Guidelines Regulation of Markets

THE MONETARY AUTHORITY OF SINGAPORE
SECURITIES AND FUTURES ACT

(CAP. 289)

GUIDELINES ON THE REGULATION OF
MARKETS

Guidelines on the Regulation of Markets

2

TABLE OF CONTENTS

Page

1. Purpose of these Guidelines 3
2. Objectives of Regulation of Markets 4
3. Scope of Regulation of Markets 7
4. Application of section 339 of the SFA (Extra-territoriality) 15
5. Regulatory Regime for Markets 17
6. Obligations of Regulated Market Operators 26


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Guideline No : SFA 02-G01
Issue Date : 1 July 2005

1 PURPOSE OF THESE GUIDELINES

1.1 These Guidelines on the Regulation of Markets (the Guidelines) are
issued by the Monetary Authority of Singapore (MAS) pursuant to section
321 of the Securities and Futures Act (Cap. 289) (the SFA). These
Guidelines aim to provide the industry with a better understanding of how
MAS will administer the legislative provisions relating to markets, which are
contained in Part II of the SFA.

1.2 These Guidelines should be read in conjunction with the provisions of
Part II of the SFA and the Securities and Futures (Markets) Regulations
2005 (the SF (Markets) Regs) and where relevant, other provisions of the
SFA.

1.3 The Guidelines on the Regulation of Markets issued on 11 September
2002 are revoked.


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2 OBJECTIVES OF REGULATION OF MARKETS

2.1 As set out in section 5 of the SFA, MAS objectives in regulating
markets are

(a) to promote fair, orderly and transparent markets;

(b) to facilitate efficient markets for the allocation of capital and
the transfer of risks; and

(c) to reduce systemic risk.

2.2 These objectives support MAS objectives of supervision set out in
the Objectives and Principles of Financial Supervision in Singapore
Monograph
1
. They are also in line with the public policy objectives set out
by international standard setting bodies such as the International
Organisation of Securities Commissions (IOSCO), in its Objectives and
Principles of Securities Regulation
2
.

2.3 The following paragraphs provide guidance on the key concepts
encapsulated in MAS regulatory objectives.

Fair, orderly and transparent markets

2.4 Confidence in the financial system and effective intermediation of
financial flows requires that capital markets be fair, orderly and transparent.

2.5 A fair market is one that is characterised by proper trading practices,
non-discriminatory access to market facilities and information, and one that
does not tilt the playing field in favour of some participants over others. A
fair market provides investors with greater confidence that they can trade
without other investors having an unfair advantage. In this regard, investors
should be able to access quotes for comparison prior to execution on a non-
discriminatory basis and bids and offers should be matched on an equitable

1
The monograph is available on the website of MAS at http://www.mas.gov.sg/.

2
For more information on IOSCO, please refer to its website at http://www.iosco.org/.

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basis. An equitable basis of matching bids and offers includes, amongst
others, execution in accordance with price-time priority.

2.6 An orderly market is one that has robust and reliable procedures and
systems that allow for the organised conclusion of transactions and at the
same time, minimising the risk of market failure. Orderliness is important
because it provides the basis for an expectation that the market will function
smoothly on a continued basis.

2.7 Transparency may be defined as the degree to which information
about trading (both pre-trade and post-trade) is made publicly available on a
real-time basis. Pre-trade information, such as best bids and offers, should
be made available to enable investors to know the transactions they may
enter into and at what prices. Post-trade information on executed trades
should be similarly publicised to reflect the market prices of executed trades.
In addition, material information such as corporate announcements, required
to assess the value of securities or futures contracts, should be readily
available to investors in a comprehensible manner and on a timely basis.

Efficient markets

2.8 Interaction of bids and offers and price discovery are intrinsic to any
well-functioning market. Interaction of bids and offers occurs when bids
and offers by participants are exposed to competition from bids and offers of
other participants. An efficient market is one where this process is reliable
and unhindered. By ensuring that the dissemination of relevant information
is reflected in the price discovery process, an efficient securities market
allows allocation of scarce capital to its most efficient use while an efficient
futures market facilitates the transfer of risks to persons most willing to bear
them.

Systemic risk

2.9 The objective of reducing systemic risk in regulating markets is
essential because systemically-important markets may potentially undermine
stability or public confidence in the financial system should the markets fail
or are disrupted.

2.10 A market is systemically-important if disruptions to the functioning of
the market can trigger or transmit further disruptions among financial market

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participants. Disruptions to the fair, orderly and transparent operations of a
market may also cause widespread disruptions among financial market
participants and may even result in instability of the financial system.

2.11 In order for MAS to achieve its regulatory objectives, it is essential
for MAS to assess the systemic importance of markets, and to be cognisant
of the risks posed by systemically-important markets. MAS therefore
subjects systemically-important markets to appropriate regulation, thereby
promoting the operation of fair, orderly and transparent markets.


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3 SCOPE OF REGULATION OF MARKETS

3.1 The definitions of the terms securities market and futures market
are contained in Part I of the First Schedule to the SFA.

3.2 The following paragraphs elaborate on some of the key elements of
the definitions and how MAS intends to administer Part II of the SFA in
relation to the interpretation of these terms.

Technology neutral approach

contain the phrase whether electronic or otherwise. This means that all
market operators, regardless of whether they operate brick-and-mortar
trading floors or fully electronic trading platforms, are subject to the same
regulatory regime.

3.4 However, a person is not deemed to be operating a securities market
or futures markets merely by establishing some form of electronic facility.
For instance, an electronic order-router operated by a licensed intermediary
which does nothing more than mere routing of orders, does not fall within
the definition of a market under the SFA (see Illustration 1 below). The
SFA is not intended to capture a facility that merely acts as a conduit or a
channel of communication to a market, if it does not exhibit the other
attributes of a market (the elements of which are set out in the respective
definitions). Such a facility is similar to an intermediary using a telephone
or facsimile machine to transmit customer orders to the relevant markets.


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Illustration 1 Electronic order router

Description of the arrangement:

A corporation provides an electronic facility that enables clients to input
orders for securities and futures contracts through the electronic facility.
The facility channels the orders of the clients, without alteration of the
information contained, to be matched at the relevant exchanges.

The corporation may be required to hold a capital market services license for
dealing in securities or trading in futures contracts but is not required to be
regulated as a market for the provision of the electronic facility. The
electronic facility is an additional channel for the corporation to receive and
transmit orders to exchanges. The pure order routing facility merely serves
as a conduit without any matching of the orders of one client with another.

3.5 Likewise, providers of technology infrastructure or software for order
routing facilities or trading facilities will not be subject to the regulatory
regime for markets under Part II of the SFA (see Illustration 2 below). Such
persons only supply the hardware or software to enable their clients, being
licensed intermediaries or market operators, to implement their business
models. This is in line with the current treatment of various service
providers which provide telephone lines, computer systems, software and
other infrastructure facilities.

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Illustration 2 - Technology service providers


A corporation provides proprietary software that enables licensed
intermediaries to place orders for securities and futures contracts listed on
overseas securities exchanges or overseas futures exchanges, as the case
may be, with overseas intermediaries. The proprietary software also
enables the transmission of execution reports back to the licensed
intermediaries who entered the orders. The software is installed either on
proprietary terminals provided by the corporation or on the computers of
the licensed intermediaries. The corporation also provides financial
information and news updates to the licensed intermediaries.

Depending on the actual mechanics of the type of financial information
provided and the manner in which it is provided, the corporation may be
required to hold a financial advisers licence. However, the corporation is
not required to be regulated as a market operator. A technology service
provider merely supplies the infrastructure or software to route orders to the
overseas intermediaries, who in turn route the orders to the relevant market.
Orders are not executed on the proprietary terminals provided by the
corporation.

Issued securities

3.6 The term issued securities refers to listed or unlisted securities that
have been previously offered to investors and which are now available for
secondary trading.

3.7 Provisions in Part II of the SFA are not applicable to primary
offerings of securities where issuers or corporations issue securities in a one-
off transaction (see Illustration 3 below). Primary offerings are regulated
through different mechanisms such as disclosure requirements, due diligence
process and other regulatory processes. The provisions governing offers of
investments are found in Part XIII of the SFA.


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Illustration 3 Facility for placement of primary issuance


A corporation provides an electronic facility via a website to facilitate
companies to raise funds through primary placement of their securities with
investors. This website is made available to both retail and institutional
investors in Singapore and financial institutions licensed by MAS.

The corporation is not required to be regulated as a market operator because
the facility facilitates the purchase and sale of previously unissued securities.
Since the definition of securities market under the SFA is applicable to
issued securities, the facility is excluded from the definition of securities
market.

Regularly

3.8 Part II of the SFA is not intended to catch one-off transactions. Offers
or invitations need to be made on the facility regularly. The term
regularly refers to systematic and recurring transactions. However, it does
not mean that transactions have to be executed at certain specified intervals
or continuously.

Centralised basis

3.9 At the heart of the operations of a market is price discovery and
formation, and this is a process that occurs when offers or invitations are
made on a centralised basis. Price discovery refers to the process of
uncovering the full-information value of an asset. With the interaction of
bids and offers, participants have a good gauge of the supply and demand for
securities, thus allowing the participants to better determine the price.
Trading facilities that pool together bids and offers of various market
participants allow for the comparison and competition of bids and offers.
Under the SFA, markets are not limited to facilities where orders are
channelled through a single central order execution, but also extend to those
where the interaction of bids and offers are done in a centralised manner (see
Illustration 4 below).


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Illustration 4 Centralised price discovery


A corporation operates a fixed income electronic facility that pulls together
multiple market makers. Each single market maker posts quotes for
government securities. The market maker is able to determine which users
are permitted to view its quotes or interact with the market maker. If a
customer is so permitted, the customer may view and interact with quotes of
multiple market makers using the electronic facility. As such, the electronic
facility, by bringing together the quotes of multiple market makers, has
facilitated the offer or invitations to sell, purchase or exchange fixed income
products on a centralised basis.
The electronic facility, by facilitating the interaction of bids and offers of the
various market makers, is deemed to have performed the price discovery
function of a market and the corporation operating this electronic facility
will fall within the regulatory framework of Part II of the SFA in respect of
its operation of a market in Singapore.

Reasonable expectation

3.10 Under the SFA, markets are not limited to trade execution or matching
mechanisms which result in the acceptance or making of offers to sell,
purchase or exchange futures contracts or issued securities directly on the
facility itself. The market operator may also fall within the regulatory ambit
of Part II of the SFA when the participants provide sufficient information on
their identities as well as firm prices and order sizes even though the
negotiations between the participants may not eventually result in the
conclusion of transactions. The relevant part in the respective definitions of
a securities market and a futures market is .being offers or invitations
that are intended or may reasonably be expected, to result, whether directly
or indirectly, in the acceptance or making, respectively, of offers to sell,
purchase or exchange.

3.11 Accordingly, a key consideration is whether buyers and sellers have
reasonable expectations that they can transact based on the information
posted on the facility. Examples include bulletin boards and electronic

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platforms which automate traditional over-the-counter markets. It is
common for potential buyers and sellers to post bid or offer information on
an electronic facility and for subsequent negotiations to be concluded
bilaterally off the facility. As long as the information posted on the facility
enables the parties to enter into or conclude, or have a reasonable
expectation to enter into or conclude, a transaction, the facility will be
treated as a market under the SFA (see Illustration 5 below).

Illustration 5 Electronic trading facilities


A corporation provides an electronic facility for licensed intermediaries and
investors in Singapore to trade in corporate and government bonds. These
participants can access the trading facility either via a secured website or
through proprietary terminals. Participants post firm prices for the order
size that they wish to transact. The facility automatically executes and
clears a firm-price order if it matches an existing firm-price order. The
facility does not settle trades. Settlement is undertaken subsequently
between the 2 counterparties. If no match is immediately available, the
facility displays the firm orders to all clients.

Orders with firm prices are automatically matched on the facility and there is
a reasonable expectation that orders posted on the facility will lead to the
conclusion of a transaction. As the facility is made available to licensed
intermediaries and investors in Singapore, MAS will require the corporation
providing the facility to be regulated as a market operator under Part II of
the SFA.

Whether through that place or facility or otherwise

3.12 A facility where the final negotiation or execution of transactions is
done outside the facility will still be treated as a market under Part II of the
SFA, where the transactions are concluded based on prices obtained from
the facility and the facility exhibits the other attributes of a market, as
described in the respective definitions of securities market and futures
market (see Illustration 6 below).


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Illustration 6 Bulletin boards


A corporation provides an electronic facility via a website to licensed
intermediaries and institutional investors in Singapore. The corporation
operating the market also has marketing agents in Singapore. The website
contains a bulletin board where participants can post indicative prices,
volumes, and counters of the securities that they wish to transact in. The
facility also enables participants to obtain the identities of interested
counterparties either via its website or through other communication means.
All subsequent negotiation, trading, clearing and settlement activities by the
transacting participants will take place off the website of the corporation.
The corporation also does not perform any trade matching or execution.

The corporation providing the facility is required to be regulated as a market
operator under Part II of the SFA even though the execution of trades is
done outside the facility, as it is caught within the scope of the definition of
market under Part I of the First Schedule to the SFA. The information
posted on the website and the ability to ascertain the identity of interested
counterparties lead to a reasonable expectation that indicative offers or
invitations will result in the conclusion of a transaction. As the facility is
made available to licensed intermediaries and institutional investors in
Singapore, MAS will require the corporation providing the facility to be
regulated as a market operator under the SFA.

Non-multilateral markets excluded

respectively provide that only a place or facility that brings together many
buyers and many sellers on a centralised basis will be regulated as a market.
A securities market or futures market, as defined under the SFA, is one that
does not include a place or facility used by only one person to make or
accept offers or invitations to sell, purchase or exchange securities or futures
contracts.

3.14 Accordingly, facilities that operate on a one-to-many basis are not
required to be regulated as markets. An example is a market-making facility

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by an intermediary that takes proprietary positions (see Illustration 7 below).
Nonetheless, the intermediary will have to comply with the relevant
regulatory requirements applicable to holders of a capital markets services
licence.

Illustration 7 Market-making facility


A licensed intermediary, authorised under the SFA to carry on business in
the regulated activity of dealing in securities, provides an electronic
proprietary market-making facility for its clients to trade in warrants. Each
warrant is given a number for identification. Clients will input into the
facility the identification number of the warrants and the volume of the
warrants which they wish to buy or sell. In return, the licensed intermediary
will indicate a price at which it is prepared to trade. If there is a matching
order, the intermediary will execute the order against its own inventory.

The licensed intermediary will not be regulated as a market operator under
Part II of the SFA as its facility is not a multilateral market but a one-to-
many facility.

Over-the-counter derivatives

3.15 The definition of futures markets in the SFA excludes a place or
facility that enables persons to negotiate material terms (in addition to the
price) of, and enter into transactions in, futures contracts, where the
material terms (in addition to the price) of futures contracts are
discretionary and not predetermined by the rules or practices of the place or
facility. The intent of this exclusion is that markets that trade over-the-
counter derivatives are not considered as futures markets for the purposes
of the SFA.

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4 APPLICATION OF SECTION 339 OF THE SFA
(EXTRA-TERRITORIALITY)

4.1 Section 339 of the SFA provides for the circumstances in which an act
conducted partly or wholly outside Singapore may constitute an offence of
any provision of the SFA. In respect of Part II of the SFA, if an operator of
an overseas market falls within the ambit of section 339(1) or (2) of the
SFA, it will be required to comply with Part II of the SFA and the operator
of the overseas market has to apply to MAS for approval as an approved
exchange or recognition as a recognised market operator (the RMO).

4.2 The Guidelines on the Application of Section 339 (Extra-
Territoriality) of the Securities and Futures Act set out the general principles
underlying how MAS would apply section 339 of the SFA to the various
parts of the SFA, including Part II. Part 4 of these Guidelines provides
additional guidance specifically for operators of overseas markets.

4.3 MAS will consider operators of overseas markets that physically
locate their trading floor or all or part of their trading infrastructure in
Singapore to fall within the ambit of section 339(1) of the SFA. In a case
where operators of overseas markets provide direct access to the overseas
market to investors in Singapore through screens or terminals placed in
Singapore that allow investors to directly make or accept offers or
invitations on the overseas market through these screens or terminals (see
Illustration 8 below), the operators of the overseas markets will fall within
the ambit of section 339(1) of the SFA. For the avoidance of doubt, where
an operator of an overseas market neither physically locates its trading
infrastructure in Singapore, nor provides direct access to investors in
Singapore through screens or terminals placed in Singapore, MAS may still
consider the operator of the overseas market to fall within the ambit of s339,
based on the factors described in the Guidelines on the Application of
Section 339 (Extra-Territoriality) of the Securities and Futures Act.

4.4 An investor in Singapore is considered to have direct access to a
market if the investor can purchase or sell futures contracts or securities on
the market without the assistance or intervention of an overseas
intermediary. On the other hand, if an investor in Singapore accesses an
overseas market through an intermediary in Singapore who forwards the
order to another intermediary in the jurisdiction where the market is located,

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the investor in Singapore is not considered to have direct access to the
market.

Illustration 8 Operator of an overseas market


A corporation is licensed to operate a market in a jurisdiction other than
Singapore. The corporation provides proprietary trading terminals for
institutional investors to enter orders and effect transactions on the overseas
market from the premises of the institutional investors in Singapore. This
facility allows the institutional investors to have direct access to the
overseas market. Transactions can be effected on the overseas market
through the terminals.

As the terminals are located in Singapore and the institutional investors have
direct access to the overseas market operated by the corporation, the
corporation operating the overseas exchange will be regulated by MAS as a
market operator under the SFA.


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5 REGULATORY REGIME FOR MARKETS

5.1 As provided in sections 6 and 14 of the SFA, a person seeking to
establish or operate a market in Singapore can only do so if the person is
either approved as an approved exchange, recognised as a RMO or
exempted as an exempt market operator (EMO) by MAS.

5.2 As a general principle, corporations operating markets that are
systemically-important will be regulated by MAS as approved exchanges.
Corporations operating other markets may be regulated as RMOs or
exempted from regulation. Approved exchanges are required to comply
with a higher level of statutory obligations than that required of RMOs.

5.3 Prior to establishing or operating a market in Singapore, the market
operator needs to apply to MAS either for approval as an approved
exchange, recognition as a RMO or exemption as an exempt market operator
(EMO). The market operator should assess whether it should apply to be
an approved exchange or a RMO by considering the factors listed in
paragraph 5.4 below in relation to its business model.

Factors for consideration

5.4 In determining whether a market operator should be regulated as an
approved exchange or a RMO, MAS will consider whether the market is
systemically-important and other relevant circumstances, such as public
interest. The factors which MAS considers are as follows:

(a) the size and structure, or proposed size and structure, of the
market operated by the corporation

Factors which MAS will take into consideration in relation to
the size of the market include the volume and value of
transactions conducted on the market, the number of investors
trading on the market and the number of participants.

The structure of the market refers to how the market is
organised. This includes, amongst others, a member-broker
structure and direct participation structure. A market that is
organised in a more complex manner, and in a manner which

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magnifies its reach or influence, e.g. via a member-broker
structure rather than a direct participation structure, could be
considered to pose a greater risk.

(b) the nature of the services provided, or to be provided, by the
market to be operated by the corporation

This relates to the range of services provided by the market
operator, such as the provision of quotes, matching of orders
and provision of data services.

(c) the nature of the securities or futures contracts traded, or to be
traded, on the market to be operated by the corporation

This relates to the number of classes of securities or futures
contracts traded on the market (for example, equities, warrants,
options and single stock futures).

(d) the nature of the investors or participants, or proposed
investors or participants, who may use or have an interest in
the market to be operated by the corporation

The factors here include the level of sophistication of the
investors or participants, the systemic importance of the
participants and the impact of any failure of the market on the
investors or participants and the broader financial sector. A
market that is widely used by retail investors is more likely to
be considered systemically-important.

(e) whether the corporation is regulated by MAS under the SFA or
any other written law


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If the corporation operating the market is already regulated
under the SFA or any other written law administered by MAS,
MAS will assess if its regulatory objectives can be achieved via
such other regulatory ambit. For example, if the holder of a
capital market services licence operates a market, MAS may
choose not to approve or recognise the market operator and
instead exempt the market operator from the regulatory regime
under Part II of the SFA, with appropriate conditions imposed
under the exemption.

(f) the parties who may be affected in the event that the market to
be operated by the corporation or the corporation itself runs
into difficulties

MAS will consider the nature of the parties who may be
affected in the event that the market runs into difficulties. This
would include considering if parties beyond the investors or
market participants would be affected and the level of
sophistication of the parties affected.

(g) in the case of a corporation operating an overseas market,
whether the corporation, in the country or territory in which the
head office or principal place of business of the corporation is
situated, is subject to requirements and supervision
comparable, in relation to the degree to which the objectives
referred to in section 5 of the SFA are achieved, to the
requirements and supervision to which market operators are
subject under the SFA

MAS will examine the regulatory regime imposed by the
overseas regulator on the overseas market and consider if it
achieves similar objectives to the regulatory regime in
Singapore. When a market operator is already supervised in its
home jurisdiction, and the supervision is comparable to MAS
supervision had the market operator been incorporated in
Singapore, the market operator is likely to be recognised as a
RMO. This is to minimise duplication of regulatory efforts and
compliance costs.


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(h) the interests of the public

MAS may consider if it is in the interests of the public to
approve the corporation operating the market as an approved
exchange. Such interests may arise if such approval may
further the development of the financial sector or reduce
systemic risk in the financial system, of Singapore.

(i) any other circumstances that MAS may deem relevant.

MAS retains the flexibility to consider other circumstances, as
it may deem relevant.

5.5 The decision as to whether a market should be regulated as an
approved exchange or as a RMO, or to be granted an exemption as an EMO,
will be based on an analysis of the factors in their entirety and is not solely
dependent on any one factor above (see Illustrations 9 and 10 below).
Illustration 9 Approved exchanges


A corporation seeks to operate a securities market in Singapore. The person
provides proprietary trading terminals for licensed intermediaries to enter
orders and effect transactions on the securities market. A large number of
classes of securities are traded on the market (for example, equities,
structured warrants and exchange traded funds) and the products traded are
popular and are widely and heavily traded by both retail and institutional
investors. The securities market is the only such facility in Singapore that
the corporation operates and the failure of the securities market will affect
not just the participants and investors, but also the broader financial sector.

Due to the broad nature of the activities of the market operator, large number
of classes of securities traded on the market and the parties who may be
affected in the event that the market runs into difficulties, amongst other
factors, the market would be considered as having systemic importance. As
such, to meet MAS regulatory objectives, the corporation operating the
securities market would be regulated as an approved exchange.


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Illustration 10 Recognised market operator


A corporation provides an electronic facility to trade fixed income products
via a website to institutional investors only. The electronic facility allows
the institutional investors to post indicative prices, volumes and futures
contracts that they wish to transact in. The facility also enables institutional
investors to obtain the identities of interested counterparties either via its
website or through other communication means. The volume of trades
conducted through the electronic is moderately high and the electronic
facility offers limited classes of securities for trading, including US
government securities and corporate bonds.

The information posted on the electronic facility and the ability to ascertain
the identity of interested counterparties lead to a reasonable expectation that
indicative offers or invitations will result in the conclusion of a transaction.
Thus, the market would fall within the regulatory ambit of Part II of the
SFA. As the electronic facility is only used by institutional investors and the
volume of trade is moderately high, the failure of the facility is not likely to
have a widespread impact on the broader financial sector since institutional
investors are better equipped to manage their risks. Thus, the corporation
operating the electronic facility would be regulated as a RMO under Part II
of the SFA based on the limited systemic risks it poses.

5.6 The approach in relation to oversight over approved exchanges and
RMOs is set out below.

Approved exchanges

5.7 MAS adopts a risk-based approach towards market operators. MAS
achieves its regulatory objectives primarily by requiring systemically-
important entities to be approved as approved exchanges and subjecting
them to a higher level of statutory obligations (in particular, Division 2 of
Part II of the SFA). MAS may exempt approved exchanges from
compliance with certain requirements if MAS is satisfied that the exemption
from compliance with such specific obligations would not hinder the
achievement of its regulatory objectives.

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Recognised markets operators

5.8 The RMO regime is an application of MAS risk-based approach
towards market operators, matching regulatory requirements to the risks
posed by the market. The regulatory requirements will be commensurate
with the risk profile, nature and scope of the functions of the proposed
market operations. MAS also seeks to ensure that there is no regulatory
arbitrage between corporations operating similar market operations with
similar risk profiles. Under Division 3 of Part II of the SFA, a small number
of minimal obligations are applicable to RMOs. MAS also has powers to
impose additional obligations on the RMOs, depending on the functions
undertaken by the market. MAS will consider the facts and circumstances of
each RMO application in deciding on the appropriate recognition conditions.
Such recognition conditions could include, amongst others, restrictions on
the types of investors the RMO can provide trading access to, the financial
products that the RMO can distribute, the requirement for the RMO to notify
MAS of changes to its business and the requirement to submit periodic
reports to MAS.

5.9 MAS may, under section 8(1) of the SFA, permit an applicant who is
not operating a market of systemic importance to elect to be regulated as an
approved exchange if the applicant is able to meet the statutory obligations
that are imposed on approved exchanges. However, the operator of a market
that is systemically important must be regulated as an approved exchange. It
does not have the option of electing to be recognised as a RMO.

5.10 On the same note, MAS recognises that a RMO may grow over time
to become systemically important. In such cases, MAS may initiate a
review of the regulatory status of the RMO under section 11(5) of the SFA
or the RMO may apply to MAS to change its status in accordance with the
requirements under section 11(1). The review of the regulatory status of the
RMO will be conducted in consultation with the RMO. Similarly, if the
systemic importance of an approved exchange reduces over time, MAS may,
under section 11(5) of the SFA, initiate a review of the regulatory status of
the approved exchange or the approved exchange may apply to change its
status in accordance with the requirements under section 11(1) of the SFA.

5.11 Section 8(3) of the SFA allows MAS to consider an application for
recognition as a RMO as an application for approval as an approved
exchange if MAS is of the view that the applicant is more appropriately

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regulated as an approved exchange, taking into account the factors described
in paragraph 5.4 above, and vice versa (see also section 11(6)). This would
only be done with the consent of the applicant. Such an application process
will eliminate the need for re-submission of a new application and payment
of additional application fees.

5.12 In the case of an operator of an overseas market applying for
recognition as a RMO, it must have an address in Singapore for the service
of any notice. MAS will also have to be satisfied that

(a) the applicant is willing and able to co-operate with MAS in
sharing information and in any other manner as required by
MAS;

(b) adequate arrangements have been made with the regulator of
the head office of the applicant on regulatory co-operation;

(c) the regulatory regime of the head office of the applicant is
comparable, in the degree to which the objectives in section 5
of the SFA are achieved, to the requirements and supervision to
which approved exchanges and RMOs are subject under the
SFA; and

(d) adequate arrangements have been made between the applicant
and a market operator in Singapore in respect of the supervision
of corporations trading on both the overseas market and the
market in Singapore, if applicable.

5.13 Generally, MAS will consider that adequate arrangements have been
made under paragraph 5.12(b) above where there is a memorandum of
understanding, or similar formal documentation, on information exchange
and mutual assistance between MAS and the home regulator of the
applicant.
Exempt market operators

5.14 Pursuant to sections 14(1) and (2) of the SFA, MAS may approve an
application to be an EMO from, or exempt, a corporation which wishes to
establish or operate a market if, in the opinion of MAS, the regulatory
objectives of MAS can be achieved without regulating that corporation as an

24
approved exchange or a RMO. The scope of activities that an EMO can
undertake is narrow. Possible scenarios whereby a market operator may be
exempted include the following:

(a) where the market operator is already separately regulated by
MAS. For instance, if the holder of a capital market services
licence operates a market, MAS may choose not to regulate the
market operator as an approved exchange or RMO, but instead
impose appropriate conditions under the exemption; or

(b) where the market poses little risk to the regulatory objectives of
MAS and its failure would cause little or limited impact to the
financial sector in general. As such, the costs of regulation may
outweigh the benefits of regulating the market (see Illustration
11 below).

Illustration 11 Exempt market operators


A corporation provides an electronic facility for the distribution of
syndicated loans and loan equivalents in both primary and secondary
markets. Users of the facility are restricted to institutional investors.
Though several products are traded on the market, only one of the products,
floating-rate notes (FRNs), falls within the definition of securities
under the SFA. The volumes of FRN trades are small relative to the total
volume of FRNs traded in Singapore and to the business of the corporation.
There are several other options available to institutional investors wishing
to trade FRNs.

The corporation providing the facility can seek to be an EMO under the SFA
as the trading volume is low and their services are only offered to
institutional clients. The failure of such a market is likely to have little or
limited impact on the participants and the financial markets as there are
other avenues to trade FRNs.

5.15 MAS is aware that with time, the operations of an EMO may develop
and grow in size and complexity. On a case-by-case basis, MAS will

25
consider whether there is a need to impose limits on the market activities of
an EMO. If the assessment of MAS is that the market activities concerned
pose risks to our regulatory objectives, MAS may revoke an exemption
granted to an EMO pursuant to the powers of MAS under section 15(1) of
the SFA.

5.16 If an EMO wishes to increase the scope of its activities, or if
circumstances change and the activities it undertakes pose higher risks than
before, the EMO may need to be regulated by MAS as either an approved
exchange or a RMO.

Holding out as approved exchange or RMO

5.17 No person shall hold himself out to be an approved exchange or a
RMO unless he is so approved or recognised by MAS. In the case where
MAS revokes the approved exchange status or RMO status, such a person, if
he has held himself out to be an approved exchange or a RMO, shall
immediately cease to do so.

Title

5.18 It is provided in section 6(3) of the SFA that except with the written
approval of MAS, no person other than an approved exchange may use the
title or description securities exchange, stock exchange, futures
exchange or derivatives exchange in any language. For RMOs who also
operate overseas securities or futures exchanges, they have to seek approval
from MAS, on a case-by-case basis, to use such title or description. MAS
would generally grant its approval to enable the RMO to operate in
Singapore without having to change its name. This facilitates the
preservation of the brand equity of the RMO.


26
6 OBLIGATIONS OF REGULATED MARKET OPERATORS

6.1 As set out in Part II of the SFA, approved exchanges and RMOs are
required to comply with a list of common obligations which are listed
below:

(a) as far as is reasonably practicable, operate a fair, orderly and
transparent market

The approved exchange or RMO is obliged to operate a fair,
orderly and transparent market and shall not engage in activities
or businesses that may conflict with this obligation.

(b) manage any risks associated with its business and operations
prudently

The approved exchange or RMO is expected to ensure that

(i) appropriate and adequate systems and controls are in
place to identify, assess, monitor and manage risks to its
market operations;

(ii) appropriate and adequate emergency procedures and
business continuity plans, as described in regulations 12
and 25 of the SF (Markets) Regs, are in place; and

(iii) there is periodic testing or review of its systems and
controls, including its business continuity plans.

Where the approved exchange or RMO also conducts
businesses and operations other than that of the operation of its
market, the approved exchange or RMO is expected to contain
the risks associated with such other businesses and operations
from that of its markets operations.


27
(c) in discharging its obligations under this Act, not act contrary to
the interests of the public, having particular regard to the
interests of the investing public

The approved exchange or RMO, with regard to the interests of
the investing public, should not engage in activities that may
compromise its ability to maintain an efficient market or lead to
an increase in the systemic risk in the financial system of
Singapore.

(d) have sufficient financial, human and system resources to
(i) operate a fair, orderly and transparent market;
(ii) meet contingencies or disasters; and
(iii) provide adequate security arrangements

The approved exchange or RMO is obliged to give regard to the
level of resources available to support the trading activities of
its market in varying market conditions, commensurate with the
needs of its business and operations.

6.2 In addition to the common obligations discussed above, an approved
exchange, being systemically important, is required to comply with
additional obligations, which are elaborated as follows:

(a) ensure that access for participation in its facilities is subject to
criteria that are fair and objective, and that are designed to
ensure the orderly functioning of its market or markets and to
protect the interests of the investing public

The approved exchange is obliged to ensure that access to
participation in its market is based on criteria that are not
unnecessarily restrictive and do not limit access on grounds
other than that of risks to the fair, orderly and transparent
operations of its market.

(b) maintain business rules and, where appropriate, listing rules
that make satisfactory provision for

28
(i) a fair, orderly and transparent market in securities or
futures contracts that are traded through its facilities; and
(ii) the proper regulation and supervision of its members

The approved exchange is obliged to maintain business rules in
compliance with regulation 18 of the SF (Markets) Regs, which
prescribes the various aspects of business rules that would enable
the approved exchange to discharge its obligations satisfactorily.

(c) enforce compliance with its business rules and, where
appropriate, its listing rules

The approved exchange is obliged to have an appropriate and
adequate surveillance and enforcement programme in place to
(i) effectively monitor compliance by its members with its
business rules;
(ii) enforce its rules; and
(iii) discipline its members in a fair and objective manner.

(d) ensure that it appoints or employs fit and proper persons as its
chief executive officer, directors and key management officers

The duties and functions of the key officers are elaborated in
regulation 29 of the SF (Markets) Regs.

Amendments to the business or listing rules

6.3 In regulation 19 of the SF (Markets) Regs, an approved exchange,
which proposes to amend its business rules or listing rules, shall consult its
participants, unless the proposed amendment would only have limited
impact on its participants. When considering the impact that a proposed rule
amendment would have on its participants, the approved exchange should
consider the likely effect that the amendment would have on the rights,
obligations, operations and systems of its various participants.


29
6.4 Generally, MAS would also expect the approved exchange to consult
the public on rule amendments that the approved exchange considers likely
to affect the interests of the general investing public.

6.5 When undertaking a consultation, the approved exchange should
provide potential respondents with a reasonable opportunity to comment on
the proposed amendment, including providing an adequate period of notice
and an appropriate avenue to provide feedback. When considering the
length of period that should be provided to potential respondents, the
approved exchange should take into account the complexity and impact that
the proposed amendment would have. Generally, the approved exchange
should provide a notice period of at least 10 business days, with longer
periods for proposed amendments that are relatively more complex or are
likely to have more impact.

6.6 Where the approved exchange has undertaken a consultation, it should
provide MAS with a summary of the comments received together with the
reasons for accepting or rejecting such comments, when submitting a
notification under regulation 19(1) of the SF (Markets) Regs. This is in
addition to the information required under regulation 19(1)(a) to (c) of the
SF (Markets) Regs.

6.7 To the extent reasonably possible, the approved exchange should
allow for a reasonable period between the time it publishes the final text of
the amendment and the effective date of the amendment. This would allow
its participants to put in place any changes necessary to allow the
participants to comply with the amended business rules. When considering
the length of period that should be provided, the approved exchange should
take into account the impact that the proposed amendment would have.

6.8 MAS recognises that there is a possibility that in urgent situations, an
approved exchange needs to propose and bring into effect rule amendments
within a very short period of time, in order for the approved exchange to
maintain fair, orderly and transparent markets. In such situations, MAS may
exercise its power to exempt the approved exchange from the requirement to
consult its participants under regulation 19(2), pursuant to section 35 of the
SFA.

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THE MONETARY AUTHORITY OF SINGAPORE

SECURITIES AND FUTURES ACT

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