SFA Regulated Activity — Securities Financing¶
Definition¶
Securities financing means lending or advancing money on the security of securities (margin financing) or lending or borrowing securities (securities lending and borrowing). This definition is set out in Paragraph 6 of the Second Schedule to the Securities and Futures Act 2001 (SFA).
The activity captures two distinct financing functions: 1. Margin financing — Lending money to clients for the purpose of acquiring or holding securities, where the securities serve as collateral for the loan 2. Securities lending and borrowing (SBL) — Lending securities to a borrower (who provides collateral) and borrowing securities from a lender (against collateral), typically to facilitate short selling, settlement, or market-making
Scope of Activity¶
Margin Financing¶
What constitutes margin financing: - Extending credit to clients for the purpose of purchasing securities (buying on margin) - Maintaining margin loan accounts where the client's securities holdings serve as collateral - Managing collateral coverage ratios — monitoring the value of the pledged securities relative to the outstanding loan - Issuing margin calls when collateral value falls below required levels - Forced liquidation of client positions when margin calls are not met
How margin financing works: - The client deposits an initial margin (typically 30-50% of the purchase price, depending on the security) - The CMS licence holder lends the balance (the margin loan) - The purchased securities are pledged as collateral for the margin loan - The client pays interest on the margin loan - If the value of the pledged securities falls, the client must deposit additional margin or the position may be liquidated
Key regulatory concerns: - Margin financing amplifies both gains and losses for the client - A decline in collateral value can trigger a cascade of margin calls and forced selling, with potential systemic implications - MAS regulates margin financing to protect both clients and market stability
Securities Lending and Borrowing (SBL)¶
What constitutes SBL: - Lending securities from the firm's own inventory or from client accounts (with client authorisation) to borrowers - Borrowing securities from other market participants to facilitate short selling, settlement obligations, or market-making - Managing the collateral posted by borrowers (typically cash, government securities, or high-quality liquid assets) - Facilitating repo (repurchase agreement) transactions — where one party sells securities to another with an agreement to repurchase at a future date at an agreed price
Common uses of SBL: - Short selling — A trader borrows securities to sell them, intending to buy them back at a lower price. The SBL provider facilitates the short sell by lending the securities. - Settlement coverage — When a seller fails to deliver securities on settlement date, the buyer's broker may borrow securities to complete the settlement. - Market-making — Market makers borrow securities to fulfil sell orders when they do not hold sufficient inventory. - Arbitrage — Borrowing securities to exploit price differentials between related instruments or markets.
Repurchase Agreements (Repo)¶
What constitutes a repo: - A repo is an agreement where one party (the seller/borrower) sells securities to another party (the buyer/lender) with a commitment to repurchase the same or equivalent securities at a specified future date and price - The difference between the sale price and the repurchase price represents the interest (repo rate) paid by the borrower - Repos are economically equivalent to a collateralised loan — the securities serve as collateral for cash
Types of repo: - Classic repo — Sale and repurchase of specific securities - Open repo — No fixed maturity date; the repo continues until either party terminates - Term repo — Fixed maturity date - Tri-party repo — A third-party agent (typically a custodian bank) manages the collateral
What Does NOT Constitute Securities Financing¶
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Dealing in securities — Buying and selling securities on behalf of clients or as principal falls under Paragraph 1 (dealing), not Paragraph 6 (securities financing). The distinction is between the transaction (dealing) and the financing of the transaction (securities financing).
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Bank lending — A licensed bank extending a general purpose loan that happens to be secured by securities is not necessarily conducting securities financing under the SFA, as licensed banks are exempt persons under the Third Schedule. However, non-bank intermediaries offering margin lending require a CMS licence for securities financing.
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Unsecured lending — Lending money that is not secured by capital markets products is not securities financing.
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Fund management custody — Holding client securities in a custodial capacity (without lending them) falls under custodial services, not securities financing.
Collateral Requirements¶
Margin Financing Collateral¶
Acceptable collateral: - Listed securities on SGX (shares, REITs, ETFs) - Government securities (Singapore Government Securities, T-bills) - Corporate bonds with investment-grade ratings - Units in authorised collective investment schemes - Cash deposits
Collateral haircuts: - Different types of collateral receive different haircuts (percentage reductions in value for margin calculation purposes) to account for price volatility - Blue-chip, high-liquidity shares typically receive lower haircuts than small-cap or illiquid shares - Government securities receive the lowest haircuts - The CMS licence holder sets its own haircut schedule, subject to MAS minimum requirements
Minimum margin ratios: - MAS prescribes minimum initial margin and maintenance margin ratios through the SFR (Financial and Margin Requirements) framework - Initial margin: the minimum collateral value required before a margin loan is extended - Maintenance margin: the minimum collateral coverage ratio that must be maintained while the loan is outstanding - If the collateral value falls below the maintenance margin, a margin call must be issued
SBL Collateral¶
- Borrowers of securities must post collateral with the lender
- Collateral is typically marked to market daily
- Collateral value must exceed the market value of the borrowed securities by a specified margin (over-collateralisation)
- Collateral substitution rights may be agreed between the parties
CMFAS Examination Requirements¶
Mandatory Modules¶
| Module | Title | Scope |
|---|---|---|
| M1A | Rules and Regulations for Dealing in Securities | SFA regulatory framework, SGX rules, client asset handling — M1A is required because securities financing is closely linked to dealing activities |
| M6 | Securities Products and Analysis | Securities products, financial analysis, risk assessment |
| M6A | Securities and Futures Product Knowledge | Updated version of M6 |
Note on CMFAS regime change (1 April 2024): M1A, M6, and M6A were retired under SFA 04-N22. Current modules are RES-1A (Dealing in Securities, replacing M1A) and CM-EIP (Excluded Investment Products, replacing M6/M6A). Old M-series passes before 1 April 2024 are grandfathered.
Additional Knowledge¶
Representatives involved in securities financing are expected to understand: - Margin calculation methodologies and collateral valuation - Securities lending market conventions (GMSLA — Global Master Securities Lending Agreement) - Repo market conventions (GMRA — Global Master Repurchase Agreement) - Collateral management and mark-to-market procedures - Risk management for leveraged positions
Continuing Professional Development (CPD)¶
- Minimum of 6 CPD hours per calendar year
- Topics must include securities financing regulatory developments, risk management, collateral management
- Tracked by the employing CMS licence holder
Key Regulatory Requirements¶
Client Asset Segregation¶
- Client securities held as collateral for margin loans must be clearly identified and segregated from the CMS licence holder's proprietary securities
- Client cash margin deposits must be held in segregated trust accounts
- The CMS licence holder must maintain records identifying which securities belong to which client
- Client securities may not be used for the firm's own purposes (e.g., pledged to the firm's lenders) without explicit client authorisation
Margin Call Procedures¶
- When collateral value falls below the maintenance margin, the CMS licence holder must issue a margin call promptly
- The client must be given a reasonable timeframe to meet the margin call (typically by the next business day)
- If the client fails to meet the margin call, the CMS licence holder must liquidate sufficient securities to restore the collateral ratio
- All margin calls and liquidation actions must be documented
Risk Management¶
- CMS licence holders providing securities financing must establish concentration limits (maximum exposure to any single client, sector, or security)
- Stress testing of margin loan portfolios under adverse market scenarios
- Monitoring of aggregate securities financing exposure relative to the firm's capital
- Liquidity risk management — ensuring the firm can meet its own funding obligations in the event of a market downturn that triggers widespread margin calls
Disclosure to Clients¶
- The terms of margin financing (interest rate, margin requirements, forced liquidation rights, fees) must be clearly disclosed to the client before the account is opened
- Risk disclosure statements must explain the risks of leveraged securities trading, including the risk of losing more than the initial investment
- Any changes to margin requirements or interest rates must be communicated to clients promptly
Record Keeping¶
- All margin loan records, collateral records, margin call records, and SBL transaction records must be retained for a minimum of 5 years
- Daily records of collateral coverage ratios for each client
- Complete audit trail of forced liquidation actions
Licensing Conditions¶
Base Capital Requirements¶
| Category | Minimum Base Capital |
|---|---|
| Securities financing (margin lending) | S$500,000 |
| Securities financing (SBL / repo) | S$500,000 |
Operational Requirements¶
- Adequate systems for real-time collateral monitoring and margin calculation
- Automated margin call generation and tracking
- Robust risk management framework covering credit risk, market risk, and liquidity risk
- Independent risk management function separate from the business/dealing function
Market Conduct¶
Representatives and CMS licence holders must comply with: - No manipulation of collateral values — artificially inflating the value of collateral to avoid margin calls or extend additional credit - Fair treatment of clients — margin calls and forced liquidation must be applied consistently and in accordance with disclosed policies - No preferential treatment — margin requirements and forced liquidation triggers must not be waived for favoured clients in a manner that increases risk to other clients or the firm
Relevance to Regnify Form 3A¶
When an FI submits a Form 3A to appoint a representative for securities financing:
- CMFAS results — Evidence of passing M1A and M6/M6A
- Fit and proper — No disqualifying criminal record, regulatory actions, or bankruptcy
- 10-year employment history — Complete with gap explanations
- Regulatory track record — All prior appointments, refusals, revocations, disciplinary actions
- Educational qualifications — As prescribed by MAS
- Reference checks — From most recent financial services employer
The FI must confirm that the representative understands the risks inherent in securities financing (particularly the leverage and collateral management aspects) and that adequate supervision and risk management controls are in place for the representative's activities.