2B.4 OTC derivatives
Decentralised, negotiated derivatives and the regime built around them after 2008. The examination tests which persons must report or clear, what the risk-disclosure documents are, and the dealing-practice standards.
4.1 Overview
Section titled “4.1 Overview”OTC derivatives are negotiated through dealers/brokers on a decentralised network, usually with less public price transparency and bilateral counterparty risk. Clearing houses can interpose as CCP, backed by margin and a mutualised default fund. Common products include interest-rate swaps, non-deliverable interest-rate swaps, cross-currency swaps, forward-rate agreements and commodity swaps. Compared with exchange markets, OTC markets have more sophisticated counterparties, longer-lived relationships, more tailored/non-standard terms and inter-dealer broking.
4.2 Regulatory regime
Section titled “4.2 Regulatory regime”Post-2008 reforms introduced trade repositories, extended market-operator/clearing/intermediary regulation and mandated reporting/clearing of prescribed OTC derivatives. Specified persons — banks, bank subsidiaries, merchant banks, finance companies, insurers and CMS holders — must report specified interest-rate, credit, FX, commodity and equity derivatives traded/booked in Singapore to a licensed repository. Section 129C requires prescribed contracts to be cleared with an approved/recognised clearing house.
4.3 SGX-DC clearing
Section titled “4.3 SGX-DC clearing”Eligible OTC commodity derivatives are registered through Titan OTC. Clearing members post initial/maintenance margin, obtain customer margin and pay variation margin for mark-to-market movements. A member may set higher internal requirements and must review them continuously.
4.4 Risk disclosure
Section titled “4.4 Risk disclosure”Form 13 and relevant Form 14/industry-standard disclosure documents must explain leverage, market, counterparty, settlement, liquidity and other product risks before account opening/execution as required. Overseas-listed products require the separate risk warning and acknowledgement.
4.5 OTC dealing practices
Section titled “4.5 OTC dealing practices”State all material terms clearly, disclose minimum dealing amounts/credit limits early, use standard confirmations and terminology, and use negotiated master agreements such as ISDA with governing law, netting, default, termination and undertaking terms. Credit-support documents should address collateral, transfer and legal regime. If a broker cannot substantiate a quotation and a difference is payable, close at the next available price and settle the difference with the principal.
Exam cues
Section titled “Exam cues”- Reporting: specified persons → licensed trade repository. Clearing: prescribed contracts → approved/recognised clearing house (s.129C).
- Documents: Form 13 is the derivatives risk disclosure; Form 14 is the overseas-listed product warning.
- ISDA master agreement covers governing law, netting, default, termination and undertakings; a credit-support document covers collateral and transfer.
- Trap: bilateral counterparty risk is the OTC default; a CCP reduces it but adds margin and default-fund considerations — it does not eliminate risk.