Commodity Trading Business in Singapore Part 1: Regulations and Licensing Requirements
Singapore’s supportive regulatory framework, lenient tax regime, well-developed financial center facilities and established infrastructure together make it an irresistible hub for commodity trading companies. Singapore is one of the region’s busiest trading ports and its history as a regional hub for commodities dates back to several centuries. Now, although there are tough competitors emerging to challenge its position, the Singapore government has preemptively devised and revised strategies to sustain its traction to the commodity traders.
Singapore’s commodity trading sector has evolved from the conventional physical trading to the current OTC paper trading and a well regulated transparent exchange traded futures market. Singapore’s proximity to key physical trading markets in the region which is emerging as the highest producer and consumer of commodities owing to the rapid industrialization, urbanization, and growing affluence, is a major drive for commodity traders to be located in Singapore.
The following article is an overview of the legislation, licensing and compliance requirements pertaining to OTC commodities derivatives trading business in Singapore. Please note that this is neither a comprehensive compilation of requirements nor a professional advice but a broad overview of requirements for OTC derivatives trading business.
Legislation
The commodities trading sector is strictly regulated in Singapore. Persons or firms engaged in any form of commodity trading activities are subjected to strict regulations under the Commodity Trading Act, enacted in 1992.
The Commodity Trading Act (CTA) provides the legislation for trade in commodity derivatives. The CTA regulates three main areas relating to commodity derivatives – broking in commodity derivatives, market for commodity derivatives and clearing facilities for commodity derivatives. Presently International Enterprises is administering the CTA.
In February 2008, the regulation of commodity futures was transferred from the Commodity Trading Act to the Securities and Futures Act (SFA) under the purview of the Monetary Authority of Singapore (MAS). Thereafter the MAS has been the singular regulator for all types futures – financial and commodities. Regulatory oversight of other commodity derivatives and spot commodity trading remain with International Enterprises (IE) under the CTA.
The Commodity Trading Act (CTA) covers all commodities except those that are already regulated under the Securities and Futures Act (SFA), such as financial instruments, gold and oil futures. Businesses that are dealing in commodity futures contracts are required to hold a Capital Market License from MAS.
Imminent Changes in Legislation
Recognizing the global trend towards strengthening regulations in over- the-counter (OTC) derivatives, a consultation paper was issued in February 2012 by MAS and IE, proposing the transfer of regulatory oversight of OTC commodity derivatives under the CTA to the SFA. The rationale for the proposal is to streamline regulatory approach between commodity derivatives and commodity futures.
When the proposed changes become effective, entities dealing in both commodity derivatives and commodity futures will require only a Capital Market License from MAS instead of the current dual license requirement. Similarly, entities operating markets and clearing facilities for futures and derivatives will require approval from MAS alone instead the present system that requires approval of MAS and IE.
With the transfer of the regulatory oversight of commodity derivatives from the CTA to the SFA, the remaining regulatory scope of the CTA will be spot commodity trading.
Scope of Commodity
The term “commodity” will cover any produce, item, goods or article that is the subject of:
- Commodity forward contract;
- Leveraged commodity trading;
- Contract made pursuant to trading in differences or
- Spot commodity trading;
and includes indices, rights and interests in such commodity, and other indices, rights or interests of any nature that the Minister may by notification in the Gazette, prescribe to be a commodity.
Establishment of Commodity Market & Clearing House
Entities operating market that list commodity derivatives and entities operating clearing house for commodity derivatives require the approval of IE.
Establishing a commodity market or clearing house; or assisting in establishing or maintaining a commodity market or clearing house, without IE’s approval is an offence that will attract a fine not exceeding S$30,000 or imprisonment for a term not exceeding 3 years or both.
An application for approval as a commodity market or clearing house shall be made in the prescribed form as the IE may determine. A copy of the rules and Constitution of the proposed commodity market, certified to be the true copies thereof by the person signing the application, must accompany the application.
Compliance Requirement for Commodity Market
An entity that is seeking approval or approved as Commodity Market shall make adequate provision:
- To ensure that its members are persons of good character and high business integrity;
- To expel, suspend or discipline member on grounds of misconduct or for a contravention of the business rules of the proposed commodity market;
- With respect to the terms and conditions under which commodity contracts may be made such as to provide reasonable assurance that all obligations arising out of any contracts entered into on that commodity market will be met with respect to clearing and all other arrangements;
- To ensure trading practices are fair and properly supervised and prevent manipulation and excessive speculation;
- To record and publish details of trading;
- For the establishment of a Compensation Fund, or any other scheme or system, accepted by the Board, to compensate customers who suffer pecuniary loss through the oversight or failure of a member, or any of its directors or employees.
- To conduct the business with due regard to the interests and protection of the public.
Licenses
In order to weed out unscrupulous activities of “Bucket Shops” and to enhance the transparency in the sector, a strict license scheme is in place. The Act imposes mandatory licensing for firms and individuals trading in all types of commodity contracts (unless specifically exempted).
Any firm or trader dealing with commodity trading must apply for a license, unless specifically exempted under the Schedule (Section 14A). Apart from the exempted categories of persons, any person who provides broking services, advisory services or operates a pool for commodity futures contracts, commodity forward contracts, trading in differences, leveraged commodity trading and certain forms of spot commodity trading, must apply for licenses.
| Commodity Trading Activity | License Required (unless exempted under Section 14A) |
|---|---|
| Broking in commodity contracts | Commodity Broker’s (CB) license [Not required to hold CTA license under Section 13(2B)] |
| Broking in spot commodity contracts | Spot Commodity Broker’s (SCB) license |
| Providing advisory services in commodity contracts | Commodity Trading Adviser’s (CTA) license |
| Operating a pool for commodity futures | Commodity Futures Pool Operator’s (CFPO) license |
| Operating a pool for commodity contracts | Commodity Pool Operator’s (CPO) license |
| Operating a pool for spot commodity contracts | Spot Commodity Pool Operator’s (SCPO) license |
Note: Other than the director of the licensed corporation or the person in the direct employment of the licensed corporation, any person who solicits and/or deals with clients on behalf of a company in the trading of (respective) contracts would be required to apply for the (respective) representative license.It must be noted that post amendment to CTA in 2008, entities which engage in broking transactions in both commodity derivatives and commodity futures are dually licensed by IE and MAS.
Exempted category
The following persons are exempted from holding a license under the CTA:
- Persons who engage in trading of commodities in the ordinary course of business and it is intended for the purpose of retail or wholesale and involves physical commodity;
- Persons contracting only with accredited investors [1];
- Licensed banks or approved merchant banks;
- Finance and Treasury Centers;
- Approved oil trading companies or approved international commodity trading companies; and
- Persons who engage in trading on their own account not involving public funds.
[1]Accredited Investor is defined as an individual whose net personal assets exceed $2 million in value or whose income in the preceding 12 months is not less than $300,000 or a Corporate with net assets exceeding $10 million in value or Trustee of prescribed trust or Other Persons prescribed by IE.
How to Apply
The necessary application forms along with relevant documents and fees need to be submitted to IE Singapore for processing. The license issued by IE Singapore is valid for a period of one year and is renewable thereafter. In exceptional circumstances IE may issue licenses with different validity periods.
Documents Required
- A detailed statement of the applicant’s assets and liabilities signed by the applicant; or
- In the case of an applicant which is a Singapore corporation, a copy of the following documents (certified true by the company director or company secretary)
- Last balance-sheet;
- Last profit and loss account; and
- Auditor’s report.
If an application for license is rejected, an appeal can be made to the Minister for Trade & Industry, within one month after the notification of rejection. The decision of the Minister will be final.
Penalty for Operating without a License
- Operating without a License is an offence, which will attract a penalty not exceeding S$100,000 or imprisonment not exceeding 3 years or both.
- Operating as representative without a valid license is an offence amounting to a penalty of up to S$50,000 or imprisonment of up to 12 months or both.
Next: Commodity Trading Business in Singapore Part II: Ongoing Compliance Requirements