RES 2B – Rules, Ethics and Skills for Derivatives Dealers of Non-Exchange Members

The Monetary Authority of Singapore (MAS) plays a crucial role in regulating the capital markets industry. One of its key functions is to issue guidelines and regulations for financial institutions operating within Singapore’s capital markets. These guidelines cover various aspects such as risk management, corporate governance, and market conduct to ensure the stability and integrity of the financial system. This regulatory framework is established under the authority of the Securities and Futures Act (SFA) 2001 and the Financial Advisers Act (FAA) 2001, which empower MAS to oversee and regulate financial institutions to safeguard investors’ interests and maintain market confidence.

Under the Securities and Futures Act (SFA) 2001, individuals or entities engaged in regulated activities such as providing financial advisory services are required to hold a Capital Markets Services (CMS) license issued by the Monetary Authority of Singapore (MAS). This includes individuals providing financial advice to retail investors, as such activities involve dealing in securities or futures contracts, which fall under the regulatory purview of MAS. Licensing requirements aim to ensure that individuals and entities offering financial services meet specific competency standards and adhere to regulatory obligations, promoting professionalism and consumer protection in the financial industry.

In this scenario, Mr. Tan, as a derivatives dealer, must adhere to regulatory requirements governing the execution of client orders, as outlined in the Securities and Futures Act (SFA) 2001. Given the client’s request to trade outside regular hours, which may raise compliance and risk considerations, Mr. Tan should consult with the firm’s compliance department and seek approval before proceeding with the order. This ensures that the trade complies with applicable laws, regulations, and internal policies, safeguarding the interests of both the client and the firm while maintaining market integrity and transparency.

Under the Securities and Futures Act (SFA) 2001, providing investment advice constitutes a regulated activity that requires a Capital Markets Services (CMS) license issued by the Monetary Authority of Singapore (MAS). This license is necessary for individuals or entities offering investment advice on securities or futures contracts to clients in Singapore. Licensing requirements aim to ensure that providers of investment advice possess the necessary qualifications, competency, and integrity to offer sound financial guidance, promoting investor protection and market integrity within the capital markets industry.

A key requirement for a firm to obtain a Capital Markets Services (CMS) license under the Securities and Futures Act (SFA) 2001 in Singapore is to employ at least one licensed representative. This representative must be approved by the Monetary Authority of Singapore (MAS) and possess the necessary qualifications and competency to conduct regulated activities on behalf of the firm. By ensuring that licensed representatives meet specific regulatory standards, such as completing relevant training and passing competency examinations, regulatory authorities aim to enhance professionalism and integrity within the financial industry, promoting investor confidence and market stability.

The primary purpose of the Securities and Futures Act (SFA) 2001 in Singapore is to regulate the securities and futures markets, ensuring fair, efficient, and transparent trading practices. This legislation provides a comprehensive regulatory framework for the issuance, trading, and dealing of securities and futures contracts, aimed at safeguarding investors’ interests, maintaining market integrity, and promoting confidence in the capital markets. By establishing regulatory standards for market conduct, disclosure, and investor protection, the SFA enhances market efficiency, fosters investor trust, and contributes to the overall stability and development of Singapore’s financial industry.

In this scenario, Ms. Lim, as a derivatives dealer, is entrusted with confidential information that could potentially impact the market. It is imperative for her to adhere to ethical and regulatory standards outlined in the Securities and Futures Act (SFA) 2001, particularly regarding the handling of material non-public information (MNPI). Ms. Lim should promptly report the information to the firm’s compliance department to ensure appropriate measures are taken to prevent insider trading and maintain market integrity. This action demonstrates professionalism, integrity, and compliance with regulatory obligations, protecting both the firm’s reputation and the interests of investors.

While retail banks may offer financial products and services to customers, they are not typically considered participants in the capital markets industry in Singapore. The capital markets industry primarily encompasses entities involved in the issuance, trading, and investment of securities and derivatives, such as asset management companies, stock exchanges, and insurance companies. Retail banks primarily engage in traditional banking activities, such as deposit-taking, lending, and retail banking services, which are distinct from the activities typically associated with the capital markets industry.

The Singapore Exchange (SGX) plays a pivotal role in the capital markets industry by providing a platform for the trading of securities, derivatives, and other financial instruments. As a leading exchange in Asia, SGX facilitates the listing, trading, and clearing of a wide range of products, including equities, bonds, futures, and options. By offering a transparent and regulated marketplace, SGX promotes liquidity, price discovery, and risk management, serving as a vital infrastructure for investors, issuers, and intermediaries in Singapore’s capital markets ecosystem. This function aligns with the objectives of the Securities and Futures Act (SFA) 2001 to promote fair, efficient, and transparent trading practices while safeguarding investor interests.

While activities such as advising clients on investment opportunities, trading securities on behalf of clients, and operating a securities exchange require licensing under the Securities and Futures Act (SFA) 2001 in Singapore, providing accounting services does not typically fall under the purview of this legislation. Accounting services are regulated separately under other relevant laws and regulations governing the accounting profession and financial reporting standards. However, individuals or entities providing accounting services should still comply with applicable laws, standards, and professional ethics to ensure accuracy, integrity, and transparency in financial reporting and disclosure.

in Singapore plays a crucial role in overseeing and enforcing regulations related to securities trading. Established under the Securities and Futures Act (SFA) 2001, the SIC is responsible for administering the Takeover Code and the Share Buyback Code, which govern transactions involving listed companies’ securities. By ensuring compliance with these codes and other regulatory requirements, the SIC promotes fair, transparent, and orderly securities markets, thereby protecting the interests of investors and maintaining market integrity. The SIC’s enforcement actions may include investigations, issuing rulings, and imposing sanctions on market participants for breaches of securities laws and regulations.

In this scenario, Mr. Lee, as a licensed representative providing financial advice, has a fiduciary duty to act in the best interests of the client and ensure that the client makes informed investment decisions. Given the client’s limited knowledge and experience in derivatives trading, Mr. Lee should provide comprehensive explanations of the derivative product, including its features, risks, and potential returns. He should also disclose any associated costs, fees, and market risks to enable the client to assess the suitability of the investment in light of their financial goals and risk tolerance. By providing transparent and balanced advice, Mr. Lee upholds professional standards, promotes investor protection, and complies with regulatory requirements outlined in the Securities and Futures Act (SFA) 2001 and related regulations governing financial advisory services.

While maintaining a physical office in Singapore may be a practical consideration for conducting business operations, it is not a specific requirement for obtaining a Capital Markets Services (CMS) license under the Securities and Futures Act (SFA) 2001. However, other requirements such as demonstrating competency, maintaining a minimum capital base, and obtaining professional indemnity insurance are essential for licensure. These requirements aim to ensure that licensed entities meet regulatory standards, possess adequate resources, and have mechanisms in place to manage risks, thereby enhancing investor protection and market integrity within Singapore’s capital markets industry.

The primary objective of licensing requirements for financial institutions under the Securities and Futures Act (SFA) 2001 in Singapore is to promote investor protection. By establishing regulatory standards and licensing criteria, authorities seek to ensure that financial institutions operating in Singapore’s capital markets industry possess the necessary competence, integrity, and financial soundness to safeguard investors’ interests. Licensing requirements help mitigate risks such as fraud, misconduct, and insolvency, thereby enhancing market confidence, integrity, and stability. Additionally, regulatory oversight and supervision of licensed entities contribute to the detection and prevention of market abuses, fostering a fair and transparent marketplace conducive to investor trust and participation.

The Financial Industry Disputes Resolution Centre (FIDReC) in Singapore plays a vital role in providing an independent and impartial platform for resolving disputes between financial institutions and consumers. FIDReC offers alternative dispute resolution services, including mediation and arbitration, to help parties reach fair and equitable settlements outside of formal legal proceedings. By offering accessible and efficient dispute resolution mechanisms, FIDReC promotes consumer protection, enhances market confidence, and contributes to the integrity and stability of Singapore’s financial industry. FIDReC’s operations align with the objectives of regulatory frameworks such as the Securities and Futures Act (SFA) 2001 and the Financial Advisers Act (FAA) 2001, which emphasize the importance of fair treatment and redress for investors in the financial marketplace.

According to the Securities and Futures Act 2001, it is essential for derivatives dealers to assess the suitability of any investment recommendation or advice given to clients. This involves evaluating the client’s knowledge, experience, and risk tolerance to ensure that the recommended product aligns with their financial objectives and circumstances. Providing recommendations solely based on potential profitability without considering the client’s suitability can lead to mis-selling and potential legal consequences. Therefore, Mr. Tan must conduct a thorough assessment of the client’s suitability before providing any recommendations or advice.

Under the Securities and Futures Act 2001, derivatives dealers engaging in OTC derivatives transactions are required to comply with various reporting and disclosure obligations mandated by regulatory authorities such as the Monetary Authority of Singapore (MAS). These obligations include providing clients with comprehensive disclosures regarding the terms and risks associated with OTC derivatives, maintaining proper documentation for all transactions, and reporting relevant information to regulatory bodies. Failure to adhere to these regulatory requirements can result in regulatory sanctions and reputational damage. Therefore, Ms. Lim must ensure full compliance with reporting and disclosure obligations throughout the OTC derivatives transaction process.

Under the Securities and Futures Act 2001, derivatives dealers are prohibited from engaging in insider trading, which involves trading securities or derivatives based on material non-public information. Confidential information about an upcoming corporate merger qualifies as material non-public information. Therefore, Mrs. Lee must refrain from trading or disclosing the confidential information until it becomes publicly available. Sharing the information with colleagues, using it for personal gain, or selectively disclosing it to clients would constitute a violation of market conduct regulations and could lead to severe legal consequences, including fines and imprisonment. Mrs. Lee must uphold the highest standards of integrity and avoid any actions that could undermine market fairness and investor confidence.

When structuring a customized OTC derivatives product for a client, derivatives dealers must consider the client’s risk profile, investment objectives, and financial circumstances to ensure suitability. This involves tailoring the product to meet the client’s specific requirements while aligning with their risk tolerance and return expectations. Providing a product with complex features or recommending high-risk derivatives without adequately disclosing potential downsides would be contrary to the client’s best interests and could lead to unsuitable recommendations. Therefore, Mr. Singh should prioritize designing the OTC derivatives product in a manner that aligns with the client’s needs and preferences, promoting transparency and suitability in the process.

Derivatives dealers have a duty to act in the best interests of their clients and ensure that trades are suitable for their financial objectives and circumstances. In this scenario, where Mr. Koh believes that executing the trade may be detrimental to the client’s financial interests, he should refuse to proceed with the trade. Instead, Mr. Koh should explain the potential risks and consequences associated with the trade to the client, emphasizing his obligation to act in the client’s best interests. Documenting the client’s insistence may provide additional clarity in the event of any future disputes or regulatory inquiries. Seeking guidance from senior management can also be beneficial in complex situations, but Mr. Koh’s primary responsibility is to prioritize client protection and uphold market conduct standards.

Market manipulation is prohibited under the Securities and Futures Act 2001 and is a serious offense that undermines market integrity and investor confidence. As a derivatives dealer, Ms. Wong has a duty to ensure that the orders she receives from clients are legitimate and compliant with regulatory requirements. In this scenario, where Ms. Wong suspects that the client may be attempting to manipulate the market, she should refuse to execute the order and conduct further due diligence to verify the client’s intentions. This may involve gathering additional information from the client, analyzing market data, and consulting with compliance or legal experts. Reporting suspicions to regulatory authorities may be necessary if Ms. Wong obtains concrete evidence of market manipulation. However, her immediate priority should be to prevent any potential harm to the market and uphold market conduct standards.

When structuring OTC derivatives products for clients, derivatives dealers must ensure that the product terms align with the client’s risk tolerance and investment objectives. If a client requests modifications that would significantly increase the product’s risk exposure, the derivatives dealer has a duty to inform the client about the potential risks associated with those modifications. This involves conducting a thorough assessment of the suitability of the requested modifications in light of the client’s financial circumstances and risk preferences. Implementing the modifications without considering their impact on the client’s risk profile could lead to unsuitable recommendations and potential legal liabilities. Therefore, Mr. Patel should prioritize transparency and client protection by informing the client about the risks and assessing the suitability of the requested modifications accordingly.

Under market conduct regulations, derivatives dealers are required to uphold the highest standards of integrity and avoid conflicts of interest that could compromise their ability to act in the best interests of clients. Receiving a substantial bonus from a client could create a potential conflict of interest and raise concerns about impartiality. Therefore, Mr. Tan should report the bonus to his employer and seek guidance on whether to accept it in compliance with company policies and regulatory requirements. Disclosing the bonus allows for transparency and ensures that appropriate measures can be taken to mitigate any conflicts of interest. Using the bonus for personal investments without disclosure could raise suspicions of unethical behavior and regulatory scrutiny. Therefore, Mr. Tan should prioritize transparency and compliance by reporting the bonus to his employer and seeking guidance on the appropriate course of action.

Regardless of a client’s level of experience or preference for minimal disclosure, derivatives dealers are obligated to provide comprehensive disclosure regarding the terms and risks associated with any OTC derivatives product. This is in line with regulatory requirements aimed at ensuring transparency, investor protection, and informed decision-making. Providing minimal disclosure could expose the client to unforeseen risks and undermine market integrity. Therefore, Ms. Chan should prioritize compliance with regulatory requirements and provide the client with comprehensive disclosure regarding the product’s terms and risks, enabling the client to make informed investment decisions. Upholding transparency and investor protection is essential in maintaining market confidence and regulatory compliance.

As per the Securities and Futures Act 2001, derivatives dealers are prohibited from engaging in insider trading, which involves trading securities or derivatives based on material non-public information. Mr. Rodriguez, upon obtaining material non-public information, should refrain from engaging in any trading activities until the information becomes publicly available. This ensures fairness and integrity in the market and prevents the exploitation of privileged information for personal gain. Proceeding with trading based on such information would constitute insider trading and could lead to severe legal consequences, including fines and imprisonment. Therefore, Mr. Rodriguez should prioritize compliance with market conduct standards by refraining from trading until the information is disclosed to the public.

When dealing with OTC derivatives transactions, derivatives dealers must ensure that the terms of the transaction are suitable for the client’s financial circumstances and risk tolerance. In this scenario, where the client requests a leverage ratio that significantly exceeds their initial investment, Ms. Nguyen should inform the client about the risks associated with high leverage and assess their suitability for the requested ratio. High leverage increases the potential for both gains and losses, amplifying the client’s risk exposure. Therefore, Ms. Nguyen must prioritize transparency and client protection by providing comprehensive information about the risks involved and assessing whether the requested leverage ratio aligns with the client’s financial objectives. Proceeding without considering the leverage ratio or offering additional leverage without proper assessment could lead to unsuitable recommendations and regulatory implications.

Derivatives dealers have a responsibility to uphold market integrity and stability by ensuring that their trading activities do not disrupt market functioning or liquidity. In this scenario, where Ms. Garcia believes that executing the large trade may impact market stability and liquidity, she should inform the client about the potential market impact and suggest alternative execution strategies. This may involve breaking down the trade into smaller orders to minimize market disruption or exploring alternative execution venues. By prioritizing transparency and communication with the client, Ms. Garcia can mitigate the potential risks associated with the large trade while promoting market conduct standards. Proceeding with the trade without considering its impact on market stability or delaying its execution to assess potential consequences demonstrates Ms. Garcia’s commitment to upholding market integrity and regulatory compliance.

Derivatives dealers have a duty to ensure that the products they offer are suitable for their clients’ financial objectives, knowledge, and experience. In this scenario, where the client expresses interest in a complex product with features that may be difficult to understand, Mr. Chen should provide comprehensive explanations and disclosures regarding the product’s features and risks. This involves educating the client about the intricacies of the product, including potential risks and implications, to enable them to make informed investment decisions. Failing to provide adequate explanations and disclosures could result in the client making uninformed choices that may not align with their financial objectives or risk tolerance. Therefore, Mr. Chen should prioritize transparency and client protection by providing thorough guidance and disclosures throughout the product structuring process, ensuring compliance with regulatory requirements and promoting market integrity.

As a derivatives dealer, Ms. Patel has a responsibility to uphold market integrity and report any suspicious activities that could potentially harm market fairness and investor confidence. Unusual trading patterns suggestive of market manipulation must be taken seriously and reported to regulatory authorities promptly. Reporting such activities demonstrates Ms. Patel’s commitment to market conduct standards and ensures that appropriate actions are taken to investigate and address any wrongdoing. Ignoring the suspicious trading patterns or capitalizing on them for personal gain would be unethical and could lead to regulatory sanctions. Therefore, Ms. Patel should prioritize transparency and integrity by reporting the suspicious trading patterns to regulatory authorities, promoting market fairness and investor protection.

When dealing with OTC derivatives transactions, derivatives dealers must ensure that the terms of the transaction are fair and reasonable for all parties involved. In this scenario, where the client’s requested terms are significantly more favorable than market norms, Mr. Wong should inform the client about the market norms for similar transactions and discuss potential adjustments to the terms. This involves educating the client about industry standards and ensuring that the transaction aligns with market practices and regulatory requirements. Proceeding with the transaction without addressing the discrepancy in terms could lead to conflicts of interest and potential legal liabilities. Therefore, Mr. Wong should prioritize transparency and fairness by engaging in open communication with the client and negotiating terms that are mutually acceptable and compliant with regulatory standards.