CMFAS Module 2A Key Note Set 2
The SGX QUEST system has the following control functions which allow certain pre-execution checks:
a. Adjust credit or quantity limits in real time during a trading session. This could be in response to a customer depositing additional funds, or an increase of decrease of position limits due to a customer request, or an attempt to reduce potential exposure size in light of volatile market conditions;
b. Grant or revoke access to selected products/ instruments) on a real-time basis;
c. Revoke the access of an Approved Trader or customer on a real-time basis. This could be in response to dismissals of Traders or potential problems with a customer; and
d. Intercept orders that exceed credit or trading limits on a real-time basis and trigger error-prevention alerts.
2. How can SGX assit a member that is unable to connect to QUEST?
In the event that a Member is unable to connect to QUEST, SGX can assist the Member to cancel resting orders, provided that:
- SGX is satisfied as to the identity and authority of the party requesting the order cancellation;
- The cancellation is done on a “best effort’ basis, meaning the order(s) may or may not be cancelled before they are executed in the market; and
- The Clearing Member agrees to indemnify SGX against all actions, proceedings, claims, demands, damages, costs, expenses and any other amounts against or incurred by the Exchange arising from the cancellation request.
3. Can a SGX-DT apply a new or different trade matching algorithm to a new or an existing contract?
If SGX-DT wishes to apply a new or different trade matching algorithm to a new or an existing contract, SGX-DT shall notify all Members of its intention to do so via a Regulatory Notice, at least three (3) weeks prior to the application of such algorithm to a contract.
4. What sort of validities does QUEST offer?
QUEST offers the following order validities:
1. Day Order;
2. Good-to-Cancel (“GTC”) ;
3. Fill-and-Kill (“FAK”);
4. Fill-or-Kill (“FOK”)
5. What order types are available on QUEST?
The following order types are available on QUEST:
- Limit Order;
- Market to Limit (MTL) Order;
- Market Order;
- Stop (Limit, MTL and Market) Order;
- Market-if-Touched (MIT) Order; and
- Session State Order (Limit, MTL, Market, Stop and MIT).
Limit Orders allow traders to specify the exact price they wish to get matched at. A Limit Order specifies the maximum price that a buyer is willing to pay, or the minimum price a seller is willing to receive for one contract. Limit orders will also specify a quantity for the order.
7. What ways can a Market Order get its price?
Market Order will get its price in one of two ways:
1. If it is entered during a state where orders are continuously matched, then the market order will be matched at the best possible price, followed by the next best price, until the entire order quantity is matched.
2. If it is entered during a state where orders are not continuously matched, then the market order takes the Equilibrium Price (EP) as its price. Accordingly, the order price will change if the EP changes.
8. What is the difference between Market Order and Market to Limit Order?
As compared to a Market Order, which would trade against any and all available prices till the order quantity is fully matched, the Market to Limit (MTL) Order prevents the risk of getting matched at prices far from the current market. However, in the case of a volatile market moving in one direction, the unmatched quantity of an MTL order may never get matched.
9. How can the stop order be triggered?
The Stop Order trigger condition can be defined by the following parameters:
- Stop Series: The Stop Series defines the instrument the Stop Price shall be compared to, e.g. NKH5.
- Stop Price: The Stop Price defines the price level that the market must reach to trigger the conversion of the order to a Limit, Market or MTL order.
- Stop Price Reference Type: The Stop Price Reference Type can be Bid Price, Ask Price or Last Price. This will indicate if the Stop Price shall be compared to the Bid, Ask or Last Price.
- Stop Price Condition: The Stop Price Condition can be bigger than or equal to (>=) or less than or equal to (<=). This will indicate if the Stop Price must be bigger than or equal to (>=) or less than or equal to (<=) the Bid, Ask or Last Price to convert the order to a limit order.
- Convert to Series: The Convert to Series defines the instrument for the Limit, Market or MTL order at conversion when the Stop Order trigger condition is fulfilled.
SSO’s are typically used to execute trades during the Pre-Open Auction
(Market-on-Open), or the Pre-Close Auction (Market-on-Close). This allows the
trader to enter his order any time before the desired session state, rather than
having to wait till this market transits to that session state.
Once the triggering session state of the SSO is reached, the SSO will trigger the
release of an order. The SSO triggered order may be of the following types:
- Limit;
- Market;
- Market-to-Limit;
- Stop Limit;
- Stop Market;
- Stop Market-to-Limit; and
- Market-if-Touched.
12. What are the advantages to Negotiated Large Trades (NLTs)?
NLTs offer several advantages to traders, such as price & execution certainty as well as lower visibility (during the time of execution only).
A trader can use NLT trades to avoid price slippage if they wish to execute a large sell order.
13. What should a Member do when a customer specifically asks the order to be executed via NLT?
If a customer specifically instructed an order to be executed via NLT, a Member who wishes to execute the order via NLT shall do the following:
a. Enter the order on QUEST for execution first, before attempting to
secure a counterparty for the NLT execution.
b. Next, seek the customer’s approval to execute the order via NLT;
c. Members may only withdraw the order from QUEST, entered in a)
above, if the price secured for the NLT is at least equal to, or better
than, the prevailing bid/offer quoted in QUEST at the time the order is
withdrawn, or unless otherwise instructed by customers.
Members may obtain a general blanket approval from their customers provided the conditions below are met.
- Members shall inform the customer that the general blanket approval is subject to compliance with the rules, laws and regulations in the customer’s country of domicile;
- The general blanket approval shall be in writing and shall detail the nature and scope of the general blanket approval given;
- Members shall highlight to the customer the risks and liabilities that the customer may face in giving the general blanket approval. In particular, the Member shall highlight that in some instances, NLT orders may not be executed at the best possible price and that the timeliness of order execution may be compromised. The customer must also be informed that he is obligated to accept all NLTs executed under the general blanket approval; and
- The customer shall acknowledge that it has read, understood, and received a copy of the signed general blanket approval.
15. What factors should SGX consider when allowing manual NLT submission?
Factors which SGX may consider allowing manual submission include:
- The number of Clearing Members which are unable to access the NLT
reporting systems; - The estimated length of time required to restore access to the NLT
reporting systems; - The impact on the ability of SGX to operate a fair, orderly and transparent
market due to the loss of access to the NLT reporting systems; and/or - Any other factor which SGX deems relevant.
16. What sort of error trades should Members be aware of?
Error Trades occur when traders enter incorrect order details into QUEST, and the order gets matched.
Common mistakes include entering the wrong:
- Direction( (e.g. entering a Buy order where it should have been a Sell Order (or vice versa)
- Price
- Quantity
- Contract code (e.g. SG instead of SB)
- Expiry month (e.g. U4 instead of U5)
SGX may consider the following factors when deciding whether to adjust the trade price or cancel any trades:
- The difference between the price at which the error trade was done and the preceding traded prices of the contract;
- Market conditions, including market liquidity in the contract at the time the error trade occurred;
- The monetary loss involved and the financial impact on the parties if the error trade is or is not adjusted or cancelled;
- Reason(s) given by the erring party for the error;
- Whether the error trade was caused partially or fully by problems with the Exchange’s systems
18. What will be aggregated when computing postions?
When computing positions, the following will be aggregated:
- Positions of all accounts directly or indirectly owned or controlled by the person;
- Positions of all accounts of any other persons acting together with the person;
- Positions of all accounts in which a person or persons have a proprietary or beneficial interest.
For deliverable futures contracts, a customer would be deemed to be in default if any of the following were to happen when the contract expires:
- He holds a short position but does not deliver the underlying instruments as required by the rules or the contract specifications; or
- He holds a long position but does not take delivery as required by the rules or the contract specifications.
20. What steps should SGX-DT take in regards to emergencies?
SGX-DT may take any of the following steps:
- Curtailment of trading in any contract;
- Revocation or suspension of access to QUEST;
- Suspension of trading in a market;
- Deferment of delivery of deliverable futures contracts;
- Designation of alternate delivery point; or
- Modification of contract specifications.
21. What sort of situations would be considered as an emergency?
It is not possible to predict unforeseen emergencies, however examples of an emergency situation may include:
- An excessive trading position accumulated by a person or persons;
- Unwarranted speculation in any of the markets;
- A state of war or threatened hostilities;
- The introduction of, or change to, official controls affecting a market or contract, (such as the closure of the foreign market where the underlying asset is traded);
- A breakdown or failure of QUEST or any other communication, equipment or market facilities operated by the Exchange; or
- Any other undesirable situation or practice that adversely affects market integrity or investor rights.
22.What sort of financial crimes are on regulators’ radar screens?
The main financial crimes that impact financial institutions and systems most and are on regulators’ radar screens are:
i. Money Laundering
ii. Terrorist Financing
iii. Embargoes and Sanctions
iv. Fraud
23. What are the general steps in the process of money laundering?
There are generally three steps in the process of money laundering:
- The Placement stage: refers to the physical disposal of benefits for criminal conduct.
- The Layering stage: refers to the separation of benefits of criminal conduct from their sources by creating layers of financial transactions designed to disguise the audit trail and criminals may buy luxury or high value goods from genuine suppliers and then resell them to unknowing customers and place the legitimate funds back in the bank as payments by then are made by cheques and wire transfers.
- The Integration stage: refers to the provision of apparent legitimacy to the benefits of criminal conduct, if the layering succeeds, the integration schemes place the laundered funds back into economy so that the funds re-enter the financial system appearing to be legitimate business funds.
24. Waht are some of the different categories of embargoes?
Different categories of embargoes:
- Embargoes affecting all relations with a particular country e.g. North Korea;
- Embargoes affecting certain named individuals or entities e.g. Specially Designated Names (SDN List);
- Embargoes on certain sectors e.g. Armaments and Weaponry; and
- Economic sanctions also vary from imposing import duties on products from certain countries and blocking of exports of certain goods to target countries, or full blockage of a country’s products.
25. What factors should be considered for a reprensentative when opening an account for a client?
Before opening an account for a client, it is important for a representative to:
- Investigate the client’s background, including close family members
- Verify sources of wealth, both historical and current
- Investigate current business and income
- Investigate political connections, business associates and close friends
- Learn about the client’s investments experience and knowledge
- Determine risk appetite
- Establish objective for the account
26. What documentation can be used to verify client information?
Documentation which can be used to verify client information includes:
- Individual – ID/passports, address proof
- Corporates – business constitution documents, board resolutions, ID docs of ultimate beneficial owner, signatories
- Offshore companies – as above, plus cert of incumbency and good standing. Determine whether shares are registered or bearer.
- Trust structures – trust deed, trustee’s resolution, letter of reference from trustee, ID docs of UBO.
27. What sort of checks should also be done to determine whether the client should be accepted?
The following checks should also be done to determine whether the client should be accepted:
- Checks in subscribed databases such as Factiva.com, Complient.com, Internet
- Origin of wealth
- Reputation risk
- Whether it’s a Listed Company
- All other relevant information deemed fit and then allocate accordingly
- Sensitivity criteria
28. What would be considered as a high risk business?
High risk businesses include:
- Personal investment companies
- Trusts, gambling and sports-betting related enterprises
- Alternative remittance systems and money service business
- Precious metals and diamond related businesses
29. What red flags in account opening for dealing should Members be watching out for?
Examples of red flags to watch out for include:
- Prospective client evasive about source of funds
- Business activity inconsistent with business profile
- Client’s background and profile match do not match the size of account relationship and conduct of account
- Windfall or lump sum payments that are unexplained
- Unclear purpose of account
- Non-transparent ownership
- Review and escalate to supervisors, compliance and management for resolution
A transaction or circumstance could be considered suspicious and warrant filing a STR to the relevant authorities if the customer:
- Is unable to complete CDD measures; or
- Is reluctant, unable or unwilling to provide any information requested by the CMI; or
- Decides to withdraw a pending application to establish business relations or a pending transaction or to terminate existing business relations