Malaysia Securities Exam Module 17 - Securities and Derivatives Trading (Rules and Regulations)

The correct answer is (d) Refrain from using or disclosing the insider information. The Securities and Derivatives Trading Rules and Regulations in Malaysia strictly prohibit the use or disclosure of insider information for personal gain. This regulation aims to ensure fair and transparent markets, preventing unfair advantages and maintaining the integrity of securities trading.

Reference: Securities Commission Malaysia – Guidelines on Prevention of Insider Trading

Correct Answer: (B) Civil and criminal penalties, including fines and imprisonment.

Individuals found guilty of insider trading may face severe legal consequences, including civil and criminal penalties. These penalties may involve substantial fines and imprisonment, as insider trading is a serious offense that undermines market integrity and investor confidence.

Relevant Regulation: Capital Markets and Services Act 2007, Section 188 – Offense of Insider Trading.

The correct answer is (A) To prevent market manipulation and excessive volatility. Circuit breakers are mechanisms designed to temporarily halt or limit trading in the event of significant market fluctuations. In the derivatives market, these measures are implemented to prevent market manipulation, maintain market stability, and protect investors from extreme price movements. By pausing trading during periods of excessive volatility, circuit breakers provide market participants with time to assess and respond to changing market conditions, reducing the risk of disorderly trading.

The correct answer is (b) Securities Commission Malaysia (SC); Considerations include risk controls and market integrity. Algorithmic trading in Malaysia falls under the jurisdiction of the Securities Commission, and traders engaging in such activities need to seek approval and adhere to regulatory guidelines. The SC emphasizes the importance of implementing robust risk controls and ensuring market integrity when employing algorithmic trading strategies. Traders like Mr. Tan should prioritize these considerations to mitigate potential risks associated with algorithmic trading.

The correct answer is (c) Acting as a counterparty to both buyers and sellers, guaranteeing trade settlement. The Clearing House in derivatives trading plays a crucial role in mitigating counterparty risk. It acts as an intermediary between buyers and sellers, becoming the counterparty to every trade. By doing so, the Clearing House guarantees the performance of the contract, ensuring that both parties fulfill their obligations. This mechanism enhances market stability, reduces default risk, and contributes to effective risk management in the derivatives market.

The correct answer is (d) Capital Markets and Services Act (CMSA). The CMSA in Malaysia includes provisions related to the disclosure of information to investors. In the context of commodity derivatives, Ms. Lim should be aware of the regulations outlined in the CMSA, which govern the disclosure of material information to investors. Adhering to these guidelines ensures transparency in the market and protects the interests of investors.

The correct answer is (c) Securities Commission Malaysia (SC) and relevant international regulators. When engaging in cross-border derivatives transactions, traders must consider regulations outlined by both the Securities Commission Malaysia and the relevant international regulators. The SC collaborates with regulatory bodies in other jurisdictions to ensure that cross-border transactions adhere to established standards, promoting regulatory consistency and protecting the integrity of the derivatives market.

The correct answer is (b) Securities Commission Malaysia (SC) arbitration. In Malaysia, the Securities Commission provides a dispute resolution mechanism through arbitration for market participants involved in derivatives trading. This process offers a fair and impartial resolution for trading disputes, providing an alternative to traditional legal proceedings.

The correct answer is (A) Attend educational seminars and webinars on derivatives trading. To gain a comprehensive understanding of the risks and rewards of derivatives trading, Mrs. Lee should actively seek educational resources. Attending seminars and webinars conducted by reputable institutions or professionals can provide valuable insights into the complexities of derivatives markets, risk management strategies, and market trends, empowering her to make informed investment decisions.

The correct answer is (c) Taxation on derivatives gains is governed by the Inland Revenue Board of Malaysia (IRB). Derivatives gains in Malaysia are subject to taxation, and the Inland Revenue Board is the regulatory body responsible for overseeing tax matters. Traders like Mr. Chen should be aware of the tax implications, including applicable rates and reporting requirements, to ensure compliance with taxation regulations.

The correct answer is (a) Delta and Theta; Delta measures the change in option price relative to the underlying asset, while Theta measures the impact of time decay on option prices. Delta represents the sensitivity of the option price to changes in the underlying asset’s price, and Theta measures the impact of time decay on the option’s value. Understanding these “greeks” is crucial for options traders to make informed decisions and manage their positions effectively.

The correct answer is (b) ETFs are investment funds that trade on stock exchanges, mirroring the performance of an underlying index. They provide diversification, liquidity, and real-time pricing, making them suitable for investors seeking broad market exposure. ETFs are investment funds that track the performance of an underlying index and are traded on stock exchanges. They offer diversification, liquidity, and real-time pricing, making them suitable for investors like Ms. Garcia seeking exposure to a broad range of assets.

The correct answer is (d) – Regularly review and update risk management systems to adapt to changing market conditions.

High-frequency trading involves rapid transactions, and effective risk management is essential to mitigate potential losses. Regularly reviewing and updating risk management systems ensures that they remain robust and can adapt to evolving market conditions, helping Mr. H navigate the challenges associated with high-frequency trading.

The correct answer is (b) – Engaging in market manipulation can lead to severe legal consequences, including fines and imprisonment.

Market manipulation is strictly prohibited in the derivatives market, as it undermines market integrity and fairness. Ms. I should be aware that participating in such activities can result in legal actions, including substantial fines and imprisonment, in accordance with securities laws and regulations.

The correct answer is (c) – Politely refuse the gift and explain the importance of maintaining a fair and unbiased relationship.

Accepting gifts from clients can create conflicts of interest and compromise the integrity of the derivatives industry. Mr. J should adhere to ethical standards and regulations by politely refusing the gift, emphasizing the importance of maintaining a fair and unbiased professional relationship.

Relevant Laws/Regulations: Securities Industry (Code of Ethics) Rules 2021, Guidelines on Standards of Conduct for Derivatives Market Participants (issued by the Securities Commission Malaysia).

The correct answer is (c) – Conduct thorough research on the features, risks, and market conditions associated with the new derivative product.

Before recommending a new derivative product to clients, Ms. P should conduct comprehensive due diligence. This includes researching the product’s features, understanding associated risks, and evaluating market conditions. Providing clients with accurate and relevant information enables them to make well-informed investment decisions.

Relevant Laws/Regulations: Securities Industry (Professional Conduct) Rules 2013, Guidelines on Conduct of Business for Derivatives Market Participants (issued by the Securities Commission Malaysia).

The correct answer is (D) – Ensure that the structured products comply with regulatory requirements and provide transparent information to clients.

When creating and marketing complex structured derivative products, Mr. Q should prioritize compliance with regulatory requirements. Providing transparent and detailed information to clients ensures that they understand the products’ features and associated risks, fostering trust and adherence to ethical standards.

Relevant Laws/Regulations: Capital Markets and Services Act 2007, Securities Industry (Professional Conduct) Rules 2013, Guidelines on Conduct of Business for Derivatives Market Participants (issued by the Securities Commission Malaysia).

The correct answer is (b) – Disclose the conflicting instructions to both clients and seek their consent to proceed with the trade.

In situations of conflicting instructions, transparency is essential. Ms. R should disclose the conflicting instructions to both clients, ensuring they are aware of the situation. Seeking their consent allows for fair and ethical decision-making, promoting trust and integrity in client relationships.

Relevant Laws/Regulations: Securities Industry (Code of Conduct for Market Participants) Regulations 2004, Guidelines on Fair Dealing (issued by the Securities Commission Malaysia).

The correct answer is (d) – Offer a general overview of the valuation methodologies without disclosing specific details.

While transparency is important, Ms. T should balance it with the need to protect proprietary information. Providing a general overview of the valuation methodologies without divulging sensitive details ensures that the client is informed while maintaining the confidentiality of certain aspects of the process.

Relevant Laws/Regulations: Securities Industry (Code of Conduct for Market Participants) Regulations 2004, Guidelines on Conduct of Business for Derivatives Market Participants (issued by the Securities Commission Malaysia).

The correct answer is B) Implement robust risk controls and circuit breakers to manage potential market disruptions. Malaysia’s Securities and Derivatives Trading regulations emphasize the importance of risk management in high-frequency trading to mitigate potential market disruptions and ensure market stability. Traders engaging in high-frequency trading strategies should implement robust risk controls and circuit breakers to manage the rapid pace of trades and prevent adverse consequences that could impact market integrity. This practice aligns with regulatory objectives to maintain a fair and orderly market environment.

The correct answer is C) Report the information to the Securities Commission Malaysia (SC) without trading on it. Malaysia’s Securities and Derivatives Trading regulations strictly prohibit the use of material non-public information for personal gain or for executing trades. Analysts who come across such information should promptly report it to the Securities Commission Malaysia (SC) to ensure market integrity and prevent insider trading. Failing to report and acting on material non-public information may lead to severe legal consequences, including regulatory sanctions and penalties.

Correct Answer: D) Sophisticated investors as provided under Part 1 of Schedule 6 and 7 of the CMSA

Explanation: The correct answer is D) Sophisticated investors as provided under Part 1 of Schedule 6 and 7 of the CMSA. According to the CFD Regulatory Framework in Malaysia, CFDs may only be offered to sophisticated investors as provided under Part 1 of Schedule 6 and 7 of the Capital Markets and Services Act 2007 (CMSA). This provision aims to ensure that CFD offerings are limited to investors who possess a certain level of financial sophistication and understanding of the risks involved in trading CFDs. This restriction is in line with the regulatory efforts to protect investors and maintain market integrity.

The correct answer is (a) Take all possible steps to resolve or adequately mitigate the conflict and make full disclosure to its clients.

According to the rules governing conflict of interest management, a CFD provider must take all reasonable measures to avoid situations that are likely to involve a conflict of interest. In cases where such a conflict does arise, the provider must take all possible steps to resolve or adequately mitigate the conflict and make full disclosure to its clients. This includes disclosing the nature of the conflict of interest and the steps taken to address it.

This practice ensures transparency and trust between the provider and its clients, as clients have a right to know if there are any conflicts of interest that may impact their investments. Failure to disclose such conflicts or adequately address them could lead to a breach of regulatory requirements and erode client trust in the provider’s services. Therefore, option (a) is the correct answer.

The correct answer is C) Decline the client’s request, explaining the prohibition on market manipulation. Malaysia’s Securities and Derivatives Trading regulations strictly prohibit market manipulation. Traders should not engage in activities that could manipulate the closing price of a security. Mr. B should decline the client’s request, explain the regulatory prohibition on market manipulation, and ensure that his actions align with ethical standards and regulatory requirements.

The correct answer is B) Decline the client’s order and report the attempt of front-running to regulatory authorities. Front-running, which involves trading ahead of a client’s order to gain an unfair advantage, is unethical and strictly prohibited by Malaysia’s Securities and Derivatives Trading regulations. Ms. C should decline the order, report the attempt of front-running to regulatory authorities, and uphold ethical standards to ensure fair and transparent market practices.

The correct answer is D) Report the loophole to the relevant authorities to address the potential issue. Discovering a loophole in the trading system that may provide unfair advantages goes against the principles of fair and orderly markets outlined in Malaysia’s Securities and Derivatives Trading regulations. Ms. E should report the loophole to the relevant regulatory authorities to ensure the integrity of the trading system is maintained and potential risks are addressed promptly. This action aligns with ethical standards and regulatory expectations.

The correct answer is B) Decline the client’s order and report the attempted pump-and-dump scheme to regulatory authorities. Participating in a pump-and-dump scheme, where the goal is to artificially inflate the price of a security for profit, is strictly prohibited by Malaysia’s Securities and Derivatives Trading regulations. Mr. F should decline the order, report the attempted scheme to regulatory authorities, and uphold ethical standards to prevent market manipulation.

The correct answer is C) Report the market rumor to the Securities Commission Malaysia (SC) without trading on it. Malaysia’s Securities and Derivatives Trading regulations emphasize the importance of preventing market manipulation and maintaining market integrity. Ms. G should report the market rumor to the Securities Commission Malaysia (SC) without trading on it, ensuring regulatory authorities are aware of potential information that could impact the market.

Correct Answer: (A) Conduct enhanced due diligence to verify the source of funds and assess the risk associated with the PEP.

Explanation:
PEPs are considered high-risk clients due to their potential exposure to corruption and illicit activities. Securities dealers are required to conduct enhanced due diligence, including verifying the source of funds and assessing the risk associated with PEPs, as per the AMLA regulations. This is essential to mitigate the risk of money laundering and ensure compliance with regulatory standards.

Correct Answer: (d) Report the request to transfer funds without disclosing transaction details to the regulatory authorities.

Explanation:
Requests to transfer funds without disclosing transaction details may raise concerns about potential money laundering or tax evasion. Investment advisers must report such requests to the regulatory authorities, as required by the AMLA regulations. This reporting helps prevent financial crimes and ensures compliance with laws aimed at combating illicit financial activities.