Malaysia Securities Exam Module 16 - Rules & Regulations of Derivatives

Correct Answer: (B) Ms. F must provide the client with clear and understandable information about the recommended derivative strategy, including associated risks.

Explanation:
Under the Capital Markets and Services Act 2007 (CMSA), investment advisers like Ms. F have a fiduciary duty to act in the best interests of their clients. This includes providing comprehensive and clear information about recommended derivative strategies, ensuring that clients are fully informed about potential risks. This obligation aims to protect investors and promote transparency in the financial advisory process.

Correct Answer: (D) Securities Commission Malaysia (SC)

Explanation:
The Securities Commission Malaysia (SC) is the primary regulatory body overseeing the Malaysian derivatives market. The SC plays a crucial role in formulating and enforcing regulations that protect the interests of investors. Investor protection mechanisms, such as disclosure requirements and fair trading practices, are established by the SC under the Capital Markets and Services Act 2007 (CMSA).

Correct Answer: (C) ABC Fund Management must comply with fiduciary duties, act in the best interests of clients, and follow relevant regulations outlined in the CMSA.

Explanation:
Under the Capital Markets and Services Act 2007 (CMSA), fund managers, including ABC Fund Management, have fiduciary duties to act in the best interests of their clients. This includes compliance with relevant regulations to ensure transparency, fair practices, and protection of investor interests. ABC Fund Management should adhere to these obligations to maintain trust and confidence among its clients.

Correct Answer: (B) Ms. X should follow the complaint resolution mechanisms provided by the derivatives exchange or platform where the transactions occurred.

Explanation:
Under the Capital Markets and Services Act 2007, the resolution of complaints related to derivatives transactions is typically overseen by the derivatives exchange or platform where the transactions occurred. Ms. X should follow the established complaint resolution mechanisms provided by the specific exchange or platform to address her concerns. This ensures a fair and impartial resolution process tailored to the rules of the exchange or platform.

The correct answer is A) Immediately liquidate his positions to meet the margin requirements. In times of heightened market volatility, it is crucial for traders like Mr. Aziz to manage their risk effectively. The Securities Commission Malaysia Act 1993 emphasizes the importance of maintaining adequate margin levels. When facing margin calls, traders should take prompt action to meet the requirements, which may involve liquidating positions to avoid further losses and maintain financial stability.

Reference: Securities Commission Malaysia Act 1993

The correct answer is (c) Conduct thorough due diligence and obtain approval from the Securities Commission before introducing the new derivative product. The Securities Commission Malaysia Act 1993 requires companies to seek regulatory approval before launching new derivative products. This involves conducting comprehensive due diligence, ensuring the product’s compliance with regulations, and obtaining approval from the Securities Commission to safeguard market integrity and protect investors.

Reference: Securities Commission Malaysia Act 1993

The correct answer is (b) Disclose her commission earnings to clients and provide objective information about the recommended derivatives. The Securities Commission Malaysia Act 1993 promotes transparency and fair dealing in the securities and derivatives markets. Miss Wong should disclose her commission earnings to clients and provide objective information about the recommended derivatives to ensure transparency, build trust, and adhere to ethical standards.

Reference: Securities Commission Malaysia Act 1993

The correct answer is (d) Report the tip to the Securities Commission and refrain from trading on the information. The Securities Commission Malaysia Act 1993 prohibits the use of non-public information for personal gain. Mr. Rahim should report the tip to the regulatory authority and refrain from trading on the information to uphold market integrity and prevent insider trading.

Reference: Securities Commission Malaysia Act 1993

The correct answer is (c) Implement measures to protect investors, such as transferring client funds to a secure entity. In the event of a brokerage firm facing financial difficulties, the Securities Commission Malaysia Act 1993 empowers regulatory authorities to implement measures to protect investors, such as transferring client funds to a secure entity. This ensures the safety of investors’ assets during challenging financial situations.

Reference: Securities Commission Malaysia Act 1993

The correct answer is (b) Diversification of the portfolio. Bursa Malaysia Derivatives Berhad encourages risk management practices, and diversifying the portfolio is a key strategy. Diversification involves spreading investments across different assets to reduce the impact of a poor-performing investment on the overall portfolio. This helps manage risk and enhance the stability of the derivatives market.

The correct answer is (a) Conduct periodic reviews of algorithmic systems. Bursa Malaysia Derivatives Berhad emphasizes the importance of risk controls in algorithmic trading. Institutional investors engaging in algorithmic trading should conduct regular reviews of their systems to ensure compliance with regulations, prevent market manipulation, and maintain the integrity of the derivatives market.

The correct answer is (d) Conduct a client suitability assessment. Bursa Malaysia Derivatives Berhad mandates that brokers must conduct a client suitability assessment to ensure that the recommended derivatives transactions are suitable for the client based on their financial situation, investment objectives, and risk tolerance. This helps protect retail clients and ensures responsible trading practices.

The correct answer is (c) – Derivatives can be utilized for hedging purposes, helping market participants manage and mitigate risks associated with price movements. According to Bursa Malaysia Derivatives Berhad Trading Manual, derivatives serve as risk management tools, allowing participants to protect themselves against adverse price movements in the underlying asset. This is a crucial aspect of hedging strategies employed by various market participants.

Reference: Bursa Malaysia Derivatives Berhad Trading Manual – Chapter on Hedging with Derivatives.

The correct answer is (b) – Options contracts are cash-settled, with the settlement amount determined based on the difference between the contract’s exercise price and the market price of the underlying asset. Bursa Malaysia Derivatives Berhad allows for cash settlement of options contracts, where the financial difference between the exercise price and the market price is settled in cash. This is a common practice in many derivatives markets to simplify the settlement process.

Reference: Bursa Malaysia Derivatives Berhad Trading Manual – Chapter on Options Trading.

The correct answer is (d) – BMD employs a clearinghouse to act as a central counterparty, guaranteeing the performance of futures contracts and reducing counterparty risk. Bursa Malaysia Derivatives Berhad utilizes a clearinghouse to interpose itself as the counterparty to both the buyer and the seller in a futures contract. This arrangement ensures the fulfillment of contractual obligations, minimizing the risk of default by either party.

Reference: Bursa Malaysia Derivatives Berhad Trading Manual – Chapter on Risk Management.

The correct answer is (b) – Options holders have the right, but not the obligation, to buy or sell the underlying asset at the exercise price. When an individual holds an options contract, they have the right to exercise the option, but they are not obligated to do so. This flexibility is a key characteristic of options trading, allowing holders to make decisions based on market conditions.

Reference: Bursa Malaysia Derivatives Berhad Trading Manual – Chapter on Options Trading.

The correct answer is (a) – Liquidity is affected by factors such as trading volume, open interest, and the bid-ask spread, with active market participation contributing to higher liquidity. Bursa Malaysia Derivatives Berhad acknowledges that liquidity is a crucial aspect of options trading, and factors such as trading volume, open interest, and bid-ask spread play a significant role. Higher liquidity ensures smoother market operations and better execution of trades.

Reference: Bursa Malaysia Derivatives Berhad Trading Manual – Chapter on Options Trading.

The correct answer is (B) Mr. Ahmad discloses his personal interest in the recommended stock on his social media. According to the “Guidance Note on Provision of Investment Advice,” it is essential for licensed derivatives brokers to disclose any personal interest or potential conflicts of interest when providing investment advice. This ensures transparency and helps clients make informed decisions. Failure to disclose personal interests may violate regulatory requirements and undermine the integrity of the advice provided.

The correct answer is (C) Refrain from trading the company’s derivatives until the information becomes public. According to securities regulations, trading based on insider information is strictly prohibited. Ms. Tan should avoid using the privileged information for personal gain and must refrain from trading the company’s derivatives until the information is made public. This ensures fair and transparent markets, preventing unfair advantages for individuals with access to non-public information.

The correct answer is (D) Refrain from using the non-public information for personal gain or sharing it. According to securities regulations, using non-public information for personal gain or sharing it with others is considered insider trading and is strictly prohibited. Ms. Lee should adhere to ethical standards by refraining from exploiting such information for personal benefit, ensuring fair and transparent markets.

The correct answer is (B) Provide detailed education on derivatives trading risks and rewards before making any recommendations. According to regulations, derivatives advisers should ensure that clients have a comprehensive understanding of the risks and rewards associated with different investment strategies. Educating the client helps them make informed decisions aligned with their risk tolerance and financial goals, fostering a responsible and transparent advisory relationship.

The correct answer is (C) Implement the trade in a manner that minimizes its potential impact on market prices. Market integrity regulations emphasize the importance of maintaining fair and orderly markets. Mr. Rahman should execute the large trade in a way that minimizes disruption to market prices, preventing undue volatility. This approach aligns with responsible trading practices and helps preserve the overall integrity of the market.

The correct answer is (A) Provide the client with a detailed explanation of the strategy and its associated risks. According to regulations, derivatives advisers should ensure that clients have a clear understanding of the risks associated with any recommended strategies. Providing detailed information helps clients make informed decisions and aligns with the principles of transparency and responsible advisory practices.

The correct answer is (C) Refrain from trading the company’s derivatives until the information becomes public. Regulatory standards prohibit the use of non-public information for personal gain or sharing it with others. Ms. Lim should adhere to ethical standards by refraining from exploiting such information for personal benefit, ensuring fair and transparent markets.

The correct answer is (A) Provide detailed explanations and educational materials to enhance client understanding. Regulatory guidelines emphasize the importance of clear communication and ensuring that clients understand recommended strategies. Mr. Ahmad should provide educational materials and detailed explanations to enhance client understanding, promoting transparency and informed decision-making.

The correct answer is (C) Seek clarification from the client to ensure the request aligns with their current risk preferences. Regulatory standards require derivatives brokers to prioritize client interests and ensure that trade requests align with the client’s stated preferences. Ms. Lim should seek clarification from the client to confirm their current risk preferences before proceeding with the trade.

The correct answer is (B) Disclose the conflict of interest to both clients and seek their consent. Regulatory standards emphasize the importance of managing conflicts of interest transparently. Mr. Lim should disclose the potential conflict to both clients and seek their consent before proceeding with any transactions, promoting fairness and client trust.

The correct answer is (b) Request additional information from the client about the source of funds and conduct enhanced due diligence.

Explanation:
According to the Guidelines on Prevention of Money Laundering and Terrorism Financing, reporting institutions in the capital market, including derivatives brokers, are required to conduct due diligence on their clients. In situations where limited information is provided, it is crucial to request additional details about the source of funds. Enhanced due diligence measures should be undertaken to ensure compliance with anti-money laundering regulations. Ignoring the lack of information or relying solely on the client’s registration status may lead to a breach of these guidelines.

The correct answer is (c) Report the suspicious transactions to the Financial Intelligence Unit (FIU) immediately.

Explanation:
The Guidelines on Prevention of Money Laundering and Terrorism Financing mandate reporting institutions to report any suspicious transactions to the relevant authorities promptly. Unusually large transactions without a clear business or investment rationale could be indicative of money laundering or terrorist financing activities. Ignoring or merely monitoring such transactions without reporting them may lead to non-compliance with the guidelines. Therefore, immediate reporting to the FIU is the appropriate action in this situation.

The correct answer is (d) Report the suspicious transactions to the Financial Intelligence Unit (FIU) without delay.

Explanation:
The Guidelines on Prevention of Money Laundering and Terrorism Financing emphasize the importance of promptly reporting suspicious transactions. Unusual behavior, such as rapid and frequent transactions, may indicate potential money laundering or terrorist financing activities. Rather than conducting an internal investigation first, reporting institutions are required to report suspicious transactions to the FIU without delay. This ensures that competent authorities can investigate and take appropriate actions to prevent illicit financial activities.