The Monetary Authority of Singapore (MAS) has proposed to revise the capital requirements for locally incorporated Recognised Market Operators (RMOs). The revisions focus on the liquidity of RMOs’ assets to better assure their continued short-term operation. MAS also seeks to align its requirements for RMOs with the capital standards of jurisdictions such as the US and EU. MAS published its proposals in a consultation paper dated 23 October 2020.
RMOs operate organised markets, link up sellers of financial products with buyers in trading venues and promote price discovery in a fair and transparent manner. Typically, RMOs do not take on counterparty risk and pose little financial risk to other entities in the financial system as they do not guarantee trades, hold customer monies or act as a party to trades. However, when an RMO is unable to operate its market, it poses an operational risk to the financial system because its participants need to seek alternative trading platforms. Therefore, MAS imposes capital requirements to provide sufficient resources for the RMO to end its operations in an orderly manner and give participants time to change to alternative trading venues.
RMOs must currently possess financial resources that are at least the highest of (i) 18% of their annual operating revenue, (ii) 50% of their annual operating costs and (iii) $500,000. Financial resources include equity with deductions for illiquid assets (assets not convertible to cash within 30 days) and for assets that are unlikely to be realisable on insolvency.
There are currently no direct liquidity requirements imposed on RMOs. MAS proposes to introduce a direct liquidity requirement for RMOs to hold cash and cash equivalents of at least 25% of their annual operating costs, with the intention of giving participants sufficient time to seek alternative trading venues if an RMO winds down its operations.
RMOs pose little financial risks to their participants, as they generally are limited to serve financial institutions, governmental entities, accredited investors and expert investors and are not permitted to serve retail customers. However, a baseline solvency requirement is still deemed necessary, since participants prefer to deal with solvent entities. Therefore, MAS proposes a revised solvency requirement for RMOs to hold eligible capital of at least the higher of (i) 25% of their annual operating costs or (ii) $250,000. Due to the proposed liquidity requirement described above, there is no requirement to deduct illiquid assets from eligible capital. MAS intends to confine the deductions from eligible capital only to assets that are more unlikely to be realisable upon insolvency of the RMO.
MAS intends to improve transparency of the capital requirements by issuing a Notice instead of the current approach of imposing capital requirements via recognition conditions. The proposed Notice sets out the calculation of liquid assets and eligible capital under the liquidity and solvency requirements above.
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Disclaimer: This article if for general information only and does not constitute legal advice.