30/09/2016

SGCA Rules on Moneys Held in

Customers' Segregated Accounts
Speed read
In Vintage Bullion DMCC v Chay Fook Yuen [2016] SGCA 49 (2 August 2016), 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
brokers 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
customers 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).
Facts
A broker, MF Global Singapore Pte Ltd (MF Global), was wound up by creditors and there was a
dispute between the liquidators and the brokers customers over the nature of the claims the creditors
had over the moneys in the brokers 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 Globals
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 Globals own funds. While it did not open separate accounts for each
individual customer, MF Global accounted distinctly for each customers 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 customers 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 customers running account with MF Global as liquidation profit. This amount would
be added to the sum reflected under Ledger Balance C/F.

Vintages 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 Globals 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 Courts 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 principalpayor by the CMS licensee as payee on its customers behalf. If, at the time the CMS licensee
received the sums on the customers 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 Customers Moneys and
Assets. One of the amendments proposed in it addressed the issue of customers moneys in the CTR
and the SFR. The MAS had suggested that the term customers 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

customers 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.

Contact information

Yin Mei Lock

+65 6671 6188

Partner, Singapore

[email protected]

Kenny Kwan

+65 6671 6088

Partner, Singapore

[email protected]

Lian Chuan Yeoh

+6671 6075

Counsel, Singapore

[email protected]

Wee Teck Lim

+6671 6142

Professional Support Lawyer,

[email protected]

Singapore

This ePublication is for general guidance only and does not constitute definitive advice.
Allen & Overy 2016 | Legal Notices