order to fulfil minimum regulatory requirements.23 It can therefore be seen that the lack of punitive regulation, in conjunction with the prevalence of commercial realities, stymie the formulation of a corporate governance culture which safeguards the interests of shareholders. This failure could arguably be extrapolated to the case of derivatives reporting and clearing. In light of the abovementioned considerations, MAS has decided to adopt a middle ground approach. In essence, this approach involves both the utilization of a legislative framework which sets up clearly defined rules and a flexible application of those rules by the regulatory authority.24 The proposed regulatory regime can thus be tailored to meet the requirements of financial markets, provide greater clarity and react to changing market circumstances.25 It is submitted that the proposed middle ground approach is the optimal course forward in the regulation of OTC derivative markets. Some degree of flexibility should indeed be exercised by regulators to avoid stifling the financial markets. Nevertheless, the overriding objective of the newly introduced reporting and clearing requirements is to safeguard the vitality of the financial system. The ability of OTC markets to cause systemic financial devastation militates against adopting a solely soft-touch principles approach without some degree of punitive measures. Furthermore, these legislative measures are also broadly similar to those currently being implemented by major financial jurisdictions in accordance with FSB guidelines.26 It is therefore unlikely that Singapore will lose ground in attracting investment in the financial sector as a result of these measures. 23 KPMG Audit Committee Institute, 4 October 2011, “Singapore’s Corporate Governance: Transformed: The Strategy to get it right”, http://www.kpmg.com/SG/en/IssuesAndInsights/CFOPublications/Documents/SingaporeCorporateGovernanceTransformed.pdf 24 This purported flexibility can supposedly be met through the use of subsidiary legislation, which will prescribe detailed requirements and exemptions in respect of the statutory rules 25 Footnote No. 6 , 26 Financial Stability Board, 15 April 2013, “OTC Derivatives Market Reforms- Fifth Progress Report on Implementation”, http://www.financialstabilityboard.org/publications/r_130415.pdf
INCREASED SAFEGUARDS FOR RETAIL INVESTORS Lehman crisis - Exposing lapses in Investor Protection? The fallout from the Lehman Brothers collapse also highlighted the vulnerability of retail investors in Singapore’s financial marketplace. Many of these investors only realised after the event that they did not possess the requisite financial knowledge to evaluate the financial risks they were undertaking at the point of purchasing Lehman-affiliated products. In tracing the history and evaluating the impact of the Lehman collapse on investors, it would be apposite to examine the relevant features of the salient Lehman products27 which caused investors to incur great losses. In essence, the redemption value of the Minibond is influenced by the occurrence of credit events involving specified institutions known as Reference Entities.28 In purchasing a minibond, the investor gains exposure to the credit risk of the Reference Entities. 29 An important feature of the Minibond securities was the fact that they were structured on a “first to default” basis. Thus, all that was required for Minibonds to be rendered worthless was for any one of the multiple Reference Entities listed in the Minibond contract to become insolvent.30 Even if more knowledgeable investors fully understood the “first to default” feature, these investors would most likely have been misled by the stellar credit ratings given to Lehman Brothers by credit rating agencies. On hindsight, these credit ratings were 27 Such as Lehman Minibonds and Morgan Stanley Pinnacle Notes distributed by Hong Leong Finance. Most of the Lehman affiliated products involved in extensive investor losses shared broadly similar features 28 Christopher Chen Chao-Hung (2011), “Product Due Diligence and The Suitability Of Minibonds: Taking The Benefit Of Hindsight”, Singapore Journal of Legal Studies, [2011] 309–329 29 Footnote No. 28. This feature was stated in the Base Prospectus and Pricing Statements of Minibond Series 9 & 10 (Base Prospectus) dated 26 June 2008 at p. 27. See Footnote 22 of Chen Chao-Hung’s article as referenced in Footnote 28 30 A common misconception was that it required all Reference Entities to default before a Minibond contractwas rendered worthless