Monetary Authority of Singapore (“MAS”) released a series of Frequently Asked Questions (“FAQ”) clarifying key queries raised on risk based capital requirement and submissions Under the Securities and Futures (Financial and Margin Requirements) Regulations (“SF(FMR)R”) and the Notice on Risk Based Capital Adequacy Requirements For Holders of Capital Markets Services Licence (“SFA 04-N13”).
All Capital Market Services Licence Holders are required to submit quarterly and annual forms to MAS to illustrate that they meet their financial margin requirements and various rations. For example licensed fund managers dealing with accredited and institutional investors are required to ensure they maintain minimum base capital of S$250,000 and maintain a minimum financial resources versus total risk requirement ratio of 120%.
Capital Market Intermediaries (“CMI”), on a quarterly basis, are required to submit the following forms:
- Form 1: Statement of Assets and Liabilities
- Form 2: Statement of Financial Resources, Total Risk Requirement and Aggregate Indebtedness
We have highlighted key clarifications provided to the capital market intermediaries in relation to meeting risk based capital adequacy requirements.
Qualifying Subordinated Loans
CMIs, as part of calculating their risk based capital requirements, are required to compute their total financial resources in Form 2. In calculating total financial resources, CMIs can add qualifying sub ordinated loans. However, the sub-ordinated loans used on temporary basis can be used in calculating financial resources as part of risk based capital requirements. In order for a loan to be considered to be a qualifying sub-ordinated loan on a temporary basis, the loan has to have a 90 day limit. Because qualifying sub-ordinated loans are a form of debt with less loss absorbing capability, they are recognised as financial resources only on a temporary basis (i.e. subject to a limit of 90 days). The 90 day limit should be performed on a calendar basis, where the aggregate of all the temporary periods during which qualifying subordinated loans are included in the risk based capital calculations in each calendar year does not exceed 90 days.
Paid-up Irredeemable and Cumulative Preference Share Capital
In relation to calculating risk based capital, CMIs can include paid-up irredeemable and cumulative preference share capital. This is included as part of financial resources calculation in Form 2. Since preference share capital have lower loss absorption capability than base capital, the inclusion of such preference share capital as financial resources is subject to an aggregate limit of 100% of base capital.
CMIs who have placed security deposits with MAS needs to be included in the calculation of risk based capital. These are typically reflected in Form 1 as “other current assets”. CMIs who are licensed to provide fund management activities, real estate trust management, advising on corporate finance, providing custodial services and dealing in capital market products where the CMI is conducting a limited-activity, are not required to deduct security deposits from financial resources. Other CMIs licensed under other categories are required to deduct security deposit from their financial resources calculation.
Interim Unappropriated Profit and Loss
CMIs as part of risk based capital calculations, are required to include interim unappropriated profits into financial resources amount in Form 2 and be calculated on a net basis. Net interim loss would be required to be deducted from base capital amount.
Operational Risk Requirement
CMIs are required to calculate their operational risk requirements as part of risk based capital calculations in the following manner:
(a) 5% of its average annual gross income, calculated in accordance with paragraph 4.1.4, for the 3 immediately preceding financial years; and
Average annual gross income means total revenue less sum of fees and commission expenses and interest expenses. MAS has clarified that fee and commission expenses are typically directly related to the transactions from which fee and commission income is derived. Fee and commission expenses typically do not include service contracts and other expenses which are not directly related to the derivation of fee and commission income. When in doubt, the CMIs should check with its auditors regarding the determination of fee and commission expenses that may be offset against fee income to ensure they are complying with appropriate risk based capital calculation requirements.
MAS has also clarified that CMIs should take available preceding annual gross incomes for calculating average annual gross income. For example if CMI has completed 2 financial years, it should compute the average of the preceding 2 years annual gross income.
Total Risk Requirement
As part of risk based capital calculation, only deposits placed with both Singapore and overseas banks, with investment grade credit quality of grade 1 are allowed to be deducted from CMIs, computation of asset measure. Any banks with more than grade 1 are considered to have higher counterparty risk and therefore should not be deducted from the asset measure.
How can Argus Assist?
We, at Argus Global, are a team of consultants who specialize in regulatory compliance for financial institutions. We assist to do the following:
- Assist in computing Form 1 and Form 2 for the purpose of risk based capital calculation.
- Review completed Form 1 and 2 to ensure they meet MAS Risk Based Capital Notices and relevant regulations.
Please reach out to us for an initial discussion at firstname.lastname@example.org.
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