RES 12B – Rules, Ethics and Skills for Securities and Derivatives Dealers of Non-Exchange Members Set Two

Over-the-counter (OTC) derivatives are customized contracts negotiated directly between two parties rather than being traded on centralized exchanges. This customization allows counterparties to tailor the terms of the contract to their specific needs, such as the underlying asset, contract size, expiration date, and settlement terms. This direct negotiation contrasts with exchange-traded derivatives, which are standardized contracts traded on centralized exchanges with standardized terms and specifications.

Front-running involves executing trades based on advanced knowledge of pending orders from clients to benefit personal accounts before executing the client’s order, which is a clear breach of fiduciary duty and market integrity. This action is highly unethical and violates the principles of fair dealing and prioritizing client interests over personal gain, as outlined in various regulatory frameworks such as the Securities and Futures Act (SFA) and the Code of Conduct for Market Dealers.

As a derivatives dealer, Mr. Tan has a fiduciary duty to act in the best interests of the client. This includes providing suitable advice and ensuring the client has a clear understanding of the risks associated with the proposed transaction. Prioritizing client education and informed decision-making aligns with ethical standards and regulatory requirements, such as those outlined in the Securities and Futures Act (SFA) and the Code of Conduct for Market Dealers.

Accepting gifts from clients can create conflicts of interest or the appearance of impropriety. However, if the gift is of nominal value and accepting it does not compromise Ms. Lee’s integrity or independence, it may be acceptable under certain circumstances. Nevertheless, it is essential for Ms. Lee to disclose the gift to her supervisor to ensure transparency and adherence to the firm’s policies and regulatory requirements, including those outlined in the Code of Conduct for Market Dealers and the Securities and Futures Act (SFA).

OTC derivatives expose investors to counterparty risk, which is the risk that the other party involved in the derivative contract may default on its obligations. Unlike exchange-traded derivatives, which are typically guaranteed by clearinghouses, OTC derivatives lack centralized clearing, leading to higher counterparty risk. This risk underscores the importance of conducting thorough due diligence on counterparties and implementing risk management strategies to mitigate potential losses. The regulatory framework, including the Securities and Futures Act (SFA), emphasizes the need for transparency and risk disclosure in OTC derivatives transactions to protect investors’ interests.

Unlike exchange-traded derivatives, where prices are determined by the open market through bids and offers on centralized exchanges, OTC derivatives’ prices are negotiated directly between counterparties based on prevailing market conditions and the specific terms of the contract. This decentralized pricing mechanism allows for greater flexibility and customization but may also lead to pricing discrepancies and increased counterparty risk. The Securities and Futures Act (SFA) mandates transparency and fairness in pricing for both exchange-traded and OTC derivatives to protect investors and maintain market integrity.

As a derivatives dealer, Ms. Wong has a duty to act in the best interests of her clients and provide them with fair and equal access to relevant information that may affect their investments. Disclosing material information selectively or using it for personal gain before informing clients would be unethical and potentially illegal. The Securities and Futures Act (SFA) prohibits insider trading and mandates fair dealing practices to maintain market integrity and investor confidence.

Credit risk, also known as counterparty risk, is unique to OTC derivatives and arises from the possibility that the counterparty may default on its obligations. Unlike exchange-traded derivatives, where a clearinghouse acts as the counterparty to all trades, OTC derivatives involve direct bilateral agreements between counterparties, exposing investors to the creditworthiness of their trading partners. Mitigating credit risk requires thorough due diligence on counterparties and implementing risk management strategies. The Securities and Futures Act (SFA) and related regulations emphasize the importance of counterparty risk management and transparency in OTC derivatives transactions to protect investors’ interests and maintain market stability.

Mr. Patel, as a derivatives dealer, is subject to strict ethical standards, including the prohibition of insider trading. Insider trading involves using non-public, material information to gain an unfair advantage in trading. Disclosing or acting upon insider information before it becomes publicly available is illegal and unethical, as it undermines market fairness and investor confidence. The Securities and Futures Act (SFA) and related regulations impose severe penalties for insider trading violations to uphold market integrity and protect investors’ interests.

Clearinghouses play a crucial role in OTC derivatives transactions by acting as intermediaries between counterparties. By becoming the counterparty to each trade, clearinghouses effectively mitigate counterparty risk by guaranteeing the performance of trades, providing anonymity, and facilitating multilateral netting. This centralized clearing mechanism enhances market stability and reduces systemic risk associated with OTC derivatives. The regulatory framework, including the Securities and Futures Act (SFA), mandates robust risk management practices for clearinghouses to safeguard market participants and maintain financial stability.

Unlike exchange-traded derivatives, which are subject to public reporting requirements on centralized exchanges, OTC derivatives transactions typically lack transparency as they are conducted privately between counterparties. The absence of public reporting may limit market visibility and hinder price discovery, potentially exposing investors to increased risks. Regulatory frameworks such as the Securities and Futures Act (SFA) emphasize the importance of transparency and market integrity in derivatives markets to protect investors and maintain confidence in financial markets.

As a derivatives dealer, Ms. Nguyen has a duty to act in the best interests of her clients and ensure that their investment decisions align with their risk preferences and financial goals. Recommending transactions that exceed a client’s risk tolerance could expose the client to undue risks and potential losses. Therefore, Ms. Nguyen should engage in open communication with the client, educate them about the risks involved, and propose alternative solutions that better suit their risk profile. This approach upholds ethical standards and regulatory requirements, including those outlined in the Securities and Futures Act (SFA) and related codes of conduct.

OTC derivatives offer greater flexibility and customization compared to exchange-traded derivatives, allowing counterparties to tailor contract terms to their specific risk management and investment objectives. This customization enables investors to hedge specific risks, gain exposure to unique market conditions, and design complex investment strategies. However, it is essential to note that greater customization in OTC derivatives comes with increased counterparty risk and may require sophisticated risk management techniques. The regulatory framework, including the Securities and Futures Act (SFA), mandates transparency and disclosure in OTC derivatives transactions to protect investors’ interests and maintain market integrity.

Mr. Smith, as a derivatives dealer, is obligated to act in the best interests of his clients and maintain market integrity. Disclosing material non-public information, such as information about an upcoming corporate event, to clients and recommending suitable actions ensures transparency, fairness, and compliance with ethical standards and regulatory requirements. Using confidential information for personal gain or failing to disclose it to clients would constitute insider trading and breach fiduciary duties, potentially leading to severe legal and reputational consequences. The Securities and Futures Act (SFA) and related regulations prohibit insider trading and mandate fair dealing practices to protect investors and maintain market confidence.

OTC derivatives often exhibit lower liquidity in secondary markets compared to exchange-traded derivatives, primarily due to the absence of centralized trading platforms and standardized contract terms. Lower liquidity can result in wider bid-ask spreads, increased price volatility, and challenges in executing large trades without significantly impacting market prices. Investors in OTC derivatives may face difficulties in exiting positions or adjusting their portfolios efficiently, especially during periods of market stress. The regulatory framework, including the Securities and Futures Act (SFA), emphasizes the importance of liquidity risk management in derivatives markets to safeguard investor interests and maintain market stability.

Front-running occurs when a broker executes orders on a security for its own account while taking advantage of advance knowledge of pending orders from its customers, thus benefiting from the price movement caused by those orders. This practice is highly unethical and prohibited by regulatory bodies such as the Monetary Authority of Singapore (MAS) under the Securities and Futures Act. Brokers are obligated to execute client orders in a fair and transparent manner, putting the interests of clients before their own.

Under the Central Provident Fund Investment Scheme (CPFIS), CPF members can invest their CPF savings in various approved investment products, including unit trusts authorized by the MAS. These unit trusts are carefully regulated to ensure they meet certain standards of risk and suitability for CPF investors. Other options, such as purchasing residential property or investing in start-up companies, are not allowed under CPFIS guidelines. The CPFIS aims to provide CPF members with options to enhance their retirement savings within a controlled and regulated framework.

Securities dealers have a fiduciary duty to act in the best interests of their clients. If Mr. Tan believes that the stock ordered by the client is not suitable or poses risks to the client’s investment objectives, he should provide honest and transparent advice. This includes advising the client against the purchase of the stock and presenting alternative investment options that align better with the client’s goals and risk tolerance. By doing so, Mr. Tan upholds ethical standards and complies with regulations outlined in the Securities and Futures Act, which emphasize the importance of fair dealing and client protection.

One of the key objectives of the CPF Investment Scheme (CPFIS) is to provide CPF members with options to diversify their retirement savings beyond traditional CPF accounts. By offering a range of approved investment products, including unit trusts and other securities, CPFIS aims to help members spread their investment risk and potentially enhance their long-term returns. This objective aligns with the broader goal of supporting CPF members in building adequate retirement funds while maintaining prudent investment practices. Regulations under the CPFIS ensure that investment options offered to CPF members are suitable, transparent, and regulated to safeguard members’ interests.

Market manipulation is a serious offense under the Securities and Futures Act, and securities dealers have a responsibility to maintain market integrity and protect investors’ interests. Upon noticing unusual price volatility due to manipulation, Mr. Rodriguez should refrain from executing the client’s order immediately. Instead, he should delay the execution and report the matter to the relevant regulatory authorities, such as the Monetary Authority of Singapore (MAS). By doing so, Mr. Rodriguez fulfills his duty to uphold market integrity and comply with regulations aimed at preventing fraudulent activities in the securities market. Reporting market manipulation is essential in maintaining fair and transparent financial markets, as mandated by the Securities and Futures Act.

As a securities dealer, Ms. Lee has a duty to act in the best interests of her clients and ensure that they are adequately informed about the securities they are trading. In this scenario, where the stock is under investigation for financial misconduct, Ms. Lee should disclose this information to the client and advise against selling the stock until the investigation concludes. By doing so, Ms. Lee upholds ethical standards and complies with regulations aimed at protecting investors’ interests, as outlined in the Securities and Futures Act. Providing transparent and timely information to clients is essential in maintaining trust and integrity in the securities market.

CPFIS-approved corporate bonds are subject to strict regulatory standards to ensure that they meet certain credit quality criteria established by the Monetary Authority of Singapore (MAS). These criteria are designed to safeguard CPF members’ investments and mitigate credit risk. By adhering to these standards, CPFIS-approved corporate bonds provide CPF members with investment options that are deemed suitable and relatively secure within the context of their retirement savings. Regulations under the CPFIS aim to protect CPF members by ensuring that approved investment products meet specified quality and risk standards.

Market manipulation is strictly prohibited under the Securities and Futures Act, and securities dealers have an obligation to maintain market integrity and protect investors’ interests. In this scenario, where Mr. Chang becomes aware of the client’s intention to manipulate the stock price, he should report this information to his superiors within the firm. By doing so, Mr. Chang fulfills his duty to uphold ethical standards and comply with regulations aimed at preventing fraudulent activities in the securities market. Reporting such behavior is essential in maintaining the integrity and fairness of financial markets.

CPFIS-approved foreign stocks are subject to regulatory oversight to ensure they meet certain standards of transparency and investor protection. These stocks must be listed on recognized exchanges and adhere to regulatory standards set by the respective jurisdictions. While CPFIS provides CPF members with the option to invest in foreign stocks to diversify their retirement savings, these investments are subject to regulatory scrutiny to safeguard investors’ interests. By investing in CPFIS-approved foreign stocks, CPF members can access opportunities in international markets while benefiting from regulatory safeguards and transparency requirements.

Securities dealers have a duty to ensure that clients are adequately informed about the risks associated with their investments and that they understand these risks before proceeding with transactions. In this scenario, where Ms. Garcia suspects that the client may not fully grasp the risks involved, she should provide comprehensive information about these risks and seek confirmation of the client’s understanding. This approach aligns with ethical standards and regulatory requirements outlined in the Securities and Futures Act, which emphasize the importance of fair dealing and investor protection. By educating clients about investment risks and confirming their understanding, Ms. Garcia promotes transparency and helps clients make informed decisions aligned with their investment objectives and risk tolerance.

Possession and trading based on material non-public information, also known as insider trading, is a serious violation of securities regulations under the Securities and Futures Act. Mr. Nguyen must not execute the order and should instead refuse to participate in any illegal activities. Furthermore, he is obligated to report the client’s possession of such information to the appropriate regulatory authorities, such as the Monetary Authority of Singapore (MAS). By taking this action, Mr. Nguyen upholds the integrity of the securities market and complies with regulatory requirements aimed at preventing insider trading.

While CPFIS provides CPF members with various investment options to diversify their retirement savings, fixed deposits with accredited financial institutions are not eligible for investment under CPFIS. CPFIS-approved investment products typically include securities such as stocks, bonds, unit trusts, and exchange-traded funds (ETFs), among others. These products are regulated and authorized by the Monetary Authority of Singapore (MAS) to ensure compliance with specified standards and suitability for CPF investors. Fixed deposits, although considered low-risk, do not fall within the scope of CPFIS-approved investments.

Market manipulation is strictly prohibited under the Securities and Futures Act and is considered both illegal and unethical. Ms. Wong must refuse the client’s request and clearly communicate that engaging in such activities is not only against the law but also violates professional and ethical standards in the securities industry. By rejecting the client’s request, Ms. Wong upholds the integrity of the securities market and fulfills her duty to act in the best interests of investors and maintain market fairness.

One of the key requirements for CPF members to invest in stocks under the CPF Investment Scheme (CPFIS) is having sufficient CPF savings in the Ordinary Account to meet the minimum investment threshold. CPFIS allows CPF members to utilize their Ordinary Account savings for investment in approved products, including stocks, to enhance their retirement funds. However, members must ensure that they have adequate savings in their Ordinary Account and meet the minimum investment threshold specified by the CPF Board. This requirement aims to safeguard members’ retirement adequacy and ensure responsible investment decisions.

Securities dealers have a responsibility to ensure that clients make informed investment decisions based on reliable and accurate information. In this scenario, where the client wants to trade based on rumors of a merger announcement, Ms. Hernandez should advise the client against trading on speculative information and suggest waiting for official announcements from the companies involved. By doing so, Ms. Hernandez upholds ethical standards and complies with regulations aimed at promoting fair and transparent markets. Trading based on rumors can lead to market manipulation and unfair advantages, which are prohibited under the Securities and Futures Act. Advising clients to wait for official information helps mitigate risks and protects investors’ interests.