Regulators in developed economies have been tackling the many risks associated with OTC products. Leading South East Asian economy, Singapore, has been the latest market to address the leverage associated with margin FX (and CFD). New proposals by the regulator could reduce the amount of leverage from 2% to 5%.
The Monetary Authority of Singapore has been looking at the difficulties retail investors face when dealing in OTC products as high amount of losses and lack of understanding are the main concerns raised by investors. Singapore is an advanced economy and competes in parallel with Hong Kong to be the financial epicentre of Asia. With a robust and stringent regulatory environment the small island is home to one of Asia’s most liquid financial markets.
Singaporean investors have been investing in a wide range of products including cash equities, futures and since 2005 CFD’s. The MAS regulates brokers who offer dealing as principle in CFD’s which include equities, commodities and FX.
UK brokers were first to set up their Asian head quarters under the MAS’s authority, including the likes of IG, CITY, CMC, GFT and Saxo Bank. Local players have also been prominent with Phillip Capital dominating the scene.
OTC products have been under the regulations of the Commodity Trading Act the new proposals aim to give the Securities and Futures Act more powers. Furthermore, the MAS proposes to expand the scope of the SFA to regulate
over-the-counter derivatives on the asset classes of commodities, credit, equities, foreign exchange and interest rates.
The Singapore Dollar is currently trading at 1.26 against the greenback.
The new regulations aim to bring light on the following:
- Enhance credit risk management by derivative dealers and mitigate the risk of over-leveraging by retail investors.
- Ensure derivative dealers dealing with retail investors are adequately capitalised to operate as a going concern in compliance with the regulatory requirements, and in the event of insolvency, to help facilitate a proper and orderly wind-up of the business.
- Enhance the protection and recovery of retail investors’ moneys and assets in the event of insolvency of the derivative dealer.
- Enhance risk disclosure to better bring out the risks and implications associated with trading unlisted margined derivatives, so as to help retail investors make informed decisions on the suitability of such products.
Singapore is the 5th largest FX centre in the world, its average daily volume is around $50 billion.
Singapore is home to sophisticated investors and thus an influx of training schools were setting up across the country. training providers have been leading the way in introducing clients to brokers not only from Singapore but across Malaysia and Indonesia.
Changes in leverage have had major impacts on client numbers in USA and Japan, the potential changes in Singapore could have a significant impact on Singapore maintaining its position as Asia’s financial hub, especially as Chinese and Indian firms look for alternative venues to manage their currency risk.
Forex Magnates team wrote a detailed report on FX in Singapore, available in the Q1 quarterly report 2012.