Cryptocurrency and digital token exchanges may be market operators

Cryptocurrency and digital token exchanges (“Token Exchanges”) which allow the trading and exchange of any token which are “capital markets products”, that is securities, shares, bonds, debentures, units in collective investment schemes, regulated under the SFA would likely be deemed to be market operators: see Case Study 6 of the Guide to Digital Token Offerings issued on 14 November 2017 (the “DTO Guide”).

Token Exchanges which do not allow trading of any capital markets products regulated under the SFA would not be subject to such regulations. However, the Monetary Authority of Singapore (“MAS”) plans to regulate all exchanges which allow trading of cryptocurrency and digital tokens (or virtual currencies) under a proposed New Payments Framework. More information on this yet to be announced.

Operators of Token Exchanges that allow trading of “capital markets products” will need to obtain MAS’s approval, recognition or exemption under the SFA.

Applicable legislation and MAS guidelines:

1. Securities and Futures Act (Cap. 289) (“SFA”)
2. Securities and Futures (Markets) Regulations 2005 (“SF(M)R”).
3. MAS Guide and MAS’s Guidelines on the Regulation of Markets (Guideline No: SFA 02-G01, 1 July 2005).

What is a market operator?

A market operator is essentially an entity operating a facility which facilitates the price discovery and formation of issued securities in a centralised manner.

Issued securities are listed or unlisted securities which have been previously offered to investors and which are not available for secondary trading.

Through the interaction of bids and offers, participants of a market can have a sense of the supply and demand and thus determine the price of securities.

The actual trade or contract completion need not take place on the facility itself. Actual trades need not even take place at all. All that is needed is that buyers and sellers have reasonable expectation that they can transact based on information posted on the facility. It would suffice that participants provide sufficient information on their identities as well as firm prices and order sizes.

This regime does not apply to one-off transactions of offers or invitations on the facility. It also does not apply to an entity making offers to others for itself (taking proprietary positions).

Current regulations for market operator

Market operators need to either be approved by MAS as an Approved Exchange (AE), or a Recognised Market Operator (RMO), or be an exempt market operator.

AEs are market operators which are systemically-important and have substantial impact on the public interest. Thus, stock exchanges which retail investors from the public can trade on are necessarily AEs.

Whether MAS will consider a market operator an AE, RMO or qualify for exemption depends on various factors.

1. the size and structure, or proposed size and structure, of the market operated by the corporation;
   1. volume and value of transactions, number of investors trading on market, number of participants;
   2. how market is organised, e.g. member-broker, direct participation, and their risks;
2. the nature of the services provided, or to be provided, by the market to be operated by the corporation;
   1. g. provision of quotes, matching of orders, provision of data;
3. the nature of securities or futures contracts traded, or to be traded, on the market to be operated by the corporation;
   1. number of classes of securities or futures contract traded on market (e.g. equities, warrants, options, single stock futures);
4. 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;
   1. level of sophistication of investors or participants;
   2. systemic importance of participants;
   3. impact of failure of market on investors or participants and broader financial sector;
5. whether the corporation is regulated by MAS under the SFA or any other written law;
   1. g. whether entity is a holder of a Capital Markets Services (“CMS”) licence;
6. 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;
   1. impact on parties beyond the investors or market participants;
7. 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;
   1. 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;
8. the interests of the public; and
   1. g. develop the financial sector or reduce systemic risk in the financial system of Singapore.
9. any other circumstances that MAS may deem relevant.

AEs and RMOs must observe the following obligations:

1. as far as is reasonably practicable, operate a fair, orderly and transparent market;
2. manage any risks associated with its business and operations prudently;
   1. ensure appropriate and adequate systems and controls are in place to identify, assess, monitor and manage risks to its market operations;
   2. ensure appropriate and adequate emergency procedures and business continuity plans, as outlined in Regulations 12 and 25 of the SF(M)R, are in place; and
   3. ensure there is periodic testing or review of its systems and controls, including its business continuity plans.
3. 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;
4. 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.

Proposed new regulations for market operators

MAS issued a Consultation Paper On Review Of The Recognised Market Operators Regime dated 22 May 2018 proposing a three-tier Recognised Market Operator (RMO) Scheme.

/	Approved Exchange (AE)	Tier 1 RMO	Tier 2 RMO	Tier 3 RMO
Eligibility	a.      Targets retail investors b.  Systematically important market operator	a.       Market operators with limited access to Singapore-based retail investors b.      Small scale of businesses.      Less retail investor participation than traditional stock & derivatives exchanges	Market operators under current RMO regime	a.      Small scale of business b.      Targeting non-retail market segment
Limit on Participants	a.      No more than 200 Singapore retail investors per listed issuer; b.      No more than S$20,000 of investment per Singapore retail investor on a single RMO; and c.       No more than 10,000 Singapore retail investor accounts. d.      Effectively max S$4 million of investment by single issuer from Singapore retail investors, and max S$200 million across all issuers from Singapore retail investors.	No individuals (even accredited investors; although AI can trade through CMS licence holders)
Limit on business	a.      Cap of S$10 million revenue per annum; b.      S$10 billion in securities traded by value annually; or c.       10 million derivative contracts traded annually.
Additional requirements	a. Obligations of an approved exchange under SFA and SF(M)R b. Compliance with Securities & Futures (Corporate Governance) Regulations c.  Self-Regulatory Organisation obligations	a.  Product governance (assess whether product appropriate for retail investors) b. Cannot collect or hold retail investors’ cash or collateral c.  Clearing, settlement & custody services can only be performed by a MAS-regulated entity d.  Publication of bids and offers, price, volume and date of last order or transaction e. Client suitability assessment MAS Notice SFA 04-N12 – Notice on the Sale of Investment Products f. Membership in FIDReC for dispute resolution g. Prospectus requirements for listing of securities h. Promulgate, monitor compliance, enforce rules to securities issuers i. Singapore Code of Take-overs and Mergers and disclosure of interest regime apply to issuers on RMO
Base capital requirement	S$10 million	S$500,000	S$500,000	S$50,000
Ongoing capital requirement	6 months’ operating expenses	6 months’ operating expenses	3 months’ operating expenses
Technology Risk Management	Full Technology Risk Management Notice and Guidelines on Outsourcing apply	Full Technology Risk Management Notice and Guidelines on Outsourcing apply	Full Technology Risk Management Notice and Guidelines on Outsourcing apply	Only part of the Guidelines apply
Compliance	a.      Fit and proper requirements (directors and key personnel) b.      KYC and AML/CFT	a.      Fit and proper requirements (directors and key personnel) b.      KYC and AML/CFT	a.      Fit and proper requirements (directors and key personnel) b.      KYC and AML/CFT	a.      Fit and proper requirements (directors and key personnel) b.      Self-certify compliance c.       KYC and AML/CFT