Due to the evolution in securities and derivatives business models over the years, with outsourcing arrangements becoming more and more common among business operators, the Capital Market Supervisory Board (the "CMSB"), on 1 October 2018, issued a new outsourcing regulation ("New Outsourcing Regulation"), which repealed and replaced the previous one. This new regulation is intended to relax the outsourcing requirements for securities companies in Thailand. The New Outsourcing Regulation will become effective on 16 November 2018.
Unlike the previous regulation, in which permissible outsourcing functions were clearly listed and outsourcing could only be done with prior approval from the Office of the Securities and Exchange Commission (the "Office of the SEC"), a securities company can now outsource any of its functions, subject to different conditions depending on whether it is a central utility function (to be explained below) or not.
Please refer to below our summary of the conditions and requirements of this New Outsourcing Regulation.
I. General Outsourcing Requirements
A securities company can outsource any of its functions to the extent that it will not be considered an empty box company (with no business operations). In addition, it must enter into an outsourcing agreement in writing containing requisite contents1 with a service provider to whom it outsources its function.
A sub-outsourcing arrangement is also doable, subject to prior consent from the securities company and the entry into a sub-outsourcing agreement having the same requisite contents as the securities company is required to have in place.
Unlike the previous regulation, prior approval from the Office of the SEC is no longer required; a securities company is only required to notify the Office of the SEC within 15 days after it has outsourced its function.
These general requirements apply regardless, notwithstanding whether the outsourcing is for a central utility function or not.
II. Outsourcing Requirements for Central Utility Function
There is no clear definition under this regulation as to what is considered a "central utility function".2 However, the Office of the SEC has given examples in the public hearing document such as a fund service platform function, and e-payment for a settlement of securities and derivatives.
A securities company can outsource the central utility function only to a service provider who has been approved by the Office of the SEC.
III. Outsourcing Requirements for Other Functions
For a function other than a central utility function, a securities company can outsource the function to any person having certain qualifications, e.g. having sufficient personnel and operational systems in place to provide the service so outsourced, and with no financial hardship indicators.
A securities company must also monitor the service provider on a regular basis and prepare a due diligence report on the outsourcing activity. It may need to ensure that the Office of the SEC is enabled to carry out onsite inspection on the service provider upon request.
The Office of the SEC is empowered to issue guidelines on this New Outsourcing Regulation as well. We will keep monitoring the situation and continue to provide updates.
1. For example, the agreement must specify, among others: (i) liability of a service provider to a securities company in case it fails to perform its duty (either willfully or negligently); (ii) an obligation of a service provider to comply with relevant Securities and Exchange Commission's conduct rules; and (iii) fee/remuneration a service provider is entitled to receive.
2. Generally, there are two tests for consideration of whether a function is a central utility function: (i) if it is provided by a limited number of service providers; and (ii) if the service is to be stopped, it would be impossible or very difficult to find another service provider to perform this function relatively quickly.