MAS to ban payment for order flow

In a surprising move, the MAS has announced a complete ban on payment for order flow in Singapore. The ban will affect brokers, banks, merchant banks and finance companies dealing in securities, derivatives, collective investment schemes and leveraged FX products. It comes into effect from 1st April 2023 and follows similar bans in other jurisdictions.

According to the MAS circular, dated 4th November, holders of capital markets services licence, banks or merchant banks licensed under the Banking Act, or finance companies licensed under the Finance Companies Act, dealing in capital markets products should not receive payment for order flow (PFOF) in placing and/or executing customers’ orders. This was also reflected in the Guidelines to Notice SFA04-N16 on Execution of Customers’ Orders. The ban cuts across all customer types, with the exception of institutional investors.

This is a critical move as it follows the PFOF bans in the UK, EU, Canada and Australia (temporary) and is indicative of a global trend among major regulators. This decision is set to level the playing field for retail customers by providing more transparency that they are not selling their flow to market makers.

What is PFOF?

PFOF refers to commission or other form of payment which a broker receives from another broker, counterparty or market maker in return for placing and / or executing customers’ orders. The commissions the broker receives are a fraction of a cent per share and, in aggregate, they can be substantial.

What are the potential implications of PFOF?

PFOF creates conflicts of interest in brokers’ best execution obligations to their customers. It incentivises brokers to place and/or execute customer orders with a market maker or trading venue paying the highest commission to them. This is inconsistent with a broker’s duty to provide best execution to customers by seeking out the best process and fastest execution.

Because of this, PFOF may cause harm to customers and can lead to poorer outcomes, inevitably incurring additional costs through wider bid-ask spreads from the other broker or counterparty who agrees to pay PFOF in return for obtaining customers’ order flow from the broker.

PFOF in other jurisdictions

Since 2012 PFOF has been banned in the UK for retail and professional clients since being PFOF was considered to undermine the transparency and efficiency of the price formation process. Customers must pay a higher price through increased spread to account for PFOF made to a broker firm. PFOF was also considered to inhibit competition by forcing liquidity providers to “pay to play”, creating a barrier to entry and expansion.

Following the ban, the Financial Conduct Authority (FCA) was also concerned that firms were circumventing rules by passing customer orders to their affiliates overseas and taking advantage of the lack of level playing field between UK and other jurisdictions. The FCA has since closely monitored and taken enforcement actions against firms breaching its rules.

In the US, the Securities and Exchange Commission (SEC) reportedly will not seek to ban PFOF, despite earlier indications that it may do so. However, the EU and Canada have also banned PFOF and Australia has instituted temporary prohibitions on the practice as it considers a ban, indicating an international shift towards the prohibition of PFOFs.

Who is affected by the MAS PFOF ban?

Holders of capital markets services licence, banks or merchant banks licensed under the Banking Act, or finance companies licensed under the Finance Companies Act, dealing in capital markets products may be affected and need to be aware of these changes.

What should I do if I’m affected?

If you are an affected firm, you should review your existing arrangements, commission and fee models to avoid receiving PFOF from 1st April 2023 onwards. You should also assess your best execution policy in accordance with the MAS Notice and Guideline on Execution of Customers’ Orders.

How we can help

Our experts, based locally in Singapore and internationally, have helped clients implement Best Execution frameworks for several years. A few examples of how we can help include:

  • Assess whether your firm is affected by this regulatory change
  • Review your firm’s commission arrangements, to assess whether they are consistent with PFOF rules
  • Design an appropriate policy, procedure and oversight framework
  • Determine the most appropriate monitoring approach for your trading footprint
  • Regulatory advice and compliance support

Get in touch if you would like to discuss further.

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