Consultation Paper on Proposed Amendments to the Capital Framework for Approved Exchanges and Approved Clearing Houses

The Monetary Authority of Singapore, MAS, has launched a consultation on „Proposed Amendments to the Capital Framework for Approved Exchanges (AEs) and Approved Clearing Houses (ACHs)“. The amendments aim to adapt the capital framework to international standards and enhance the resilience of AEs and ACHs particularly in view of their systemic relevance to the functioning of the financial market in Singapore.
In its consultation, MAS proposes rule amendments to the above noted regulations (see „Other regulatory spec. affected“) and the issuance of a new notice on capital requirements for such infrastructures to
(1) impose a separate liquidity requirement on AEs and ACHs to ensure they can meet short-term obligations. Specifically, MAS would mandate such institutions to maintain a reserve of cash or assets easily convertible to cash enough to cover a minimum of six months‘ worth of operating expenses. For purposes of such calculation, operating expenses would exclude the depreciation of assets as no cash outflow occurs in this context and include lease payments.
(2) make adjustments to the components of capital that may count towards meeting the solvency capital requirement to exclude such items for which future cashflows are uncertain and include those items already covered by the above noted liquidity requirement. In this context, MAS proposes, for instance, to exclude unsecured loans and advances extended by the AE or ACH, as these have a lower certainty of recoverability, but include illiquid assets as they are covered via the separate liquidity requirement.
(3) modify the total risk requirement (TRR) composed of operational risk, investment risk, and general counterparty risk as follows:
– The operational risk capital requirement is intended to cover potential expenses arising from operational disruptions. These disruptions might stem from various sources such as information system failures, internal process inefficiencies, human resources issues, or external events that could impact the services provided by the entity. Within the current capital framework, AEs and ACHs are mandated to allocate six months‘ worth of operating expenses, excluding depreciation and amortization (D&A), towards operational risk capital. However, MAS finds that D&A should be included in the required capital as the replacement of systems and components is essential for the maintenance of a proper service.
– The investment risk capital is meant to accommodate for risks associated with investments that AEs and ACHs make on their own behalf. Currently, capital buffer requirements for investments in subsidiaries are based on the level of ownership. MAS suggests that all investments in subsidiaries or associated firms should require adequate risk capital in the value of 100% of the investments due to contagion risk and that investments in other, non-related entities should require a capital buffer of 10%.
– The general counterparty risk capital requirement currently applies to clearing houses only, in particular to credit exposures related to non-members. Such capital is set at 8% of the total value of credit-weighted exposures. MAS proposes to broaden this requirement to also include members depending upon the credit quality in accordance to general credit rating criteria.
(4) move the notification and reporting requirements relating to capital adequacy and loan arrangements from the approval conditions into the above noted regulations. These would include
– quarterly submissions (within 30 days after quarter end) to verify compliance with the liquidity and solvency requirements;
– the yearly submission of a capital plan within 30 days after the start of a financial year; and
– the prompt notification of loan arrangements, including the issuance of debt (within 21 days).