Industry Guide | Guide for Commodity Trading Business in Singapore
If you are looking for an excellent place to set up a commodity trading business, look no further than Singapore. In this guide, we’ll provide information about over-the-counter trading of commodity derivatives in Singapore, including issues relating to compliance, legislation, and licensing. Those trading physical commodities should consult the Trading Company Setup Guide.
Singapore’s Commodity Trading Act of 1992, or CTA, regulates the commodities trading sector. All participants must strictly adhere to its rules.
Look to the CTA for regulations regarding:
- Brokerage of commodity derivatives
- Markets for commodity derivatives, and
- Clearing facilities for commodity derivatives
The CTA is administered by International Enterprises Singapore.
The 2008 Securities and Futures Act (SFA) transferred oversight of commodity futures to the Monetary Authority of Singapore, or MAS. The MAS controls all types of futures, both commodities and financial instruments. This includes futures for gold, oil, and other assets. Other commodity derivatives, such as options, stayed under the CTA.
You must obtain an MAS Capital Market License if you want to operate in the Singapore commodity futures sector. However, the international drive toward stronger regulation of OTC derivatives prompted the MAS in 2012 to propose that the SFA assume oversight of all commodity derivatives. This move streamlines and optimizes control over futures and other derivatives. When the transfer is complete, a single Capital Market License will allow you to participate in all forms of commodity derivative trading, market operations and clearing facilities. IE licensing will no longer be necessary.
The CTA will still be active in regulating spot, or current, commodity trading.
The CTA fights fraud and protects investors. You won’t find bucket shops licensed in Singapore. You can go online and check out a dealer’s license before you start trading with them. Click Commodity Trading Act for a list of legitimate companies. The government can only do so much — it’s up to you, the trading public, to monitor suspicious and fraudulent commodity trading practices.
An item is a commodity if it is traded in any of the following ways:
- Spot commodity trading
- Leveraged commodity trading
- Commodity forward contract
- Contract for differences trading
- Commodity indexes
- Commodity rights and interests
- Any other trading of items announced by the Minister to be commodities
Commodity Market and Clearing House
You need a license to operate a commodity derivatives market or clearing house in Singapore. The IE issues the license. If you fail to procure the license, expect to pay a fine of S$30,000 and spend the next three years as a guest of the Singapore Prison System.
If you want approval to start a clearing house or commodity market, fill out the application provided by IE. You’ll need to read the Memorandum and Articles of Association that is attached to the application form.
Requirement for Commodity Market Compliance
If you want to get your commodity market approved, take steps to:
- Allow only honest members
- Punish members who break the rules
- Meet all your obligations
- Use fair trading practices
- Supervise trading to prevent over-speculation and manipulation
- Keep and publish trades and trade details
- Set up a system to pay customers who lose money because of oversight or failure
- Never forget your obligation to protect the public
Do You Need a License?
You sure do if you broker trading in commodity derivatives apart from futures. You must obey CTA regulations unless you qualify for an exemption under Section 14A. Licensing suppresses bucket shops and other unscrupulous schemes. Your license enables you to trade all types of commodity contracts.
Unless you are exempted under Section 14A, you’ll need a license if you:
- Provide brokerage services
- Provide advisory services
- Operate a pool for commodity futures contracts, commodity forward contracts, trading in differences, leveraged commodity trading and certain forms of spot commodity trading
Types of License
Type of Commodity-Related Activity
|Commodity contract brokerage||Commodity Broker’s (CB) license
[Not required to hold CTA license under Section 13(2B)]
|Spot commodity contract brokerage||Spot Commodity Broker’s (SCB) license|
|Advisory services for commodity contracts||Commodity Trading Adviser’s (CTA) license|
|Operating a commodity futures pool||Commodity Futures Pool Operator’s (CFPO) license|
|Operating a commodity contracts pool||Commodity Pool Operator’s (CPO) license|
|Operating a spot commodity contracts pool||Spot Commodity Pool Operator’s (SCPO) license|
Note: If you solicit or deal with trading clients on behalf of a licensed corporation, you’ll need a representative’s license. This doesn’t apply to the corporation’s directors and direct employees. Until the two merge, you’ll need dual licensing from MAS and IE if you broker commodity derivative and futures transactions.
You don’t need a CTA license if you:
- Trade physical commodities in the course of your retail or wholesale business
- Deal only with accredited investors*
- Are a licensed bank or an approved merchant bank
- Are a finance or treasury center
- Are an approved international commodity-trading company
- Are an approved oil-trading company
- Trade only for your own account and are not involved in public funds
*You are an accredited investor if you have personal assets exceeding S$2 million and your last 12-month income was at least S$300,000. You’re an accredited corporation if you have at least S$10 million in assets. Other accredited investors can be trustees or others specified by IE.
Applying for a License
IE Singapore will receive the required application forms, supporting documents and fees. You’ll get a license that’s good for one year and renewable after that. In some cases, you might get a license that’s good for a period other than one year.
- A signed, detailed statement of your assets and liabilities
- If you’re a Singapore corporation, you must provide certified copies of the following documents
- Most recent balance sheet
- Most recent income statement
- Auditor’s report
The company director or secretary must certify these copies.
You can appeal a rejected application within a month to the Minister for Trade and Industry. The minister’s decision is forever.
Penalty — Operating Without a License
- You might be imprisoned for up to three years and have to pay up to a S$100,000 fine
- If you’re a representative operating without a license, you can be locked up for up to 12 months and be slapped with a penalty up to S$50,000
Commodity Broker Financial Requirements
- If you are a commodity broker — futures or spot — you must prevent your prior four-week adjusted net capital from falling below either S$250,000 or 10 percent of the CTA requirement for segregated customer funds, whichever is greater.
- You must make notifications if, as a commodity broker, your adjusted net capital falls below either S$400,000 or 12.5 percent of the CTA requirement for segregated customer funds, whichever is greater.
- If you are member of the commodity market, you must inform the market and do what they recommend. The market must immediately report you to the IE.
- If you aren’t a member, tell the IE and follow the directions of the Board.
- IE can decide to cut you some slack regarding capital requirements, as long as you play ball.
Statement of Financial Condition
- Every quarter, submit your financial statements to IE within 30 days of the end of the quarter. This applies to commodity brokers and spot commodity brokers. Make sure the statements are correct, fairly report your assets and liabilities, and are properly signed.
- If, as a commodity broker, your adjusted net capital falls below either S$400,000 or 12.5 percent of the CTA requirement for segregated customer funds for five days in a row, submit weekly financial reports until you correct the condition, and then for eight weeks more. Get the reports over to the IE by Monday of the following week.
- If you trade for yourself or for a related corporation, the IE may allow you to maintain no less than S$25,000 in adjusted net capital if you also have a S$1 million irrevocable letter of credit made out to the IE — or to the commodity market to which you belong — and issued by an IE-approved bank.
Broker Record- and Account-Keeping
If you are a commodity broker or a spot commodity broker, you will have to maintain:
- Records that account for and explain transactions such that you can create accurate financial statements that will withstand audit.
- Records that conform to accounting standards and have enough detail regarding:
- The amounts received and remitted; the purchase and sale of contracts; all debits and credits
- All transactions for yourself and for your customers
- Records and contracts for at least six years. Protect your records from loss, damage or falsification. If you don’t, you might be fined up to S$10,000 and spend up to 12 months behind bars.
If you are a commodity broker or a spot commodity broker, hire an auditor to check your accounts.
Submitting Annual Accounts
If you are a commodity broker or spot commodity broker, you’ve got three months after the financial year ends to submit your financial statements and auditor’s report, unless IE gives you more time. If you don’t, you’ll be writing a check for up to S$10,000 if convicted of dawdling.
Set up a separate trust account for any property, securities or money you hold on behalf of your customers. Account for this money separately from your own. Don’t withdraw the money except for authorized reasons, which the CTA explains in its regulations. Keep proper books to explain all transactions regarding your customers’ accounts.
You’ve got two days to send a written confirmation of an executed contract to the customer, or else.
Monthly Confirmation Statements
You must regularly send written detailed statements to customers showing transactions, profit and loss, funds held, financial charges, credits and other important information. Send the statements at the close of business on the last day of the month or some other regular date, but you must send them within three months.
Record Keeping by Trade Adviser and Commodity Pool Operator
If you are a commodity-trading adviser or a commodity pool operator, you will have to maintain:
- Records that detail data about customers, accounts, transactions and confirmations
- Records of advertisements or other literature or advice distributed, writings, publications, memos, acknowledgements, risk disclosure agreements, power of attorney agreements, circulars and contracts
- Records containing itemized details of all of your commodity transactions
Required Reporting for Pool Operators
If you operate a commodity pool, send an annual report to each pool participant. File a copy with IE within three months of year-end or some other period that IE allows. Make sure you include the following in your annual report:
- The pool’s net asset values for the last two years
- Each year-end outstanding participation unit’s net asset value or each participant’s pool share or interest for the two preceding years.
- Financial statements that have been audited according to generally accepted financial standards.
You’ve got 30 days to send each participant statements showing changes to net asset value and profit/loss for the period. Make sure you and two directors sign the statements.
Required Disclosures for Pool Operators
If you operate a commodity pool, give each potential customer a document disclosing details in a set format before you ask for or accept money, securities or other property. Disclose:
- The name, address and contact details for you, the commodity adviser and the executing commodity broker
- Contract types, restrictions and risks
- For operator, directors, advisers and brokers, any potential or actual conflicts of interest
- Current (within three months) performance records showing a starting net asset value, any changes such as additions, withdrawals and redemptions, net performance/rate of return and ending net asset value of pool.
- How the pool’s trading advisers actually performed for the period.
- Details and descriptions of how much the pool spent and will spend on expenses in the previous and upcoming year.
- Minimum and maximum contributions, pre-trading holding periods, how and when you distribute funds and what happens if the pool is so underfunded it can’t start trading.
- Transfer restrictions
- How participants can redeem their pool interests, including how you calculate the redemption value, costs, pre-redemption notices or conditions and redemption restrictions.
- How much each participant is liable for that exceeds the amount contributed.
- How often the pool distributes its profits or capital, along with any salient details.
- Proprietary account trading details of the pool operator, advisers and directors, or a statement explaining why such details are not forthcoming for each such person.
- An announcement that you will send participants monthly or quarterly account statements and certified annual reports.
Required Disclosures for Trading Advisers
If you’re a trading adviser, you can only take funds, securities and properties from clients if you are licensed as a commodity-trading broker or pool operator. Before you accept anything from clients, disclose the following in writing:
- Your name, address and contact information, and the address of your main business office
- How your trading program works, what types of contracts you trade and any trading restrictions.
- Which bank, merchant bank or commodity broker your clients must use to open an account
- What kind of performance you actually had over the last three years and why any material differences regarding performance exists among accounts.
- How you figure fees and how much you charge.
- Real or potential conflicts of interest you may have with a director or broker.
- Your and your directors’ proprietary trading details.
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