MAS Consults on the Proposed Regulatory Approach for Derivatives Contracts on Payment Tokens

Dec 12 2019 | by OrionW

The Monetary Authority of Singapore (MAS) published a consultation paper on its proposed approach under the Securities and Futures Act (SFA) for derivatives contracts that use payment tokens such as Bitcoin and Ether as underlying assets (Payment Token Derivatives).

Payment tokens have enjoyed massive popularity in the last few years, but the market for them remains largely unregulated.  Despite the volatile nature of payment tokens and the lack of clear understanding of their underlying economics, interest in these payment instruments remains high.  The tokens’ popularity combined with investors’ interest has created a need for a regulated alternative like Bitcoin futures which are listed and traded on US futures exchange.

Regulated derivatives are a more reliable reference of value for an underlying asset, especially if they are connected to reliable institutional investors with risk management procedures and investment strategies.  In Singapore, a derivative is regulated if its “underlying thing” is listed in the SFA[1] or is prescribed by MAS[2].  Currently, payment tokens are not “underlying things” and derivatives of them are not regulated, unless the payment token is also a type of regulated underlying thing.

MAS has proposed an approach that balances the innovative characteristics of payment tokens against the need for high standards and strict regulations.  MAS’s approach calls for regulating Payment Token Derivatives that are traded on Approved Exchanges; not regulating them (for now) when they are traded in other markets; and increasing margin requirements for retail investors trading both regulated and unregulated Payment Token Derivatives with or through MAS-regulated financial institutions.

MAS proposes to regulate Payment Token Derivatives offered by Approved Exchanges

Approved Exchanges are regulated as systemically important facilities that bring together participants for multilateral trading across a broad suite of capital markets products.  Approved Exchanges pose a high level of potential systemic risks due to their central market infrastructure role.  Therefore, there is a need to have strict oversight of products offered on Approved Exchanges due to the risk of contagion to the wider financial system.

These strict oversight and high-standard requirements mean that the systems and processes of Approved Exchanges will be able to cope with the risks posed by Payment Token Derivatives.  In addition, Approved Exchanges have business rules that guide members and participants and subject offenders to disciplinary actions such as suspension of trading access when appropriate.  Approved Exchanges also have surveillance systems to deter market manipulation and are subject to processes that lessen counterparty risks. Considering these measures and standards, MAS is only proposing to regulate Payment Token Derivatives offered by Approved Exchanges.

MAS proposes not to otherwise regulate Payment Token Derivatives now

MAS does not intend to regulate Payment Token Derivatives not offered by an Approved Exchange, as Payment Token Derivatives as a general asset class do not pose systemic risks to the financial system.  Instead, MAS plans to cooperate with entities with the highest regulatory scrutiny (such as Approved Exchanges) to set appropriate standards for Payment Token Derivatives.

In the future and at an appropriate time, MAS plans to consider regulating Payment Token Derivatives offered by other entities.

Proposed Measures for Retail Investors

MAS views Payment Tokens Derivatives as unsuitable for retail investors to trade due to their highly volatility and unclear economic value.  In order to mitigate the losses and risks associated with this trading, MAS plans to introduce measures for retail investors who trade in Payment Token Derivatives offered or distributed by MAS-regulated financial institutions.  The measures are expected to be put in place by 30 June 2020.

For example, MAS-regulated financial institutions will have to collect 1.5 times the standard amount of margin required for contracts offered by Approved Exchanges, subject to a minimum of 50%.  These measures will also cover products like debentures that are based on payment tokens, though issuers are strongly encouraged to engage MAS in advance if they intended to offer these products to the public.  This margin requirement will be supported with other measures that serve to actually discourage retail investors from trading in these highly risky products.

Proposed Amendments to Subsidiary Legislation

MAS proposes to amend the SFA to reflect the intended regulatory scope of Payment Token Derivatives.  The new amendments include the definition of “payment token” under the SFA.  MAS clarifies that this definition of “payment tokens” under the SFA will not affect the definitions of “payment tokens” in any other Acts.

The draft amendments can be found in Annex B of the Consultation Paper.

Written comments and feedbacks on the Consultation Paper and the amendments to the SFA must be submitted by 20 December 2019.


[1] As follows: a unit in a collective investment scheme; a commodity; a financial instrument, i.e. any currency, currency index, interest rate, interest rate instrument, interest rate index, securities, securities index, a group or groups of such financial instruments; and the credit of any person.

[2] Any intangible property is prescribed to be an underlying thing, in the case of a futures contract traded on an organised market established or operated by any approved exchange or recognised market operator.