lalone, Katten Muchin Rosenman

However, the EU’s decision at the end of last year to grant temporary relief to UK central counterparties (CCPs) operating in Europe took some of the political sting out of the issue.

“Even though the EU’s equivalence frameworks for trading venues and CCPs differ, it would have been very difficult for the European Commission to grant equivalence to Singapore, which has its own regulatory regime, whilst at the same withholding equivalence from the UK whose rules are, in fact, those of the EU,” says Nathaniel Lalone, a partner at Katten Muchin Rosenman in London. “The sequencing doesn’t surprise me at all – I think the two are unquestionably related.”

Nathaniel Lalone_Katten Muchin
Nathaniel Lalone

Last month, the EC and the MAS hinted equivalence moves were afoot. In their joint statement, the two announced plans to come up with a common approach whereby EU and Singapore businesses would be able to comply with their respective trading obligation rules and hedge risks across the derivatives markets more efficiently.

“Vice-president Dombrovskis intends to propose that the EC adopt an equivalence decision to recognise a list of organised markets established in Singapore, operated by an approved exchange or a recognised market operator, as platforms eligible for the execution of derivatives subject to the EU ‘on-venue’ trading obligation, provided the requirements [of Mifid II] are met,” the statement said.

The Singaporean trading obligation, which will force certain derivatives contracts to be traded on-venue, would cover interest rate swaps denominated in several currencies such as the US dollar, euro and sterling, according to the joint statement.

Equivalence positives

The apparent conclusion of equivalence negotiations between the EC and MAS has been welcomed as positive for the market.

“Equivalence is important if market participants are to continue trading in the way they currently do,” says Kai Loon Loh, a Singapore-based lawyer at Ashurst. “For certain kinds of swaps, people are already trading on certain platforms and these platforms may be in the EU. Mandatory trading should not, as far as possible, disrupt how global banks or Asian banks are currently conducting their affairs; otherwise this will lead to a fragmentation of the market.”

However, some argue the decision may lead to an uneven agreement where European firms gain more than their Singapore counterparts.

Individual EU member states will retain the authority to set licensing requirements. So while the MAS says it plans to adopt regulations to exempt certain EU trading platforms from the requirement to register in Singapore if they handle Singaporean clients, the EC’s equivalence decision will not include specific provisions for how venues from Singapore are to be licensed in the EU.

“All the EU is doing is saying EU firms can meet their mandatory derivatives trading obligation on a Singapore trading venue. That’s just one limited form of equivalence – it’s not an exemption from any licensing requirements for those same venues,” says Lalone. “So, if a Singapore venue tries to onboard a firm located in a particular EU member state, it will have to make sure it complies with any licensing requirements under the national rules of that member state. So this is not exactly a reciprocal agreement.”

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