30 September 2016

SGCA Rules on Moneys Held in Customers' Segregated Accounts

In Vintage Bullion DMCC v Chay Fook Yuen [2016] SGCA 49, the Court of Appeal held that sums deposited by a broker in customer segregated accounts to cover the profits earned by customers from leveraged foreign exchange and commodity transactions that were accrued but not yet due and payable to them were covered by a statutory trust. These sums were therefore not part of the broker’s assets available for distribution in its liquidation to its unsecured creditors.

Under regulation 21 of the Commodity Trading Regulations (CTR), a broker is required to, among other things, account in a separate trust account for all the money accruing to a customer as a result of the customer’s commodity trading. Under regulation 16 of the Securities and Futures (Licensing and Conduct of Business) Regulations (SFR), a holder of a capital markets services licence (a CMS licensee) is required to, among other things, deposit in a trust account all moneys received on account of its customer.

The effect and scope of both regulation 21 of the CTR and regulation 16 of the SFR (collectively, the Relevant Regulations) were considered in the recent Singapore Court of Appeal decision of Vintage Bullion DMCC v Chay Fook Yuen [2016] SGCA 49 (2 August 2016).


A broker, MF Global Singapore Pte Ltd (MF Global), was wound up by creditors and there was a dispute between the liquidators and the broker’s customers over the nature of the claims the creditors had over the moneys in the broker’s segregated client money accounts. The broker had offered, among other things, leveraged foreign exchange transactions (LFX Transactions) and leveraged commodity transactions (Bullion Transactions). Vintage Bullion DMCC (Vintage) was one of its customers, and brought a claim against the liquidators of MF Global on behalf of itself and a number of MF Global’s customers. For the purposes of this case note, we will discuss the case as being brought by Vintage.

Various types of sums held in customer segregated accounts

Customers who wished to transact in LFX Transactions or Bullion Transactions would open an account and place funds with MF Global by way of margin to enable them to enter into (and keep open) positions in either of the products. Such margin was deposited into customer segregated accounts, which were omnibus client accounts maintained by MF Global. The funds placed in these accounts were segregated from MF Global’s own funds. While it did not open separate accounts for each individual customer, MF Global accounted distinctly for each customer’s funds held in its customer segregated accounts.

MF Global generated daily statements for customers, which would reflect the customers’ daily trade activity in LFX Transactions and Bullion Transactions. In this regard, such statements would include information on the customer’s “Total Account Equity”, which comprised the following:

  • Unrealised Profits: the paper value of the open position determined with reference to the market price of either the underlying currency or reference bullion.

  • Forward Value: the profit earned from a position when it was closed. Contractually, MF Global had no obligation to pay this amount to the customer until a later date, as specified in the terms of the customers’ agreement as “the date on which the respective obligations of the parties to a foreign exchange or over-the-counter transaction are to be performed” (Value Date). The Value Date would usually be two days after the close-out date but was sometimes later.

  • Ledger Balance C/F: On the Value Date, the sum reflected under the Forward Value would be credited to the customer’s running account with MF Global as “liquidation profit”. This amount would be added to the sum reflected under “Ledger Balance C/F”.

Vintage’s claims over the moneys in the customer segregated accounts

In its ordinary course of business, MF Global segregated from its own funds a sum of money and placed this sum in the customer segregated accounts to ensure that at all times there were sufficient funds parked in those accounts to cover the Total Account Equity of all its customers. When MF Global went into a voluntary creditors’ liquidation, Vintage sought to claim the sums held in the customer segregated accounts in respect of Unrealised Profits, Forward Value and Ledger Balance C/F as held on trust for MF Global’s customers. It asserted that all the moneys were subject to, amongst other things, a statutory trust.

The High Court had held that the Relevant Provisions created a statutory trust but that the trust applied only to those sums that represented the Ledger Balance C/F. It reasoned that this was because the customers’ right to demand payment had only arisen with respect to the sums in the Ledger Balance C/F and not the sums in the other two categories. Vintage appealed.

The Court of Appeal decision

The Court of Appeal accepted the High Court’s decision that the Relevant Regulations created a statutory trust over the moneys held in the customer segregated accounts. It also agreed with the High Court that the Unrealised Profits were not subject to the statutory trust. However, it departed from the High Court with respect to the Forward Value and ruled that the sums held in the customer segregated accounts attributable to the Forward Value were subject to the statutory trust.

Phang JA ruled that sums “accrue to” a customer or are “received on account of” a customer within the meaning of the Relevant Regulations when the customer concerned is legally entitled to the sum in question:

  • With respect to when sums “accrue to” a customer (regulation 21 of the CTR), he referred to income tax cases which had construed income accruing to a taxpayer as arising when the taxpayer had a legal right to the income.

  • With respect to sums which are “received on account of” a customer (regulation 16 of the SFR), he stated that the meaning of “received” must not be read so narrowly so as to require a separate counterparty. Accordingly, it would include payment received from a CMS licensee as principal-payor by the CMS licensee as payee on its customers’ behalf. If, at the time the CMS licensee received the sums on the customer’s behalf, the customer was not legally entitled to it as yet, the CMS licensee would simply be receiving it for itself.

In both cases, therefore, the test was whether the customer was legally entitled to the sums in question.

In the case of the Unrealised Profits, the sums comprising the Unrealised Profits were merely notional figures that would become actual figures only upon closure of the underlying transaction itself. Until such closure, the amounts were nothing more than a hypothetical position of what would be the profit (or loss) if the position had been closed out. There could be no legal entitlement to a sum that was notional or uncertain, and therefore the customer had no legal entitlement to the sums attributable to the Unrealised Profits.

In the case of the Forward Value, however, the sums that represented the Forward Value were based or premised on an underlying transaction that had already been closed or concluded where the customer had made a profit on the transaction. These were sums that the customer was legally entitled to, with the only qualification being that the customer had no right to withdraw the sums until the Value Date had arrived. However, by closing out the transaction, the customer had done all that was required of him to earn the profits that arose from the transaction. Furthermore, to not accord statutory protection to moneys that customers were entitled to but not yet paid would not accord with Parliamentary intent as that would allow companies to circumvent the statutory protection through the use of contractual mechanisms which defer or delay the timing of payment of sums which customers are in effect already legally entitled to.

As the moneys representing the Unrealised Profits were not customers’ moneys, the deposit by MF Global of its own funds to cover these sums in the customer segregated accounts together with the moneys representing the Forward Value and the Ledger Balance C/F resulted in a comingling of the funds of MF Global with those of its customers. However, in the view of the Court of Appeal, this was not inconsistent with the Relevant Regulations and it was satisfied that in so acting MF Global had acted in accordance with the statutory requirements to segregate moneys set out in the Relevant Regulations. This comingling did not therefore prevent a statutory trust from arising. Accordingly, a statutory trust arose over the moneys in the customer segregated accounts with respect to the sums representing the Forward Value and the Ledger Balance C/F.

An issue for a future case

In this case, MF Global had in fact segregated moneys in accordance with its statutory obligations under the Relevant Regulations. Therefore, the issue of when the statutory trust arose did not arise. This was an issue that the Court of Appeal left to be decided in a future case where the facts would require such a decision. Its observations in this regard are noteworthy:

  • Phang JA noted that the statutory trust under the Relevant Regulations could be analysed in two different ways. Under one analysis, a statutory trust arises upon the receipt or accrual of moneys even if the broker does not segregate the moneys from its own funds. Such a statutory trust would not give the customer a proprietary right to the moneys received or accrued until they were segregated. However, a broker that failed to comply with its statutory obligations to segregate customer moneys would be liable to the customers for either breach of trust or breach of statutory provisions.

  • Under another analysis, the statutory trust would not automatically arise upon the receipt or accrual of moneys but only upon the broker segregating the moneys in accordance with the statutory obligations in the Relevant Regulations. If the broker failed to comply with its statutory obligations to segregate customer moneys, the customer would not have a civil claim against the broker. The only recourse for such non-compliance was through criminal sanctions as set out in regulation 34 of the CTR (fine not exceeding SGD5,000) and regulation 55 of the SFR (fine not exceeding SGD50,000).

Phang JA noted that the second analysis appeared more consistent with the drafting of the regulations but declined to decide the issue.

Proposed amendments to the Relevant Regulations

We had noted in our August update that the Monetary Authority of Singapore had issued a Consultation Paper on Enhancements to the Regulatory Requirements on Protection of Customer’s Moneys and Assets. One of the amendments proposed in it addressed the issue of “customer’s moneys” in the CTR and the SFR. The MAS had suggested that the term “customer’s moneys” be defined to include contractual rights arising from transactions entered into by a CMS licensee on behalf of or with its customers. The amendment would make clear that sums arising from trades that had closed out in a customer’s favour but which were not yet due and payable to him are covered by the Relevant Regulations and must be held in segregated customer accounts.

Yin Mei Lock +65 667 16188
Partner, Singapore yinmei.lock@allenovery.com
Kenny Kwan +65 66716088
Partner, Singapore kenny.kwan@allenovery.com
Lian Chuan Yeoh +65 6671 6075
Counsel, Singapore lianchuan.yeoh@allenovery.com
Wee Teck Lim +65 66716142
Professional Legal Support, Singapore WeeTeck.Lim@allenovery.com

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