High quality global journalism requires investment. Please share this article with others using the link below, do not cut & paste the article. See our Ts&Cs and Copyright Policy for more detail. Singapore has moved to calm disruption to its over-the-counter (OTC) energy derivatives by temporarily exempting interdealer brokers without a futures broking licences from the need to have one as brokers try to stave off a loss of business to exchanges.
The move highlights how sweeping regulatory changes enshrined in the Dodd-Frank Act in th US are having a knock-on effect in overseas markets.
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In recent weeks interdealer brokers in the city-state’s OTC gas oil, crude oil and fuel oil swaps markets – the biggest in Asia outside Japan – have seen business fall amid the twin effects of incoming US regulatory reforms and moves by CME Group and IntercontinentalExchange (ICE) to “futurise” the swaps markets.
Last month, ICE converted all of its cleared energy swaps to “exchange for futures” contracts, as well as block trading products. That was partly to help derivatives users avoid the cost of registration as swap dealers, which they would have to pay for under incoming Dodd-Frank rules once their trading reached a certain threshold.
This would impose stringent capital and trade reporting requirements as part of a pledge by the Group of 20 richest nations in 2009 to make the OTC derivatives markets safer in the wake of the financial crisis.
ICE rival CME has offered exchange for futures contracts for clearing through its Clearport clearing facility in the US for some months. Recently it also listed those on its Globex trading system, as well as making them available for block trading.
Both CME and ICE have been ramping up efforts at their Singapore-based Asian operations to attract energy derivatives customers to their cleared products.
That, together with the incoming Dodd-Frank rules, had started to choke off the traditional voice-brokered business that has long been the bread and butter of brokers such as Ginga, Amerex, PVM, Radix and OceanConnect.
Such brokers have been unable to offer their customers block trades as an alternative to voice-traded swaps because most are not approved as futures brokers with the Monetary Authority of Singapore, the regulator. They had thus been suffering as customers started using the EFS and block trades cleared at CME and ICE instead.
However, the MAS this week sent letters to the interdealer brokers saying they had been granted a temporary exemption from the requirement to register as futures brokers, pending submission of an application to become a futures broker. That is to be sent in by December 31.
“Everybody’s frantically trying to get everything together for these applications,” said one interdealer broker. “As far as the market’s concerned things are back almost to normal.”
MAS confirmed on Friday it had spoken to all the affected inter-dealer brokers individually and granted them an interim exemption. “This is consistent with the approach taken by other regulators,” it said.
Singapore is a hub for the trading of energy swaps in crude oil, gas oil and fuel oil, which is used in power stations and ship bunkering. Such products are increasingly in demand as hedging tools amid continued demand for key energy commodities, much of it driven by China.
They are traded over the counter between counterparties such as large commodity trading houses Vitol, Glencore and Trafigura, and banks such as Morgan Stanley and Goldman Sachs.
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