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

According to the Securities and Futures Act (SFA) and the Code of Conduct for Derivatives Dealing, dealers have a fiduciary duty to act in the best interests of their clients. This includes ensuring that trades are suitable for the client’s risk profile and investment objectives. If a trade may not be suitable, it is essential for the dealer to inform the client about the associated risks and obtain their written consent before proceeding. This ensures transparency, upholds ethical standards, and protects the client’s interests.

According to the Central Provident Fund Investment Scheme (CPFIS), CPF members are allowed to invest their CPF funds in various investment products. However, it is crucial for investors like Mr. Tan to consider the suitability and risks associated with the investment, especially when dealing with highly speculative and volatile products. Consulting with a qualified financial advisor can help Mr. Tan understand the potential risks, rewards, and whether the investment aligns with his financial goals and risk tolerance. This ensures that Mr. Tan makes informed investment decisions, safeguarding his retirement savings.

According to the Code of Conduct for Derivatives Dealing, it is essential for dealers to maintain the highest standards of integrity, professionalism, and ethical conduct. Accepting gifts from clients can create conflicts of interest or give the appearance of favoritism, potentially compromising the dealer’s objectivity and independence. Therefore, Ms. Lim should politely decline the gift to uphold ethical standards and ensure that her actions do not raise questions about her integrity or professionalism.

The Supplementary Retirement Scheme (SRS) allows individuals to save for retirement by investing in a wide range of financial instruments. However, there are certain rules and restrictions that Mr. Lee should be aware of. Investments made using SRS funds are subject to eligibility criteria, and there are withdrawal restrictions until retirement age. Mr. Lee should ensure that any additional investments using his SRS account comply with these rules to avoid penalties or complications in the future.

Insider trading involves trading securities based on material, non-public information, which is illegal and unethical. As a derivatives dealer, Mr. Kumar has a duty to maintain market integrity and prevent insider trading. Therefore, upon receiving insider information, Mr. Kumar should immediately report it to the relevant authorities, such as the Monetary Authority of Singapore (MAS), to prevent the misuse of confidential information and uphold the integrity of the financial markets. Failure to report insider information could result in severe legal and regulatory consequences for Mr. Kumar and his firm.

The Code of Conduct for Derivatives Dealing emphasizes the importance of maintaining the integrity of the financial markets and upholding ethical standards. Front-running client orders for personal gain is a violation of these standards and can lead to severe consequences, including legal and regulatory sanctions. Mrs. Chang has a duty to report such unethical behavior to her supervisor or compliance department promptly. Reporting ensures that appropriate action is taken to address the misconduct and maintain the trust and confidence of clients and market participants.

Structured products can vary significantly in terms of complexity, features, and risks. It’s crucial for investors like Mr. Singh to understand that the performance of structured products is tied to the performance of underlying assets, such as stocks, bonds, or indices. Additionally, structured products may involve complex features, such as derivatives, which can introduce additional risks. Before investing, Mr. Singh should carefully assess the features, risks, and suitability of the structured product, considering his investment objectives, risk tolerance, and financial situation.

The Code of Conduct for Derivatives Dealing requires dealers to act with integrity and transparency in their dealings with clients. Receiving commissions for executing trades is a common practice, but it’s essential for dealers like Ms. Wong to disclose such commissions to their firm’s compliance department. The compliance department can provide guidance on handling commissions in compliance with regulatory requirements and firm policies. This ensures transparency, mitigates conflicts of interest, and upholds ethical standards in derivatives dealing.

Withdrawals of CPF funds for investment purposes are subject to certain eligibility criteria and restrictions under the CPF Investment Scheme (CPFIS). Mr. Koh should ensure that he meets these criteria and understands the implications of withdrawing his CPF funds, including potential tax consequences and restrictions on investment choices. It’s essential for Mr. Koh to make informed decisions and consider his retirement needs and financial goals before withdrawing CPF funds for investment purposes.

Confidential information about potential mergers or other market-moving events is considered material non-public information. Using such information for personal gain or disclosing it to others is illegal and unethical, constituting insider trading. As a derivatives dealer, Mr. Tan has a duty to maintain market integrity and prevent insider trading. Therefore, he should refrain from trading based on the confidential information and maintain strict confidentiality to avoid regulatory sanctions and uphold the trust of clients and market participants.

Misrepresentation of financial information by clients is a violation of ethical standards and regulatory requirements. Ms. Rodriguez has a duty to maintain integrity and honesty in her dealings with clients and the financial markets. Therefore, upon discovering the misrepresentation, she should report it to her supervisor or compliance department immediately. Reporting ensures that appropriate action is taken to address the misconduct, prevent potential harm to other market participants, and uphold the integrity of the derivatives market.

Unit trusts are investment funds that pool money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other assets. The performance of unit trusts is directly linked to the performance of the underlying assets, such as the stock market. Therefore, investors like Mr. Patel should be aware that unit trusts are subject to market fluctuations and risks associated with the underlying assets. Before investing, Mr. Patel should assess the suitability of the unit trust based on his investment objectives, risk tolerance, and financial situation.

As a derivatives dealer, Mr. Garcia has a responsibility to maintain market integrity and prevent market manipulation. Executing a large order immediately could disrupt the market price and potentially create unfavorable conditions for other market participants. Therefore, Mr. Garcia should execute the order gradually, taking into account market conditions and minimizing the impact on the market price. This approach ensures fair and orderly markets, upholding the trust and confidence of market participants.

Corporate bonds are debt securities issued by corporations to raise capital. The credit risk of corporate bonds depends on the financial stability and creditworthiness of the issuing company. Therefore, investors like Ms. Nguyen should be aware of the credit risk associated with corporate bonds, including the potential for default or downgrade in the issuer’s credit rating. Before investing, Ms. Nguyen should assess the creditworthiness of the issuing company and consider her risk tolerance and investment objectives to make informed investment decisions.

Confidential research reports containing material non-public information are considered insider information, and trading based on such information is illegal and unethical. Mr. Johnson has a duty to maintain market integrity and prevent insider trading. Therefore, he should refrain from trading based on the confidential information and maintain strict confidentiality to avoid regulatory sanctions and uphold the trust of clients and market participants. Additionally, Mr. Johnson should report the receipt of such information to the relevant compliance authorities within his firm.

Margin requirements in derivative trading are the funds that a trader is required to deposit with a broker in order to cover potential losses if the market moves against their position. This ensures that traders have enough capital to meet obligations arising from adverse price movements. Margin requirements are set by regulatory authorities and exchanges to ensure market stability and protect investors. In Singapore, margin requirements are governed by regulations such as the Securities and Futures Act (SFA) and the regulations set forth by the Monetary Authority of Singapore (MAS).

As a licensed securities dealer, Mr. Tan is obligated to act in the best interests of his clients and provide them with suitable advice. While the client has instructed immediate execution, it is Mr. Tan’s responsibility to ensure that the client is aware of any potential risks associated with such action. This may include factors such as market volatility, potential impact on the price of the shares, and the possibility of executing the trade at a less favorable price. By informing the client about these risks, Mr. Tan fulfills his duty of care and ensures that the client can make an informed decision. This aligns with the principles of ethics and professionalism outlined in the Securities and Futures Act (SFA) and the Code of Conduct for Securities Dealers issued by the Monetary Authority of Singapore (MAS).

The primary purpose of using derivatives in financial markets is to facilitate the transfer of risk between parties. Derivatives allow investors to hedge against adverse price movements in underlying assets or to speculate on future price movements. By entering into derivative contracts, parties can effectively manage their exposure to various risks, such as interest rate risk, currency risk, and commodity price risk. This helps to enhance market efficiency and stability by allowing market participants to allocate risk more efficiently. Regulations governing derivatives trading in Singapore, such as the Securities and Futures Act (SFA) and regulations issued by the Monetary Authority of Singapore (MAS), aim to ensure the proper functioning and integrity of derivative markets.

Trading based on insider information is illegal and unethical. As a licensed securities dealer, Ms. Lee has a duty to adhere to regulatory requirements and uphold the integrity of the financial markets. Therefore, she should advise the client to refrain from trading based on the insider information disclosed. Additionally, Ms. Lee should inform the compliance department about the client’s disclosure to ensure that appropriate action is taken to prevent any potential violations of securities laws and regulations. Insider trading is prohibited under the Securities and Futures Act (SFA) in Singapore, and individuals found guilty of such offenses may face severe penalties, including fines and imprisonment.

Leverage in derivative trading involves using borrowed funds or margin to amplify potential returns. By leveraging their capital, traders can control larger positions in the market than their initial investment would allow. While leverage can magnify profits, it also increases the potential for losses, as losses are also amplified. Therefore, traders must exercise caution when using leverage and ensure they have a thorough understanding of the risks involved. The use of leverage is regulated in Singapore under the Securities and Futures Act (SFA) and guidelines issued by the Monetary Authority of Singapore (MAS) to ensure the stability and integrity of the financial markets.

As a derivatives dealer, Mr. Lim has a legal and ethical obligation to maintain the integrity of the financial markets and prevent insider trading. Suspecting that the client may possess insider information raises serious concerns about potential market abuse. Therefore, Mr. Lim should promptly inform the compliance department about the client’s instructions and suspicions. The compliance department will then conduct an investigation into the matter to ensure compliance with regulatory requirements, including the Securities and Futures Act (SFA) in Singapore. Reporting such instances to the compliance department is crucial for upholding market integrity and preventing illegal activities.

Ms. Tan’s observation of unusual trading patterns and potential market manipulation raises significant concerns about the client’s request to sell the shares immediately. It is essential for Ms. Tan to escalate this matter to the compliance department promptly. By informing the compliance department about the client’s urgency and the observed trading patterns, Ms. Tan ensures that appropriate actions are taken to investigate the situation further. This aligns with the principles of ethics and professionalism outlined in the Securities and Futures Act (SFA) in Singapore. Reporting such suspicious activities to the compliance department helps maintain market integrity and prevents potential market abuse.

As a derivatives dealer, Ms. Chang has a duty to ensure that her clients fully understand the risks associated with the financial products they wish to trade. In this scenario, the client’s lack of understanding about the risks indicates the need for clear and comprehensive communication. Ms. Chang should take the time to explain the potential risks involved in the complex derivatives contract, including the implications of leverage and potential losses. This aligns with the principles of ethics and professionalism outlined in the Securities and Futures Act (SFA) in Singapore, which emphasize the importance of providing clients with suitable advice and ensuring they make informed decisions.

Trading based on insider information is illegal and unethical, and securities dealers have a duty to prevent such activities. In this scenario, Mr. Koh should advise the client to refrain from trading based on the insider knowledge of the impending merger announcement. Additionally, Mr. Koh should promptly report the matter to the compliance department to ensure appropriate action is taken. This aligns with the regulatory requirements outlined in the Securities and Futures Act (SFA) in Singapore, which prohibit insider trading and mandate dealers to report any suspicious activities to regulatory authorities. Upholding integrity and compliance with securities laws are paramount responsibilities of securities dealers.

High-frequency trading (HFT) can have significant implications for market stability and fairness due to its rapid pace and large trading volumes. Ms. Ng must consider the potential impact of HFT transactions on market integrity, including issues such as market manipulation and systemic risk. Additionally, she should assess whether the client’s HFT strategies comply with regulatory requirements under the Securities and Futures Act (SFA) in Singapore. While HFT can provide liquidity and efficiency to markets, dealers must ensure that such activities do not compromise market integrity or disadvantage other market participants. Regulatory authorities closely monitor HFT activities to maintain a fair and orderly marketplace.

The correct answer is (c) Executing trades without obtaining proper authorization from clients. According to the Securities and Futures Act 2001, it is illegal for securities dealers to execute trades without proper authorization from their clients. This is to ensure that trades are conducted based on the client’s instructions and in their best interest, maintaining the integrity and trust in the financial markets.

The correct answer is (a) Mr. Tan should diversify his CPFIS investments across various asset classes to mitigate risk. According to the Central Provident Fund Investment Scheme (CPFIS), investors like Mr. Tan are encouraged to diversify their investments to spread risk. Investing solely in high-risk speculative stocks may expose Mr. Tan to significant losses. Diversification helps to balance risk and return, ensuring the safety and growth of CPF funds over the long term.

The correct answer is (b) Inform Mrs. Lee about her concerns regarding the market and recommend postponing the sale until conditions are more favorable. According to the Securities and Futures Act 2001, securities dealers have a duty to act in the best interest of their clients. This includes providing suitable advice and ensuring that client transactions are conducted in a manner that prioritizes the client’s welfare. By informing Mrs. Lee about the market conditions and recommending a postponement, Ms. Lim demonstrates her commitment to fulfilling her fiduciary duty to her client.

The correct answer is (c) Inform Ms. Tan about his concerns regarding the product’s risk profile and recommend alternative investment options. As per the Securities and Futures Act 2001, securities dealers have a fiduciary duty to act in the best interest of their clients. In this scenario, Mr. Wong should prioritize Ms. Tan’s financial well-being by disclosing his concerns about the investment product’s risk profile. Recommending alternative options that align better with Ms. Tan’s conservative investment objectives demonstrates Mr. Wong’s commitment to fulfilling his duty as a responsible securities dealer.

The correct answer is (d) Recommend a diversified investment portfolio tailored to Ms. Lim’s moderate risk tolerance, comprising a mix of stocks, bonds, and other asset classes. According to CPFIS guidelines, investors like Ms. Lim are encouraged to diversify their CPF investments to manage risk effectively. Mr. Chan should recommend a balanced portfolio that aligns with Ms. Lim’s moderate risk tolerance while maximizing her retirement savings potential. Diversification across various asset classes helps mitigate market volatility while offering growth opportunities, ensuring a stable and prosperous retirement for Ms. Lim.