No part of this Study Guide may be reproduced, stored in a ...

i

© ALL RIGHTS RESERVED

The Institute of Banking & Finance November 2020 (Version 4.6) No part of this Study Guide may be reproduced, stored in a retrieval system, or transmitted in any form by or any means, electronic, electrical, chemical, mechanical, optical, photocopying, recording or otherwise, without the prior permission of The Institute of Banking & Finance (IBF). IBF shall not be responsible or liable for any loss or damage whatsoever that may be caused by or suffered as a result of reliance on any statement, error or omission contained in this Study Guide. This Study Guide contains information believed to be correct, current or applicable at the time of compilation. The rules and regulations which are referenced in this Study Guide are updated as of 1 September 2016. The reader or user is advised to seek professional assistance where appropriate. You shall not modify, remove, delete, augment, add to, publish, transmit, sell, resell, license, create derivative works from, or in any way exploit any of the study guide content, in whole or in part, in print or electronic form, and you shall not aid or permit others to do so.

ii

Acknowledgements

IBF would like to express its gratitude to the following individuals for their contributions and support in the development of CMFAS Study Guide and Examinations:

CMFAS Examinations Board Mr Tan Boon Gin, Singapore Exchange Regulation Pte Ltd (Chairperson) Ms Grace Mok, Singapore Exchange Regulation Pte Ltd Ms Yolanda Constantine, Monetary Authority of Singapore Mr Kenneth Kaw, Monetary Authority of Singapore Ms Lim Mei Shern, Monetary Authority of Singapore Mr Rodney Lim, Nikko Asset Management Asia Limited Ms Karen Tiah, Allen & Gledhill LLP Ms Rachel Eng, WongPartnership LLP Mr TK Yap, CGS-CIMB Securities (Singapore) Pte Ltd Ms Yit Chwee Fung, UOB Bank Ltd Ms Kao Shih Teng, Lion Global Investors Ltd Ms Yvonne Ong, CapitaCommercial Trust Management Limited Mr Martin Siah, Bank of America Merrill Lynch Mr Kan Shik Lum

Study Guide Writers Mr Gerard Tong Ms Yvette Cheak Candidates who have passed the CMFAS examinations are encouraged to continue on their learning journey by attending IBF accredited programmes. For more information, please visit www.ibf.org.sg.

http://www.ibf.org.sg/

iii

Preface

Module 1A – Rules & Regulations for Dealing in Securities (SGX-ST Members)

The objective of the CMFAS Module 1A – Rules & Regulations for Dealing in Securities (SGX-ST Members) (“M1A”) Exam is to test candidates on their knowledge and understanding of the regulatory framework including the laws and regulations and associated codes, notices, practice notes and guidelines governing securities dealing. Candidates are required to pass the relevant modules of the CMFAS examinations pertaining to the regulated activity that they intend to conduct. Once they have passed the relevant CMFAS examinations, candidates must ensure that their notification to act as an appointed representative is lodged with MAS on the Public Register via the Representative Notification Framework (RNF), before they can commence any dealings in regulated activities. For details, please refer to the relevant MAS Notice under the Securities and Futures Act (SFA) – SFA 04-N09.

Organisation of the Study Guide

The Study Guide consists of 6 chapters, each devoted to a specific area of securities dealing and its related regulations that the candidates will need to know in order to pass the M1A Exam. Each chapter begins with a list of learning objectives, followed by a chapter introduction which provides an overview of the chapter. Examples and case studies are also used where appropriate in the Study Guide to enhance candidate’s understanding of key learning points and application of issues discussed. A summary of each chapter is provided below:

Chapter 1: The Capital Markets Industry in Singapore & Participants in the Capital Markets Provides an overview of the capital markets eco-system, regulatory bodies and the relevant

legislation and rules governing the conduct of capital markets activities in Singapore. Chapter 2: Licensing and Business Operations Outlines the obligations and regulatory requirements governing of the business operations of

Capital Markets Services licence holders and individual representatives in securities dealing. Chapter 3: Market Conduct Highlights the rules and regulations prohibiting market misconduct in relation to securities dealing. Chapter 4:

The Trading System & Infrastructure Explains the securities trading system and infrastructure, dealing mechanics and settlement procedures.

Chapter 5: Central Provident Fund Investment Scheme (“CPFIS”)

Provides an overview of CPFIS.

iv

Chapter 6: Prevention of Financial Crimes Discusses the regulatory requirements for the prevention of money laundering and countering the financing of terrorism.

To assist candidates in the review of the study materials, we have included a set of review questions and the answer key at the end of the Study Guide. A list of essential readings is also provided. Candidates should ensure that they complete the essential readings before attempting the examination.

Study Guide Updates

The Study Guide is updated at appropriate intervals to reflect changes and developments in the financial industry. Candidates should ensure that they have the latest version of the Study Guide before sitting for the examination. Please refer to the Study Guide Updates page on the IBF website or contact IBF directly to check for the latest updates. The Study Guide is available in electronic/PDF format. Upon successful registration of the exam, candidates will be able to access and download a complimentary copy of the study guide from their IBF Portal Account. Please note that access to the study guide will expire on the registered exam date. Candidates should note that the rules and regulations which are referenced in this Study Guide are updated as of 1 September 2016.

Important Notes about the Exam

The M1A Exam is conducted at the Assessment Centre of IBF. The examination comprises of 100 multiple-choice questions (MCQ) with a duration of 2 hours. The passing mark is 75%. The exam includes questions that test candidates’ knowledge, understanding and application of the relevant rules and regulations governing securities dealing. Candidates should note that they will not be tested on the following in the M1A Exam:

i. The Capital Market Industry in Singapore & Participants in the Capital Markets (Chapter 1); and

ii. The amount of penalties applicable under the laws and regulations and associated codes, notices, practice notes and guidelines governing securities trading.

For more information on the examination rules, regulations and other administrative procedures, please refer to the IBF website at www.ibf.org.sg.

Contents

Chapter 1 – The Capital Markets Industry in Singapore and Participants in the Capital Markets…………. 1.1 Introduction…………………………………………….......................................................................................... 1 1.2 Institutional Participants in the Capital Markets.…………….................................................................. 3 1.3 The Regulatory Framework and Regulatory Bodies………………………………………………........................... 5 1.4 SGX Listing Framework…………………………………………………………............................................................ 9 Chapter 2 – Licensing and Business Operations………….......................................................................... 2.1 Introduction…………………………………..................................................................................................... 17 2.2 Grant of CMS Licence……………………………............................................................................................ 18 2.3 Registration of Representatives…………................................................................................................ 25 2.4 Obligations of Representatives………………..…………………………………………………………………………………….. 32 2.5 Regulatory Requirements for Advertising.……………………………………………………………………………………… 35 2.6 Opening of Customer Accounts …………………………………………………………………………………………………….. 36 2.7 Confidentiality of Customer’s Information …….……………………………………………………………………………… 45 2.8 Management of Customer Trading Account...………………………………………………………………………………… 47 2.9 Keeping of Books and Audit ....…………….………………………………………………………………………………………… 55 2.10 Customer’s Moneys and Assets……………………………………………………………………………………………………… 59 Chapter 3 – Market Conduct…………………………………………….................................................................... 3.1 Introduction………………..……................................................................................................................. 71 3.2 Market Misconduct under the SFA and SGX-ST…..………...................................................................... 71 3.3 False Trading and Market Rigging Transactions…................................................................................ 72 3.4 Securities Market Manipulation…………………….…………….………………………………………………………………… 74 3.5 False or Misleading Statements and Information…………………………………………………………………………… 75 3.6 Fraudulently Inducing Persons to Deal in Securities ……………………….……………………………………………… 76 3.7 Employment of Manipulative and Deceptive Devices……………………………………………..……………………… 77 3.8 Dissemination of Information about Illegal Transactions…….…………….…………………………………………… 77 3.9 Insider Trading……………………………………………………………….…….………………………………………………………… 78 3.10 Securities Hawking……………………………………………………….………………………………………………………………… 82 3.11 Other Market Conduct Rules & Guidelines…………………………………….………………………….…………………… 3.12 Vigilant Practices Against Market Misconduct………………………………………………..……………………………… 3.13 SGX Regulatory Tools to Uphold Fair, Orderly and Transparent Markets…………………………………..…… 3.14 Duty to Report…………………………………………………………………………………………………………..…………………… 3.15 Penalties for Misconduct under the SFA………………………………………………………………………….…………..… 3.16 Penalties for Market Misconduct Under the SGX-ST Rules……………………………………………………….….…

83 87 89 93 93 94

Chapter 4 – The Trading System and Infrastructure………………………………………….................................... 4.1 Introduction…...................................................................................................................................... 97 4.2 SGX Securities Products………………....................................................................................................... 100 4.3 Risk Management and Order Processing…..…………….......................................................................... 100 4.4 Trading Mechanics…………………………………………................................................................................... 102 4.5 Settlement Procedures…………………………………………………….….............................................................. 116

Chapter 5 – Central Provident Fund Investment Scheme (CPFIS)……………………...................................... 5.1 General Information and History of CPFIS.…....................................................................................... 124 5.2 Difference between CPFIS-OA and CPFIS-SA………............................................................................... 125 5.3 What is a CPF Investment Account?.…................................................................................................ 126 5.4 Eligibility Criteria……………………............................................................................................................ 126 5.5 Opening a CPFIS Investment Account………......................................................................................... 126 5.6 Operational Process for Purchase and Sale of Investments (CPFIS-OA only)…………........................... 126 5.7 Service Providers under the CPFIS………………………………………………………….…....................................... 127 5.8 Criteria for Inclusion of Investment Products under CPFIS.…………...................................................... 128 5.9 Transfer of Monies from CPF Investment Account to CPF Ordinary Account….................................. 130 5.10 Dividends and Profits Earned……......................................................................................................... 131 5.11 Charges................................................................................................................................................ 131 5.12 Release of Investment Holdings……………………..…................................................................................ 131 5.13 Bankruptcy……………………………..…………................................................................................................ 132 5.14 Death…......…......…......…......…......….............…......…......…......…........................................................... 132 Chapter 6 – Prevention of Financial Crimes…………………………………………………………………………………………. 6.1 Introduction to Prevention of Financial Crimes……………………….……………………………………………………… 133 6.2 Anti-Money Laundering and Counter-Terrorism Financing Regime in Singapore............................... 138 6.3 The Regulatory Framework of Financial Crimes – Rules and Regulations………................................... 138 6.4 MAS Notices & Regulations on Prevention of Money Laundering & Countering the Financing of

Terrorism……………………………………………………………………………………………………………………………………….. 143 6.5 Targeted Financial Sanctions related to Anti – Money Laundering and Terrorism Financing………….. 144 6.6 Designation of Tax Crimes as Money Laundering Predicate Offences in Singapore........................... 145 6.7 The Three Lines of Defence……………………………………………………………………………………………………………. 146 6.8 Client Onboarding…………………………………………………..……………………………........................................... 147 6.9 Enterprise-Wide Risk Assessment……………………………………………………………………………….…………………. 160 6.10 Operational Risk Controls to Prevent Financial Crimes….................................................................... 160 6.11 Reporting & Filing Requirements………….............................................................................................. 161 6.12 Penalties & Risks for Non-Compliance…………………………….................................................................. 162 6.13 Training, Audit and Internal Control Framework…………………………………………………………….……………… 163 Appendix A – Criteria for the Assessment of a Customer Account Review ….…..……………………………………… 164 Appendix B – Criteria for the Satisfaction of the Customer Knowledge Assessment ……………….............. 165 Appendix C – Risk Warning Statement for Overseas-Listed Investment Products…………………………………….

Appendix D – Excluded Investment Products……………………………………………………………………………………… Appendix E – Examples of Suspicious Transactions……………………………………………………………………………… Appendix F – Review Questions………………………………………………………………………………………………………… Appendix G – Essential Readings…………………………………………………………………………………………………………

166 169 171 175 181

1 | Chapter 1 - The Capital Markets Industry in Singapore and Participants in the Capital Markets

Capital Markets Financial Advisory Services Examination Module 1A - Rules and Regulations for Dealing in Securities (SGX-ST Members)

Chapter 1: The Capital Markets Industry in Singapore

and Participants in the Capital Markets

Learning Objectives

The candidate should be able to understand the:

Basic features of the capital markets, including primary and secondary markets, exchanges (over-the-counter and regulated) and financial intermediaries.

Different business activities undertaken by institutional participants in the capital markets.

Roles of each regulatory body in the regulation of the securities industry:

Monetary Authority of Singapore

Singapore Exchange Securities Trading Ltd

The Central Depository (Pte) Limited

Singapore Exchange Derivatives Trading Ltd

Singapore Exchange Derivatives Clearing Ltd

Origin of the relevant rules and requirements governing securities and derivatives trading and clearing including:

Securities and Futures Act

Mainboard and Catalist Rules

SGX-ST Rules

CDP Clearing Rules

DVP Rules

CDP Depository Rules

Futures Trading Rules

SGX-DC Clearing Rules

1.1 Introduction

1.1.1 The Capital Markets in Singapore

1. The Primary Market

An important function of the capital markets is to provide opportunities for businesses to raise capital to fund their business activities. These capital-raising activities take place in the primary market.

Chapter 1 - The Capital Markets Industry in Singapore and Participants in the Capital Markets | 2


Businesses raise capital through the issuance of various securities instruments such as shares / common stock / equity securities, bonds / fixed income securities and company warrants. Investors would then provide the capital by buying these instruments.

When investors buy these instruments, they are taking on risk as the price of financial instruments fluctuates in accordance with the company’s performance. Changes in the value of the instruments would eventually lead to the investors wishing to sell their holdings, either to realize a profit, or to remove a poorly performing instrument from their investment portfolio. 2. The Secondary Market

Trading activity that takes place outside of the initial capital-raising activities (i.e. in the primary market) take place in the secondary market. As such, it can be said that the secondary market allows investors to manage or transfer their risk to other parties.

Risk transfer or risk management can also be achieved by trading in futures or derivatives products instead of simply selling the shares or bonds. Some examples of derivatives include Futures, Options and Issuer or Company Warrants.

Singapore Exchange Limited (SGX) provides capital-raising and risk management opportunities to the global market through its product offerings. Table 1.1.2: Examples of Products Offered by SGX for Capital Raising & Risk Management

Capital Raising Risk Management

SGX Securities Trading Shares

Bonds

Company Warrants

Issuer Warrants

SGX Derivatives Trading Futures

Options

1.1.3 Exchanges

Primary and secondary market activities can either take place in the over-the-counter (OTC) markets or on regulated exchanges. The OTC market is also known as the “call around” market, because market participants call each other directly to determine each other’s interest to buy or sell any given security.

An exchange provides a centralized market where buyers and sellers can congregate. This allows for the easy discovery of the prices and quantities at which each participant is interested to buy or sell securities. In order to trade on an exchange, the buyer or seller needs to either be a Trading Member of the exchange, or a customer of a Trading Member of the exchange.

1.1.4 Financial Intermediaries

There are different types of financial intermediaries that connect the businesses that need to raise capital with public investors.

In the primary market, the process of raising capital through new securities is a complex process through which businesses are able to reach out to potential investors. For example in the equity market, new shares are issued through a process termed the Initial Public Offering (IPO) where a business is required to present investors with



accurate information on its financial standing, future potential and any other relevant information. Financial intermediaries such as banks or financial institutions with a capital markets services licence to advise on corporate finance are usually appointed as issue managers, as most businesses are unlikely to have such expertise in-house.

In the secondary market, it would be difficult for an investor who is holding a security to directly find a buyer for the same security. In this case, other financial intermediaries such as brokers function as a middle agent to match selling interest and buying interest.

1.2 Institutional Participants in the Capital Markets

1.2.1 Banks

There are different types of banks licensed under the Banking Act Cap. 19 or approved under the Monetary Authority of Singapore Act, which may provide capital markets services, e.g. as dealing in securities. The types of banking licences include:

i. Qualifying Full Banks/ Full Banks ii. Wholesale Banks iii. Offshore Banks iv. Merchant Banks

1. Qualifying Full Banks/Full Banks

Qualifying Full Banks and Full Banks provide the whole range of banking business approved under the Banking Act and are allowed to take deposits of any amount in any currency, including offering savings accounts. They are also allowed to provide capital markets products, custodial business, underwriting, corporate finance activities and some even offer life policies as distributors for insurance companies. In view of the fact that they do not have restrictions in offering deposit products, many of the Qualifying Full Banks or Full Banks are also in the retail banking business as well. Their clientele base is more diversified with mass retail, private banking and institutional clients. 2. Wholesale Banks

Wholesale Banks provide the full range of banking business but are restricted in their deposit taking activities. Wholesale Banks are only allowed to take foreign currency deposits in any amount but are restricted to take deposits in Singapore dollars. They can only accept Singapore dollar deposits of at least S$250,000. They are not allowed to operate Singapore dollar savings deposit accounts. Many wholesale banks therefore prefer to solicit business from High Net Worth Individuals (HNWI) through their private banking arms. Such clients are usually more interested in capital markets products for investments.

3. Offshore Banks

Offshore banks can generally carry on any banking business subject to restrictions on Singapore dollar business. Offshore banks are not allowed to accept Singapore dollar deposits whether in the form of fixed deposits or savings deposit from Singapore residents. It is also restricted in lending in Singapore dollars. Such Singapore dollar lending cannot in aggregate exceed $500 million at any one time unless with the prior approval of MAS. An offshore bank can accept Singapore dollar deposit from non-residents subject to a minimum threshold of S$250,000 but cannot operate a savings deposit account even for non-residents. In view of the restrictions on



their licences, offshore banks are not in the retail space and are usually in more specialised areas such as trade finance with their corporate clients or private banking business where capital markets investment products and services are offered.

4. Merchant Banks

Merchant Banks are not licensed under the Banking Act but are approved under the MAS Act. They are not allowed to accept deposits or borrow from the public in any form except from banks, finance companies, shareholders and companies controlled by shareholders. Merchant banks therefore are also not found in the retail space but can undertake corporate finance activities (including flotation, underwriting, buying and selling of shares and other securities), which falls under capital markets services or private banking through its Asian Currency Unit for non-Singapore dollar banking business.

1.2.2 Capital Markets Services (CMS) Licence Holders

CMS licence holders which are related to securities include (amongst others):

i. Broker / Dealer Companies ii. Corporate Finance Advisory Companies iii. Providers of Custodial Services for Securities

1. Broker / Dealer Companies

Apart from banks, broker/dealer companies are another class of financial intermediary. These companies do not engage in the deposit-taking and credit extension activities like banks, but instead specialise in matching buyers with sellers. In the context of the capital markets eco-system, broker/dealer companies would also be Trading or Clearing Members which provide trading or clearing facilities to their customers, allowing the customers to trade on the exchange1. 2. Corporate Finance Advisory Companies

Corporate finance advisory companies provide corporate finance advisory services including acting as issue managers or sponsors for listings on the Mainboard or Catalist of SGX-ST, as the case may be. They also advise on arrangements, reconstructions and take-overs, acquisitions and disposals. 3. Providers of Custodial Services for Securities

These entities are required to hold a CMS licence in providing custodial services. Custodians serve institutional clients, as well as individual clients. Besides providing general custodial services, custodians maintain records of the movement of securities to and from their clients’ accounts and are the interface for their clients to the exchanges for the settlement and delivery of securities. Some custodians also provide securities financing and securities lending services. Securities lending is deemed as dealing in securities and consequently, an entity which carries out securities lending is required to have a CMS licence to deal in securities. Securities financing and securities lending are not similar activities and require a different type of CMS licence. 4. Others (Non-CMS Licence Holders) – Finance Companies Finance companies are licensed under the Finance Companies Act and therefore are not required to apply for a CMS licence for regulated activities which are not prohibited by the Finance Companies Act or where the finance company has been granted an exception under Section 25(2) of the Act, and are exempted institutions. Finance

1 Refer to Section 1.3.1 for details about the Trading and Clearing Members of the SGX securities & futures markets.



Companies generally are not active participants but usually use the services of Trading Members for the delivery or settlement of purchases and sales of securities of their clients who are their customers with share financing facilities. In providing such financing services, finance companies also provide custodial services of securities to their clients and thus are responsible for the records of movement in the custodian accounts. Finance companies are subject to MAS’ regulation, supervision and inspections.

1.3 The Regulatory Framework and Regulatory Bodies

Singapore’s regulatory framework for capital markets seeks to promote a sound, stable and progressive financial services sector through regulation and supervision. Specifically, it seeks to safeguard interests of investors and maintain confidence and stability in the market by:

Keeping risks at acceptable levels to maintain both the stability of the financial system as a whole and the soundness of individual institutions;

Maintaining a safe and efficient financial infrastructure;

Ensuring fair, efficient and transparent organised markets; and

Keeping customers well-informed and empowered.

In order to achieve these objectives, the securities and derivatives markets, in particular, are regulated by regulatory bodies including:

• Monetary Authority of Singapore (MAS) • Singapore Exchange Securities Trading Ltd (SGX-ST) • The Central Depository (Pte) Ltd (CDP) • Singapore Exchange Derivatives Trading Ltd (SGX-DT) • Singapore Exchange Derivatives Clearing Ltd (SGX-DC)

These regulatory bodies are responsible for originating and issuing the relevant rules and requirements governing the trading and clearing of securities and derivatives trading, including:

• Securities and Futures Act (SFA) • SGX Mainboard Rules • Catalist Rules • SGX-ST Rules • CDP Clearing Rules • Delivery-Versus-Payment (DVP) Rules • CDP Depository Rules • Futures Trading Rules • SGX-DC Clearing Rules

1.3.1 Roles of the Regulatory Bodies

1. Monetary Authority of Singapore (MAS) MAS was established under the MAS Act (1970), which came into force in 1972. Its mission is to promote sustained non-inflationary economic growth, and a sound and progressive financial centre. Its functions are to:

a. Act as the central bank of Singapore, including the conduct of monetary policy, the issuance of currency, the oversight of payment systems and serving as banker to and financial agent of the Government;

b. Conduct integrated supervision of financial services and financial stability surveillance;



c. Manage the official foreign reserves of Singapore; and

d. Develop Singapore as an international financial centre.

MAS is responsible for, amongst others, the administration of the following legislations which are relevant to the securities and futures industry, including:

Securities and Futures Act (Cap. 289) (SFA), the main legislation governing the securities and futures industry in Singapore.

Securities and Futures (Licensing and Business Conduct) Regulations;

Securities and Futures (Markets) Regulations;

Securities and Futures (Clearing Facilities) Regulations;

Securities and Futures (Financial and Margin Requirements for Holders of Capital Markets Services Licence) Regulations; and

Securities and Futures (Corporate Governance of Approved Exchanges, Designated Clearing Houses and Approved Holding Companies) Regulations.

The SFA gives MAS a wide range of powers to enable the sound development of the securities and futures market. These include (but are not limited to) the power to:

Approve securities exchanges, futures exchanges and clearing houses;

Review any amendments to rules and regulations of the Exchanges and clearing houses;

Take disciplinary actions (such as warning, fine, reprimand, suspension of licence, revocation of licence and issuance of prohibition order) if the licensed person contravenes any condition or restriction imposed on its licence, or any direction issued to it by MAS under the SFA, or any provision in the SFA;

Inspect the books of Exchanges, a person operating an exempt market, clearing house, a person operating an exempt clearing facility, the holder of a capital markets services licence, an exempt person or a representative; and

Conduct investigation into alleged or suspected contravention of any provision of the SFA or written direction issued under the SFA.

2. Singapore Exchange Limited (SGX)

SGX connects investors in search of Asian growth to corporate issuers in search of global capital. SGX is Asia’s most international exchange with a large proportion of companies listed on SGX originating outside of Singapore. It also offers clients the world’s biggest offshore market for Asian equity futures, centred on Asia’s three largest economies – China, India and Japan.

In addition to offering a fully integrated value chain from trading and clearing, to settlement and depository services, SGX is also Asia’s pioneering central clearing house. In conducting its regulation of the markets, SGX has adopted six guiding principles:

Guiding Principle One: Disclosure-Based Regulation – The facilitation of fair access to information for all market users for achieving a fair, orderly, and transparent market.

Guiding Principle Two: Comprehensive Risk Management - SGX focuses regulatory attention on the safe and efficient operation of its clearing houses and requires a comprehensive, integrated, and reliable approach to the management of the counterparty risks from clearing and trading members as well as other risks within the clearing houses.



Guiding Principle Three: Risk-Based Targeting of Regulatory Activities - SGX adopts a pragmatic risk-based approach. Supervisory activities focused on principles one and two are tailored according to risk profiles developed for issuer sponsors and Member firms. Resources are allocated to those matters that it considers as posing the greatest risks to achieving a fair, orderly, and transparent market and safe and efficient clearing outcomes.

Guiding Principle Four: Balanced Approach to International Best Practice - SGX aims to ensure that its rules and regulatory activities are consistent with international best practice for exchanges and clearing houses, striking an appropriate balance between internationally recognised practices and local needs and conditions.

Guiding Principle Five: Transparency - SGX seeks to be open and transparent in all its regulatory operations to the extent consistent with its statutory obligations and the public interest.

Guiding Principle Six: SGX as a Frontline Regulator and Managing Regulatory Conflict - MAS is the statutory regulator and has oversight over SGX’s regulatory responsibilities. SGX performs a frontline regulatory role in maintaining fair, orderly, and transparent markets, as well as safe and efficient clearing facilities.

SGX maintains a close collaborative relationship with other regulatory and enforcement agencies such as the MAS, Commercial Affairs Department (CAD) and the Accounting and Corporate Regulatory Authority (ACRA) on matters such as regulatory policies, risk management, regulatory oversight, and enforcement actions. 3. Singapore Exchange Securities Trading Limited (SGX-ST)

SGX-ST is a subsidiary of SGX incorporated under the Companies Act. It undertakes the day-to-day regulation of the securities market and administers the SGX-ST rules, which governs the access to and conduct in the securities market of the SGX-ST. SGX-ST Trading Members are required to adhere to SGX-ST Rules.

SGX-ST is the only approved securities exchange in Singapore and is responsible for setting the rules and membership and trading requirements of the exchange. SGX-ST can mete out disciplinary action for non-compliance with any of the requirements.

SGX-ST allows companies and investors to achieve capital-raising and investment objectives through its rules, such as the listing requirements for companies that wish to raise capital and to have their securities traded on SGX-ST. Companies which are already listed can also raise further capital through the market and SGX-ST.

Companies can choose to be listed on the SGX Mainboard or the Catalist Board. The Mainboard caters to the needs of more established companies, with higher entry and listing requirements such as minimum profit and market capitalisation levels. The Catalist Board caters to the needs of smaller or fast-growing companies, and has a different model where companies must be brought to list by approved Sponsors via an initial public offering (IPO). For these companies, there is no minimum quantitative entry criteria required by SGX. Instead, Sponsors will decide if the listing applicant should be listed.

The listing requirements applicable to all companies that wish to be listed on the SGX-ST platforms are covered in the SGX-ST Listing Manual2, which contains the rules and regulations for among others:

Listing Requirements;

Acquisitions;

Realizations;

Takeovers; and

2 The SGX-ST Listing Manual contains the Mainboard Listing Rules and the Catalist Listing Rules. Refer to Section 1.5 or the SGX website for further details http://rulebook.sgx.com/#



Timely disclosure of corporate information.

4. The Central Depository (Pte) Limited (CDP)

CDP was established in 1987 as a wholly owned subsidiary of SGX. It provides integrated clearing, settlement and depository facilities for the securities market, covering both equities and fixed income instruments. CDP principally serves the Singapore market, but has links with other central depositories in the United States, Japan and China to support settlement of cross-border trades.

CDP is now a Qualifying CCP (Central Counterparty). Members of Qualifying CCPs are subject to lower capital requirement for their trade and default fund exposures under the new Basel III framework introduced by the Basel Committee on Banking Supervision. This means that as a CDP member, one will benefit from lower capital costs.

CDP holds the book-entry securities deposited with it as a bare trustee for the collective benefit of depositors. Securities are immobilized at CDP where ownership is transferred via book-entry. The physical certificates of immobilized instruments are safe kept with a CDP nominated custodian bank.

All trades executed on SGX are required to be settled on T+33. Each trade is settled on a gross basis during an end-of-day settlement run. During the run, securities are transferred from a seller's securities account to that of the buyer and vice versa.

For investors who hold direct accounts with CDP, they should ensure that their trading accounts maintained with SGX-ST members are linked to their direct securities accounts before trading. The linkage effectively is a standing instruction from the investor to CDP, to act upon the sole instruction of the SGX-ST member to debit securities from and credit securities into the securities account pertaining to SELL and BUY contracts executed through that trading account.

In 2008, CDP launched the Pre-Settlement Matching Service (PSMS) to replace the manual processes where depository agents and SGX-ST members agree trade details over the phone before manually affirming the transaction settlement details in CDP. PSMS positions Singapore securities processing in line with global markets by introducing a straight-through-processing environment to automate the pre-settlement matching process prior to settlement at the CDP. This automation, through PSMS, improves operational efficiency and minimizes operational risk by eliminating errors and delays associated with manual processing and mitigates the risk of settlement failures through the early matching of settlement instructions. Depository agents and SGX-ST members will either upload a data file or manually input settlement instructions into PSMS without prior communication with their settlement counterparts.

Participants can choose to settle their transaction on a Delivery-versus-payment (DVP) or Free-of-Payment (FOP) basis. For DVP transactions, CDP acts as central counterparty between the participants. For transactions settled on a FOP basis, participants make their money settlement without involving CDP.

DVP rules govern the settlement of trades on a delivery-versus-payment basis through CDP. Clearing Members of CDP must adhere to the CDP Rules. These are the:

CDP Clearing Rules

CDP Depository Rules

3 Refers to T+3 exchange business days, which is 3 exchange business days after the trade day.



5. Singapore Exchange Derivatives Trading Limited (SGX-DT)

SGX-DT was established under the Companies Act and carries on the business of establishing, conducting and regulating a futures market with underlying assets including commodities and financial instruments under the SFA. SGX-DT lays down the rules and requirements to ensure orderly trading and settlement of futures and options on various products, including interest rates, equity and equity indices and energy, covering major markets such as Asia, Europe and United States. These are contained in the Futures Trading Rules, which govern SGX-DT Trading Members.

6. Singapore Exchange – Derivatives Clearing Limited (SGX-DC)

SGX-DC is a wholly owned SGX subsidiary, and provides clearing for:

Products quoted on Singapore Exchange Derivatives Trading (SGX-DT);

OTC commodity trades registered via the SGX OTC Trade Registration Platform (TRS); and

OTC financial derivatives trades registered via industry-used trade registration system.

SGX-DC is now a Qualifying CCP. As mentioned in Section 1.4.1.4, members of Qualifying CCPs are subject to lower capital requirement for their trade and default fund exposures under the new Basel III framework. Similarly this means that as an SGX-DC member, one will benefit from lower capital costs.

Futures Clearing Members are governed by the SGX-DC Clearing Rules.

1.4 SGX Listing Framework

SGX provides an avenue for companies to raise capital for their businesses. It also sets the rules for this avenue through its listing requirements.

1.4.1 Listing Process

A company seeking listing in the SGX must first apply to SGX, which requires the submission of an application for listing. Before making the application, the company will first have to engage an adviser as the issue manager to prepare for the listing application. Such services are usually provided by a bank or a financial institution with a CMS licence for advising on Corporate Finance. The company then authorises the issue manager to deal with the SGX on its behalf.

The issue manager plays an active role in the listing process. It will gather the required information, liaise with the SGX on matters relating to the application and makes the final submission. Services of legal and accounting firms are usually engaged to oversee the legal and accounting aspects of the application, especially on the factual and legal representation and disclaimers.

1.4.2 Initial Public Offer (IPO) Timeline

Prior to the submission of the listing application, the company is advised to consult SGX and seek pre-clearance on any issues it is unclear about to reduce any delays in the processing of the application. There are two parts to the timeline:

The pre-submission preparation: and

Post –submission approval and listing.



The average timeline for submission to approval and trading is as follows:

i. Pre-submission consultation - 2-6 months ii. SGX & MAS review 9 – 12 weeks iii. Lodgement & Public Exposure on MAS Opera website - 2 weeks iv. Registration & Launch - 1-2 weeks v. Trading Commences

Figure 1.4.2: Timeline to Launch

Source: SGX website (refer to Footnote 4)

1.4.3 Listing Requirements

1. Methods of Listing

Primary Listing - Companies must meet SGX’s initial listing requirements outlined below for either a Mainboard or Catalist Listing. After listing, companies have to comply with all of SGX’s continuing listing obligations.

Secondary listing - Companies that are already listed on an acceptable exchange (referred to as the “home exchange”) may seek a secondary listing on SGX Mainboard without having to comply with SGX’s continuing listing obligations. Secondary-listed companies must make announcement to SGX and provide all information and documents to it at the same time as they are released to the home exchange. They must comply with all the rules of the home exchange and the laws of the jurisdiction in which the company is incorporated. 2. Global Depository Receipts (GDR)

A company that is already listed on an overseas exchange must abide by the rules of its home exchange. It can also choose to list and raise funds via GDRs on SGX Mainboard. GDRs are specialist products offered only to institutional and accredited investors. GDR issuers must provide all information and documents (in English) to SGX at the same time as such information are released to the home exchange.

1.4.4 Initial Public Offering (IPO) or Introduction

A company seeking listing on SGX, whether on a primary or secondary listing basis, should at the beginning indicate its listing preference and at the point of application do the following:

i. For an IPO – The company should indicate whether it intends to issue new shares or offer existing shares to the investing public. It should then lodge a prospectus with MAS prepared in accordance with the relevant regulations. During the course of the listing process, the prospectus will be subject to public comments for up to 2 weeks.

3. For an Introduction - If the intention is to list by way of Introduction, no shares will be offered to the investing public. This route is suitable for companies that do not require funds at the point of listing but needs to pave the way i.e. by introducing itself in the market. An Introductory document has to be submitted to SGX which is to be prepared based on the requirements in the relevant regulations. The Introductory document will not be subjected to public comments.

i) Pre-submission Consultation

ii) SGX &MAS approval

iii) Lodgement & Public Exposure on Opera

iv) Registration & Launch

v) Trading Commences



1.4.5 Mainboard Admission Requirements

A company seeking to list on the Mainboard must meet the admission requirements4 summarized in the table below. Review of the listing documents is done by SGX and MAS.

Quantitative Requirements

New Mainboard admission criteria Companies intending to join SGX’s Mainboard must meet one of the following quantitative requirements:

• Minimum consolidated pre-tax profit of at least S$30 million for the latest financial year with operating track record of at least 3 years;

• Profitable in the latest financial year, and has a market capitalization of not less than S$150 million based on the issue price and post-invitation issued share capital with operating track record of 3 at least years; or

Operating revenue in the latest completed financial year and a market capitalization of not less than S$300 million based on the issue price and post-invitation issued share capital. Real Estate Investment Trusts and Business Trusts who have met the S$300 million market capitalization test but do not have historical financial information may apply under this rule if they are able to demonstrate that they will generate operating revenue immediately upon listing. Operating track record required is at least 1 year.

Mining, Oil & Gas (MOG) Requirements

Admission standards for MOG listing aspirants that are not in production A MOG listing aspirant that is not in production seeking a listing has to satisfy the following conditions:

• Has market capitalisation of not less than S$300 million based on the issue price and post-invitation issued share capital; and

• Discloses its plans, milestones and capital expenditure to advance to production stage.

Requirement for all MOG companies:

• Have at least achieved Indicated Resources (for Minerals) or Contingent Resources (for Oil & Gas);

• Have sufficient working capital for 18 months from listing;

• Have at least one independent director with appropriate industry experience and expertise; and

• Appoint an audit firm with the relevant industry experience.

Shareholder Spread

• 25% of issued shares in the hands of at least 500 shareholders (For market capitalisation > S$300 million, shareholding spread varies between 12-20%); and

• At least 500 shareholders worldwide in the case of a secondary listing and where the Exchange and the primary home exchange do not have an

4 Refer to SGX website: http://www.sgx.com/wps/portal/sgxweb/home/listings/getting_started/listing_boards?clink=equities=1=1

http://www.sgx.com/wps/portal/sgxweb/home/listings/getting_started/listing_boards?clink=equities=1=1



established framework and arrangement to facilitate the movement of shares, at least 500 shareholders in Singapore or 1,000 shareholders worldwide.

Independent Directors

2 Singapore resident independent directors.

Moratorium

• After IPO, promoters cannot sell any of their shareholdings for 6 months. They may sell up to 50% of their shareholdings thereafter for the next 6 months.

• For Pre-IPO investors who had acquired their shares within the 12-month period prior to IPO and hold > 5% shareholding, the “profit portion” of their shareholdings is subjected to a moratorium period of 6 months after IPO.

IPO Documentation • Prospectus;

• Lodged on MAS OPERA website.

Accounting Standard

Singapore, US or International Accounting Standards.

Domicile At the discretion of the issuer.

Trading & Reporting Currency

At the discretion of the issuer.

Business Operations No requirement for operations in Singapore.

Continuing Obligations

Rules relating to disclosure of material information, periodic reporting, additional share issuance, corporate transactions, corporate governance guidelines, interested persons transaction and free float will apply.

1.4.6 Catalist Listing

1. Sponsorship

A company seeking a listing on Catalist can only choose the primary listing route. The company must also have a sponsor for the Catalist listing, who has been approved by SGX.

Sponsors are chosen and approved by SGX based on stringent eligibility criteria which include experience in corporate finance and compliance advisory work, and they are closely supervised and regulated through the continuing obligation route. They are required to employ qualified professionals who must also be approved by SGX as “Registered Professionals”.

Sponsors are responsible for the admission and continuing obligations of companies listed on Catalist as SGX no longer undertakes direct supervision over admission and continuing obligations of companies listed on Catalist. Such admission and supervision has been transferred to sponsors.

A company seeking listing through Catalist must comply with listing requirements even though there is no minimum quantitative entry criteria set by SGX. The IPO documents are not reviewed by SGX. The admission of the company is based on the sponsor’s assessment of its suitability for listing.

A company on Catalist must engage a sponsor on an ongoing basis for as long as they are listed on the Catalist Board. Sponsors take direct supervision responsibility of the company listed on Catalist but SGX retains the power to discipline them for breaches of rules and regulations.



Figure 1.4.6.1: Timeline for Listing on Catalist

Source: SGX website at http://www.sgx.com/wps/portal/sgxweb/home/listings/getting_started/listing_boards?clink=equities=1=1

2. Offer Document

Before registering with Catalist, the company has to lodge an Offer Document on SGX Catalodge website. The Offer Document has to comply with the same disclosure requirements as a prospectus prepared in accordance with the securities and futures regulations. This includes the provisions relating to civil and criminal liability under the SFA.

The Offer Document is to be lodged with SGX, acting as agent of MAS. The Offer Document will be posted on the SGX’s Catalodge website for a period of at least 14 days for public comments providing an avenue for public to air any concerns they may have of the company and its status. 3. Working Capital Statement

The sponsor and directors of the company must include a statement in the Offer Document stating that the company has sufficient working capital for their present requirements and for at least 12 months after IPO. 4. Shareholding Spread

Shareholding spread is set at 15% of issued capital in the hands of the public with a minimum of 200 shareholders.

5. Moratorium Period

To secure the commitment of promoters and pre-IPO investors there will be restrictions on the sale of the shareholdings of the promoters.

If at the time of the IPO the promoters hold more than 50% of the post-invitation share capital, they are allowed to sell provided their shareholdings will not go below 50% of the post invitation share capital. If they hold less than 50% of the post-invitation share capital at the IPO, they cannot sell any shares at the IPO. They are also prevented from selling any of their shareholdings during the 6 months after the IPO and may sell only 50% of their shareholdings in the subsequent 6 months.

For pre-IPO investors who had acquired their shares within the 12 month period prior to IPO, the “profit portion” of their shareholdings will be subject to a moratorium period of 12 months after the IPO. The profit portion is calculated by multiplying the difference between the price paid by the investor for the shares and the IPO price by the number of shares held. 6. Differences between the Mainboard and Catalist Listing Requirements

The main differences between the Mainboard and Catalist Listing requirements are shown in the table below:

Mainboard Catalist

Target Companies Established Companies

(Quantitative entry criteria)

Fast Growing Companies

(No Quantitative entry criteria)

i) Notification to SGX

ii) Lodgement & Public Exposure

on Catalogue

iii) Registration & Launch

Trading Commences

http://www.sgx.com/wps/portal/sgxweb/home/listings/getting_started/listing_boards?clink=equities=1=1



Mainboard Catalist

Regulatory Approach Exchange-regulated & supervised Exchange-regulated, sponsor -supervised

Review of IPOs & Post-IPO Supervision

SGX Sponsors

Key Advantages to Companies

Established Mainboard branding

Access to wider range of institutional investors

Open to more product type

Faster time to market

Easier subsequent fundraising, acquisitions & disposals

Ongoing Sponsor guidance

Quantitative admission criteria

Yes No

Maximum thresholds for fund-raising

Non pro-rata (not offered to existing shareholders): 20%

Pro-rata (offered to existing shareholders in proportion to their shareholdings

Non Pro-rata: 50% to 100%

Pro-rata: 100%

Thresholds for Shareholder Approval for Acquisitions & Disposals

20% or more of ratios calculated in comparison to specified benchmarks (Benchmarks)

Acquisition: 75% or more of Benchmarks

Disposal: 50% or more of Benchmark

Fundamental change in business

1.4.7 Mainboard and Catalist Board Continuing Listing Obligations

Both methods of listing requires similar continuing listing obligations.

1.4.8 Roles & Responsibilities of the Sponsor and SGX with regard to the Catalist Board

1. Sponsors’ Roles & Responsibilities

The main obligations are summarized below and include:

i. Ensuring the proper assessment of eligibility criteria or conditions imposed by SGX for listing of companies under their sponsorship;

ii. Reporting to SGX any material or adverse matters which may impact the company;

iii. Seeking SGX’s advice about the application or interpretations of rules;

iv. Notifying SGX promptly on the employment of new professional to be registered and the resignation of registered professionals;

v. Having adequate systems and resources to discharge its obligations including having sufficient number of registered professionals who are “Fit and Proper”;

vi. Acting professionally, transparently and efficiently in its dealings with the listing applicants or companies as follows:



a. Exercising due care and professionalism;

b. Maintaining regular contact with the companies;

c. Seeking assistance of other appropriately qualified and suitable professionals such as specialist in law and accounting whilst retaining its overall management and oversight of the activity;

d. Avoiding conflict of interest situations and remaining independent in its relations with the listing applicant; and

e. Accepting sponsorship of companies that are willing to submit to SGX’s rules and thus allowing itself to discharge its duty.

2. SGX’s Role & Responsibilities

SGX’s role is to lay down the rules and review the performance, processes and controls of the sponsors against these rules. In carrying their reviews they ascertain:

i. The quality and due diligence standards of the sponsor’s assessment process.

ii. The quality of its continuing activities;

iii. Whether there are breaches of the rules.

3. SGX’s Actions for Non-Compliance

In the event of breaches of the rules by the sponsors or its registered professionals, the SGX can take the following actions:

i. Reprimand the sponsor or registered professional privately or publicly;

ii. Require the directors, senior management and registered professionals to attend a re-education program focused on complying with the rules;

iii. Require rectification measures to be taken by the sponsor or registered professionals;

iv. Put conditions and restrictions on the activities of the sponsor or registered professionals; or

v. Suspend the sponsor or registered professional from carrying out some or all of its activities for a period of time with the suspension being announced to the market.

1.4.9 Explanation of Terms

The term “Listing” means being listed on the official boards of SGX and companies “listed” will appear on the official list of the SGX.

“Quotation” refers to companies that are quoted and are dealt with over the counter (OTC) and are not listed on the SGX official list. In such instances, SGX acts only as a platform provider for the trades and the prices of these companies are quoted on GlobalQuote platform. These companies are not required to meet listing requirements or continuing listing requirements.

1.4.10 Access to Material Information about Listed Companies

Listed companies must announce all material information which investors would reasonably require to have in order to make informed decisions on listed securities. They are to do this through the SGXNet system which is accessible by the public on SGX website www.sgx.com.

http://www.sgx.com/



Such information includes information about its subsidiaries and associated companies which are necessary to be reported to avoid what may seem like creating a false market or would be likely to affect the price or value of the listed company’s shares.

1.4.11 Shareholders Rights to Vote at Meeting

Notices convening meeting shall specify the place, day and hour of the meeting and a meeting to consider special businesses shall be accompanied by a statement regarding the effect of any proposed resolution in respect of such businesses. Notices shall be given to all shareholders at least 14 days before the meeting for ordinary resolutions and 21 days for special resolutions.

A holder of ordinary shares shall be entitled to be present and to vote at any general meeting. Shareholders who are unable to attend a shareholders meeting may appoint a proxy to attend and vote on its behalf. A proxy shall be entitled to vote on a show of hands on any matter at any general meeting.

1.4.12 SGX’s Actions on Breaches whether on Mainboard or Catalist Board

Breaches of the SGX-ST Rules and Futures Trading rules by Members, their directors, employees and representatives will be investigated by the SGX’s Risk Management & Regulation Group. On completion of an investigation SGX-ST or SGX-DT may do the following:

i. Issue a warning letter;

ii. Impose a fine on the Member;

iii. Initiate disciplinary proceedings before the appropriate disciplinary committees;

iv. Refer the matter to relevant government authority for further action;

v. Reprimand, Suspend, Fine or Expel a Member or its Representative;

vi. Publish the disciplinary action taken; and/or

vii. Do not take further action if there is insufficient evidence of a breach.

1.4.13 Listing of Debt Securities on SGX

Besides listing on SGX Mainboard and Catalist, companies or issuers can list debt securities on SGX, which gives them access to the debt capital markets in Singapore. Types of debt securities eligible for listing on SGX include fixed and floating-rate bonds, convertible and exchangeable bonds, covered bonds, asset-backed securities, loan participation notes, commercial papers, hybrid capital securities (e.g. preference shares) and structured products.

The listing of debt securities are similarly subject to listing requirements regarding the issuer’s profile, trustee and trust deed, offering memorandum, listing fees and continuing obligations5.

5 Refer to SGX website for further info: http://www.sgx.com/wps/portal/sgxweb/home/listings/getting_started/listing_boards

http://www.sgx.com/wps/portal/sgxweb/home/listings/getting_started/listing_boards

17 | Chapter 2 - Licensing and Business Operations


Chapter 2:

Licensing and Business Operations

Learning Objectives

The candidate should be able to understand:

✓ The regulatory requirements for the grant of capital markets services licence

✓ The SGX-ST Rules governing trading practices and conduct

✓ The requirements for notification as appointed representatives under MAS Representative Notification Framework

✓ The requirements for registration with SGX-ST and the obligations of Trading Representatives

✓ The regulations and guidelines for advertising

✓ The regulations and guidelines for opening of customer trading accounts

✓ The laws and regulations for safeguarding the confidentiality of customer information

✓ The rules and regulations on managing customer trading accounts

✓ The rules and regulations on record keeping, audit and the protection of customers’ moneys and assets

2.1 Introduction

This chapter focuses on the regulatory requirements governing the business operations of Capital Markets Services (CMS) licence holders and Individual Representatives.

CMS licence holders are licensed and regulated under the SFA. A corporation may make an application for a CMS licence1 to carry on business in one or more of the regulated activities as specified in the SFA. Individuals acting for CMS licence holders to carry out the regulated activities are required to be appointed representatives under the SFA2.

MAS is able to supervise CMS licence holders and their representatives via a framework of legal and regulatory requirements to ensure that they are well-managed and resilient against systemic risks.

1 SFA Section 86 - Grant of CMS Licence

2 SFA Section 99B – Acting as representative

Chapter 2 - Licensing and Business Operations | 18


Confidence and stability are core to an efficient and well-functioning capital market. Therefore, in addition to requiring CMS licence holders to be licenced, MAS requires them to conduct business professionally and act responsibly by having adequate resources, tools, systems, processes and controls in place to provide efficient and quality services. CMS licence holders must also ensure that their representatives are properly trained and competent to give fair and professional advice to their clients.

2.2 Grant of CMS Licence

A CMS licence will only be granted to a corporation3. A corporation proposing to conduct regulated activities under the SFA would need to hold a CMS licence under the SFA unless it is exempted under the Third Schedule4 or is an exempt institution5.

The minimum licensing admission criteria for corporations applying for a CMS licence ensure that only financially sound and reputable corporations that are prudently managed and directed by officers who are competent and have integrity.

2.2.1 Base Capital Requirements

A CMS licence holder, a corporation needs to satisfy the Base Capital Requirements (BCR)6 for its proposed regulated activities. The BCR for dealing in securities are as follows:

Table 2.2.1: Base Capital Requirements (BCR) for Dealing in Securities

Regulated Activity BCR (S$)

Dealing in securities (clearing member7) 5 million

Dealing in securities (non-clearing member8) 1 million

Dealing in securities (non-member9) 1 million

Dealing in securities (introducing broker10) 500,000

Dealing in securities (restricted broker11) 250,000

3 For applicants that are incorporated in a foreign country, they should satisfy MAS that the branch in Singapore would be subject to proper management oversight and be able to comply with all laws and regulations governing its operations.

4 SFA Third Schedule – Specified Persons

5 SFA Section 99 - Exemptions from requirement to hold CMS Licence; SFR (LCB) - Second Schedule (Exemptions from Section 82(1) & 99B(1) of the Act

6 SFR (Financial & Margin Requirements for Holders of CMS Licences) First Schedule – Base capital requirement for a corporation to be granted a CMS licence; MAS Guidelines on Criteria for the Grant of a CMS licence other than for Fund Management (SFA04-G01), Annex 1(A)

7 Refers to a corporation which is a member of an approved clearing house authorised to operate a clearing facility for securities.

8 Refers to a corporation (not being an introducing broker or restricted broker in relation to dealing in securities) which is a member of a securities exchange.

9 Refers to a corporation (not being an introducing broker or restricted broker in relation to dealing in securities) which is not a member of a securities exchange.

10 For the purposes of dealing in securities, refers to a corporation (dealing in securities) which does not carry any customer’s positions, margins or accounts in its own books; and either (i) carries on the business only of soliciting or accepting orders for the purchase or sale of any securities from any customer (not being a restricted broker); or (ii) accepts money or assets from any customer as settlement of, or a margin for, or to guarantee or secure, any contract for the purchase or sale of securities by that customer.

11 For the purpose of dealing in securities, refers to a corporation (dealing in securities) which (i) does not carry any customer’s position, margins or accounts in its own books; (ii) deals in securities only with accredited investors; and (iii) does not accept money or



2.2.2 General Criteria

The applicant should be primarily engaged in the business of conducting any one of the regulated activities and be operating out of a physical office in Singapore. The applicant must satisfy that it will discharge its duties efficiently, honestly and fairly.

MAS would take into account whether the applicant is a reputable entity that has an established track record in the proposed activity to be conducted in Singapore or in a related field, for at least the past 5 years. The applicant and its holding company or related corporation, where applicable, should also have good home ranking in its home country and is subject to proper supervision by its home regulatory authority. The applicant, its officers, employees, representatives and substantial shareholders must be “fit and proper” persons in accordance with MAS Guidelines on Fit and Proper Criteria (FSG-G01)12.

2.2.3 Criteria in Respect of the Board of Directors, Chief Executive Officer and Representatives of the Applicant13

The board of directors and senior management of the applicant should uphold good corporate governance standards and practices in directing and managing the applicants business. The board of directors should compromise a minimum of 2 members, at least one of whom is resident in Singapore. The chief executive officer14 of the applicant should also be a resident in Singapore.

The applicant must obtain MAS’ approval prior to appointing a person as its chief executive officer, its director who resides in Singapore or is to reside in Singapore, or its director who is directly responsible for its business in Singapore. In addition, the applicant is required to employ at least 2 full time individuals in respect of each regulated activity for which the corporation is seeking to be licenced to conduct. These individuals must be appointed as representatives for the relevant regulated activity as required under the SFA.

2.2.4 Notification of Change of Particulars

A CMS licence holder is required to inform MAS within 14 days of any change in particulars if it ceases to carry on business in the regulated activity it is licenced for, or if there is a change in the CMS licence holder’s records15 as follows:

1. The CMS licence holder’s name;

2. The address of the principal place of business in respect of the licenced activity;

3. The regulated activity or activities to which its licence relates;

4. Where the business is carried on under a name or style other than the name of the CMS licence or the name or style under which the business is carried on; and

5. Such other information as may be prescribed.

assets from any customer as settlement of, or a margin for, or to guarantee or secure, any purchase or sale of securities by that customer.

12 FSG-G01 – MAS Guidelines on Fit and Proper Criteria

13 MAS Guidelines on Criteria for the Grant of a CMS Licence other than for Fund Management (SFA 04 - G01), paragraphs 3.9 to 3.15

14 SFA Section 2(1) - Interpretation

15 SFA Section 94 - Records of holders of CMS Licence



These changes have to be reported within 14 days as the information is required by MAS for publication and communication to the investing community and market participants to enable them to assess the impact of the changes.

2.2.5 Lapsing, Revocation and Suspension of CMS Licence

A CMS Licence will lapse if the CMS licence holder is wound up or dissolved, whether in Singapore or elsewhere. MAS may also revoke or suspend a CMS licence if it has reasons to believe that the CMS licence holder or its representatives or officers had failed to discharge its duties efficiently, honestly and fairly, or had not acted in the best interest of its customers or had breached the conditions imposed on their licences16.

Penalties – SFA 95

Heavy penalties are imposed if a CMS licence holder continues to carry on business after its licence had lapsed or been suspended or revoked. Fines of up to $150,000 will be imposed, upon conviction and a further fine of not exceeding $15,000 will be imposed for every day the offence continues after conviction. This is to ensure that customers are not misled into dealing with errant CMS licence holders which may result in financial losses or credit issues for the unknowing customers.

2.2.6 Approval of CEOs and Directors

To ensure that CMS licence holders are soundly and prudently managed or directed by “fit and proper” persons, CMS licence holders are also required to seek MAS’ prior approval for the appointment of a chief executive officer or director17. This prevents individuals who are not of good standing from being appointed, especially if they have been convicted in Singapore or elsewhere of dishonesty or fraud or are undischarged bankrupts, have been compounded with creditors or have unsatisfied judgement debts.

This expectation of CMS licence holders to meet the “fit and proper” criteria” requirements continue even after a CMS licence has been granted, and is monitored on a continuing basis. MAS has the power of authority to remove the CMS licence holder’s executive officers or directors if they fail to meet “fit and proper” criteria, e.g. if they had been convicted of an offence involving fraud and dishonesty, is an undischarged bankrupt, failed to discharge their duties of office.

2.2.7 Duties of CMS Licence Holders

CMS licence holders have to comply with all laws and rules governing their operations. To provide reasonable assurance on the safety, effectiveness and efficiency of their business operations, CMS licence holders have to institute adequate internal controls commensurate with the nature, scale and complexity of the business18. These include:

1. Implementing effective written policies on all operational areas, including financial policies, accounting and internal controls, and internal auditing. CMS licence holders must ensure compliance with the policies;

2. Implementing compliance functions and arrangements, including specifying the roles and responsibilities of officers and employees to ensure compliance with all applicable laws, codes of conduct and standards of

16 SFA Section 95 - Lapsing, Revocation and Suspension of CMS Licence

17 SFA Section 96 - Approval of Chief Executive Officer or Director of Holder of CMS licence; SFR (LCB) Section 12 - Application for Appointment of Chief Executive Officer and Director

18 SFR (LCB) Section 13 - Duties of Holder of CMS Licence



good practice in order to protect investors and reduce the CMS licence holder’s risk of incurring legal or regulatory sanctions that may be imposed by MAS or any other public authority, financial loss, and reputational damage;

3. Identifying, addressing and monitoring the risks associated with the trading or business activities;

4. Ensuring that their business activities are subject to adequate internal audit;

5. Ensuring that internal audits include inquiring into the CMS licence holder’s compliance with all relevant laws and all relevant business rules of any securities exchange, futures exchange and clearing house;

6. Setting out in writing the limits of discretionary powers of each officer, committee or sub-committee or other group of persons empowered to commit the CMS licence holder to any financial undertaking or to expose it to any business risk (including any financial, operational or reputational risk);

7. Keeping a written record of the steps taken by the CMS licence holder to monitor compliance with its policies, its accounting and operating procedures, and the limits on discretionary powers;

8. Ensuring accuracy, correctness and completeness of any report, book or statement submitted by the CMS licence holder to its head office (if any) or to MAS; and

9. Ensuring effective control and segregation of duties to mitigate potential conflicts of interest that may arise from the CMS licence holder’s operations.

CMS licence holders also have the responsibility to implement clearly defined policies and procedures for ensuring that only qualified persons are appointed as representatives for conducting regulated activities. CMS licence holders must ensure that their representatives pass the requisite examination or are exempted from the examination before registering them as representatives. They are required to maintain a register which includes information on the type of regulated activities conducted by representatives, the date on which its representatives completed the applicable examinations or non-examinable courses and the basis for exemption if a representative is not required to pass a certain module of the CMFAS examination.

CMS licence holders must also ensure that independent and rigorous due diligence checks are conducted to ensure that representatives meet “fit and proper” criteria. They have to file a “Report on Misconduct of Representative” if any of its representatives fail to meet the “fit and proper” criteria or have committed acts relating to market misconduct within 14 days after the discovery of the misconduct.19

CMS licence holders who fail to comply with their prescribed duties will be guilty of an offence which is punishable with a fine.

2.2.8 Trading Practices and Conduct

CMS licence holders and their representatives who are registered with SGX-ST as Trading Members and Trading Representatives respectively, must adhere to SGX-ST Rules governing trading practices and conduct.

1. Acting as Principal20

A Trading Member and its representative must ensure that they inform their customer beforehand if they are trading as principal with the customer. Any contract note relating to the transaction must show that the Trading Member and its representative had acted as principal.

19 Notice on Reporting of Misconduct of Representatives by Holders of CMS Licence and Exempt Financial Institutions (SFA 04-N11)

20 SGX-ST Rule 13.1 - Acting as Principal



Penalties – SGX-ST Rule 13.1

An offence under this rule is not compoundable and is subject to a mandatory minimum imposable penalty.

2. Acting as Agent21

When acting as an agent in the execution of a customer’s order, a Trading Member and its representative must ensure that they:

i. Carry out the customer’s instructions;

ii. Exercise skill, care and diligence;

iii. Act in good faith;

iv. Act in the best interest of customers;

v. Disclose all circumstances and risks that could reasonably be expected to affect a customer’s decision, if asked by a customer;

vi. Inform the customer of the current best bid and offer prices on the Trading System, if asked by the customer;

vii. Disclose the commission and any benefit directly or indirectly receivable on the transaction;

viii. Do not enter into a transaction which may conflict with a duty to the customer, unless the customer is informed and consents to the transaction; and

ix. Do not disclose a customer’s order unless:

(a) The prior written consent of the customer for the disclosure of the information is obtained;

(b) The disclosure is for the effective execution of the customer’s order;

(c) The disclosure is necessary for the operations and risk management of the trading member if these functions have been outsourced by the Trading Member; or

(d) The disclosure is required under the law or under SGX-ST Rules.

A Trading Member must ensure that a person to whom it discloses a customer’s order maintains confidentiality of the information. An offence under this rule may be compounded with a fine.

3. Separation of Customer and Propriety Trading Activities

Trading Members must have procedures to prevent any conflict of interest between its customers’ trading activities and its own proprietary trading activities22. An offence under this rule may be compounded with a fine.

4. Precedence of Customers Orders

A Trading Member or Trading Representative must not deal in securities for his own account 23 or for a “Prescribed Person’s24” account if the Trading Representative has an unexecuted order on the same terms as a

21 SGX-ST Rule 13.2 - Acting as Agent

22 SGX-ST Rule 13.3.1 (1) - Separation of Customer and Proprietary Trading Activities

23 “Own account” means an account in which the Trading Member or the Trading Representative has a beneficial interest in.

24 SGX-ST Rule 13.4.2 Customer Orders – Precedence where “Prescribed Person” means:

a. The Trading Representative’s Trading Member;

b. A director of the Trading Member;

c. An employee or a Trading Representative of the Trading Member;



customer25.

This rule will not apply under the following circumstances:

i. The Trading Member or Trading Representative does not have access to customer’s order flow information while executing for his own accounts or for the “Prescribed Person’s” account;

ii. The customer has prescribed that the order be executed under specified conditions and the Trading Member or Trading Representative is unable to execute the order by reason of those conditions; or

iii. The transaction is entered into under prescribed conditions.

Penalties – SGX-ST Rule 13.4.1


5. Arrangement with Customers26

A Trading Member or its Trading Representative must not:

i. Accept a share in the profits of a customer’s account or have any arrangement with a customer to share in the profits of the customer’s account;

ii. Have any arrangement with a third party to allocate profits or losses to a customer’s account; or

iii. Lead a customer to believe that the customer will not suffer loss as a result of opening an account or dealings.


An offence under SGX-ST Rule 13.5.1(1) or 13.5.1(3) may be compounded with a fine. An offence under SGX-ST Rule 13.5.1(2) is not compoundable and is subject to a mandatory minimum imposable penalty.

6. Management of Customers’ Margins by Trading Members26

Where the Trading Member collects margins from the customer in connection with trades executed on SGX-ST, the following shall apply:

i. Trading Members may impose margin requirements, hair-cut rates, payments periods for customers to deposit collateral, valuation of positions and collateral, and making calls for additional margins, as it see fit;

ii. If a Trading Member is unable to contact a customer to call for margins, a written notice sent to the customer at the most recent address furnished by the customer to the Trading Member shall be deemed sufficient;

iii. Where a customer fails to meet such margin that the Trading Member may call from the customer, the Trading Member may take actions as it deems appropriate, without giving notice to the customer, to reduce its exposures to the customer. Such actions may include liquidating all or part of the customer’s positions.

d. A person, a group of persons, a corporation or a group of corporations, or family trusts, whom the Trading Member, director, employee or Trading Representative of the Trading Member is associated with or connect to.

25 SGX-ST Rule 13.4.1 - Customer Orders-Precedence

26 SGX-ST Rule 13.5 - Arrangement with Customers

26 SGX-ST Rule 13.5A - Margin Management for Trading Members in Respect Any Margins from Customers



SGX-ST may also order Trading Members to immediately take action to offset all or part of the positions of the customer to rectify the deficiency.

Penalties – SGX-ST Rule 13.5A

An offence under this rule may be compounded with a fine which will depend on factors such as the number of prior violations, and whether the offender is a Trading Member or Approved Executive Director.

7. Trading Authority

Before accepting any orders from a third party, a Trading Member must obtain written authorisation from the customer empowering the third party to trade for the customer’s account27. An offence under this rule may be compounded with a fine.

8. Separation of Front and Back Office Functions

Under SGX-ST Rule 12.14.1, A Trading Member must have processes in place to minimise and manage any conflicts of interest, including but not limited to separating its front office and back office functions to prevent any conflict of interests.



9. Trading by Employees and Agents

A Trading Member must require a Director, Officer, Dealer and employee to obtain the prior written approval of a senior management staff independent of sales or dealing of a Trading Member, or a senior management staff of a related corporation of that Trading Member charged with the approval function, for each trade in his personal account or an account over which he or she has control or influence28.

A Trading Representative should not execute an order for his personal account without proper written approval29.

A Trading Member must require a Director, Officer, Trading Representative or employee of the Trading Member to trade through it. However, if this is impractical, the Trading Member is deemed to satisfy this rule if it has procedures to monitor such trades and documents the circumstances that gives rise to the impracticality30.

A Trading Member must not knowingly buy or sell securities or futures contracts for a Director, Officer, Trading Representative or employee of another Trading Member, except with the prior written approval of the other Trading Member31.

A Trading Member must have in place procedures to:

27 SGX-ST Rule 12.4.1 - Trading Authority

28 SGX-ST Rule 12.17.1 - Trading by Employees and Agents



31 SX-ST Rule 12.17.4 - Trading by Employees and Agents



i. Ensure that agents who are privy to confidential information relating to dealing in securities or trading in futures contracts, do not use such information to trade for their own benefit; and

ii. Monitor the trading activities of its Directors, Officers, Trading Representatives and employees.

This Rule does not require a Trading Member to approve remisiers' personal trades. However, as a good control measure, Trading Members should conduct more frequent reviews of the trading activities of its remisiers. This is also in line with SGX-ST Rule 12.17.6 which requires a Trading Member to have in place procedures to monitor the trading activities of its remisiers, amongst other persons.

The frequency of these reviews should be conducted at a level where the Trading Member is confident that its remisiers’ trading activities are above board.


An offence under SGX-ST Rule 12.17.1, 12.17.2, 12.17.3, 12.17.4, 12.17.5 or 12.17.6 may be compounded with a fine. The penalty will be dependent on factors such as the number of prior violations, and whether the offender is a Trading Member or Approved Executive Director.

10. Compliance Review

A Trading Member must carry out checks from time to time to ensure compliance with the regulatory requirements of MAS and SGX-ST rules, directives and its policies and procedures. The checks must be carried out by an internal audit or compliance department/person whose reporting line is independent of dealing, sales and operations32.


An offence under this rule may be compounded with a fine. The penalty will depend on factors such as the number of prior violations, and whether the offender is a Trading Member or Approved Executive Director.

2.3 Registration of Representatives

Individuals intending to conduct any regulated activity under SFA have to be an appointed representative, temporary representative33 or provisional representative34 in respect of that type of regulated activity. They can only commence dealings in regulated activities after they have satisfied the entry and examination

32 SGX-ST Rule 12.18 - Compliance Review

33 Temporary representatives are appointed to conduct regulated activities on a short-term basis. They are eligible to be appointed for a total of 6 months within any 24-month period, with each appointment not lasting more than 3 months. In addition to education and work experience-related admission criteria, they must be an employee of a related entity of the principal and must be currently licensed, authorised or otherwise regulated for that activity in an overseas jurisdiction with a regulatory regime that is comparable to that of Singapore. Refer to SFR (LCB) Frequently Asked Questions.

34 Provisional representatives are given a grace period of three months to complete the requisite examinations applicable to appointed representatives. During the grace period, they are allowed to conduct regulated activities. In addition to educational and work experience-related admission criteria (including 3 years of relevant work experience), provisional representatives must be currently or previously licensed, authorised or otherwise regulated for a continuous period of at least 12 months (and not more than 12 months before) for the relevant activity in an overseas jurisdiction with a regulatory regime that is comparable to that of Singapore. Refer to SFR (LCB) Frequently Asked Questions.



requirements for regulated activities under SFA (refer to Section 2.3.2) and their name has been entered into the Public Register of Representatives (refer to Section 2.3.6).

Financial institutions should ensure that they do not permit any individuals to conduct any regulated activities under the SFA if they are not notified as appointed, temporary or provisional representatives under the SFA35.

SGX-ST Rules also require SGX-ST Trading Members to ensure that their representatives who deal in securities are under SFA and to register them as Trading Representatives with SGX-ST36. Upon registration, a Trading Representatives will be deemed to be bound by the Rules and Directives of SGX-ST in addition to meeting the regulatory requirements prescribed under the SFA and conditions applicable to appointed, temporary or provisional representatives.

Any person who carries out regulated activities without being registered with MAS and SGX-ST will be guilty of an offence if convicted and will be liable to the following penalties.

Penalties

SFA SGX

SFA 99B(1)

Any individual who conducts a regulated activity when he is not an appointed, provisional or temporary representative contravenes SFA 99B(1) and shall be guilty of an offence and liable to a fine not exceeding $50,000 or to imprisonment for a term not exceeding 12 months, or to both. In the case of a continuing offence, to a further fine not exceeding $5,000 for every day or part thereof during which the offence continues after conviction.

SFA 99B(3)

A financial institution which permits any individual who is not an appointed, provisional or temporary representative to conduct any type of regulated activity under the SFA contravenes SFA 99B(3) and shall be guilty of an offence and shall liable on conviction to a fine not exceeding $150,000 and, in the case of a continuing offence, to a further fine not exceeding $15,000 for every day or part thereof during which the offence continues after conviction.

SGX-ST Rule 4.6.13(1)

Offences under this rule may be compounded with a fine. The penalty will be dependent on factors such as the number of prior violations, and whether the offender is a Trading Member or Approved Executive Director.

2.3.1 Acting for One Principal

A representative can act for only one principal unless it has the approval of MAS to act for more than one principal, or if the principals are related corporations37. MAS may require a representative who is applying to act for more than one principal to furnish relevant information or documents to support the application.

SGX-ST Rules also stipulate that a Trading Representative must act for only one Trading Member38.

The objectives of the one-representative-one-principal rule are two-fold:

35 SFA Section 99B(3) - Acting as Representative

36 SGX-ST Rule 4.6.13(1) - Trading Representatives

37 SFA Section 99J - Representative to Act for Only One Principal

38 SGX-ST Rule 7.5.2 - Acting for A Trading Member



1. To secure clarity for investors about the status of representatives, the principals they represent, and more importantly, where responsibility rests for complaints and redress; and

2. To ensure that principals closely monitor and supervise their representatives at all times.

Penalties

SFA SGX

SFA 99J (1)

Any person who breaches the one-representative-one-principal rule contravenes SFA 99J (1) and shall be guilty of an offence and liable on conviction to a fine not exceeding $50,000 or to imprisonment for a term not exceeding 12 months or to both. In the case of a continuing offence, to a further fine not exceeding $5,000 for every day or part thereof during which the offence continues after conviction.

SGX-ST Rule 7.5.2

Offences under SGX-ST Rule 7.5.2 may be compounded with a fine. The penalty will be dependent on factors such as the number of prior violations, and whether the offender is a Trading Member, Approved Executive Director or Trading Representative.

2.3.2 Minimum Entry and Examination Requirements

All appointed representatives who represent CMS licence holders or exempt financial institutions must meet minimum entry and examination requirements39.

To be eligible for registration as a Trading Representative, an applicant must fulfil all the following conditions:

1. Be at least 21 years old.

2. Have a minimum education level (only applicable to GCE O-Level Examinations sat on or before 1980) equivalent to:

• At least 4 GCE O-Level credit passes; or

• At least 2 GCE O-Level credit passes if he has 3 continuous years of relevant working experience over the last 5 years (only applicable to licensed representatives who sat for O Levels before 1980;

3. Have satisfied the CMFAS examination requirements for those regulated activities he will deal in40.

4. Be a fit and proper person, which includes41:

• Possessing qualities of honesty, integrity and sound reputation;

• Competence and capability; and

• Financial soundness, e.g. not being an undischarged bankrupt, whether in or out of Singapore.

Some examples of the factors for assessing the “Honesty, Integrity and Reputation”, “Competence and Capability” and “Financial Soundness” criteria are as follows:

39 Notice on Minimum Entry and Examination Requirements for Representatives of Holders of CMS Licence and Exempt Financial Institutions (SFA 04-N09)

40 Refer to SFA 04-N09 for list of Required CMFAS Examinations

41 Refer to MAS Guidelines on Fit and Proper Criteria (FSG-G01)



1. Honesty, Integrity and Reputation

Whether the person:

i. Has been refused the right or restricted in his right to carry on any trade, business or profession for which a specific licence, registration or other authorisation is required by the law in any jurisdiction;

ii. Has been the subject of any investigations or disciplinary proceedings or been issued a warning or reprimanded by MAS or any other regulatory authority, an operator of a market or clearing facility, any professional body or government agency, whether in Singapore or elsewhere;

iii. Has been convicted of any offence or is being subject to any pending proceedings which may lead to such a conviction under any law in any jurisdiction;

iv. Has any judgement debt (in particular that associated with a finding of fraud, misrepresentation or dishonesty) entered against the person in any civil proceedings or is a party to any pending proceedings which may lead to such a judgement under the law in any jurisdiction;

v. Is or has been a director, partner, substantial shareholder or concerned in the management of a business that has been censured, disciplined, prosecuted or convicted of a criminal offence or been the subject of any disciplinary or criminal investigation or proceeding, in Singapore or elsewhere, in relation to any matter that took place while the person was a director, partner, substantial shareholder or concerned in the management of the business;

vi. Is or has been a director, partner, substantial shareholder or concerned in the management of a business that has been suspended or refused membership or registration by MAS, any other regulatory authority, an operator of a market or clearing facility, any professional body or government agency, whether in Singapore or elsewhere;

vii. Is or has been a director, partner, substantial shareholder or concerned in the management of a business that has gone into insolvency, liquidation or administration during the period when, or within a period of one year after, the person was a director, partner, substantial shareholder or concerned in the management of the business, whether in Singapore or elsewhere.

2. Competence and Capability

Whether the person:

i. Has satisfactory past performance or expertise in regards to the nature of his business or duties whether in Singapore or elsewhere;

ii. Is assuming concurrent responsibilities which would give rise to a conflict of interest or otherwise impair his ability to discharge his duties in relation to any activity regulated by MAS;

iii. Has satisfactory educational qualification or experience, relevant skills and knowledge in relation to the nature of duties they are required to perform. The person should have satisfied the minimum entry and examination requirements for representatives conducting any activity regulated by MAS.

3. Financial Soundness

Whether the person:

i. Is or has been unable to fulfil all or any of his financial obligations in Singapore or elsewhere;

ii. Has entered into a compromise or scheme of arrangement with his creditors;

iii. Is subject to a judgement debt which is unsatisfied, either in whole or in part, in Singapore or elsewhere;

iv. Is an undischarged bankrupt in Singapore or elsewhere;

v. Is or has been the subject of a bankruptcy petition or any other similar process in Singapore or elsewhere.



The list of examples cited are not exhaustive. Please refer to “MAS Guidelines on Fit and Proper Criteria” (FSG-G01) which set out the fit and proper criteria applicable to all relevant persons in relation to the carrying out of any activity regulated by MAS.

2.3.3 Due Diligence Checks

CMS licence holders are expected to conduct rigorous and independent checks on the fitness and propriety of their representatives as the onus is on them to establish that their representatives are fit and proper persons. Prior to appointing an individual as its representative, the CMS licence holder is expected to carry out the following due diligence checks on the proposed representative42:

1. Probity checks on representative’s identity by obtaining a copy of his current identity documentation (e.g. National Registration Identity Card, Foreign Identification Number or Passport) and verify his identity. If the proposed representative is a foreigner, the CMS licence holder is expected to verify that he has the relevant employment pass or has sought approval from the relevant authorities to work in Singapore.

2. Probity checks of representative’s past records which includes conducting reference checks with the proposed representative’s previous employers to confirm that he has not been dismissed or asked to resign, and to ask if he has any material adverse record taken by the previous employer. CMS licence holders are also expected to check the Public Register of Representatives (refer to Section 2.3.5.1) on MAS website and conduct probity searches, including but not limited to publicly available registers provided by enforcement and regulatory agencies, self-regulatory organisations, and professional body or association, to verify the proposed representative’s past records of employment and regulatory status, including any past criminal or disciplinary records under any law or rule in any jurisdictions.

3. Probity checks on the representative’s financial status. At a minimum, the CMS licence holder should obtain the proposed representative’s records from the Ministry of Law’s Insolvency and Public Trustee’s Office Online Portal to ensure that he is not an undischarged bankrupt. If the proposed representative was self-employed, the CMS licence holder should obtain the individual’s records from the CPF Board to verify that he is not in arrears of his contributions to the CPF Board as required under the CPF Act. The CMS licence holder should also conduct checks with credit agencies, including bankruptcy status in overseas jurisdictions as well as requesting the proposed representative to provide a search result of his credit status with the Credit Bureau (Singapore).

2.3.4 Revocation and Refusal of Registration of Licence43

The decision whether to register a representative or to revoke a registration depends on the following:

1. The seriousness or severity of circumstances surrounding the person’s failure to meet a specific criteria;

2. The relevance of the unfulfilled criteria in relation to the duties that are, or are to be performed and the responsibilities that are, or are to be assumed by the person;

3. The amount of time that has lapsed since the person’s failure to meet a specific criteria.

42 CMI 01/2011 MAS Circular on Due Diligence Checks and Documentation in Respect of the Appointment of Appointed, Provisional and Temporary Representatives

43 SFA Section 99M - Power of Authority to Refuse Entry or Revoke or Suspend Status of Appointed, Provisional or Temporary Representative



2.3.5 Representative Notification Framework

Financial institutions can register representatives as an appointed44, provisional45 or temporary46 representative with MAS through the Representative Notification Framework (RNF). The RNF allows financial institutions to lodge notifications with MAS electronically via the online system for their representatives who intend to conduct regulated activities. As part of the notification, financial institutions are to certify that the representatives whom they intend to appoint are fit and proper and meet the competency, financial soundness and integrity standards required. Once a registration has been processed, the name of the proposed representative would be published on the online Register of Representatives on MAS website.

1. Public Register of Representatives

Besides the name of the representative, the regulated activities which the representative is allowed to conduct, the principal companies which the representative has worked for within the past three years and any formal regulatory action taken by MAS against the representative, would be displayed on the Public Register of Representatives.

2. Importance of RNF Number

All representatives are assigned a unique representative number, which will stay with them even if they change principals. With this number, members of the public may verify the representatives whom they are dealing with against the Register of Representatives, thereby reducing their risk of dealing with unregulated individuals. Financial institutions are encouraged to make the unique representative numbers of their representatives readily available to consumers for consumers to verify the representative’s regulatory status. It is thus important for representatives to know their own RNF number.

3. Cessation of Status of Representatives

The status of an appointed, provisional or temporary representative in respect of any regulated activity is valid until it ceases under the following circumstances:

i. The principal notifies MAS of such cessation;

ii. The appointed representative has ceased to act as a representative for a continuous period of one month, and his principal has not notified MAS of his cessation as a representative;

iii. MAS has revoked the status of the appointed representative;

iv. The principal ceases to carry on business in that type of regulated activity;

v. The licence of his principal lapses, the licence is revoked by MAS, or a prohibition order is issued by MAS against his principal prohibiting it from carrying out that type of regulated activity.

The above also apply to provisional and temporary representatives, with necessary modifications and adaptations. The status of a provisional representative is only valid for a maximum of 3 months from the date his name is entered into the Public Register of Representatives. For a temporary representative, the principal can notify MAS of the appointment for a further 3-month period only after the representative has commenced the first 3-month block.

44 SFA Section 99D - Appointed Representative

45 SFA Section 99E - Provisional Representative

46 SFA Section 99F - Temporary Representative



2.3.6 Registration with SGX-ST

The process to be appointed as a Trading Representative is not complete until he/she is also registered with SGX-ST. Such registration is to be made in the form prescribed by SGX-ST and supported by a CMS licence holder as his principal. SGX-ST may in its absolute discretion approve or reject an application and is not obliged to give any reason for its rejection.

2.3.7 Automatic De-Registration

A representative will automatically cease to be registered as a Trading Representative when he or she47:

1. Is of unsound mind;

2. Becomes a bankrupt, within or outside Singapore;

3. Breaches any law or regulations involving fraud or dishonesty, within or outside Singapore;

4. Has not satisfied a judgement debt or is subject to a compromise or scheme of arrangement with his/her creditors, within or outside Singapore;

5. Is no longer a representative, provisional or temporary representative of the regulated activities under the SFA; or

6. Has exemption for registration withdrawn from the Public Register of Representatives as an appointed representative, provisional or temporary representative.

2.3.8 Deletion from Register of Trading Representatives

A Trading Representative who ceases to act for his Trading Member will have his name deleted from the Register of Trading Representatives upon the effective date of cessation48.

2.3.9 Change of Particulars

An appointed, provisional or temporary representative is required to inform his principal company of any change in his residential address or other personal particulars within 7 days after the date of change of the particulars. The principal company is required to notify MAS of its representative’s change of particulars no later than 14 days after the date of the change of the particulars in the prescribed form and manner49.

Similarly, a Trading Representative must keep SGX-ST updated of his personal particulars and inform SGX-ST in writing of any change in his residential or mailing address or contact number within 7 days of the change50.

47 SGX-ST Rule 7.7 - Automatic De-Registration

48 SGX-ST Rule 7.8.1 - Deletion from Register

49 SFA Section 99H(5) - Lodgment of Documents; SFR (LCB) Section 5 – Change of Particulars and Additional Regulated Activity of Representative

50 SGX-ST Rule 7.5.7 - Contact Details



Penalties

SFR(LCB) SGX

SFR (LCB) 5

Any person who contravenes SFR (LCB) 5 shall be guilty of an offence and liable on conviction to a fine not exceeding $50,000.

SGX-ST Rule 7.5.7

Offences under this rule may be compounded with a fine. The penalty will be dependent on factors such as the number of prior violations, and whether the offender is a Trading Member, Approved Executive Director or Trading Representative.

2.4 Obligations of Representatives

2.4.1 Compliance

A Trading Representative who is registered with SGX-ST must comply with the rules and any directives prescribed by SGX-ST whilst he remains and acts as a Trading Representative51. He must adhere to the principles of good business practice in the conduct of his business affairs52.


An offence under this rule may be compounded with a fine. The penalty will be dependent on factors such as the number of prior violations, and whether the offender is a Trading Member, Approved Executive Director or Trading Representative.

2.4.2 Payment of Fees

A Trading Representative must pay SGX-ST fees, levies and charges as SGX-ST prescribes. SGX-ST may reduce or waive any fee, levy or charge53.


An offence under this rule may be compounded with a fine. The penalty will depend on factors such as the number of prior violations, and whether the offender is a Trading Member, Approved Executive Director or Trading Representative.

2.4.3 Register of Securities (Form 15)

A Trading Representative must maintain a Register of Securities in accordance with SFA54. The Register must include Futures Contracts (if any).

51 SGX-ST Rule 7.5.1 - Compliance

52 SGX-ST Rule 7.5.3 - Good Business Practice

53 SGX-ST Rule 7.5.4 - Payment of Fees

54 SGX-ST Rules 7.5.5 - Register of Securities, SFR(LCB) 4 - Register of interests in securities



The Register must be:

1. Updated within 7 days of transactions; 2. Produced to SGX-ST, if asked for inspection; and 3. Extracted for SGX-ST



2.4.4 Other Businesses

A Trading Representative must inform SGX-ST in writing at least 14 days before he engages in, or holds any substantial shareholding in, any other business that might potentially conflict with being a Trading Representative55. The Trading Representative must ensure that the proposed engagement or shareholding is agreed by his principal Trading Member, and is does not breach the SFA, SFR, SGX-ST Rules or Directives or any relevant law or regulation. A Trading Representative must supply SGX-ST with any information it requires regarding the engagement or acquisition of shareholding.

For appointment as a non-executive director of a SGX-ST listed company, the Trading Representative must furnish SGX-ST with an explanation of how conflict of interests that may arise from the dual appointments have been addressed, and an undertaking to disclose the directorship to customers when necessary for the discharge of the Trading Representative’s fiduciary responsibility. His principal Trading Member must also advise SGX-ST that it is aware of the directorship and is satisfied that conflicts of interest have been sufficiently addressed.

If SGX-ST objects to the engagement or acquisition of shareholding, a Trading Representative must not proceed with it. SGX-ST may extend the 14-day notification period. If extended, the Trading Representative must not proceed with the engagement or acquisition of shareholding before extended period ends. If SGX is of the opinion that an engagement or shareholding is detrimental to the financial integrity, reputation or interests of SGX-ST, the principal Trading Member or its customers, SGX-ST may require the Trading Representative to end it. If SGX-ST objects to the engagement or acquisition of shareholding or requires a Trading Representative to end it, the Trading Representative may, within 14 days after it is notified of SGX-ST's decision, appeal in writing to the Board whose decision will be final.



2.4.5 Remisier’s Deposit

A Trading Representative who acts as a remisier must deposit at least S$30,000 with the Trading Member56. The deposit can be in the form of cash deposits, marketable securities or a guarantee from a bank or financial institution operating in Singapore. A Trading Member may require a remisier to increase the amount of deposit or restrict the remisier’s volume of business if, in the Trading Member’s opinion, the deposit is not enough for the volume of business transacted by the remisier.

55 SGX-ST Rules 7.5.6 - Other Businesses; SGX Directive No.1 – Directorship of SGX-ST Listed Companies

56 SGX-ST Rules 7.6.1 - Remisier’s Deposit





2.4.6 Continuing Education

Under the Guidelines on Fit and Proper Criteria (FSG-G01), “Competence and Capability” is one of several important criteria for considering whether a person is fit and proper. MAS expects appointed, provisional or temporary representatives to keep abreast of developments in the industry and update skills and knowledge relevant to the activities they conduct 57 . In this regard, their principal companies must ensure that representatives receive adequate training to have the knowledge and skills to conduct the regulated activities under the SFA. Principal companies should also provide quality, on-going training to their representatives. These training programmes should be well structured and go beyond satisfying requirements on training hours. Where the training is conducted by a product provider or any third party trainer, the principal company must be satisfied that the training is adequate.

Similarly, trading representatives registered with SGX-ST are expected to be competent and continually upgrade themselves through continuing professional development. The onus is on the Trading Member to ensure that its Trading Representatives meet this requirement.

Training can be in the form of:

• Face to face training

• E-learning

• Seminars and workshops and generally be via formal or documented learning.

The CPD activities can be in appropriate combination of:

• Relevant market conduct requirements

• Relevant product knowledge

• Relevant compliance-related matters

• Other relevant skills or competencies

A Trading Member can determine the appropriate combination of CPD training but it is the Trading Member’s duty to keep track of its Representatives’ training requirement.

2.4.7 Obligations of a Former Trading Representative

A former Trading Representative remains liable to SGX-ST for any liabilities incurred under the SGX-ST rules or directives during the period of his registration58. He is also subject to disciplinary actions for any offence committed during the period of his registration.

57 Notice on Minimum Entry and Examination Requirement for Representatives of Holders of CMS Licence and Exempt Financial Institutions (SFA 04-N09)

58 SGX-ST Rules – 7.9 Obligations of a Former Trading Representative



2.5 Regulatory Requirements for Advertising

To prevent the investing community from being misled, SGX59 and SFA60 have rules and regulations governing the use of advertisements in relation to securities dealing. Trading Members and Trading Representatives must adhere to these rules when publishing advertisements, market letters or similar information, collectively called advertisements in this study guide.

2.5.1 SGX-ST Rules

A Trading Member must ensure that any advertisement or publication:

• Is accurate;

• Is not misleading;

• Does not contain claims that are not externally verifiable; and

• Does not tend to bring SGX or its related corporations, or other Trading Members, into disrepute.

2.5.2 Securities and Futures (Licensing & Conduct of Business) Regulations

The Securities and Futures (Licensing and Conduct of Business) Regulations stipulate that advertisements:

1. Should not refer to specific profitable recommendations it made in the past. If past recommendations are referred to, the advertisement must:

i. List ALL the recommendations, both profitable and unprofitable, that it made in at least the 12 months immediately before the date of the advertisements;

ii. State the name of each instrument recommended, the date and nature of the recommendation, the market price at that time, the price at which the recommendation was to be acted upon, and the current market price of the instrument; and

iii. Contain a statement, in as large a font as the largest font used in the body of the advertisement, that explains that past results of instruments in the list does not guarantee similar results in the future.

2. Should not directly or indirectly claim that any chart, formula, strategy or device referred to in the advertisement can be used to determine which instruments to buy or sell, or when to buy or sell them, without prominently disclosing its limitations and difficulties in usage.

3. Should not claim that any report, analysis or other service will be provided free of charge, unless it is in fact provided, in its complete form, without any condition or obligation.

4. Should not contain any inaccurate, misleading or exaggerated statement or presentation that is designed to exploit an audience’s lack of experience and knowledge.

5. Should not claim that its abilities or qualifications have in any way been approved by the Authority.

59 SGX-ST Rules – 12.19 Advertising

60 SFR (LCB) Section 46 – Advertisement; SFR (LCB) Section 46A - Certain representations prohibited



Penalties

SFR (LCB) 46A SGX-ST Rule Schedule Chapter 12 - Operational Requirements (12.19)

Any CMS licence holder that represents or knowingly permit to be represented or implied in any manner to any person that its abilities or qualifications have been approved by MAS contravenes SFR (LCB) 46A and shall be guilty of an offence and liable on conviction to a fine not exceeding $50,000 and, in the case of a continuing offence, to a further fine of $5,000 for every day or part thereof during which the offence continues after conviction.

Offences under this Rule may be compounded with a fine. The penalty will be dependent on factors such as the number of prior violations, and whether the offender is a Trading Member or Approved Executive Director.

2.6 Opening of Customer Accounts

2.6.1 Customer Accounts

It is important to know your customers, both from the perspective of being able to offer the correct products and services to suit their investment needs, as well as to prevent money laundering. A Trading Member has to ensure that an account has been opened for a customer before transacting on his behalf or selling any investment product to him. In opening the account, the Trading Member has to obtain particulars of a customer and understanding the customer’s investment objectives. The purpose is to ensure that the Trading Member abides by the know-your-customer principle.

2.6.2 Separate Accounts and Account Designation61

A Trading Member must maintain separate accounts for each person whose account is carried on the books of the Trading Member. A customer account must be identified and designated by the full name of the customer(s) and an account code.



2.6.3 Individual Customer Accounts62

Before opening an individual customer account, a Trading Member must:

1. Obtain particulars of the customer (and any person authorised to trade for the customer), including the full name, a copy of the identity card/passport, specimen signature, residential and mailing addresses, telephone numbers, occupation, and the name, address and telephone number of the customer’s employer, and investment objectives; and

61 SGX-ST Rule 12.3.7 - Separate Accounts and Account Designation

62 SGX-ST Rule 12.3.1 – Individual Customer Account



2. Take appropriate steps to verify the customer’s identity and intention if the customer does not open the account in person.

1. Verification of Customers’ Identity

A Trading Member may employ one or more of the following means to verify an individual customer’s identity if the customer does not open the account in person63:

1. Accept account opening forms that are certified by:

i. A Justice of Peace, a commissioner of oath, a notary public, or an advocate and solicitor;

ii. Members of other securities exchanges which have established information-sharing agreements with SGX-ST; or

iii. Branches of banks which operate in Singapore and with which the customer holds a banking account.

The Trading Member may verify the customer’s identity through direct telephone contact with person performing the certification by:

2. Establishing telephone contact with the applicant on an independently verified home or business number;

3. With the customer’s consent, contacting the personnel department of the customer’s employer on a listed business number to confirm his employment; or

4. Obtaining from the customer statements from a bank, Central Provident Fund Board or income tax authority.

2. Digital Signature

A Trading Member is encouraged to explore the use of digital signatures for online identification and verification. The identification and verification procedures for acceptance of digital signatures must be at least as rigorous as those which a Trading Member would normally have employed.

Penalties – SGX-ST Rule 12.3.1(1) and 12.3.1(2)

An offence under Rule 12.3.1(1) and 12.3.1(2) may be compounded with a fine. The penalty will depend on factors such as the number of prior violations, and whether the offender is a Trading Member or Approved Executive Director.

2.6.4 Corporate Customer Accounts64

Before opening a corporate customer account, a Trading Member must:

1. Obtain particulars of the customer, including the full name, registered and mailing addresses, names and signatures of person authorised to trade, and investment objectives;

2. Obtain a certified true copy of the certificate of incorporation of the customer; and

3. Obtain either:

i. A copy of the directors’ resolution of the customer approving the opening of the trading account with the Trading Member and empowering specific directors and officers to:

63 SGX-ST Practice Note 12.3.1 - Verification Procedure in Respect of Customers’ Identity

64 SGX-ST Rule 12.3.2 – Corporate Customer Account



• Trade in securities or futures contracts for the customer’s account; and

• Execute all documentation for trading and settlement in the account;

ii. A power of attorney (in English) certified by a notary public authorising identified person to open a trading account and trade on behalf of the customer; or

iii. Note in writing the basis upon which it believes the customer may open the account and engage in transactions and that the persons acting for the customer have been duly authorised to trade on the customer’s behalf.

SGX-ST Rules on individual and corporate customer accounts requires Trading Members to obtain their customers’ particulars and understand their customers’ investment objectives. For example, customers may wish to invest according to their risk appetite, invest in certain products, or have any other relevant objectives. The purpose is to ensure that the Trading Members abide by the know-your-customer principle65.

Penalties – SGX-ST 12.3.2(1), 12.3.2(2) or 12.3.2(3)

An offence under these rules may be compounded with a fine. The penalty will be dependent on factors such as the number of prior violations, and whether the offender is a Trading Member or Approved Executive Director.

2.6.5 Agency Account

For an agency account, a Trading Member must have on file:

1. The name of the principal;

2. Written evidence of the customer’s authority to trade for the principal66.


An offence under Rule 12.3.3 may be compounded with a fine. The penalty will depend on factors such as the number of prior violations, and whether the offender is a Trading Member or Approved Executive Director.

2.6.6 Joint Account67

Trading Members may allow customers to open a joint account if:

1. A joint securities account is opened with CDP;

2. Each joint account holder is at least 18 years old; and

3. No joint account holder is an undischarged bankrupt.

A joint account may be operated by no more than 2 individuals. However, if it is an estate account, it may be operated by all personal representatives.

65 SGX-ST Practice Note 12.3.1, 12.3.2 – Customer Accounts

66 SGX-ST Rule 12.3.3 - Agency Account

67 SGX-ST Rule 12.3.4 – Joint Account



A Trading Member must maintain the following information:

i. Particulars of each joint account holder;

ii. The names of person authorised to give trading orders and settlement instructions and receive scrip from the Trading Member;

iii. The names of persons to whom payments by the Trading Member are to made; and

iv. Details of any accounts held in an individual capacity by a joint account holder.

A Trading Member must require each joint account holder to specify whether the joint account holder is jointly and severally liable for all debts incurred in a joint account.

Penalties – SGX-ST 12.3.4(1), 12.3.4(2), 12.3.4(3) or 12.3.4(4)

An offence under these rules may be compounded with a fine. The penalty will depend on factors such as the number of prior violations, and whether the offender is a Trading Member or Approved Executive Director.

2.6.7 Additional Safeguards for Trading by Young Investors68

In addition to fulfilling customer due diligence requirements prior to account opening, Trading Members have to institute additional safeguards for trading by individuals above the age of 18 and below the age of 21 years (Young Investors) who may be new to the securities market and have limited trading experience. They may not fully appreciate the risks of securities and other investment products offered to them. As such, the Trading Members should undertake the following procedures, and give appropriate emphasis to the following:

1. Suitability Assessment

When a Young Investor opens a securities trading account, the Trading Member should assess the Young Investor’s suitability, taking into account the financial knowledge and risk capacity of the Young Investors to trade. A specific suitability assessment should also be made before allowing a Young Investor to trade in more complex instruments or products (such as a derivative contract or product with embedded derivatives). The decision to allow the Young Investor to trade in such instruments or products should be approved by a senior executive of the Trading Member. 2. Risk Disclosure

The risks and uncertainties associated with investing or trading in securities and other products to be sold by the Trading Member should be properly explained to the Young Investor. This is to ensure that the Young Investor has an appropriate understanding of the key risks and commitments involved.

3. Supervision

Trading Members should ensure that the relevant staff members are adequately trained and familiar with the safeguards put in place for Young Investors. Similarly, any additional procedures should be communicated to all Trading Representatives to ensure proper adherence and consistent application. In addition, a senior executive should be appointed to oversee and take responsibility for managing all issues relating to Young Investors. This includes monitoring the Trading Member’s dealings with the Young Investors and making appropriate adjustments to the procedures and processes where necessary.

68 SGX-ST Practice Note 12.3.1, 12.3.4 – Additional Safeguards for Trading by Individuals above the Age of 18 and Below the Age of 21 Years.



4. Investor Education

Trading Members should offer basic investment courses to Young Investors, as well as product specific courses to those who wish to trade in more sophisticated instruments and products. These courses will enable Young Investors to be more aware of the implications of their trading decisions and to be able to make better investment choices.

2.6.8 Specified Investment Products Trading Account69

Specified Investment Products (SIPs) are derivatives or products which may contain derivatives. They have complex features and risks which can expose investors to more factors which can cause a loss. Some SIPs are listed on an exchange while others are not.

Examples of SIPs Listed on an Exchange Examples of SIPs Not Listed on an Exchange

• Certain exchange traded funds and notes

• Structured warrants

• Futures

• Certificates

• Structured notes (e.g. equity-linked structured notes, credit linked structured notes)

• Certain unit trusts

• Certain investment-linked life insurance policies

1. Customer Account Review & Customer Knowledge Assessment

Not all customers have the knowledge or experience to assess an SIP’s complex features. As such, CMS licence holders and exempt financial institutions must conduct:

i. Customer Account Review (CAR) based on criteria set out in Appendix A before opening a SIP trading account for a customer who is a retail investor70 to transact in any SIP which is listed for quotation or quoted on a securities market or a futures market; or

ii. Customer Knowledge Assessment (CKA) based on the criteria set out in Appendix B before opening a SIP trading account for a customer who is a retail investor to transact in any SIP which is neither listed for quotation nor quoted on a securities market or a futures market.

For joint trading accounts, the requirement to conduct the CAR or CKA will apply to each of the customers intending to open the joint SIP trading account.

69 MAS Notice on the Sale of Investment Products (SFA 04-N12)

70 SFA 4A – Specific Classes of Investors

(i) Retail Investor refer to an investor who is not an accredited investor, institutional investor or expert investor.

(ii) Accredited Investor includes an individual whose net personal assets exceed in value $2 million or whose income in the preceding 12 months is not less than $300,000; or a corporation with net assets exceeding $10 million in value

(iii) Institutional Investor refers to a bank, a merchant bank, a finance company, a company/co-operative society licensed as an insurer in Singapore, a Trust company, the Government, a statutory board, a pension fund/collective investment scheme, a CMS licence holder for securities dealing, fund management, providing custodial services for securities, REIT management, securities financing, or futures contracts trading, a person carrying on the business of dealing in bonds with accredited/expert investors, and the Trustee of a Trust, or any other such person as prescribed by the Authority.

(iv) Expert Investor refers to a person whose business involves the acquisition and disposal, or holding of capital markets products, whether as principal or agent.



For the purpose of the CAR and CKA, a CMS licence holder or exempt financial institution has to take into consideration information on a customer’s educational qualifications, investment experience and work experience. If a customer does not provide these information, he shall be deemed as not possessing knowledge or experience in derivatives (for CAR) or in the unlisted SIPs (for CKA).

When conducting a CAR or CKA for a new customer, or a customer whose previous CAR or CKA is no longer valid, a CMS licence holder or exempt financial institution will assess a customer’s investment experience according to the:

a) Classification of the capital markets product(s) previously transacted by the customer; and

b) Listing status of such capital markets product(s).

at the time that the customer had transacted in such capital markets product(s).

A CMS licence holder or exempt financial institution shall highlight to the customer in writing that any inaccurate or incomplete information provided by the customer may affect the outcome of the CAR or CKA.

2. Approval to Open SIP Trading Accounts

A CMS licence holder must not open a SIP trading account for a customer unless its senior management who is not involved in that account’s opening process and is not a connected person of that customer is satisfied, on the basis of the outcome of the CAR or CKA, that the customer has knowledge or experience in derivatives (for CAR) or in the unlisted SIP (for CKA), and has approved the opening of the customer’s SIP trading account.

Regardless of the outcome of the CAR, a CMS licence holder or an exempt financial institution shall include a statement in its account opening form that a customer can, at any time, request for advice concerning a SIP. Upon such request, the licence holder or exempt financial institution shall provide advice to the customer.

Notwithstanding a positive outcome of the CKA, CMS licence holders or exempt financial institutions should offer to provide advice concerning the unlisted SIP to the customer. If the customer does not wish to receive advice, CMS licence holders or exempt financial institutions must document the customer’s decision in writing and highlight to the customer that it is the customer’s responsibility to ensure the suitability of the product selected. CMS licence holders or exempt financial institutions should also warn the customer in writing that the customer had chosen not to receive advice and to confirm in writing if the customer wishes to proceed without advice.

3. Requirements for Customers are Assessed Not to Possess Knowledge or Experience in Derivatives or Unlisted SIPs

The licence holder or exempt financial institution shall inform the customer of the outcome of the CAR if they are assessed not to possess knowledge or experience in derivatives following the CAR. If the customer intends to proceed to open a SIP trading, the CMS licence holder or exempt financial institution shall:

i. Inform the customer in writing of the outcome of the CAR;

ii. Obtain the customer’s written confirmation that he still intends to proceed with the opening of the SIP trading account despite not being in possession of knowledge or experience in derivatives;

iii. Explain to the customer the general features and risks associated with investing in derivatives and provide the customer a written statement of the explanation given; and

iv. Inform the customer in writing that it is the customer’s responsibility to ensure that he understands any capital markets product(s) that he intends to transact using the SIP trading account.



The licence holder or exempt financial institution shall inform the customer of the outcome of the CKA if they are assessed not to possess knowledge or experience in derivatives following the CKA. If the customer intends to proceed to open a SIP trading, the CMS licence holder or exempt financial institution shall:

a) Inform the customer in writing of the outcome of the CKA and that it is unable to proceed to transact in the unlisted SIP on behalf of the customer unless it is also an exempt financial adviser; and

b) where the CMS licence holder or exempt financial institution is also an exempt financial adviser, it shall provide financial advisory services to the customer in accordance with the standards set out in the Notice on Recommendations on Investment Products71.

4. Validity of the Outcome of CAR72

The CMS licence holder or exempt financial institution must not allow a customer to transact in a SIP through the SIP trading account after 3 years has expired from the date of the conduct of the CAR for the customer concerned, until and unless:

i. The CMS licence holder or exempt financial institution has checked and is satisfied that the customer has transacted in a listed SIP through the account

a) More than once during the preceding 3-year period; and

b) More than once during each subsequent 3-year period; or

ii. The CMS licence holder or exempt financial institution has conducted a new CAR for the customer.

5. Validity of the Outcome of CKA73

If a customer is assessed to have knowledge or experience to transact in an unlisted SIP, the CMS licence holder or exempt financial institution may allow the customer to transact the unlisted SIP for a period of one year from the date of the assessment. After a year has elapsed, the CMS licence holder or exempt financial institution shall conduct a new CKA on the customer before it transacts on behalf of the customer in any unlisted SIP.

6. Documentation and Record Keeping74

A CMS licence holder or exempt financial institution shall document every CAR and CKA conducted for each customer. The documentation must include:

i. Information collected from a customer on his educational qualification, work experience and investment experience;

ii. An assessment of the customer’s knowledge and experience in derivatives or unlisted SIPs, as the case may be;

iii. The outcome of the CAR or the CKA; and

iv. The approval of its senior management to open the customer’s SIP trading account, where applicable.

Where a CMS licence holder or an exempt financial institution transacts in any SIP which is listed for quotation or quoted on a securities market or a futures market on behalf of a customer, the CMS licence holder or exempt

71 MAS Notice on Recommendations on Investment Products (FAA-N16)

72 Notice on the Sale of Investment Products (SFA 04-N12) – Paragraph 16 Validity of the Outcome of CAR

73 Notice on the Sale of Investment Products (SFA 04-N12) – Paragraph 26 Validity of the Outcome of CKA

74 Notice on the Sale of Investment Products (SFA 04-N12) – Paragraphs 27-29 Documentation & Record Keeping



financial institution must maintain records of all communication between them and the customer in respect of the relevant trade, including a record in the form of a file note or a tape recording of the telephone conversation.

7. Requirements on CMS Licence Holders and Exempt Financial Institutions Dealing in Overseas-Listed Investment Products75

Overseas-listed investment products carry a different set of risks and levels of protection for investors. As such, CMS licence holders and exempt financial institutions are required to warn retail customers of the possible risks prior to the customer’s first purchase of an overseas-listed investment product. They have to provide the risk warning statement set out in Appendix C and obtain the customer’s acknowledgement of the risk warning statement, in written form or otherwise, before allowing the customer to transact76 in any overseas-listed investment product for the first time.

Risk Warning Statement - The risk warning statement highlights the key risks that customers should be aware of when trading overseas-listed investment products, such as:

• Level of investor protection and safeguards afforded in the relevant foreign jurisdiction;

• Differences between the legal systems in foreign jurisdiction and Singapore;

• Tax implications, currency risks, and additional transaction costs that may be incurred;

• Exposure to counterparty and correspondent broker risks;

• Political, economic and social developments that may influence overseas markets.

These and other risks may affect the value of the investment and customer need to understand them before they trade in foreign-listed investment products.

The CMS licence holder or exempt financial institution shall maintain records of the Customer’s acknowledgement for a period of not less than 5 years as per the SFA 102(3) Keeping of Book and Furnishing of Returns.

Where a CMS licenced holder or exempt financial institution offers an overseas-listed investment product to its customers, the CMS licence holder or exempt financial institution may implement a system to identify and determine that the overseas-listed investment product is to be classified as an “Excluded Investment Product” (refer to Appendix D for list of Excluded Investment Products).

Where a CMS licenced holder or an exempt financial institution does not implement a system to identify and determine that an overseas-listed investment product is to be classified as an excluded investment product, the overseas-listed investment product shall be classified as a specified investment product, and the requirements to conduct the CAR shall apply to a CMS licence holder or an exempt financial institution dealing in the overseas-listed investment product for a customer.

Where a CMS licence holder or an exempt financial institution has classified an overseas-listed investment product as an excluded investment product, it shall ensure the classification of the overseas-listed investment product concerned remains accurate and current at all times.

75 Notice on the Sale of Investment Products (SFA 04-N12) – Paragraphs 29D-29K Requirements on Licenced Persons and Exempt Financial Institutions Dealing in Overseas-Listed Investment Products

76 According to the MAS Notice on Sale of Investment Products (SFA 04-N12, Paragraph 29F), “transact” means (a) The purchase of any overseas-listed investment product other than in connection with the creation of short positions; or (b) The sale of any overseas-listed investment product in connection with the creation of short positions.



A CMS licence holder or exempt financial institution may outsource the identification and classification of an overseas-listed investment product as an excluded investment product to another party. Where the identification and classification of an overseas-listed investment product has been outsourced, the CMS licence holder or exempt financial institution shall be responsible for the implementation of the classification system, including but not limited to, the accuracy of the classification.

Penalties – SFA 101(3)

Under SFA 101(3), any persons who contravenes any direction issued by MAS (which includes the Notice on the Sale of Investment Products), shall be guilty of an offence and shall be liable on conviction to a fine not exceeding $50,000 and, in the case of a continuing offence, to a further fine not exceeding $5,000 for every day or part thereof during which the offence continues.

2.6.9 Approval of Customer Accounts77

The opening of a customer account must be approved by at least 1 senior management staff of the Trading Member who is independent of the sales or dealing function, or a senior management staff of a related corporation of that Trading Member who is authorised to approve customer account opening. The approval must:

1. Be given before the execution of the first trade for the customer;

2. Be in writing which includes secured electronic record; and

3. Form part of the permanent records of the Trading Member.


An offence under SGX-ST Rule 12.3.5 may be compounded with a fine. The penalty will be dependent on factors such as the number of prior violations, and whether the offender is a Trading Member or Approved Executive Director.

2.6.10 Risk Acknowledgement Statement78

A Trading Member must obtain a written acknowledgement from a customer that the customer is aware of the risk associated with holding and trading of securities and futures contracts, unless otherwise permitted by the SFA. This Rule does not apply to a customer who is an accredited investor or institutional investor trading only in securities.


An offence under SGX-ST Rule 12.3.6 is not compoundable and is subject to a mandatory minimum imposable penalty.

77 SGX-ST Rule 12.3.5 - Approval of Customer Accounts

78 SGX-ST Rule 12.3.6 - Risk Acknowledgement Statement



2.7 Confidentiality of Customers’ Information

CMS licence holders and its appointed representatives must protect and keep customers’ information confidential. Exempt financial institutions which are licensed banks or merchant banks are subject to banking secrecy regulations under Section 47 of the Banking Act (for banks) and the Banking Regulations (for merchant banks). All intermediaries are required under common law and the Personal Data Protection Act (PDPA) to safeguard the confidentiality of their customer information.

2.7.1 Banking Act Section 47 - Banking Secrecy

Under Section 47 of the Banking Act, a bank in Singapore or any of its officers cannot disclose customer information to any third party except as permitted under the Banking Act. These would include following circumstances:

1. Where the bank has the prior written consent of the customer, and in accordance with the terms of the

consent;

2. The disclosure is necessary for risk management of the bank and for the internal audit by internal and external auditors, lawyers, or consultants approved or engaged by the bank;

3. The disclosure is required under any law or rules for investigating or prosecuting an offence alleged or suspected to have been committed under any written law (which is in turn defined in the Banking Act).

Penalties - Section 47 of the Banking Act

Any person who contravenes of shall be guilty of an offence and shall be liable on conviction:

1. in the case of an individual, to a fine not exceeding $125,000 or to imprisonment for a term not exceeding 3 years or to both; or

2. In any other case, to a fine not exceeding $250,000.

When a request is received to disclose customer information, it is good practice to refer the request to the bank’s legal or compliance department to be professionally assessed whether the disclosure is permitted by law or contractual agreement between the bank and the customer concerned.

In the event that a disclosure is made, a bank still has the duty to inform and remind the person to whom the information is released to, that the recipient of the information has an obligation to safeguard confidentiality or bear the consequence of a breach.

In addition, the requirement to maintain confidentiality of customer information is covered under SFR (LCB) regulations and SGX-ST rules.

1. SFR (LCB) Regulations79

CMS licence holders should not divulge information relating to a customer’s order, unless the disclosure is:

1. Necessary for the effective execution of the order;

2. Permitted under the rules of the relevant securities exchange, futures exchange, clearing house or recognised trading system provider, as the case may be; or

79 SFR(LCB) Section 47(2) - Trading Standards



3. Required by MAS. 2. SGX-ST Rules80

A Trading Member and its Trading Representative must comply with SGX-ST rules on confidentiality of customer’s information. They must maintain confidentiality of customer’s information unless:

1. The prior consent of the customer for the disclosure of the information is obtained;

2. The disclosure is for the effective execution of the customer’s order;

3. The disclosure is necessary for the operations and risk management of the Trading Member if these functions have been outsourced by the Trading Member; or

4. The disclosure is required under the law or under the SGX-ST rules.

A Trading Member must ensure that a person to whom it discloses a customer’s information under points (2) and (3) above maintains confidentiality of such information.

Penalties

SFR(LCB) 47 SGX Rule 12.2.1 or 12.2.2

Any person who contravenes SFR (LCB) 47 shall be guilty of an offence and liable on conviction to a fine not exceeding $50,000.

An offence under SGX-ST Rule 12.2.1 or SGX-ST Rule 12.2.2 may be compounded with a fine. The penalty will be dependent on factors such as the number of prior violations, and whether the offender is a Trading Member, Approved Executive Director or Trading Representative.

2.7.2 Personal Data Protection Act81

The Personal Data Protection Act was passed into law and will be implemented in phases:

1. Phase 1 which covers largely administrative matters such as the establishment of the Personal Data Protection Commission (PDPC) came into effect on 2 January 2013;

2. Phase 2 relating to the Do Not Call Registry (DNC) was implemented on 2 January 2014; and

3. Phase 3 relating to the data protection framework will come into effect on 2 July 2014.

Data protection is an aspect of privacy protection which deals with control over the collection, storage, accuracy, use and disclosure of personal information. The purpose of data protection is to ensure that personal data is not collected, used or disclosed without the knowledge or consent of the individual concerned. The PDPA is also aimed at preventing the processing of incorrect or inaccurate personal data about a specific individual.

Impact on Business Operations

CMS licence holders and exempt financial institutions should establish clear policies and procedures to comply with the provisions of the PDPA and other confidentiality obligations which include requiring representatives to:

1. Check with the “Do Not Call” registry before making marketing calls to a Singapore telephone number;

80 SGX-ST Rule 12.2- Confidentiality of Customer’s Information

81 Personal Data Protection Act 2012



2. Seek clear and unambiguous consent through written forms such as other means as satisfies the PDPA. Violation of “Do Not Call” provisions of the PDPA is an offence.

The Personal Data Protection Commission recognises consent given before 2 Jan 2014 for the sending of a specified message, provided that such consent:

1. Has not been withdrawn by the individual on or after 2 Jan 2014;

2. Is clear and unambiguous; and

3. Is evidenced in writing or other forms so as to be accessible for subsequent reference.

Penalties - PDPA

An organisation that breaches any of its duties under the DNC provisions in the Act commits an offence and is liable on conviction to a fine of an amount not exceeding $10,000 for each offence. In appropriate cases, the Commission has the power to compound the offence for a sum of up to $1,000.

2.8 Management of Customers’ Trading Accounts

Only after the account has been opened with the requisite legal documents obtained, suitability assessment completed and risk profile established, then should the customer be allowed to trade within his investment profile.

2.8.1 Communication with Third Parties82

A Trading Member must communicate directly with its customers in respect of statements, contract notes, or all other information, whether in writing or electronically, unless the customer has authorised otherwise in writing. It must not allow any person other than the customer to collect any cash, share certificates, contract notes, credit or debit notes, cheques or statements, unless the customer has authorised that person in writing. An offence under this rule may be compounded with a fine.

2.8.2 Brokerages and Charges

Unless SGX-ST decides otherwise, the commission rate chargeable for the purchase or sale of securities is negotiable83. All charges and expenses, including stamp duty and clearing fee, to be borne by the customer must be disclosed to the customer and agreed between the customer and the Trading Member84.

Penalties – SGX-ST Rules 12.5.1 and 12.5.2

An offence under Rule 12.5.1 (Commission rate to comply with specified rates, if so prescribed by SGX-ST) may be compounded with a fine. The penalty will be dependent on factors such as the number of prior violations, and whether the offender is a Trading Member or Approved Executive Director.

82 SGX-ST Rule 12.9 - Communication with Third Parties

83 SGX-ST Rule 12.5.1 - Brokerage and Charges

84 SGX-ST Rule 12.5.2 - Brokerage and Charges



An offence under Rule 12.5.2 (To disclose charges and expenses borne by customer) may be compounded with a fine. The penalty will be dependent on factors such as the number of prior violations, and whether the offender is a Trading Member or Approved Executive Director.

2.8.3 Customer Education85

Except for Accredited Investors86 and Institutional Investors87, a Trading Member must provide its Internet Trading customers with adequate information, guidance and training on:

1. Prohibited trading practices;

2. Potential limitations and risks of Internet Trading;

3. System functionalities and order management procedures; and

4. Market conventions such as minimum bid sizes and board lot sizes.

With respect to Accredited Investors and Institutional Investors, a Trading Member's obligation relates solely to the provision of adequate information in relation to prohibited trading practices.

Penalties – SGX-ST Rule 12.3A.1

Offences under this rule (Trading Member to provide online customers with adequate information on specific areas) may be compounded with a fine. The penalty will be dependent on factors such as the number of prior violations, and whether the offender is a Trading Member or Approved Executive Director.

2.8.4 Contract Notes

Under the SFR (LCB) and SGX rules, a CMS licence holder must send its customer a contract note for the purchase or sale of securities or futures contracts by the next market day 88 . In cases where any detail about the transaction which needs to be included in the contract note only becomes available later, the CMS licence holder should issue the contract note by the next business day after the detail becomes available.

The contract note must state that the contract is subject to the rules and directives of SGX-ST if the trade is transacted on or through the SGX-ST Trading System or reported to SGX-ST89. It must also contain information specified in Regulation 42(1) of the SFR (LCB)90. Such details include:

85 SGX-ST Rule 12.3A.1; SGX Practice Note 12.3A.1 Customer Education

86 SFA Section 4A – Specific Classes of Investors - Accredited Investor includes an individual whose net personal assets exceed in value $2 million or whose income in the preceding 12 months is not less than $300,000; or a corporation with net assets exceeding $10 million in value, as specified on the corporation’s latest audited balance sheet (where the corporation is required to produce audited accounts).

87 SFA Section 4A – Specific Classes of Investors - Institutional Investors include a bank, a merchant bank, a finance company, a company/co-operative society licensed to carry out insurance business in Singapore, a trust company, the Government, a statutory board, a pension fund/collective investment scheme, a CMS licence holder for securities dealing, fund management, providing custodial services for securities, REIT management, securities financing, or futures contracts trading, a person (other than an individual) carrying on the business of dealing in bonds with accredited/expert investors a trustee, or any other person as prescribed by the Authority.

88 SFR(LCB) Section 42 - Contract Notes; SGX-ST Rule 12.6.1 - Contract Notes

89 SGX-ST Rule 12.6.2 - Contract Notes




1. The name under which the CMS licence holder carries on its business of dealing in securities, and the address of the principal place of business;

2. A statement informing the customer that the CMS licence holder is dealing in securities as a principal if the CMS licence holder is doing so;

3. The name and address of the recipient of the contract note;

4. The date of the transaction;

5. The quantity and type of the securities that was transacted;

6. The price per unit of the transaction;

7. The total amount of money involved in settling the transaction;

8. Any amounts that are to be added or deducted from the transaction;

9. The rate and amount of commission (if any) charged; and

10. The amount of all stamp duties or other duties or taxes payable in connection with the transaction.

SGX-ST rules91 also specify that a contract note must show separately brokerage charged, clearing fee, stamp duty, and goods and service tax unless otherwise prescribed by SGX-ST.

A record, with the details mentioned above from (1) to (10), in the form of a contract note is to be sent to the customer for him to check and verify his transaction to be in order and to report any discrepancy. There must be dedicated resources and communication channels for a customer to make enquiries and report discrepancies or make complaints. In addition to the above record of transaction, customer statements must be prepared and sent to them monthly on the movement in the account and the position at each reporting period.

Under SGX-ST rules92, before issuing contract notes in electronic form, a Trading Member must obtain the customer’s prior revocable and informed consent. The Trading Member must retain evidence of the customer’s consent. To constitute “informed consent” a customer must be told of the manner of delivery and retrieval of the electronic record and any costs that may be incurred. If asked by SGX-ST, a Trading member must produce the contract notes in substantially the same form and containing the same trading information as were given to customers.

Penalties

SFR (LCB) SGX

SFR (LCB) 42

Any CMS licence holder that without reasonable excuse, contravenes any provision of SFR (LCB) 42 Contract Notes shall be guilty of an offence and liable on conviction to a fine not exceeding $50,000 and, in the case of a continuing offence, to a further fine of $5,000 for every

SGX-ST Rule 12.6.1 and 12.6.3

An offence under these rules is not compoundable.

SGX-ST Rule 12.6.2 and 12.6.4



92 SGX-ST Rules 12.6.3 (2) and 12.6.7 - Contract Notes



Penalties

SFR (LCB) SGX

day or part thereof during which the offence continues after conviction.

SGX-ST Rule 12.6.7


2.8.5 Provision of Statements to Customers

1. Monthly Statements93

Under SFR (LCB) and SGX-ST rules, a CMS licence holder shall send monthly statements of account to customers. SGX-ST rules stipulate that a Trading Member must send its customers (including a Trading Representative) the monthly statements by the first week of the next month unless there is no change from the last statement. The statement must contain the following information:

i. Securities transactions of the customer and the prices at which the transactions are entered into;

ii. The status of every asset of the customer that the CMS licence holder is holding in custody, including any asset deposited with a third party that is used for securities lending or held as collateral;

iii. The date, amount and reason for movement of the assets of the customer;

iv. The movement and balance of money in the customer account; and

v. A detailed account of all financial charges and credits to the customer's account during the statement

period, unless these have been included in any contract note or tax invoice issued by the CMS licence holder

to the customer.

The Member does not need to send a monthly statement to a customer if:

a) The information that is to be contained in the statement has already been sent to the customer by a Clearing House, which the Member is a member of; or

b) There has been no change to the customer’s account in the month; or

c) The customer is an Accredited Investor, or a corporation related to the Member, and:

A. Real-time electronic statements have been made available to the customer, and the customer has agreed to using these electronic statements; or

B. The customer has requested, in writing, not to receive such monthly statements.

Before issuing statements of accounts in electronic form, a Trading Member must obtain the customer’s prior revocable and informed consent, as well as retain evidence of the customer’s consent. To constitute “informed consent”, a customer must be told of the manner of delivery and retrieval of the electronic record and any costs that may be incurred. If asked by SGX-ST, a Trading Member must produce the statement of accounts in substantially the same form and containing the same information as were given to customers.

93 SFR(LCB) Sections 40(1) & (2) - Provision of Statement of Account to Customers; SGX-ST Rule 12.7 - Statement of Account to Customers



2. Quarterly Statement

If a monthly statement has not been sent for the last month of a calendar quarter (i.e. March, June, September and December), the CMS licence holder shall send a quarterly statement to the customer, containing the same information that is required on a monthly statement of account94.

Penalties

SFR (LCB) SGX

SFR(LCB) 40 (1), (2) or (3)

Any person who contravenes SFR (LCB) 40 (1), (2) or (3) shall be guilty of an offence and liable on conviction to a fine not exceeding $50,000.

SGX-ST Rule 12.7.1

An offence under Rule 12.7.1 (To send monthly statement of account within stipulated timeline; and to include information in the statement of account in accordance with SFR) is not compoundable.

SGX-ST Rules 12.7.2, 12.7.3 and 12.7.5


2.8.6 Amendment of Contract95

Under SGX-ST rules, a Trading Member may amend a contract if there is valid reason for the amendment. The amendment must be approved by at least one senior management staff of the Trading Member who is independent of sales or dealing, or a senior management staff of a related corporation with the authority to amend contracts. The approval must be given before the contract is amended.



2.8.7 Payment to Customers96

SGX-ST rules require all cheques to customers must be crossed, unless:

i. The payee customer requests otherwise in writing; and

ii. A senior management staff of the Trading Member who is independent of sales or dealing, or a senior management staff of a related corporation with the authority to approve payments gives written approval to the customer’s request.

A Trading Member must not accept a house cheque, i.e. a crossed cheque issued by the Trading Member in favour of a customer, from a customer unless:

94 SFR(LCB) Section 40(3) - Provision of statement of account to customers

95 SGX-ST Rule 12.8 - Amendment of Contract

96 SGX-ST Rule 12.10 - Payment to Customers



a) The customer is the payee of the cheque; and

b) The cheque is used to settle an amount owing by the customer to the Trading Member or is deposited into a trust account as directed by the customer.



2.8.8 Remisiers Working in Teams97

Remisiers can operate in teams and enter orders from each other’s customers. Trading Members and their remisiers who wish to engage in such arrangements must observe the following:

1. Prior to commencement of any team arrangements, Trading Members must approve the teams and furnish SGX-ST with the names of remisiers who operate in teams and any subsequent updates;

2. If a customer’s order is passed along a chain of remisiers, each remisier must record from and to whom he receives and transmits the order, and the time of such receipt and transmission. Trading Members must ensure that the team remisiers do not trade ahead of their customers;

3. Trading Members must keep customers informed of the team arrangements, and give them the option not to be serviced by remisiers working in teams. Trading Members should also keep their customers informed of any changes to team compositions;

4. Remisiers must be jointly and severally liable if customers’ losses are not recovered;

5. Trading Members must establish in writing the terms and conditions of each team arrangement with its remisiers. The terms and conditions must include how possible disputes amongst remisiers working in teams are resolved. Possible disputes that may arise from team arrangements include those in respect of commission allocation, trading errors, and overtrading;

6. Trading Members must ensure that their Banker’s Guarantee are enforceable;

7. Trading Members ensure that remisiers working in teams will not compromise their compliance with all relevant legislation and regulations.

As team arrangements increase the risk of a single customer or the team trading beyond the trading limit imposed, Trading Members should closely monitor the team to ensure that customers’ and remisier’s trading limits are not exceeded, especially in the case of trades not executed on the Trading System which are not capture in real time in the Trading System. Trading Members should also conduct frequent reviews of team operations to ensure that trading irregularities do not occur.

2.8.9 Reporting of Delinquent Accounts

Under SGX-ST Rule 12.13.1, a Trading Member must inform SGX-ST (or any third party to whom SGX-ST has outsourced its operational functions) of the particulars of any customer account that it considers to be a delinquent account. SGX-ST (or the third party) may disseminate the information to all other Trading Members.

97 SGX-ST Rules Directive 2 - Remisiers Working in Teams





2.8.10 Stock Account98

Under SGX-ST Rule 12.15, all purchases and sales of securities or futures contracts by a Trading Member for its proprietary account must be made under a separate stock account of the Trading Member.

A stock account must be operated by a Director, or his designate, who is licenced to trade.

A Trading Member must not allow a remisier to operate a stock account.


An offence under SGX-ST Rule 12.15.1, 12.15.2 or 12.15.3 may be compounded with a fine. The penalty will be dependent on factors such as the number of prior violations, and whether the offender is a Trading Member or Approved Executive Director.

2.8.11 Suspense Account99

Under SGX-ST Rule 12.16, if a customer’s order to purchase securities or trade in futures contracts is unlikely to be completed during a Market Day, the purchases (or trades in the case of Marginable Futures Contracts) may be debited to:

• A customer’s suspense account; or

• A general suspense account until completion.

Once the order is completed, the purchases must be booked to the customer’s account. Orders must not be warehoused in the suspense account for more than 2 Market Days, unless under exceptional circumstances. In such cases, the Trading Member must document the reasons for the extension of time.

A customer’s suspense account must be used only for that customer’s trades. However, a Trading Member may execute trades in a customer’s suspense account and subsequently book the trades to another customer’s account if:

1. It has obtained the prior written consent of:

a) the customer whose suspense account is being used; and

b) the customer to whom the trade is booked; and

2. It receives the booking instruction only after the trades have been executed in the customer’s suspense account.

A general suspense account may be used to hold purchases or sales for different customers, if the Trading Member has procedures to ensure fair allocation to customers.

98 SGX-ST Rule 12.15 – Stock Account

99 SGX-ST Rule 12.16 – Suspense Account



A suspense account must not be used for error trades or proprietary trades.


An offence under SGX-ST Rule 12.16.1(2), 12.16.1(3) or 12.16.4 may be compounded with a fine. The penalty will be dependent on factors such as the number of prior violations, and whether the offender is a Trading Member, Approved Executive Director or Trading Representative.

An offence under SGX-ST Rule 12.16.2 or 12.16.3 may be compounded with a fine. The penalty will be dependent on factors such as the number of prior violations, and whether the offender is a Trading Member or Approved Executive Director.

2.8.12 Soft Dollar Commissions100

A Trading Member and its Trading Representatives may receive goods and services from a broker for directing business to the broker if:

1. The goods and services can reasonably be expected to assist in the provision of services to the customer;

2. Records of the goods and services received are maintained; and

3. There are appropriate internal controls and procedures for such arrangements. The following goods and services do not qualify as acceptable soft dollar receipts or payments:

• Travel, accommodation and entertainment expenses.

• General administrative goods and services including office equipment and premises expenses.

• Membership fees.

• Employees' salaries.

• Direct money payment. This does not include payment of referral fees under a referral agreement.

A Trading Member or its Trading Representative should not receive goods and services from a broker, if the act of it compromises the interest of the customer or may result in the breach of the Rules or other regulatory requirements by the Trading Member or its Trading Representatives.

Penalties

SGX-ST Rule 12.20.1


SGX-ST Rule 12.20.2

An offence under this rule may be compounded with a fine. The penalty will be depend on factors such as the number of prior violations, and whether the offender is a Trading Member or Approved Executive Director.

100 SGX-ST Rule 12.20 – Soft Dollar Commissions; SGX-ST Practice Note 12.20.1 – Soft Dollar Receipts or Payments



2.8.13 Use of Prescribed Forms101

A Trading Member must use forms that SGX-ST prescribes.


An offence under rule may be compounded with a fine. The penalty will be dependent on factors such as the number of prior violations, and whether the offender is a Trading Member or Approved Executive Director.

2.9 Keeping of Books and Audit

2.9.1 Keeping of Books and Furnishing of Returns

Under the SFA102, CMS licence holders are required to keep books of account and records of transactions which should sufficiently explain the transactions and financial position of the CMS licence holder’s business, and enable true and fair profit and loss accounts and balance sheets to be prepared from time to time.

The books should be kept for a period of at least 5 years, and in a manner which would enable them to be conveniently and properly audited.

The CMS licence holder must be able to furnish returns and records when notified by MAS in writing, and provide information relating to its business as MAS may require.

SFR (LCB) 39 stipulates that CMS licence holders must keep books and records in English containing the following:

1. Customer Details

• Particulars of every customer, and guarantors;

• Particulars of authorized traders;

• Every power of attorney or other document authorising the CMS licence holder to operate the account of the customer on a discretionary basis;

• Customer statement of accounts;

• Particulars of each customer asset, including:

o The amount, description of each asset deposited with and held in trust for the customer, and the date of deposit;

o The person for whom the asset is held;

o Whether it is held for safe custody, mortgaged, charged, or pledged;

o The date and quantity of each movement of assets into or out of the trust account or custody account arising from any asset borrowing or lending activity;

o The date, amount and purpose of each withdrawal from the trust account or custody account; and

101 SGX-ST Rule 12.22 - Use of Prescribed Forms

102 SFA Section 102 - Keeping of Books and Furnishing Returns



o The date and amount of, and the reason for, each disposal of collateral from the trust account or custody account;

2. Customer Correspondence

• Every written agreement entered into by the CMS licence holder with its customer;

• Every statement acknowledging receipt of assets from a customer indicating the person in whose name the assets are registered;

• Every report, letter, circular, memorandum, publication, advertisement and other literature or advice distributed by the CMS licence holder to any existing or prospective customer, indicating the date of publication, and every report, statement, submission, letter, journal, ledger, invoice, and other record, data or memoranda, which has been prepared or received in the course of business of the holder;

3. Particulars of every proprietary transaction of the CMS licence holder, including:

• The description and quantity of the assets;

• The price and fee arising from the transaction;

• The transaction date and settlement or delivery date;

• The name of the counterparty to the transaction; and

• The realised or unrealised gain or loss;

• 4. Particulars of all income and expenses of the CMS licence holder, and:

• Particulars of all liabilities (including contingent liabilities) of the CMS licence holder; and

• Particulars of all assets of the CMS licence holder, where they are held, and whether or not they have been pledged as security against loans or advances.

The list of records cited above are not exhaustive. Please refer to SFR (LCB) 39 which set out the books and record keeping requirements for CMS licence holders.

Similarly, SGX-ST requires Trading Members, Directors or Trading Representatives to:

i. Maintain complete records and audit trails to evidence compliance with the SGX-ST Rules, and in accordance with the requirements in the SFA, SFR103 and the SGX-ST Rules104;

ii. Not make, or cause to be made, any false or misleading entries, in hardcopy or electronic form, in any books, records, slips, documents, statements relating to the business, affairs, transactions, conditions, assets or accounts (referred to as “the Documents”) of the Trading Member105;

iii. Make all material entries in any of the Documents; and

iv. Not alter or destroy any of the Documents without a valid reason.

103 SFR (LCB) Section 39 - Books of Holder of Capital Market Services Licence

104 SGX-ST Rule 12.1.1(1) - Records

105 SGX-ST Rule 12.1.1(2) - Records



A Trading Member must ensure the integrity, security and confidentiality in the transmission and storage of all records106. They must also make records available to SGX-ST at such time as SGX-ST requires107.

A Trading Member must produce to SGX-ST, if asked, a complete audit trail of transactions, from the receipt of an order to settlement. Unless otherwise required by SGX-ST, for trades and orders which occurred within the 6 month period immediately before the request, the records must be provided to SGX-ST immediately, and for trades and orders which occurred more than 6 months prior to the request, the records must be provided to SGX-ST no later than 2 business days from the date of request108.

Penalties

SFA and SFR(LCB) SGX

SFA Section 102(1), (3) or (4) & Section 102(5)

Any CMS licence holder that contravenes SFA section 102(1), (3) or (4) or any regulation made under section 102(5) without reasonable excuse shall be guilty of an offence and liable on conviction to a fine not exceeding $50,000 and, in the case of a continuing offence, to a further fine of $5,000 for every day or part thereof during which the offence continues after conviction.

SFR(LCB) 39 (1), (2) and (3)

Any person who contravenes SFR (LCB) 39 (1), (2) and (3) shall be guilty of an offence and liable on conviction to a fine not exceeding $50,000.

SGX-ST Rule 12.1.1(1) to (4) & 12.1.3

An offence under these rules is not compoundable.

SGX-ST Rule 12.1.1 (1) & 12.1.2

An offence under these rules may be compounded with a fine. The penalty will depend on factors such as the number of prior violations, and whether the offender is a Trading Member, Approved Executive Director or Trading Representative.

2.9.2 Audit

CMS licence holders must appoint an auditor to audit its accounts109 and prepare a true and fair profit and loss account and a balance sheet for each financial year110. The account and balance sheet must be lodged with MAS within 5 months after the end of the financial year, together with the auditor’s report on the account and balance sheet.

The CMS licence holder may apply to MAS for an extension of the 5-month period for lodgement of account and balance sheet. If MAS is satisfied that there is a special reason for requiring an extension, it will extend the period by not more than 4 months, subject to conditions or restrictions which MAS may think fit to impose.

MAS may direct a CMS licence holder to remove and replace its auditor if it is not satisfied with the performance of duties by the auditor.

106 SGX-ST Rule 12.1.2 - Records

107 SGX-ST Rule 12.1.3 - Records

108 SGX-ST Directive No. 4 - Audit Trails and Records

109 SFA Section 106 - Appointment of auditors

110 SFA Section 107 - Lodgement of annual accounts, etc.



Penalties – SFA 107

A fine not exceeding $500 for every day or part thereof that the lodgement is late, subject to a maximum fine of $50,000. A CMS licence holder which contravene any condition imposed by MAS for an extension of lodgement shall be guilty of an offence and be liable on conviction to a fine not exceeding $50,000.

2.9.3 Reports by Auditor

The auditor should immediately send a report in writing to MAS if it discovers any of the following matters or irregularity whilst performing its duties as an auditor:

i. Any matter which adversely affects or may adversely affect the financial position of the CMS licence holder to a material extent;

ii. Any matter which constitutes or may constitute a contravention of any provision of the SFA or an offence involving fraud or dishonesty; or

iii. Any irregularity that has or may have a material effect upon the accounts, including any irregularity that may affect or jeopardise the moneys or assets of any customer of the CMS licence holder.

A copy of the report should be sent to the securities exchange or futures exchange if the CMS licence holder concerned is a member of a securities or futures exchange.

Where the CMS licence holder fails to lodge an auditor’s report as required under Section 107 of the SFA or where MAS receives a report by the auditor of any matter or irregularity found during an audit of the CMS licence holder, MAS has the power to appoint an auditor to carry out an examination and audit of the CMS licence holder’s books.

2.9.4 Offence to Destroy, Conceal, Alter Books111

Any person who destroys, conceals or alters any book relating to the business of the CMS licence holder with the intent to prevent, delay or obstruct the performance of an examination or audit will be guilty of an offence and be liable on conviction to a fine not exceeding $100,000 or to imprisonment for a term not exceeding 2 years or both. The same penalty applies to any person who sends or conspires with another person to send out of Singapore any book or asset belonging to a CMS licence holder will be guilty of an offence and will be liable to similar penalties.

2.9.5 Safeguarding of Books

A CMS licence holder shall take reasonable precautions to prevent falsification of books required to be kept under the SFA and to facilitate the discovery of any falsification of books112. Any CMS licence holder who contravenes this regulation shall be guilty of an offence under the SFA.

The objective of requiring the segregation of assets is to ensure that the customers’ interest is protected and returned to customers by liquidators in the event of a liquidation.

111 SFA Section 111 - Offence to destroy, conceal, alter, etc., books

112 SFA Section 112 - Safeguarding of books



2.10 Customers’ Moneys and Assets

2.10.1 Definitions113

For the purpose of this section on customer’s moneys and assets, “customer” in relation to the CMS licence holder, does not include:

1. The CMS licence holder in carrying out any regulated activity for its own account;

2. An officer, an employee or a representative of the CMS licence holder; or

3. A related corporation of the CMS licence holder with respect to an account belonging to and maintained wholly for the benefit of that related corporation.

A reference to “money received on account of a customer” of the CMS licence holder includes:

i. Money received from, or on account of, the customer in respect of a sale or purchase of futures contract or a transaction connected with leveraged foreign exchange trading;

ii. Money received from, or on account of, the customer for the purchase of or holding of securities, or the maintenance of a securities trading account by the customer;

iii. Money received for the account of the customer in respect of a sale of securities;

iv. Money received from, or on account of, the customer, where the CMS licence holder provides securities financing to the customer;

v. Money received from, or on account of, the customer for the purpose of managing the customer’s funds; and

vi. Money received from, or on account of, the customer in the course of the business of the CMS licence holder,

But does not include:

a) Money which is to be used to reduce the amount owed by the customer to the holder;

b) Money which is to be paid to the customer or in accordance with the customer’s written direction;

c) Money which is to be used to defray the holder’s brokerage and other proper charges; and

d) Money which is to be paid to any other person entitled to the money.

“Customer’s assets”, in relation to the CMS licence holder means securities and assets (other than money), including Government securities and certificates of deposits, that are beneficially owned by a customer of the CMS licence holder.

113 SFR(LCB) Section 15 - Definitions of this Part



2.10.2 Customers’ Moneys

1. Money Received on Account of Customer114

The CMS licence holder must treat and deal with all money received on account of its customer as belonging to that customer. The money must be deposited in a trust account or in another account directed by the customer no later than the next business day115 after receiving the money.

The customer’s money must not be commingled with other funds, or used as margin or guarantee for, or to secure any transaction of, or to extend the credit of, any person other than the customer.

The CMS licence holder may commingle monies from different customers into the same trust account, but must separately account for the monies and assets of each customer.

2. Maintenance of Trust Account with Specified Financial Institutions116

The CMS licence holder must maintain a trust account in which it deposits moneys received on account of its customers with:

i. A bank licenced under the Banking Act;

ii. A merchant bank approved as a financial institution under the MAS Act; or

iii. A finance company licenced under the Finance Companies Act.

The CMS licence holder may deposit customer’s moneys which are denominated in a foreign currency in a trust account with a custodian outside Singapore which is licenced, registered or authorised to conduct banking business in the country or territory where the account is maintained, subject to the customer’s prior written consent.

3. Notification and Acknowledgement from Specified Financial Institutions117

Before depositing moneys received on account of its customers, the CMS licence holder must give written notice to the financial institution and obtain acknowledgement from it that all moneys deposited in the trust account are held on trust by the CMS licence holder for its customer and the financial institution cannot exercise any right of set-off against the moneys for any debt owed by the CMS licence holder to the financial institution; and the account is designated as a trust account, or a customer’s or customers’ account which shall be distinguished and maintained separately from any other account in which the CMS licence holder deposits its own money.

4. Customer’s Money Held with a Clearing House118

The holder of a CMS licence to deal in securities may deposit moneys received on account of its customer with a clearing house or a member of a securities exchange for a purpose specified under the business rules and practices of the clearing house or securities exchange, as the case may be.

114 SFR (LCB) Section 16 - Money Received on Account of Customer

115 “Business day” means the business day of the CMS licence holder, or if the custodian with whom the trust account is maintained is closed for business on that day and the CMS licence holder is unable to deposit the money in the account, the next business of the custodian.

116 SFR (LCB) Section 17 - Maintenance of Trust Account with Specified Financial Institutions

117 SFR (LCB) Section 18 - Notification and Acknowledgement from Specified Financial Institutions

118 SFR (LCB) Section 19 - Customer’s Money Held with a Clearing House, etc.



5. Investment of Moneys Received on Account of Customers119

A CMS licence holder may hold moneys received on account of its customer on trust for the customer, including moneys which the CMS licence holder may from time to time advance to the customer’s trust account in any of the following forms of investment:

i. Any Government securities;

ii. Any debt instrument of the government of the country of the securities market or futures market or futures exchange on which the CMS licence holder normally transacts its business; or

iii. Any other securities or instrument as MAS may determine.

The CMS licence holder shall keep a record of all transactions relating to such moneys including:

a) The date on which the transaction was made;

b) Where applicable, the name of the person through whom the transaction was made;

c) The amount of money invested in the transaction;

d) A description of the transaction;

e) The place, if any, where the moneys and assets are kept;

f) Where applicable, the date on which the subject-matter of the transaction was realised or otherwise disposed of and the amount of money received from the realisation or disposal; and

g) Where applicable, the name of the person to whom or through whom the subject-matter of the transaction was disposed of.

6. Withdrawal of Money from Trust Account120

CMS licence holders must not withdraw any money from a customer’s trust account except for the purpose of:

i. Making a payment to another person entitled thereto;

ii. Making a payment to meet obligation of a customer whose money is deposited that account; being an obligation that arises from any dealing in securities, trading in futures contracts or leveraged foreign exchange trading by the CMS licence holder for the customer;

iii. Defraying brokerage and other proper charges;

iv. Making a payment to another person or account with written instruction of the customer;

v. reimbursing the CMS licence holder any moneys that it had advanced to the account and any interest and returns that it is entitled to by virtue of SFR(LCB) 23121, as long as the withdrawal does not result in the account becoming under-margined or under-funded;

vi. Making a deposit on account of its customer with a clearing house or a member of the securities exchange or for an investment in accordance with SFR(LCB) Regulation 20122;

vii. Making a payment or withdrawal that is authorised by law.

119 SFR (LCB) Section 20 - Investment of Moneys Received on Account of Customer

120 SFR (LCB) Section 21 - Withdrawal of Money from Trust Account

121 SFR(LCB) Section 23 - Placement of Licensee’s Own Money in Trust Account

122 SFR(LCB) Section 20 - Investment of moneys received on Account of Customers



7. Interest Arising from Trust Account123

Interest earned from the maintenance of the moneys received on account of the customer in a trust account and all returns from the investment of money in accordance with SFR (LCB) Regulation 20, shall accrue to the customer. The CMS licence holder has to ensure that the interest or returns accrued to the customer are paid to or held for the benefit of the customer.

8. Placement of licensee’s Own Money in Trust Account124

A CMS licence holder may advance sufficient money to a customer’s trust account from its own funds under the following circumstances:

i. To prevent the customer’s trust account from being under-margined or under-funded; or

ii. To ensure the continued maintenance of that account.

The CMS licence holder may retain any interest earned and return arising on the moneys which it has advanced to the account.

9. No Effect on Lawful Claims or Liens125

Nothing in SFR (LCB) Division 2126 shall be construed as avoiding or affecting any lawful claim or lien which any person has in respect of any money held in a trust account in accordance with this Division or any money belonging to a customer before the money is paid into a trust account.

Penalties – SFR(LCB)

Any person who contravenes the following SFR(LCB) regulations shall be guilty of an offence and liable on conviction to a fine not exceeding $50,000:

• SFR(LCB) 16(1) or (2) Money Received on Account of Customer;

• SFR(LCB) 17(1) Maintenance of Trust Account with Specified Financial Institutions;

• SFR(LCB) 18 Notification and acknowledgement from specified financial institutions;

• SFR(LCB) 20(2) Investment of moneys received on account of customers;

• SFR(LCB) 21 Withdrawal of Money from Trust Account; or

• SFR(LCB) 22(2) Interest Arising from Trust Account, etc.

10. Customer’s and Remisier’s Money

In addition, SGX-ST has rules governing customers’ and remisiers’ money and requires Trading Members to also comply with SFR rules on customers’ money.127 Under the SGX-ST rules, ‘’customer’’ includes a remisier, unless otherwise specified128

123 SFR (LCB) Section 22 - Interest arising from Trust Account

124 SFR (LCB) Section 23 - Placement of Licensee’s Own Money in Trust Account

125 SFR(LCB) Section 24 - No Effect on Lawful Claims or Liens

126 SFR(LCB) Division 2 – Customer’s Moneys

127 SGX-ST Rule 12.11 - Customer’s and Remisier’s Money; SFR(LCB) Part III, Division 2 & 4 - Customer's Moneys & Miscellaneous

128 SGX-ST Rule 12.11.1 - Customer’s and Remisier’s Money



CMS licence holders are required to deposit all moneys received on account of their customers in a trust account or in any other account directed by the customer129. All money received on account of a remisier must be deposited in a trust account130.

Trading Member must:

i. Designate the accounts maintained with specified financial institutions for a customer or a remisier as a trust account, or a customer or remisier account131;

ii. Deposit money received on account of customers in a separate trust account from remisiers132;

iii. Not commingle money received on account of its customers or its remisiers with its own funds133. However, a Trading Member may deposit its own funds into a trust account under the following circumstances:

a) To prevent the customer’s trust account from being under-margined or under-funded; or

b) To ensure the continued maintenance of that account.

iv. Not withdraw a remisier’s money from a trust account except to134:

a) Pay the remisier;

b) Meet any amount due and payable by the remisier to the Trading Member;

c) Reimburse the Trading Member money advanced to the trust account, and any interest and returns that the Trading Member is entitled to, provided the withdrawal does not result in the trust account becoming under-funded; or

d) Make a payment or withdrawal that is authorised by law.

v. A Trading Member must notify the remisier of the withdrawal made by the next business day135.

Penalties

Nature of Offence SGX-ST

Failure to comply with stipulated provisions in SFR(LCB)

SGX-ST Rule 12.11.1

Offence is not compoundable and is subject to a mandatory minimum imposable penalty.

Failure to deposit all money received on account of a remisier in a trust account

SGX-ST Rule 12.11.2


Failure to designate the accounts maintained with a financial

SGX-ST Rule 12.11.3

129 SFR(LCB) Section 16(1)(b) - Money received on account of customer

130 SGX-ST Rule 12.11.2 - Customer's & Remisier's Money

131 SGX-ST Rule 12.11.3 - Customer’s and Remisier’s Money; SFR(LCB) Section 17 – Maintenance of Trust Account with Specified Financial Institutions







Penalties


institution as a trust account, or customer or remisier account.


Commingling money received with Trading Member’s own funds.

SGX-ST Rule 12.11.5


Withdrawal of remisier’s money from a trust account when the prescribed conditions are not met.

SGX-ST Rule 12.11.6


Failure to notify remisier of the withdrawal made by the next business day.

SGX-ST Rule 12.11.7

Offence may be compounded with a fine. The penalty will be dependent on factors such as the number of prior violations, and whether the offender is a Trading Member or Approved Executive Director.

2.10.3 Customer’s Assets

CMS licence holders are required to comply with SFR (LCB) in relation to customer’s assets received and held on account of the customer or as collateral for any amount owed by the customer to the CMS licence holder136.

1. Duties of CMS Licence Holders upon Receipt of Customers’ Assets137

The CMS licence holder must deposit a customer’s assets in a custody account held on trust for the customer and ensure that the customer’s assets are not commingled with any other assets. They should make arrangements for a custodian to maintain the custody account.

The CMS licence holder shall deposit the customer’s assets in the custody account no later than the business day immediately following the day on which they receive the assets or is notified of the receipt of such assets, whichever is the later, unless the assets have in the meantime been returned to the customer or deposited in an account directed by the customer.

A customer’s assets may be commingled with the assets of another customer and deposited in the same custody account. The CMS licence holder must separately account for the assets of each customer.

2. Maintenance of Custody Account with Specified Custodians138

The CMS licence holder must maintain a custody account in which it deposits a customer’s assets with:

i. A bank licensed under the Banking Act;

ii. A merchant bank approved as a financial institution under the MAS Act;

136 SFR(LCB) Section 25 - Application of this Division

137 SFR(LCB) Section 26 - Duties of Holder on Receipt of Customer’s Assets

138 SFR(LCB) Section 27 - Maintenance of Custody Account with Specified Custodians



iii. A finance company licensed under the Finance Companies Act;

iv. A depository agent within the meaning of section 130A of the Companies Act for the custody of securities listed for quotation or quoted on SGX-ST or deposited with the Central Depository (Pte) Ltd;

v. An approved trustee for a collective investment scheme within the meaning of section 289 of the SFA; or

vi. Any person licensed under the SFA to provide custodial services for securities.

The CMS licence holder may maintain the custody account itself where it is licensed under the Act to provide custodial services.

Subject to the customer’s prior written consent, CMS licence holders may, for the purpose of the safe custody of the customer’s assets denominated in a foreign currency, maintain the custody account with a custodian outside Singapore which is licensed, registered or authorised to act as a custodian in the country or territory where the account is maintained.

3. Notification and Acknowledgment from Specified Custodian139

Before depositing a customer’s assets in the account, the CMS licence holder must give written notice to the custodian, and obtain an acknowledgment from the custodian that:

i. All assets deposited in the custody account are held on trust by the holder for its customer; and

ii. The account is designated as a trust account, or a customer’s or customers’ account, which shall be distinguished and maintained separately from any other account in which the holder deposits its own assets.

4. Suitability of Custodian140

The CMS licence holder which maintains its customer’s assets in a custody account must:

i. Before opening the custody account, conduct due diligence as to the custodian’s suitability for the holder’s customer or class of customers; and

ii. Maintain records of the grounds on which it has satisfied itself of the suitability of the custodian.

5. Customer’s Assets Held with Clearing House, etc.141

A CMS licence holder dealing in securities may deposit its customer’s assets with a clearing house or a member of a securities exchange for a purpose specified under the business rules and practices of the clearing house or securities exchange, as the case may be. 6. Customer Agreement142

A CMS licence holder providing custodial services for its customer’s assets must notify the customer of the terms and conditions that would apply to the safe custody of the customer’s assets. These shall include:

i. The arrangements for the giving and receiving of instructions by or on behalf of the customer in respect of the services to be provided including, where applicable, the arrangements for the giving of authority by the customer to another person and the extent of that authority and any limitation thereto;

139 SFR(LCB) Section 28 - Notification and Acknowledgment from Specified Custodian

140 SFR(LCB) Section 29 - Suitability of Custodian

141 SFR (LCB) Section 30 - Customer’s Assets Held with Clearing House, etc.

142 SFR(LCB) Section 31 - Customer Agreement



ii. Any lien over or security interest in the assets by the holder or a third party;

iii. The circumstances under which the holder may realise the assets held as collateral to meet the customer’s liabilities to the holder;

iv. Where the customer’s assets are to be held with a custodian other than the holder, the liability of the holder in the event of default by the custodian;

v. Where the holder intends to commingle the customer’s assets with those of other customers and maintain such assets with a custodian other than itself, a statement that the customer’s interest in the assets may not be identifiable by separate certificates, or other physical documents or equivalent electronic records, and a condition that the holder shall maintain records of the customer’s interest in the assets that have been commingled;

vi. The person in whose name the assets are registered;

vii. The arrangements in relation to claiming and receiving dividends, interest payments and other entitlements accruing to the customer, and the exercise of any right and power arising from ownership of the assets;

viii. The arrangements for the provision of information relating to the custody of the asset to the customer; and

ix. All applicable fees and costs for the custody of the assets.

7. Custody Agreement143

Before placing its customer’s assets in a custody account with a custodian, the CMS licence holder must agree with the custodian, in writing, to the following:

i. That the account shall be designated as that of the customer or customers;

ii. That the custodian shall hold and record the assets in accordance with the holder’s instructions; and the records shall identify the assets as belonging to the holder’s customer and the assets shall be kept separate from any asset belonging to the holder or to the custodian;

iii. That the custodian shall not claim any lien, right of retention or sale over any asset standing to the credit of the custody account, except

a) Where the holder has obtained the customer’s written consent and notified the custodian in writing of the written consent; or

b) In respect of any charges as agreed upon in the terms and conditions relating to the administration or custody of the asset;

iv. That the custodian shall provide sufficient information to the holder in order that the holder may comply with its record-keeping obligations under the Act or these Regulation or under any other law;

v. The person in whose name the assets are registered;

vi. That the custodian shall not permit any withdrawal of the assets from the custody account, except for delivery of the assets to the holder or on the holder’s written instructions;

vii. The arrangements for dealing with any entitlement arising from the assets in the custody account, such as coupon or interest payment;

viii. The extent of the custodian’s liability in the event of any loss of the assets maintained in the custody account caused by fraud or negligence on the part of the custodian or any of the custodian’s agents; and

ix. The applicable fees and costs for the custody of the assets.

143 SFR(LCB) Section 32 - Custody Agreement



Unless the CMS licence holder is licensed to provide custodial services for customer’s assets, it must disclose to the customer the terms and conditions agreed with the custodian before depositing its customer’s assets in a custody account.

8. Lending of Customer’s Securities144

A CMS licence holder may lend or arrange for a custodian to lend its customer’s assets which are securities if the following conditions are met:

i. The CMS licence holder has explained the risks involved to the customer; and

ii. Obtained the customer’s written consent to do so.

Before the commencement of such lending, the CMS licence holder must enter into an agreement with that customer setting out the terms and conditions for such lending with the customer whose securities are to be lent. The CMS licence holder must also enter into an agreement with the custodian setting out the terms and conditions for the lending, and disclose these terms and conditions to the customer.

9. Mortgage of Customer’s Assets145

CMS licence holders may mortgage, charge, pledge or hypothecate its customer’s assets under the following circumstances:

i. Subject to an agreement between the CMS licence holder and its customer, where the CMS licence holder is owed money by the customer, the CMS licence holder may mortgage, charge, pledge or hypothecate the customer’s assets but only for a sum not exceeding the amount owed by the customer to it.

ii. The holder of a CMS licence does not contravene the regulation by reason only of an excess arising on any day through the reduction of the amount owed by the customer to the holder on that day, but only if the holder pays or transfers to the mortgagee, chargee or pledgee concerned money or assets of an amount sufficient to reduce such excess as promptly as practicable after the excess occurs and, in any event, no later than the next business day.

CMS licence holders may mortgage, charge, pledge or hypothecate the customers’ assets together if and only if:

a) The sum of the claims to which such customers’ assets are subject as a result of such mortgage, charge, pledge or hypothecation does not exceed the aggregate amounts owed by the customers to the holder; and

b) The claim to which each customer’s assets are subject as a result of such mortgage, charge, pledge or hypothecation does not exceed the amount owed by the customer to the holder.

10. Withdrawal of Customer’s Assets146

The CMS licence holder must not withdraw any of its customer’s assets from a custody account except for the purpose of:

i. Transferring the asset to any person entitled thereto;

ii. Meeting the customer’s obligation arising from any dealing in securities, trading in futures contracts or leveraged foreign exchange trading, as the case may be, by the holder for the customer;

144 SFR(LCB) Section 33 - Lending of Customer’s Securities

145 SFR(LCB) Section 34 - Mortgage of Customer’s Assets

146 SFR(LCB) Section 35 - Withdrawal of customer’s Assets



iii. Transferring the asset to any person or account in accordance with the customer’s written directions;

iv. Securities lending;

v. Mortgaging, charging, pledging or hypothecating the assets in accordance with regulation 34;

vi. Making a deposit in accordance with regulation 30; or

vii. Making a transfer that is authorised by law.

11. No Effect on Lawful Claims or Liens

Nothing in SFR (LCB) Division 3147 shall be construed as avoiding or affecting any lawful claim or lien which any person has in respect of any money held in a trust account in accordance with this Division or any money belonging to a customer before the money is paid into a trust account.

Penalties – SFR(LCB)

Any person who contravenes the following SFR (LCB) regulations shall be guilty of an offence and liable on conviction to a fine not exceeding $50,000:

• SFR(LCB) 26(1) or (2) Duties of Holder on Receipt of Customer’s Assets;

• SFR(LCB) 27(1) Maintenance of custody account with specified custodians;

• SFR(LCB) 28 Notification and acknowledgement from custodians;

• SFR(LCB) 29 Suitability of Custodians;

• SFR(LCB) 31 Customer Agreement;

• SFR(LCB) 32 Custody Agreement;

• SFR(LCB) 33(2), (4), or (5) Lending of Customer’s Securities;

• SFR(LCB) 34 Mortgage of Customer’s Assets; or

• SFR (LCB) 35 Withdrawal of Customer’s Assets.

12. Customer’s and Remisier’s Assets

In addition, SGX-ST has rules governing customers’ and remisiers’ assets and requires Trading Members to comply with the SFR(LCB) rules on customers ‘and remisiers’ assets148 A ‘’customer’’ includes a remisier, unless otherwise specified149 and ‘’remisier’s assets’’ refers to any securities or assets (other than money) that are beneficially owned by a remisier.

The following regulations under SFR (LCB) do not apply to remisiers150:

• SFR(LCB) 30 which stipulates that CMS licence holders dealing in securities may deposit its customer’s assets with a clearing house or a member of a securities exchange for a purpose specified under the business rules and practices of the clearing house or securities exchange;

147 SFR(LCB) Division 3 – Customer’s Assets

148 SFR(LCB) Division 3 – Customers ‘Assets; SGX-ST Rule 12.12

149 SGX-ST Rule 12.12.1 – Customer’s & Remisier’s Assets

150 SGX-ST Rule 12.12.2 - Customer’s and Remisier’s Assets



• SFR(LCB) 33 on lending of customer’s securities (refer to Section 2.10.3.8 of the Study Guide); and

• SFR (LCB) 34 on mortgage of customer’s assets (refer to Section 2.10.3.9 of the Study Guide).

SGX-ST rules also stipulate that a Trading Member must:

i. Designate the accounts maintained with a financial institution specified SFR (LCB) 17151 for a customer or a remisier as a trust account, or a customer or remisier account, as the case may be152;

ii. Deposit assets of its customers in a separate custody account from remisiers;

iii. Not commingle the assets of a customer or remisier with its own assets;

iv. Not withdraw a remiser’s assets from a custody account except to:

a. Return the assets to the remisier;

b. Use the assets to meet any amount due and payable by the remisier to the Trading Member; or

c. Make a transfer or withdrawal that is authorised by law.

v. Notify the remisier of the withdrawal by the next business day.

Penalties


Failure to comply with stipulated provisions in SFR(LCB)

SGX-ST Rule 12.12.1


Failure to designate the accounts maintained with a financial institution as a trust account, customer or remisier account.

SGX-ST Rule 12.12.3


Failure to deposit assets of its customers in a separate custody account from remisiers.

SGX-ST Rule 12.12.4


Commingling assets of a customer or remisier, with Trading Member’s own assets.

SGX-ST Rule 12.12.5


Withdrawal of remisier’s assets from a custody account when the prescribed conditions are not met.

SGX-ST Rule 12.12.6


151 SFR(LCB) Section 17 - Maintenance of Trust Account with Specific Financial Institutions

152 SGX-ST Rule 12.12.3 - Customer’s and Remisier’s Assets



Penalties


Failure to notify remisier of the withdrawal of assets by the next business day.

SGX-ST Rule 12.12.7

Offence may be compounded with a fine. The penalty will be dependent on factors such as the number of prior violations, and whether the offender is a Trading Member or Approved Executive Director.

71 | Chapter 3 - Market Conduct


Chapter 3: Market Conduct

Learning Objectives

The candidate will understand:

What constitutes market conduct and prohibited conduct

Different types of market misconduct under SFA & SGX-ST regime

Different types of market misconduct penalties under SFA & SGX-ST

SGX regulatory tools to uphold a fair, orderly and transparent market

Trading related Acts/Rules and Regulations under SFA/SFR(LCB) and SGX-ST

3.1 Introduction

A sound and progressive financial services sector is the aim of MAS as the regulator of financial institutions in Singapore and it seeks to achieve this objective through both financial supervision and development initiatives.

Public confidence in a fair and orderly capital market, one that reflects the forces of genuine supply and demand, enhances the liquidity and efficiency of the market. Improper conduct which gives a false and misleading impression of trading activity, price movements or market information leads to a reduction in market efficiency and confidence.

Rules regulating trading activity under the SFA and SGX-ST rules, effective surveillance and robust investigations are part and parcel of the overall enforcement strategy against capital market misconduct.

All capital market participants play a part to ensure a fair, efficient and transparent market environment and any market misconduct will be dealt with stringently by MAS and/or SGX.

3.2 Market Misconduct under the SFA and SGX-ST

A high standard of ethical conduct is expected from all participants of the capital market. This is covered in the market conduct rules under the SFA and SFR and further reinforced in the SGX-ST rules.

The rules apply to acts occurring in Singapore with respect to any securities, whether listed or quoted in or outside Singapore. If the act is deemed as misconduct in Singapore, it would also be deemed as misconduct even if the transactions take place outside Singapore1. Similarly, the rules apply to acts occurring outside Singapore

1 SFA Section 196 – Application of this Division

Chapter 3 - Market Conduct | 72


with respect to securities listed or quoted on a securities market in Singapore. That is, the rules have extraterritorial reach.

Example

If a person sitting in Japan carries out transactions intending to manipulate prices of a counter listed or quoted on SGX-ST, then that act of price manipulation will be regarded as having taken place in Singapore for purposed of market misconduct offences. Any persons found guilty will face the penalties of a fine or an imprisonment term or both.

Practices that gives an unfair advantage to certain customers over the general public are strictly prohibited as they go against the grain of fair competition. Therefore all customers, intermediaries and their representatives and those seeking to raise funds through the capital market must abide by the regulations that guide market conduct.

The severity of the fines and imprisonment term reflects how serious MAS & SGX are in deterring market misconduct and ensuring personal liability for any persons breaching the laws on market conduct.

The SFA & SGX-ST spells out the prohibited market conduct as:

False Trading and Market Rigging Transactions

Securities Market Manipulation

False or Misleading Statements and Information

Fraudulently Inducing Persons to deal in Securities

Employment of Manipulative and Deceptive Devices

Dissemination of Information about Illegal Transactions

Insider Trading

3.3 False Trading and Market Rigging Transactions 2

False trading and market rigging can be described as the use of artificial means or methods to influence the price of any securities, or to cause volatility without real basis in the market instead of letting natural market forces prevail. Such conduct is prohibited and any CMS licence holder or representative who commits such offences will face stringent penalties, reputational repercussions and possibly a suspension or revocation of licence.

False Trading includes:

Creating or having the intention to create an appearance of active trading on any securities;

Buying and selling any securities that do not involve a change in beneficial ownership of those securities in order to maintain, change or cause fluctuations in the market price of the securities in the market;

Doing anything that creates or is likely to create a false or misleading appearance of active trading or with respect to the market for or the price of securities if the person is reckless as to whether doing that act would so create or be so likely to create; or

2 SFA Section 197 – False Trading and Market Rigging, SGX-ST Rule 13.8.1 & 13.8.3 – Market Manipulation and False Market



Creating transactions that are intended to give a false and misleading appearance with respect to the market for, or the price of, any securities.

Many devices have been used to rig trades and create a false market but the more common devices are:

1. Buying and selling without a change in beneficial ownership;

2. Wash trades; and

3. Matching orders which are specifically spelt out to in SFA Section 197(3)(a) to (c) as prohibited.

Example – (1) No change in beneficial ownership

A person A may transfer his title of shares to person B with a side arrangement for person B to hold them in trust for him, unknown to the brokerage. Then when person B sells the shares, the proceeds of that sale actually goes to person A as the shares still belong to person A under the side arrangement. In this example, there is no change in the beneficial ownership as in fact, person A owns the shares all the time. Therefore, person A had not in effect sold the shares but continued to have ownership throughout, creating a false impression that ownership had changed hands thus misleading the investing public.

A wash sale is a transaction effected through the market which involves no change in the beneficial ownership of any securities. SFA Section 197(5)3 provides that there is no change in the beneficial ownership of security if a person who had an interest in the securities before the purchase or sale continues to have an interest in the securities after the purchase or sale. SGX-ST Rule 13.8.44 also prohibits a Trading Member or a Trading Representative from directly or indirectly dealing in securities which involve no change of beneficial ownership as defined in SFA.

Example – (2) Wash Sale

A wash sale occurs when a person places 5 orders to buy a certain number of shares of Company D through a broker. He then places another number of orders to sell the same number of shares of Company D through another broker. Effectively the same number of shares of a company is bought and sold through different brokers but by the same person with no change of ownership. The intended effect is to give an appearance of active trading in Company D’s shares.

Matching orders are similar to having a side arrangement in Example (1) above. This involves the entering of an order for the purchase of securities through a broker with the knowledge that a sales order for the same amount or price has been entered or will be entered into at about the same time by another party known to him through a different broker. The purpose of which is to create an impression of active trading in the securities.

Example – (3) Matching Order

Person X and Person Y wish to dispose of their shares in Company Z at a substantial profit. At the time, these shares are quoted at $1 on the Exchange. Person X enters a sale order for shares in Company Z at a price slightly higher than the current price, i.e. $1.10. Person Y then enters a buy order for the same shares and for the same number and price. They then repeat their trades, reversing their roles and for a slightly higher price. This process is repeated as often as is necessary. This has the effect of nudging up the share price and attracting other investors to trade in Company Z. When the price of the shares in Company Z is sufficiently high. Person X and Person Y can close out and unload their own shares at the artificially inflated price.

3 SFA Section 197 - False Trading and Market Rigging Transactions

4 SGX-ST Rule 13.8.4 - Market Manipulation and False Market



While there is probably no limit to the devices that can be used in false trading or market rigging, two of the most common techniques are wash sales and matching orders.

3.4 Securities Market Manipulation5

In broad terms, market manipulation involves intentional interference with the free forces of supply and demand to deceive or defraud investors, or for some other ulterior purpose.

To prevent market manipulation, there are provisions in SFA which disallow any person from directly or indirectly effecting two or more transactions in securities of a corporation if the transactions have the effect of raising, maintaining or stabilising the price of securities of the corporation in the securities market. There are similar provisions under SGX-ST rules against market manipulation.

SGX-ST Rule 13.8.16 states that and Trading Member or Trading Representative must not engage in any practices, or induce any person to create a false or misleading appearance of active trading in any securities, or lead to a false market in respect of any securities. The rule is concerned with the effect or likely effect of an order or a transaction, and involves an objective assessment of whether a false or misleading appearance of false market, has been created. Whether an activity is “false or misleading” will depend on circumstances in each case.

The rule does not prevent Trading Members and Trading Representatives from carrying out legitimate trading strategies which reflect the forces of genuine supply and demand. However, Trading Members and Trading Representatives must do so bearing in mind their obligations to the market, and with an appropriate degree of care. Although Trading Members and Trading Representatives must carry out their customers’ instructions, a Trading Member and Trading Representative should not accept a customer’s instructions blindly, but should exercise judgement in each case. (Refer to Section 3.12 on Vigilant Practices against Market Misconduct)

SGX-ST Rule 13.8.3 prohibits a Trading Member or Trading Representative from entering a buy or sell order in the Trading System if there is an existing opposite order from the same Trading Member or Trading Representative in the same security. This rule does not apply if:

1. The Trading Member or Trading Representative knows or ought to reasonably know that the orders are for different beneficial owners;

2. The order is a type expressly permitted by SGX-ST as having a legitimate commercial reason and which is unlikely to create a false market; or

3. The Trading Member or Trading Representative can otherwise establish that the purpose for which the order was made was not to create a false market.

For example, orders under the following circumstances will be permitted:

1. Orders from a fund manager whose instructions are intended to switch the security from one sub-account to another for legitimate commercial reasons;

2. Orders from an affiliate overseas, acting on behalf of different beneficial owners, and the trades will be booked out eventually to these beneficial owners.

SGX-ST Rule 13.8.5 prohibits a Trading Member or a Trading Representative from dealing in securities in a manner that will or may affect or maintain the price of the securities, where the intent is to induce other persons to subscribe for, buy or sell the securities is deemed market manipulation and is prohibited. However, this rule

5 SFA Section 198 – Securities Market Manipulation; SGX-ST Rule 13.8.5 – Market Manipulation and False Market

6 SGX-ST Rules 13.8.1, 13.8.3 and 13.8.5 - Market Manipulation and False Market



does not apply to stabilising action carried out in accordance with Regulation 3 of the Securities and Futures (Market Conduct)(Exemption) Regulations.

Example - Securities Market Manipulation

Market manipulation happens when a person (Person X) executes trades using his account and the accounts of a number of his clients to trade at prices above the previous traded price which has the effect of artificially maintaining or increasing the price of the security.

It was found that through the execution of manipulative or fictitious buy orders, a false market was created by Person X. Person X will not only face disciplinary action but will be liable, on conviction, to penalties for market misconduct.

Penalties

SFA SGX

SFA Part XII Market Conduct

Division 1 Prohibited Conduct –Securities

Any person who contravenes any provisions of this Division shall be guilty of an offence and shall be liable on conviction to a fine not exceeding $250,000 or to imprisonment for a term not exceeding 7 years or to both7.

Refer to Section 3.14 for civil penalties and civil liabilities.

SGX-ST Rules 13.8.1, 13.8.4 and 13.8.5

An offences under SGX-ST Rules 13.8.1, 13.8.4 and 13.8.5 are not compoundable and is subject to a mandatory minimum imposable penalty.

SGX-ST Rule 13.8.3


3.5 False or Misleading Statements and Information 8

The dissemination of information or statements that are false or misleading in a material particular that is likely to:

Induce the subscription of securities by other persons,

Induce the sale or purchase of securities by other persons; or

Raise, lower, maintain or stabilise the market price of securities,

is strictly prohibited, if the person disseminating the information or statement does not care whether the information or statements is true or false, or he knew or should have known that the information or statements are false or misleading in a material particular. Such prohibition is spelt out in Section 199 of the SFA. Such dissemination can be in the form of:

Newsletters;

research papers;

electronic means; or

the media or word of mouth

7 SFA Section 212 - Penalties under this Division

8 SFA Section 199 - False and Misleading Statements; SGX-ST Rule 13.8.6 – Market Manipulation and False Market



CMS licence holders or their representatives should not knowingly with intent make or publish any statement, forecast or promise that are false or misleading to induce others to deal in securities. If a CMS licence holder or its representative recklessly does so through wilfully concealing material facts which are recklessly published, stored or recorded will be contravening the SFA sections mentioned above.

And under SGX-ST Rule 13.8.6, it covers in general that any Trading Member or Trading Representative must not disseminate information that is false or misleading, otherwise they will be deemed to have breached this market conduct rule.

Penalties

SFA SGX



Any person who contravenes any provisions of this Division shall be guilty of an offence and shall be liable on conviction to a fine not exceeding $250,000 or to imprisonment for a term not exceeding 7 years or to both.


SGX-ST Rule 13.8.6


3.6 Fraudulently Inducing Persons to Deal in Securities9

Under SFA Section 200(1), it is an offence to induce or attempt to induce another person to deal in securities by:

1. Making or publishing any statement, promise or forecast that he knows or ought reasonably to have known to be misleading, false or deceptive;

2. Any dishonest concealment of material facts;

3. Reckless making or publishing of any statement, promise or forecast that is misleading, false or deceptive; or

4. Recording or storing in, or by means of, any mechanical, electronic or other device information that is now to be false or misleading in a material particular.

Penalties – SFA Part XII Market Conduct, Division 1 Prohibited Conduct – Securities



9 SFA Section 200 – Fraudulently Inducing Persons to Deal in Securities; SGX-ST Rule 13.8.5 – Market Manipulation and False Market



3.7 Employment of Manipulative and Deceptive Devices 10

Under SFA Section 201, it is an offence for any person to directly or indirectly, in connection with the subscription, sale or purchase of any securities to:

1. Employ any device, scheme or artifice to defraud;

2. Engage in any act, practice or course of business which operates as a fraud or deception, upon any person;

3. Make any statement he knows to be false in a material particular; or

4. Omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading.

Example: Employment of Manipulative and Deceptive Devices

Person Y entered 5 buy orders for a certain counter during the Pre-Open phase at a price between $3.38 and $3.48 totalling 1.1 million shares representing 62.7% of all buy quantities queuing at the material time. At the same time he also placed a sell order for 100,000 shares of the same counter at $3.35. He then deleted the buy orders at 8.59 am just before the opening price was determined.

By deleting the buy orders, Person Y showed that he had no intention of fulfilling his order. His real intention is to cause the market opening price at 9 am to be at a favourable level for him to fulfil his sell order at $3.35, which will result in a profit for himself.

In this example, Person Y had used deceptive device to influence the share price and deceived the market.

The pre-open and the pre-close phases of the market were introduced to increase efficiency and to ensure market integrity and transparency and that orders are genuine. Any device or action used to misuse the phases are deemed as manipulative and deceptive which is an offence under the SFA.

Penalties – SFA Part XII Market Conduct, Division 1 Prohibited Conduct –Securities



3.8 Dissemination of Information about Illegal Transactions 11

Just as the use of manipulative devices is prohibited as they create artificial market conditions, the dissemination of information about illegal transactions is also prohibited. This is to prevent those “in the know” from taking advantage of and benefitting from the resultant market movements. This is really a “blackout rule” to prevent undesirable practices.

10 SFA Section 201 – Employment of Manipulative and Deceptive Devices; SGX-ST Rule 13.8.6 & 13.8.7 – Market Manipulation and False Market

11 SFA Section 202 – Dissemination of Information about Illegal Transactions; SGX-ST 13.8.6 - Market Manipulation and False Market



SFA Section 202 makes it an offence to circulate, disseminate, or authorise, or be concerned in the circulation or dissemination of any statement or information to the effect that the price of any securities of a company or a business trust will, or is likely, to rise or fall or be maintained as a result of an illegal transaction.

An illegal transaction refers to a transaction that is/to be entered into or done in contravention of the market misconduct provisions prohibiting against false trading, market rigging, securities market manipulation, disseminating false or misleading statements or information, fraudulently inducing persons to deal in securities or employing manipulative and deceptive devices.

That person is guilty of an offence if he, or a person associated with him:

1. has entered into or purports to enter into the illegal transaction; or

2. has received, or expects to receive, any consideration or benefit for circulating or disseminating the information or authorising the circulation or dissemination of such information.

Example: Dissemination of Information about Illegal Transactions

Person Z directed Person A to use deceptive methods to influence the price of securities in a corporation. Person Z knew that the actions would cause the price of the securities to move in a certain direction. Person Z then inform others about the possible outcome in order for them to benefit from it. Person Z expects to receive a cut of the profits made from these other persons as a result of the price movements.

Penalties

SFA SGX





SGX-ST Rule 13.8.6


3.9 Insider Trading12

3.9.1 What is Inside Information?

Inside or “insider” information is information that is not generally available, and if known would or would be likely to have a material effect on the price of value of securities. A reasonable person would be taken to expect information to have a material effect if the information is likely to influence persons who commonly invest in securities in deciding whether or not to buy, subscribe for or sell the securities13.

Information is considered to be “public” or “generally available” if:

12 SFA Section 218 & 219 – Prohibited conduct by connected & non-connected persons in possession of inside information; SGX-ST Rule 13.8.7 – Market Manipulation and False Trading

13 SFA Section 216 – Material effect on price of value of securities



i. It consists of readily observable matter;

ii. Without limiting the generality of (i),

a) it has been made known in a manner that would, or would be likely to, bring it to the attention of persons who commonly invest in securities of a kind whose price or value might be affected by the information; and

b) since it was made known, a reasonable period for it to be disseminated among such persons has elapsed; or

iii. It consists of deductions, conclusions or inferences made or drawn from either or both of (i) and (ii)(a) above.

3.9.2 Definition of Insider Trading

Insider trading therefore is to trade on such privileged and confidential information. Trading on such inside information therefore serves to provide an advantage over other investors resulting in an unfair market.

Persons with inside information on a corporation or its securities must not enter into transactions in such securities. It is irrelevant that the person did not have an intention to use the inside information. They must also not communicate the information to other parties.

3.9.3 An Insider

The provisions in the SFA make a differentiation between the sources of “insider” information, that is, from a “connected person” and a “non-connected person”. The distinction is in the prosecution of the perpetrators.

1. A Connected Insider14

In the case of a connected person, it has to be proven that the connected person was in possession of information which was not generally available. It is also presumed until proven otherwise that the connected person knew that the information was not generally available and if the information was generally available, it might have a material effect on the price or value of the security.

A person is connected to a corporation if he/she:

i. Is an officer of the corporation or of a related corporation;

ii. Is a substantial shareholder in that corporation or in a related corporation;

iii. Occupies a position that may reasonably be expected to give them access to price sensitive information by virtue of:

a) any professional or business relationship existing between them (or their employer or a corporation of which they are an officer) and that corporation or a related corporation; or

b) them being an officer of a substantial shareholder in that corporation or in a related corporation.

A person is an officer of a corporation if he/she is:

i. A director, secretary or employee of the corporation;

ii. A receiver, or receiver and manager, of property of the corporation;

iii. A judicial manager of the corporation;

iv. A liquidator of the corporation; or

14 SFA Section 218(5) – Prohibited conduct by connected persons in possession of inside information



v. A trustee or other person administering a compromise or arrangement made between the corporation and another person.

It should be noted that the issuer's lawyers, accountants, bankers, investment bankers, public relations consultants, advertising agencies, consultants, valuers and other third parties are also regarded as insiders. Where an issuer is involved in the negotiation of an acquisition or transaction, the other parties to the negotiation may also be regarded as insiders15. 2. A Tippee

In the case of a non-connected person (a “tippee”), it has to be proven that the person knew that the information in his possession was not generally available and is price sensitive. A tippee is different from a connected insider in that:

i. A tippee does not have to be connected to the corporation in respect of which he knows price sensitive information;

ii. Actual knowledge that the information is not generally available and is price sensitive is required before the tippee is obliged to not subscribe for or trade in the securities, or to procure another person to do the same. This is opposed to a connected insider where it is sufficient to show that they ought reasonably to have known that they possessed information which is not generally available and which is price sensitive; and

iii. There is also a shift in the burden of proof against the connected insider in that if it is shown that he/she possessed confidential price sensitive information, it will be presumed, unless proved otherwise, that he knew that the information was not generally available and was price sensitive.

Unlike earlier provisions for market misconduct, a tippee does not have to:

a) Be the one who received information, directly or indirectly, from an insider;

b) Have an arrangement or association with the insider; and

c) Be aware that the insider himself is precluded from dealing. All that is required is that the tippee must possess the price sensitive information and that he/she must know that the information is not generally available and is price sensitive. It is irrelevant where the information came from. Such a tippee is not permitted to subscribe for or trade in securities or procure another person to do so. It is irrelevant that the tippee did not have an intention to use the inside information. 3. Tipping Off Offence

If a person possesses inside information, he or she must not communicate the information or cause the information to be communicated to a third party, if he or she knew or ought to know that the third party would (or would cause another person to) deal in such securities (known as the “tipping off offence”).

Notwithstanding the source of insider information, i.e. whether it came from connected persons or non-connected persons, it is clear that the rules and regulations prohibit trades carried out through the knowledge of “inside” information to unfairly benefit “insiders” and thus prevents fair competition and places other customers at a disadvantage. It is also not necessary to prove that the person with “inside” information intended to use the information.

15 Paragraphs 27 & 28 of the SGX-ST Listing Manual



3.9.4 Exceptions and Defences16

There are excepted categories of individuals and situations that are found within the SFA. These are:

i. The redemption by trustees or managers in respect of a collective investment scheme, subject to certain conditions (SFA Section 222);

ii. Persons acting as underwriters and pursuant to the performance of their roles (SFA Section 223);

iii. The purchase or sale of securities pursuant to legal requirements such as requirements imposed by written law or a court order (SFA Section 224);

iv. Price-sensitive information communicated pursuant to legal requirements such as requirements imposed by written law or a court order (SFA Section 225);

v. Knowledge within corporation– knowledge of an officer is typically regarded as knowledge of the corporation, unless Chinese walls apply (SFA Section 226);

vi. Knowledge within partnership and limited liability partnerships – knowledge of a partners is typically regarded as knowledge of the partnership or limited liability partnership, unless Chinese walls apply (SFA Section 227);

vii. Knowledge by virtue of a natural person’s own transactions (SFA Section 228); and

viii. Knowledge of a corporation’s own transaction (SFA Section 229).

Besides the above exceptions and defences, SFA Section 231 also deals in exceptions based on the ‘Parity of Information’, i.e. if both parties have the same information, the parties would be on equal footing and can enter into the transaction with one another.

SFA Section 231 states as long as the court is satisfied that the information comes into the defendant’s knowledge solely as a result of information having been made known to any persons who commonly invest in securities affected by the information, or ought reasonably to have known of the information, before entering into the transaction or before the information was communicated, is considered as good defence.

Section 230 provides for an exemption for broker-dealers. A CMS licence holder for dealing in securities can trade on a stock market if it or its representative entered into the transaction on behalf of a principal, where the instruction of the principal was not solicited by, and the principal was not advised by the CMS licence holder or its representative, and the principal and the CMS licence holder or its representatives are not “associates”.

Example - Insider Trading

Person A has information of a potential takeover of Company B by Company C when working for Company B. He used this information to buy up a large number of shares in Company B using the account of a third party D. After the announcement of the takeover, the price of Company B went up 12.8% higher than the previous traded price.

However, the takeover did not take place and knowing that it will not take place, Person A then sold an even larger number of shares in Company B using the same account of third party D, avoiding a substantial loss from his earlier trades because after the announcement of the withdrawal of takeover, the price fell by 70% of the previous traded price.

16 SFA Sections 222 – 229 – Defences and Exceptions



By using third party D’s account with the brokerage firm, Person A had also deceived the brokerage firm. Person A thus had breached regulations on Insider Trading Section 218 (2) (a) and (b) in addition to Section 201(b) on SALE and purchase of securities under the SFA.

A civil penalty of $2.9 million was imposed on An after MAS commenced civil proceedings against him in the courts.

Penalties

SFA SGX

SFA 218, SFA 219, SFA 220 & SFA 309

Any person who is guilty of insider trading or Tipping-off Offence will be liable on conviction to a fine not exceeding $250,000 or to imprisonment for a term not exceeding 7 years or to both.17

SGX-ST Rules 13.8.7


3.10 Securities Hawking18

Securities hawking refers to making an offer of securities in an unsolicited meeting. The securities hawking prohibition aims to prevent pressure selling of financial products to retail clients (e.g. “boiler room” practices, badgering).

Representatives are not allowed to offer or invite any subscription or purchase of securities, during any unsolicited meetings with clients or other investors. This requirement does not apply to offers made to securities that do not need a prospectus, such as those to institutional investors, accredited investors19.

Example: Securities Hawking

A customer visits a bank to enquire about obtaining a credit card. When he is waiting for his credit card application to be processed, a bank employee approaches him to sell an investment product to him. The bank employee is engaging in securities hawking if he has not obtained the customer’s consent or has not enquired if the customer is interested to listen to the sales pitch, before approaching the customer.

Penalties – SFA Part XII Market Conduct, Division 3 – Securities Hawking

Any person who is guilty of the securities hawking offence will be liable on conviction to a fine not exceeding $10,000 or to imprisonment for a term not exceeding 6 months or to both and, in the case of a second or subsequent offence, to a fine not exceeding $20,000 or to imprisonment for a term not exceeding 12 months or to both.20

17 SFA Section 204 – Penalties under Division 1, Part XII, SFA

18 SFA Section 309 – Securities hawking prohibited

19 SFA Section 304 - Offer made to institutional investors; SFA Section 305 - Offer made to accredited investors and certain other persons

20 SFA Section 309(4) – Securities hawking prohibited



3.11 Other Market Conduct Rules & Guidelines

Apart from the market conduct offences stipulated above, there are other trading related regulations and rules – both under the SFA and SGX-ST Rules – that CMS Licence Holders or their Representatives have to comply with. The regulations and rules under SFA/SFR (LCB) which relate to business conduct, such as, giving priority to customer’s orders, maintaining a register of securities, withholding orders and disclosing orders etc., are covered in Chapter 2. There are also occasions when SGX-ST may review all the Trading Members’ trades if there are reasons to believe that a Trading Member has breached these rules.

3.11.1 Excessive Trading / Churning21

Churning is intentional trading for the purpose of enriching a broker at his customer’s expense. Churning creates large aggregate commissions with little, if any, commensurate benefit for customer. This is done by entering into many trades, often small, which generate little or no profit for the customer. Each trade, of course, earns the broker a commission. Churning is prohibited under SGX-ST Rule 13.7.1 which stipulates that a Trading Member or Trading Representative must not encourage transaction if the sole object is generating commission.

Penalties - SGX-ST Rule 13.7


3.11.2 Unauthorised Trading22

Unauthorised trading occurs when a Trading Representative executes trades in a customer’s account without the customer’s knowledge or approval. Sometimes, the customer may not even be aware of such trades because the Trading Representative had directed the contract notes (which depict the trade executed under the customer’s account) to another address. Dormant account are particularly at risk to such activity.

Accordingly, SGX-ST Rule 13.6 prohibits unauthorised trading and the Trading Representative must not:

1. Execute his personal trades in the account of a customer; and

2. Use a customer’s account for third party trading without the customer’s prior written authorisation.

Penalties SGX-ST Rule 13.6


3.11.3 Errors and Breakdowns23

A Trading Member and a Trading Representative must not knowingly take advantage of a situation arising from:

21 SGX-ST Rule 13.7 – Excessive Trading

22 SGX-ST Rule 13.6 – Unauthorised Trading

23 SGX-ST Rule 13.14 - Miscellaneous



1. A breakdown or malfunction in any of SGX-ST’s procedures or systems; or

2. Error entries made by SGX-ST or CDP on the Trading System.



There are other market conduct guidelines which CMS licence holders and representatives are expected to comply with. These include:

Short Selling Guidelines

Marking Sell Orders

Securities Borrowing and Lending

3.11.4 Short Selling Guidelines24

The Guidelines on Short Selling Disclosure (SFA15-G02) are derived from the provisions of Part II of the SFA. Short selling is defined as the sale of securities that the seller does not own at the time of the sale, and it may be ‘covered’ or ‘uncovered’ (also known as ‘naked’ short selling).”

In ‘covered’ short selling, at the time of the sale, the seller has borrowed the securities or has otherwise made arrangements to fulfil his obligation to deliver the securities. In ‘uncovered’ short selling, at the time of the sale, the seller is not in possession of securities or has not otherwise made arrangements to meet his delivery obligation.

The motivation for short selling is that the person believes that a security’s price will decline, so it sells the security first, hoping that he or she can buy the securities back at a lower price later after the price has fallen to make a profit from the transaction.

There are advantages to allow some form of short selling as it provides for a more efficient price formation, increases market liquidity and facilitates risk management and the development of hedging activities.

Conversely it could also result in increased market volatility, potentially leading to disorderly markets under conditions of significant market uncertainty. Short selling may also be used as a tool in market abuse, where false rumours are passed with the objective of causing others to sell thus bringing prices down in a panic. ‘Uncovered’ short selling may also result in disruptions of the settlement process.

In view of the negative impact of short selling, and to mitigate the potentially disruptive impact on the settlement process, The Central Depository (Pte) Limited (CDP), purchases securities on behalf of sellers who not possess securities for delivery on settlement day (a term ‘buying in” is used to describe this activity). When the CDP carries out the buying-in, the cost of purchase and an additional penalty is charged to the seller who failed to deliver the securities. Such buying-in procedures are determined at the discretion of the CDP25. The SGX-ST will also conduct investigations to detect if there was market abuse.

24 MAS Guidelines on Short Selling Disclosure (SFA15-G02); SGX-ST Rule 10.6.8 – Short Selling

25 CDP Clearing Rule 6.7.4 – Buying-In Procedures



The combined actions of the CDP and SGX-ST help mitigate some of the potential negative effects of short selling and ensure that markets continue to function in an orderly and efficient manner.

Like most major jurisdictions, SGX-ST requires reporting of short selling. This is because information on short selling activities is relevant to the trading decisions of market participants. For example, information that those securities are under sustained heavy short selling may indicate strong negative price pressure on those securities. Information on short sale transactions also helps to deter market abuse by alerting authorities to activities that may potentially disrupt the orderly functioning of the markets and aids in investigation and enforcement.

Although it is good to gather information on short selling and interpret the information, market participants are cautioned to exercise care when interpreting such information. For instance, information on short sale volume may not reflect the outstanding short position in those securities. Volume of short sales may include trades which have been offset by the buy-in trades.

Penalties - SGX-ST Rule 10.6.8


3.11.5 Marking Sell Orders26

In order to ensure that short sell information are captured comprehensively, SGX-ST has established disclosure requirements for its members. It requires all Trading Members to obtain confirmation from the relevant market participant for sell orders to declare whether the sale order is a short sell order before a sell order can be executed. Market participants are expected to split sell orders, if they do not own the full quantity of securities to be sold. They are required to split the order into two with the short sale order marked accordingly.

SGX-ST will publish aggregated short selling information, such as short sales volume and value, on the SGX website by the start of each trading day, based on short sale order data collected on the previous trading day.

As information on short selling may be taken into account by other market participants when making trading decisions, all market participants are expected to accurately disclose the nature of their sell orders for SGX-ST Trading Members’ compliance with the disclosure requirements on short selling. SGX-ST will provide its Trading Members with a facility to correct erroneously marked sell orders.

Penalties - SGX-ST Rule 8A.3

An offence under SGX-ST Rule 8A.3 may be compounded with a fine. The penalty will be dependent on factors such as the number of prior violations, and whether the offender is a Trading Member, Approved Executive Director or Trading Representative.

3.11.6 Securities Borrowing and Lending27

Just as short selling is allowed subject to conditions including having pre-arrangements for ‘covered’ short selling, securities borrowing and lending is allowed as a market practice subject to conditions as outlined in the SFR (LCB) 45.

25MAS Guidelines on Short Selling Disclosure (SFA15-G02); SGX-ST Rule 8A.3- Marking of Sell Orders

27 SFR (LCB) 45 – Securities Borrowing and Lending; SGX-ST Rule 17.3 – Securities Borrowing and Lending



When a CMS licence holder borrows from an owner of securities, the CMS licence holder must ensure that it provides collateral up to 100% of the market value of the securities borrowed. Similarly if the CMS licence holder lends securities, including those belonging to its customers, it must obtain collateral from the borrower, up to 100% of the market value of the securities borrowed. But under the SGX-ST rules, the collateral is up to 105%.28

Such collateral arrangement does not apply if the CMS licence holder borrows from an accredited investor as defined in the SFA. However such arrangement and conditions must be documented in writing.

The value of the collateral throughout the borrowing and lending arrangement must be 100% of the market value of the securities.

Such borrowing and lending must be clearly documented in writing and must comply with the following:

State the capacities in which the arrangement was entered into, as agent or principal.

Provide for the transfer of title to and the interest in the securities to the CMS licence holder from the borrower or from the CMS licence holder to the lender as the case may be.

Provide for the transfer of title to and interest in whole or in part of the collateral provided or obtained by the CMS licence holder which is at least 100% of the market value of the securities borrowed by the CMS licence holder from the lender or lent by the CMS licence holder to the borrower as the case may be.

Provide the rights to document the borrowing and lending arrangement including the treatment of dividend payments, voting and other rights and arrangement for dealing in any corporate action.

Provide for the daily mark to market valuation of the collateral to determine the procedure for calculating margin and treatment of shortfalls, if any.

Provide the procedures for the return of securities lent and borrowed.

Provide for the termination of agreement, setoff of claims, default conditions, calculation of lending or borrowing fees as the case may be.

Provide for the governing law and jurisdiction subjected to.

Before any borrowing arrangements can be entered into, the CMS licence holder must explain the risk in such arrangements to the customer and obtain his understanding in writing.

Penalties

SGX-ST Rule 17.3

An offence under SGX-ST Rule 17.3 may be compounded with a fine. The penalty will be dependent on factors such as the number of prior violations, and whether the offender is a Trading Member, Approved Executive Director or Trading Representative.

SFR(LCB) 55

Any person who contravenes regulations 45(1), (3), (4), (5), (6) or (7) shall be guilty of an offence and shall be liable on conviction to a fine not exceeding $50,00029.

28 SGX-ST Rule 17.3.3 – Collateral

29SFR(LCB) Section 55 - Offences



3.12 Vigilant Practices Against Market Misconduct30

The SGX-ST rules mirror those of the Regulation set out in the SFA and provides further guidance in reminding Trading Members and their Trading Representatives to be mindful and vigilant against market misconduct. It requires Trading Members and their Trading Representatives through Chapter 13 of the SGX-ST Trading Rulebook not to accept instructions from customers at face value but to ask relevant questions to satisfy themselves when an unusual order is received from a customer that it is not to create false trading or an attempt to manipulate the price of a security.

Only if the Trading Member or Trading Representative is satisfied that the suspicion is a false alarm and that the transaction is a genuine commercial transaction, then only should the deal be put through. Failing which, if in an investigation, the deal is found to be manipulative, and that no due diligence was further carried out to ensure the genuineness of the transaction, the Trading Member and Trading Representative may face disciplinary actions brought against them by SGX or MAS.

To prevent such manipulation and the creation of a false market, the SGX-ST rules have suggested the following vigilant practices:

1. Inconsistent History (SGX-ST Rule 13.8.2(1))

A Trading Member or Trading Representative should consider whether the proposed transaction will be inconsistent with the history or, or recent trading, in the security. This is because Trading Member or Trading Representative would generally be familiar with the patterns of trading in each stock. They are therefore expected to exercise judgement, based on their experience and knowledge of trading in the stock, in assessing the likely impact of a proposed transaction on the market for a security.

Note that this Rule does not prevent a Trading Member or Trading Representative from executing an order simply because it will have an impact on the market for, or price of security.

2. Collaboration (SGX-ST Rule 13.8.2(2))

Trading Member and Trading Representative should consider whether the proposed transaction will, or may cause or contribute to a material change in the market for, or the price, of security, and whether the person involved or another person with whom the first person is collaborating may directly or indirectly benefit from alterations in the market or price.

In the absence of a good reason to buy or sell quickly, customers generally want to obtain the best price. Trading Member or Trading Representative who receives an order that would materially alter the market for, or price of, the security, should consider whether it is genuine or manipulative.

In order to be able to do this, Trading Member and Trading Representative must know their customers. Orders placed by a customer or a related party of that customer, who may have an interest in creating a material change in the market for, or price of, a particular security, should be closely examined. For example, a large holder of particular security may have an interest in inflating the value of the holding (e.g. window dressing for investment performance purposes), or decreasing the price of the security (e.g. as a precursor to a takeover bid or for purposes which include lowering a conversion price), and may place orders accordingly.

30SGX-ST Rule 13.8.1 and SGX-ST Rule 13.8.2 – Market Manipulation and False Market



3. Multiple or Large Order (SGX-ST Rule 13.8.2(3))

Where the proposed transaction involves the placing of multiple buy and sell order at various prices higher or lower than the market price, or placing of buy and sell order which give the appearance of increased volume, this may be indicative of an attempt to create a false and misleading appearance.

For their own part, Trading Member or Trading Representative should not make large entries above or below the prevailing spread to facilitate filling an order on the other side of the market. The placing of buy (sell) orders at various price steps below (above) the market may create a false or misleading appearance that the entries are on behalf of genuine buyers (sellers). The layering of orders also translates into a change in the depth screen and may mislead market participants with respect to interest in the counter.

4. Transaction to Influence Prices (SGX-ST Rule 13.8.2(4))

A Trading Member or Trading Representative should consider carefully any orders placed with instruction to execute them at or near the close of trading, particularly if a price target is set. A Trading Member or Trading Representative should be alert to orders placed near the close on the last trading day of the month, quarter or year, or on option and warrant expiry dates, which will move the price when executed.

A customer who, to the knowledge of the Trading Member or Trading Representative, declines the opportunity to obtain a better price during the day and prefers to pay a higher (lower) price near the close should be queried as to the strategy. This is important if the order is buy or sell a small volume of the security, which is likely to move the price and possibly fix the closing price. Further, if the Trading Member or Trading Representative received a series of similar orders over a number of days, each of which generates a price movement near the close of trading, the Trading Member or Trading Representative should be satisfied that the client is not attempting to create a false or misleading appearance with respect to the price of the security. For example, a fund manager’s quarterly performance will improve if the valuation of his portfolio at the end of the quarter in question is higher. By placing a large order to buy relatively illiquid shares, which are also components of his portfolio, to be executed at or just before the close, his purpose might be to distort the price in his favour.

Accordingly, a Trading Member or Trading Representative should consider whether a proposed transaction will coincide with or is likely to influence the calculation of reference prices, settlement prices and valuations.

5. Connected Parties (SGX-ST Rule 13.8.2(5))

Where the parties involved in the proposed transaction are connected, there is a concern that there may effectively be no change in beneficial interest. This would be the case if the security is held in the name of the buyer, but the market risk actually remains with the seller. Note that this is also caught under Section 197(5) of the SFA.

6. Matching Orders (SGX-ST Rule 13.8.2(6))

Where buy and sell orders are to be entered at about the same time and for about the same price and quantity, this may suggest that the transaction is pre-arranged. Pre-arranged transactions have the effect of creating a misleading appearance of active trading, or improperly excluding other market participants from the transaction since the first bid or offer was not adequately exposed to the market. The execution of crossings or transactions between the same parties for the same volumes, which are subsequently reversed at the same prices, also raises question whether the transaction involve a change in beneficial ownership, or are for rollover of trades to extend settlement, or for a purpose of engaging in a circular trading scheme to create the impression of turnover.

Matching orders or pre-arranged transactions are also caught under Section 197(3)(6) and (c) of the SFA.



7. Erratic Movements in Price or Volume (SGX-ST Rules 13.8.2(7))

A Trading Member or Trading Representative should consider whether the proposed transaction will or may cause the price of the security to increase or decrease, but following which the price is likely to immediately return to about its previous level. The key question in this area is whether there appears to be any logical trading pattern to the security’s price and volume, or whether it seems erratic. Trading is manipulative if it is intended to move the price of the security.

8. Removal of Orders before Execution (SGX-ST Rule 13.8.2(8))

Where a proposed bid (offer) is higher (lower) than the previous bid (offer) but is to be removed from the market before it is executed, this could indicate that the order is not genuine, especially where a distinctive pattern of such orders is observed. Hence, it would be a breach of this Rule if, at the time the bid (offer) was made, the Trading Member or Trading Representative did not intend to buy (sell), but intended that the bid (offer) would not trade and would be cancelled. Sometimes, such order are entered to induce buyers (sellers) into the market to facilitate the filling of an order on the other side of the market.

9. Excessive Volume or Size (SGX-ST Rule 13.8.2(9))

Trading Member or Trading Representatives are not prohibited from trading significant volumes where there is a legitimate purpose for the transaction and it is executed in a proper manner. However, where the volume or size of the transaction is excessive relative to reasonable expectations of the depth and liquidity of the market at the time, this may indicate that the trading is done with the purpose of controlling the price of a security. If so, this would amount to manipulative trading.

10. Likelihood of Trading at Best Offer Volume / Next Price Level (SGX-ST Rule 13.8.2(10))

A Trading Member and Trading Representative should consider whether the proposed buy (sell) order is likely to trade with the entire best offer (bid) volume and part of the offer (bid) at the next price level. If a customer regularly buys (sells) on the up-tick (down-tick) in the face of consistent selling (buying) pressure, the Trading Member or Trading Representative should query whether the customer is a bona fide purchaser (seller). Repetitive orders to clear the best offer (bid) volume, particularly within a short time, suggest that the Trading Member or Trading Representative might be attempting to break the market. The trading spikes or troughs were meant to excite the market and attract spectators to join in. Such transaction would also be in breach of Section 198 of the SFA.

11. Series of Orders Affecting Consistency Price of Security (SGX-ST Rules 13.8.2(11))

A Trading Member and Trading Representative should consider whether the proposed buy (sell) order forms part of a series of orders that successively and consistently increase (decrease) the price of the security.

For example, if a customer places a sell order well above the best ask and one or more buy orders which would increase the price towards the customer’s ask price, a Trading Member or Trading Representative should query the customer as to the strategy. It may be that the buy orders are intended to get the price running and facilitate the sale at the higher price. Illiquid stocks, in particular, are susceptible to this type of improper trading. Such transactions would also be in breach of Section 198 of the SFA.

3.13 SGX Regulatory Tools to Uphold Fair, Orderly and Transparent Markets

SGX conducts rigorous surveillance of trading activities to detect any undesirable trading conduct and enforce the listing rules. The Exchange deploys its customised surveillance system that picks up unusual trading patterns and behaviour in individual counters real-time, throughout trading hours. Where necessary, Surveillance



analysts may contact Trading Members and Trading Representatives for further information on their trades and orders as well as their client details.

3.13.1 Public Query and Trade with Caution

When alerted, Surveillance analysts review company disclosures, macroeconomic factors as well as industry developments that could explain the trading activity.

When the trading activity cannot be explained, the Exchange may issue a query to the listed company. The aim of the query is to extract any yet-to-be announced material information from the listed company as well as alert investors of unusual trading activities. The query will be posted under the company’s name in the Company Announcements page on www.sgx.com.

Where a listed company queried by SGX replies that it is unaware of any reasons for the unusual trading activities in its security, SGX will issue a “Trade with Caution” announcement. This announcement from SGX reminds investors to be cautious when trading in that company’s security as the trading activity in that listed company’s security could be caused by market forces other than the corporate developments of the company. The “Trade with Caution” announcement will be posted under the Company’s name in the Company Announcements page on www.sgx.com.

For investors, the public query serves to raise awareness that trading activity in a particular counter is unusual. The incidences of query serve as real-time up-to-the-minute alert to the investors to trade with care.

3.13.2 Suspension or Restriction of Trading 31

Under SGX ST Rule 8.10.1, SGX-ST has the authority and power to suspend or restrict trading under certain circumstances, including in SGX-ST’s opinion, if the market is not orderly, informed or fair, or circumstances are about to occur that may result in there not being an orderly, informed or fair market.

In addition, SGX-ST may suspend or restrict trading in any or all listed or quoted securities:

1. When SGX-ST wishes to release information on an issuer which is market sensitive;

2. When it is of the opinion necessary in the public’s interest;

3. When an Issuer requests and SGX-ST agrees to the suspension;

4. When access to the Trading System is generally restricted;

5. When any of the circumstances describe in Rule 1303 of the SGX-Listing Manual occurs; and

6. When SGX-ST Rule 8.10A on Circuit Breakers apply under chapter 4;

7. When one or more of SGX-ST function are threatened to be severely or adversely affected by a physical emergency such as a fire, terrorist attacks, power failure, communication or complete malfunction of its systems.

No trading of the securities which are subject to a suspension must be executed unless specifically approved by SGX-ST.

SGX-ST may lift a suspension at any time and may also decide upon lifting of suspension allow for extra sessions of trading.

31SGX-ST Rule 8.10 – Suspension and Restriction of Trading

http://www.sgx.com/




An offence under SGX-ST Rule 8.10 is not compoundable and is subject to a mandatory minimum imposable penalty.

Example – Suspension or Restriction of Trading

Examples of SGX-ST suspended trading in securities are:

- Links Island Holdings Limited in 2000 - Blumont Group Limited 2013 - Asiasons Capital Ltd in 2013 - LionGold Corp Ltd in 2013

3.13.3 Designated Security 32

Designation of a security is used sparingly in exceptional cases in the opinion of the SGX-ST Board, there has been manipulation of a security, excessive speculation or if it is desirable in the interests of the market.

By declaring the quoted security as a designated security, SGX may imposes conditions for the trading as follows:

Requiring a Trading Member to obtain margins from each customer in respect of the customer’s dealing in the designated security

Restricting trading in the designated security by a Trading Member if its outstanding contracts in the designated security exceed 5% of the paid-up company whose securities are designated, or any percentage the Board may prescribe; or

Prohibit any sale unless the seller holds the Designated Security at the time of the sale with the CDP or can deliver the physical security and executed transfer forms to the Trading Member.

SGX-ST may also require the Trading Member to provide particulars on its trading of the designated securities including the particulars of the customer involved. The Trading Member must provide such requested information by the next business day.



Example – Designated Security

Examples of some designated securities by SGX-ST:

- Dayen Environmental Limited in 2002 - Jade Technologies in 2008 - Blumont Group Limited in 2013 - Asiasons Capital Ltd in 2013 - LionGold Corp Ltd in 2013

32SGX-ST Rule 8.8 – Designated Securities and Futures Contracts



3.13.4 Declaring a Corner 33

In extreme circumstances, if the Board is of the view that a single party or a group has acquired enough control over supply of a security to be able to dictate price for delivery, and it wishes to act in the interest of the general public, it may declare a corner on the security.

In making the declaration, the Board may impose conditions on:

delivery by extending the due date of delivery

declaring that contracts be cash settled (without delivery).

It may also impose cash settlement terms such as:

i. If a seller contracted to sell for less than the fair settlement price, he/she must pay the buyer the difference between the fair settlement price and the contract price.

ii. If a seller contracted to sell for more than the fair settlement price, the buyer must pay the seller the difference between the contract price and the fair settlement price.

iii. If a buyer contracted to buy for less than the fair settlement price, the seller must pay the buyer the difference between the fair settlement price and the contract price.

iv. If a buyer contracted to buy for more than the fair settlement price, the buyer must pay the seller the difference between the contract price and the fair settlement price.

A Settlement Committee has to be formed to determine the Fair Settlement Price to ensure independence. The composition of the Settlement Committee is to be decided by the Board who will recommend the fair settlement price to the Board who will accept the Settlement Committee’s recommendation unless there are reasons to reject. Once the Board accepts the recommendation of the Settlement Committee, the decision is binding on all parties.

Example – Declaring A Corner

SGX-ST had declared a corner situation on Links Island Holdings in 2000. This was in view of drastic increase in its share price having jumped nearly threefold in one and a half months. The shares of the company were found to have been ‘’cornered’’ by a group of investors – meaning they held stakes major enough to enable them to manipulate the share price.



33SGX-ST Rule 8.9 - Corner



3.14 Duty to Report Market Misconduct34

A Trading Member or Trading Representative has a duty to immediately report to SGX-ST if he reasonably suspects, or knows of, any attempted market manipulation, false trading or insider trading.



3.15 Penalties for Misconduct under the SFA

A CMS Licence Holder and its Representatives are duty bound to immediately report to SGX-ST of any suspicion of attempted market manipulation, false trading or insider trading.

Any contravention of the provisions of the market conduct rules will result, if found guilty, of:

Criminal penalties;

Civil penalties;

Civil sanctions, financial and reputation Loss; or

In the event of a suspension, or loss of licence.

3.15.1 Criminal Penalties35

Offences for market misconduct are criminal and carry heavy penalties, which include fines of up to SGD250,000 or imprisonment of 7 years or both.

3.15.2 Civil Penalties36

In addition to criminal penalties, if found guilty, the CMS Licence Holder or it Representative may also face civil action in which the offender may offer remedies and the Authority is empowered to bring an action in court resulting in the court imposing a civil penalty in place of the criminal penalty. Such civil penalty can be the higher of either the following sums:

a) A sum not exceeding 3 times the amount of profit the defendant has gained or the amount of loss that he has avoided, as a result of the contravention or

b) A sum equal to S $50,000 if he is not a corporation or S $100,000 if he is a corporation.

If the defendant is convicted or acquitted in the trial of the criminal proceedings brought against him, proceedings for a civil penalty will not be commenced. If there is a withdrawal of the charge against the defendant, the MAS is still in a position to commence its action against him. Likewise, should the civil penalty proceedings be concluded against a defendant whereby he is ordered to pay the civil penalty, no criminal proceedings shall be commenced. Similarly, ongoing civil penalty proceedings will be stayed should there be

34SGX-ST Rules 13.8.8 – Market Manipulation and False Market

35 SFA Section 204 – Penalties under this Division; SFA 220 - Not necessary to prove intention to use

35SFA Section 232 Civil Penalty



criminal proceedings commenced on the same set of facts against the defendant in the civil penalty proceedings37.

3.15.3 Civil Sanctions, Financial and Reputation Loss38

In addition to criminal action brought against the offender, or having to face civil penalties, the CMS Licence Holder or its Representative may face civil liabilities through legal action taken out against them for losses incurred by the market players due to their manipulative actions. Such action may require damages to be paid resulting in financial loss. But more painful will be the loss of reputation which may result in loss of customers, confidence in the firm and finally financial loss. And in more serious case, Trading Members may even have its licence suspended or revoked depending on the severity of the defective action and for its Representative, suspension, dismissal or de-register from the public register.

The person who may bring such a civil action is one who:

i. Had contemporaneously with the commission of the offence, entered into trades of the same description; and

ii. Had suffered market losses due to the effects of the offence

The person may recover the amount he lost subject to the following ceiling:

a. The amount of profit gained by the defendant; or b. The amount of loss avoided by the defendant.

In addition, the amounts recovered by other individuals from the defendant for similar claims will be deducted from the amount that may be recovered. In other words, the profit gained / loss avoided by the defendant will essentially be divided among those who suffered from his market misconduct.

If criminal proceedings or proceedings for a civil penalty are brought, the action for damages must be stayed pending resolution of these other proceedings .However, if these proceedings are successful, the civil claimants may piggy-back on the results of these proceedings subject to proving that they suffered a loss.

In practice, given the difficulties involved in bringing a claim, and the relative resources of the state compared to private individuals, in most cases, criminal proceedings or proceedings for a civil penalty will be brought first, with civil claimants relying on the results of these proceedings to recover their losses.

3.16 Penalties for Market Misconduct under the SGX-ST Rules

A breach of the SGX-ST Rules is punishable with disciplinary action by SGX-ST. Towards this end, the SGX-ST Rules empower SGX-ST to carry out investigations39, and to charge a Trading Member or Trading Representative before a Disciplinary Committee if the investigations reveal any breach of the Rules or directives issued by SGX-ST40.

37SFA Section 233 – Action under SFA 232 not to commence etc., in certain situations

37SFA Section 234 – Civil liability; SFA Section 235 – Action under section 234 not to commence, etc. in certain conditions; SFA Section 236 – Civil liability in event of conviction, etc.

39SGX-ST Rules 14.1.1 – Exchange Investigations

40SGX-ST Rules 14.3 – Disciplinary Action



A person who is charged is given an opportunity to present his case to the Disciplinary Committee whose procedures are governed by the Rules41. SGX-ST and the person charged may be represented by an advocate and solicitor42. If, after having considered the matter, the Disciplinary Committee finds that the charge has been proven, it may do any of the following43:

1. Expulsion;

2. Suspension;

3. Fine (which may be paid by instalments);

4. Impose restrictions or conditions on the activities that he undertakes;

5. Reprimand (publicly or privately);

6. Require an education to be undertaken;

7. Require specific compliance training;

8. Require reimbursement or compensation;

9. If he is a Director of a Trading Member, require him to step down from day-to-day conduct of the business affairs of the Trading Member; or

10. If he is a Manager, confirm, change or discharge his appointment as Manager.

The decision of the Disciplinary Committee may be appealed to an Appeals Committee, whose decision is final and binding44. It should be noted that once a person is charged, to ensure the protection of customers and the public, SGX-ST may suspend, or otherwise restrict the activities of a Trading Member, an Approved Executive Director or a Trading Representative if the person is charged45:

1. An offence under the SFA or Securities and Futures Regulations;

2. An offence involving fraud or dishonestly, whether in or out of Singapore

3. An offence relating to director’s duties; or

4. An offence under any relevant law or regulation which governs that person’s other business activities.

Penalties - SGX-ST Rules 14.1, 14.2, 14.6, 14.9, & 14.12

Offences under the above SGX-ST rules are not compoundable and are subject to a mandatory minimum imposable penalty.

41SGX-ST Rules 14.6 – Disciplinary Committee Proceedings

42SGX-ST Rules 14.9 – Appeals Proceedings

43SGX-ST Rules 14.5 – Disciplinary Committee Powers

44SGX-ST Rules 14.8 – Appeals

45SGX-ST Rule 14.12 – Interim Powers of SGX-ST

Chapter 4 – The Trading System and Infrastructure | 96


Chapter 4: The Trading System and Infrastructure

Learning Objectives

The candidate should be able to:

Securities Trading Infrastructure

✓ Understand the trading infrastructure that SGX provides to its members companies.

✓ Know the responsibilities of the member companies with respect to allowing automated order processing.

✓ Know the principal means for member companies to ensure that orders submitted to the Exchange can comply with the regulatory requirements.

✓ Understand the trading system for the automatic matching of orders designated and approved by SGX-ST for the transactions on SGX-ST.

✓ Know the securities products traded on SGX.

Trading Mechanics

✓ Know the Trading hours on SGX-ST and its different market phases.

✓ Know the minimum bid sizes for shares of various prices.

✓ Be able to differentiate “cum” basis from “ex” basis of securities.

✓ Know the concepts of “zero” and “99999” account code.

✓ Know how contracts can be cancelled and how error occurs.

✓ Know the factors SGX-ST may consider when deciding whether to cancel an error trade.

✓ Know the conditions under which a Trading Member may execute Direct Business.

✓ Know the circumstances for suspension on restriction of trading and trading halts.

Settlement

✓ Know the mode of delivery and settlement for trades in eligible securities.

✓ Be familiar with the time table for settlement of trades.

✓ Be aware of SGX-ST's powers in respect of access to foreign markets.

✓ Know the obligations of a Trading Member when accessing a Foreign Market via the Exchange Link to trade in Selected Foreign Securities.

✓ Know the core trading principles of trading selected foreign securities via the Exchange Link.

97 | Chapter 4 - The Trading System and Infrastructure


4.1 Introduction

Securities which are listed or quoted on SGX-ST must be traded through the SGX trading system1. The trading engine that is operated by SGX on its securities trading platform is called QUEST-ST (SGX Quotation and Execution System). A Trading Member must ensure that its system and connections to the SGX trading system operate properly, and have adequate and scalable capacity to accommodate trading volume levels2.

This chapter covers rules on:

• Market access and connectivity

• Risk management and order processing

• Settlement procedures

4.1.1 Market Access and Connectivity

SGX provides a sound and efficient trading infrastructure that enables Trading Members easy and reliable access into its securities market. Market participants and investors may choose a variety of ways to access the market. The trading infrastructure of SGX-ST allows member firms to choose from a variety of front-end order management system (OMS) to execute orders and receive market data. These OMSs are provided by Trading Members, brokers and independent software vendors.

4.1.2 Connectivity Options to Quest

1. Direct Market Access (DMA)

Trading Members may link their OMS directly to the SGX-ST trading system by interfacing the Member’s OMS system to the SGXAccess FIX Controller which is owned and supported by SGX-ST. The SGXAccess FIX Controller is configured to route orders and provide market information.

The OMS system allows a Trading Member to configure credit control limits, risk management features, trade prevention and alerts requirements according to their own internal policies and procedures whilst allowing the interface for direct access to flow orders and market information to and from SGX-ST via SGXAccess. Before such interfaces are done, SGX requires the Trading Member’s OMS system to undergo a conformance and assessment test for compatibility, stability and security to ensure adequacy of systems and connections to the SGX trading system.

A Trading Member may authorise DMA for its customers in respect of markets established by or operated by SGX-ST or such markets as SGX-ST specifies3.

Figure 4.1.2 (1) - Direct Market Access

1 SGX-ST Rule 8.1 - Trading

2 SGX-ST Rule 4.6.22 - Adequacy of Systems

3 SGX-ST Rule 4.5A.1 - Direct Market Access

Customer Trading

Member

QUEST-ST

Order Flow

Order Flow



For every customer that a Trading Member authorises DMA for, the Trading Member must have measures in place for each customer to4:

1. Meet minimum standards including standards on financial standing, credit history and criminal records, adverse records or pending court proceedings relating to prohibited market conduct;

2. Have appropriate procedures in place to assure that all relevant persons:

(a) Are familiar with and comply with SGX-ST rules on DMA;

(b) Have knowledge and proficiency in the use of the order management system;

(c) Be provided information concerning its access to the Trading System and applicable laws:

(d) Be subject to a legally binding agreement governing the terms and conditions for such DMA;

(e) Have security arrangements in place to ensure that unauthorised persons are denied such DMA; and

(f) Assist SGX-ST in any investigation into potential violations of these Rules and applicable laws. Such assistance shall be timely and shall include, but is not limited to, the provision of information to SGX-ST relating to the identity and address of any person who may be responsible for the execution of an order or trade.

Where a Member permits its customer to delegate the DMA it has been granted to other persons, the agreement with the customers must ensure that all persons with DMA are subject to the above requirements.

SGX-ST may require a Trading Member to provide to it with a report by an independent reviewer on the Member's compliance with the above requirements.

Penalties

SGX-ST Rule 4.5A.2(1)(a) to SGX-ST Rule 4.5A.2(1)(d) and SGX-ST Rule 4.5A.2(2)

Offences under the above rules may be compounded with a fine. The penalty will be dependent on factors such as the number of prior violations, and whether the offender is a Trading Member or Approved Executive Director.

SGX-ST Rule 4.5A.2(3)


SGX-ST Rule 4.5A.2(1)(e) & SGX-ST Rule 4.5A.2(1)(f)

Offences under the above rules are not compoundable and is subject to a mandatory minimum imposable penalty.

2. Sponsored Access

In addition to giving Trading Members access to the securities market, the OMS system can also be configured to connect the Trading Members’ clients to SGX market from any global location. This is known as Sponsored Access and is usually offered by Trading Members to customers who are market makers and high frequency traders who need very quick access to Quest-ST.

With SGX Access, all orders will then be routed to Quest-ST for matching of trades.

4 SGX-ST Rule 4.5A.2 - Conditions Governing Direct Market Access



Figure 4.1.2 (2) - Sponsored Access

Automated order processing through direct access is the process of routing orders through to SGX-ST without the intervention of a Trading Representative. Therefore if a Trading Member sponsors a person for direct access, its OMS must be able to intercept the requests and validate them before they are routed to Quest–ST for execution. Errors can be destabilising to the market and can cause financial loss if not intercepted early.

Example:

In 2007, a trader at a bank mistakenly sent an order to sell 300,000 shares at a price of 1 JPY, when he had intended to sell 1 share at a price of 300,000 JPY. With no alerts in place, the order was sent to the exchange, triggering a wave of selling and stop-loss orders, adding to the selling pressure in the market.

The incident caused confusion in the markets and resulted in financial losses incurred by multiple parties as a result of panic selling. The case reinforces the need for system adequacy and robust internal control measures to be implemented by Trading Members when Direct Market Access is granted to provide flexibility and convenience to clients.

For every customer that a Trading Member authorised Sponsored Access for, Trading Members must5:

i. Maintain a register which records the identity and address of all customers with Sponsored Access, which has be to maintained in the manner prescribed by SGX-ST6 and produce the register to SGX when requested,

ii. Have measures in place for each customer to comply with the SGX-ST rules relating to OMS.

iii. Sponsored Access participants must be persons regulated by a recognised regulatory authority for regulated activities.

iv. Have legally binding agreement with security arrangement in place.

v. Provide customer education on responsibilities and compliance with regulations; and

vi. Agreement to assist in any investigation into potential conflicts.

A “recognised regulatory authority” refers to a signatory to the International Organization of Securities Commissions’ Multilateral Memorandum of Understanding Concerning Consultation and Co-operation of the Exchange of Information” and “regulated activity” has the same meaning as defined in the SFA.

Penalties

SGX-ST Rule 4.5A.3(1)(a), 4.5A.3(1)(c), 4.5A.3(2)(a), 4.5A.3(2)(b)

Offences under the above rules may be compounded with a fine. The penalty will depend on factors such as the number of prior violations, and whether the offender is a Trading Member or Approved Executive Director.

5 SGX-ST Rule 4.5A.3 - Conditions Governing Sponsored Access

6 SGX-ST Rule 4.5A.3(1)(c) - Conditions Governing Sponsored Access

Customer

Member

QUEST-ST

Order Flow



Penalties

SGX-ST Rule 4.5A.3(1)(b)


4.1.3 Suspension and Termination of Direct Access7

SGX-ST may suspend or terminate, or direct a Trading Member to suspend or terminate a person’s Direct Market Access if:

• The person fails to assist SGX-ST with any investigation into potential violations of SGX-ST rules governing Direct Market Access and applicable laws;;

• If it is in the interest of a fair, orderly and transparent market; or

• The person has caused the Trading Member to breach requirements in the SGX-ST Rules.

A Trading Member must have the ability to immediately suspend or terminate a customer’s Direct Market Access when necessary for the fulfilment of its duties under SGX-ST Rule 4.6.48 or any other reason.

Penalties - SGX-ST Rule 4.5A.4


4.2 SGX Securities Products

SGX’s securities products are traded on an electronic screen-based system, and include the following:

• Bonds, Debentures and Loan Stocks • Business Trusts • Equities • Exchange Traded Funds (ETFs) • Global Depository Receipts (GDRs) • Real Estate Investment Trusts (REITs) • Warrants

4.3 Risk Management and Order Processing

A Trading Member must establish and maintain adequate internal control systems for securities traded on SGX-ST9 and have written policies and procedures on risk management controls and demonstrate compliance in the following areas10:

1. Monitoring the credit risks arising from the acceptance of all orders on at least a daily basis;

7 SGX-ST Rule 4.5A.4 - Suspension and Termination of Direct Access

8 SGX-ST Rule 4.6.4 Obligations of a Trading Member – Good Business Practice

9 SGX-ST Rule 4.6.7 (2) - Establish Procedures and Systems

10 SGX-ST Rule 4.6.7A - Risk Management and Financial Controls



2. Ensuring that:

i. Automated pre-execution risk management control checks are conducted on all orders, including credit control checks on all orders;

ii. There are appropriate internal controls for the setting and modification of any parameters of such automated pre-execution risk management control checks;

3. Having error-prevention alerts to bring attention to possible erroneous entries of quantity, price and other data fields; and

4. Defining and managing the Trading Member’s sources of liquidity to ensure that there are sufficient liquidity facilities to meet settlement obligations.

A Trading Member must have automated processes in place to monitor at the firm level if the Trading Member is at risk of breaching capital and financial requirements and prudential limits on exposures to a single customer and a single security, so as to restrict trading activity or inject additional capital if necessary.

4.3.1 Pre-Execution Checks

In order to manage risk in Quest-ST, all orders must be subject to pre-execution checks11. These checks, including credit checks, are to be performed on every customer order to prevent overtrading. The parameters of pre-execution checks and filters may include but are not limited to:

i. Dollar limit to control the gross buy and sell value and/or net buy/sell value. This limit may be applied to an individual customer, a Trading Representative, a group of related accounts or a proprietary account;

ii. Security limit to control the dollar/quantity exposure to each security. This limit may be used to control concentration risk for each customer and for the Trading Member’s accounts as a whole on a per-security basis;

iii. Dollar/quantity limit and price limit for each order. This allows for the detection of errors in inputting orders. For example, if a customer or Trading Representative were to enter an unusually large sized order or an order at a price that is far from the prevailing price, they could be alerted for confirmation of the order before it is accepted by the system;

iv. Controls to restrict customers to selected markets, order types and securities.

Pre-execution risk management control functions may include the following:

i. The ability to adjust credit or quantity limits in real time during a trading session;

ii. The ability to set permission levels (e.g. access to selected products/instruments) and revoke the access of a Trading Representative or customer on a real time basis; and

iii. The ability to intercept orders that exceed credit or trading limits on a real-time basis and trigger error-prevention alerts.

Trading Members who authorise Sponsored Access will be able to meet the requirements of SGX-ST Rule on Pre-Execution Checks by being able to directly set and control pre-determined automated limits in the Sponsored Access customer’s system, having automated alerts whenever such limits are altered, and by conducting regular post-execution reviews of trades. Trading Members should assess and continue to ensure that the pre-execution risk management control checks are robust on an ongoing basis.

11 SGX-ST Practice Note 4.6.7A(1)(b) – Pre-Execution Checks



4.3.2 Error Prevention

SGX-ST Rule 4.6.7A(1)(c) requires Trading Members to have error-prevention alerts to bring attention to possible erroneous trade entries.

The types of error-prevention alerts to be made available may include but are not limited to the following12:

i. Maximum quantity per order to alert Trading Representatives and customers of possible erroneous entries in relation to quantity; and

ii. Price alerts to alert Trading Representatives and customers of possible erroneous entries in relation to price.

Price alerts may include but are not limited to price range checks to alert Trading Representatives and customers when the new order entry price has exceeded:

i. A certain percentage; or

ii. A certain number of ticks, as compared to the most recent of the last traded price, the previous settlement price, the closing price or the opening price, as the case may be.

Penalties - SGX Rule 4.6.7A(1)(c)

An offence under SGX-ST Rule 4.6.7A(1)(c) may be compounded with a fine. The penalty will depend on factors such as the number of prior violations, and whether the offender is a Trading Member or Approved Executive Director.

4.4 Trading Mechanics

4.4.1 Trading13

A security or futures contract listed or quoted on SGX-ST must be traded through the Trading System or as otherwise allowed under SGX-ST Rules

Penalties - SGX Rule 8.1.1

An offence under SGX-ST Rule 8.1.1 may be compounded with a fine. The penalty will be dependent on factors such as the number of prior violations, and whether the offender is a Trading Member, Approved Executive Director or Trading Representative.

4.4.2 Trading Hours and Market Phases14

A security listed or quoted on SGX-ST must be traded through the Trading System, SGX Reach. The trading hours and market phases are divided into the following:

12 SGX-ST Practice Note 4.6.7A(1)(c) - Error Prevention

13 SGX-ST Rule 8.1.1 - Trading

14 SGX-ST Rule 8.2.1 & 8.2.2 – Trading Hours; SGX Practice Note 8.2.1 - Application of Market Phases and Algorithm



Market Phase Start End

Pre-Open 8.30 am 8.58 - 8.59 am

Non-Cancel 8.58 – 8.59 am 9.00 am

Open 9.00 am 5.00 pm

Pre-Close 5.00 pm 5.04 - 5.05 pm

Non-Cancel 5.04 – 5.05 pm 5.06 pm

• Pre-Open/Pre-Close - This phase allows for order entry, reduction in order size and withdrawal of orders but no matching of orders.

• Non-cancel – As the name implies, no order entry and amendments are allowed in this phase. All existing orders are matched at a single price according to the algorithm set by SGX-ST. All unmatched orders, except at the close of trading are carried out in the next phase.

• Trading – This phase allows for order entry, reduction in order size and withdrawal of orders. All orders are matched in accordance with price priority, subject to SGX-ST Rule 8.10A of Circuit Breakers and Cooling Off Periods (refer to Section 4.4.10), followed by time priority.

• Closing – The closing routine is a 6-minute session after trading stops. It comprises the Pre-Close Phase and the non-Cancel Phase. All unmatched orders are carried forward to the Closing Routine. This routine is designed to reduce the risk of manipulating closing prices with a single transaction at an unusually high or low price, just before the trading session ends.

• Adjust – An adjust phase operates upon the lifting of a suspension and during a trading halt. This phase allows order entry, reduction in order size and withdrawal of orders. At the end of this phase, orders will be matched at a single price based on the algorithm set by SGX-ST. All unmatched orders will be carried over to the next phase15.

4.4.3 Continuous All-Day Trading

SGX introduced Continuous All-Day Trading (CAT) in 2011. This allows one to trade on SGX during lunch period, between 12:30 pm and 2 pm. SGX trading hours will overlap those of other Asian exchanges, allowing investors in pan-Asian securities to respond to news flow in the home markets and provide for greater convenience.

When trading between 12:30 pm and 2 pm, Trading Representative may be away from the desk and news screen. In such circumstances, Trading Members will apply arrangements as follows:

• The use of central dealing desks, where the Trading Representatives may channel customers’ orders to central dealers for order execution;

• The appointment of a back-up Trading Representative to handle customers’ orders when the primary Trading Representative is away from office;

• The use of mobile technology or hand-held equipment by the Trading Representative to execute customers’ orders while he/she is outside the Trading Member’s office premises.

As a Trading Representative, the level of service may be affected, as relaying customers’ orders to the market may take a little longer than usual. In addition, the response by Trading Representative to customers’ questions may be less timely. The Trading Representative is encouraged to discuss order execution and management with the customer. As any resting, unmatched orders queuing in the trading system may be matched throughout the day including the period between 12:30 pm to 2 pm, customers should be reminded to monitor the status of orders given to the Trading Representative and the developments of the market all day.

15 SGX Practice Note 8.2.2 – Procedures for Contingency Order Withdrawal



A Trading Member must inform all customers that Trading Representatives are operating away from its office premises and of any resulting limitations that might affect customer service.

4.4.4 Trading Algorithms16

The methodology for computing the single price at which orders at the end of the Opening Routine, Closing Routine and Adjust Phase are matched (“Equilibrium Price”) is as follows:

• The Equilibrium Price is the price that has the largest volume and the lowest imbalance. “Imbalance” refers to the net difference between the cumulative bid volume and cumulative ask volume.

• If the highest tradable volume occurs at more than one price, the Equilibrium Price is the price with the lowest imbalance.

• If market orders are present and the market order volume on one side exceeds the cumulative order volume on the opposite side there would be a Market Order Surplus. This means that the lowest imbalance occurs at “Market Price”. In this situation, one tick will be added on the side with the Market Order Surplus and that would be the Equilibrium.

• If the highest tradable volume and the lowest imbalance occurs at more than one price (“the price overlaps”), the Equilibrium Price is determined by market pressure:

(a) with only buy pressure within the price overlap, the Equilibrium Price is the highest price within the price overlap; or

(b) with only sell pressure within the price overlap, the Equilibrium Price is the lowest price within the price overlap.

• If the highest tradable volume and lowest imbalance occur at more than one price and there is both buy and sell pressure or nil pressure within the price overlap, the Equilibrium Price is:

(a) the price within the price overlap that is closest to the last traded price; or

(b) where there is no last traded price, the lowest price within the price overlap.

4.4.5 Order Types and Order Validities

1. Order Types

Order types available in SGX Reach include:

• Limit Orders

• Market Orders

• Market-to-Limit Orders

• Session State Orders

• Price Triggered Orders – Stop Orders and If-Touched Orders.

2. Order Validities

There are 2 main execution orders for orders executed on SGX Reach. They are “Fill or Kill” (FOK), where the order is matched in entire quantity or completely cancelled. There is no partial fill, and the order is not stored in the order book. The other is “Fill and Kill” (FAK), where the order is matched with as much quantity as possible and the unmatched quantity is cancelled. The order is not stored in the order book.

16 SGX ST Practice Note 8.2.1 – Application of Market Phases and Algorithm



SGX Reach offers the following time-in-force validities:

• Day order – The order is valid only on the day the order is entered into the order book. If it is not matched, it will be removed from the order book at the end of the trading day.

• Long dated order – The order is valid in the order book for a specific period of time. It stays in the order book until it is fully filled, specifically cancelled, or the instrument is de-listed or expired. Long dated orders on SGX are valid for up to maximum of 30 days.

Long dated orders include Good-Till-Date (GTD) and Good-Till-Maximum (GTM). GTD order will come with a date the order will expire, subject to a date that is within 40 days from the day the order is placed. GTM orders will sit in the order book for 30 days.

Investors who intend to use long dated orders should note that as the order is left on the order book for a period of time, market conditions could change and the order may become unfavourable. The order may incur more transaction cost id the order is partially filled each day and commissions are charged on each day that an execution occurs. In addition, long dated orders will be purged when there are corporate actions in the stock/units or when the validity of the order expires.

3. Limit Orders

A limit order is an order which is entered into the order book with both the price, maximum buy price or minimum sell price, and quantity that a buyer or seller is willing to trade at. The behaviour of the limit order is dependent on the time validity selected.

Investors who wish to minimise slippage can choose limit orders as such orders are used to buy at or below the prevailing market price or to sell at or above the prevailing market price. However, investors using limit orders have no guarantee that the order will be filled.

4. Market Orders

A market order is an order which is entered into the order book with a specified quantity but without a price. It is purely volume-based and has no target price. It is an instruction to trade at the best price currently available in the market.

A market order prioritises execution over all other factors. It will trade through the order book to match the specified quantity. That is, one market order can match with opposite orders of different price levels of the order book until the entire market order volume is filled.

The main advantage of a market order is that the transaction is completed immediately. If an investor sees a good price, the best way to secure a trade is to place a market order as it has priority over the limit orders. This allows investors to take advantage of price swings as they happen.

Investors who intend to use market orders must note the following:

• There is no guarantee that an order will be filled at a target price. That is, a buy order could be filled at a much higher price than intended, or a sell order can be filled at a much lower price than intended.

• Using market orders during a volatile market is not recommended as there is a higher probability that the prices will change quickly. Hence, the incidence of ‘slippage’ is higher in fast-moving markets or for illiquid securities with thin order book and wide bid-ask spread.

• The order may be split across multiple investors on the other side of the transaction, resulting in different prices for the order.



5. Market-to-Limit Order

A market-to-limit order is an order which is entered into the order book with a quantity but without a price, just like a market order. However, it will only match at the current best bid or ask price and not trade through the order book. If the order is only partially filled after matching at the current best price, the remainder is submitted as a limit at the same price that the earlier match occurred.

Investors can consider market-to-limit orders instead of market order as such orders benefit them by ensuring execution for at least a portion of the order at one price while avoiding the risk of the rest of the order getting filled at too high a price.

6. Session State Orders

A session state order is an instruction to place an order into an order book at a specific session state (SSO) of a trading day. A SSO is not visible to the rest of the market before it is being triggered. Session state orders that are not activated by the end of the trading day will be automatically deleted from the system.

SSOs allow investors to prepare their orders in advance of session state changes. Investors can specify the session in which to trigger their orders. SSOs improve order management as investors are able to prepare their orders at Pre-Open to set it to trigger at Open. This will ensure that their orders are entered on time for Market Open. In addition, placing a session state order at any time during continuous trading to be triggered at the closing routine allows investors to ensure that their orders will be inserted into the closing auction.

7. Price Triggered Orders

Price Triggered Orders allow market participants to buy or sell an instrument when the trigger price condition is reached. Reach ST offers 2 types of Price Triggered Orders (PTOs), namely, Stop Orders and If-Touched Orders.

A Stop Order is an instruction containing a target price and volume that will be converted into an actual order in the order book once the target price is met. A stop order can either be a stop limit order or a stop market order, which will determine the nature of the actual order created once the trigger condition is met. Once activated, the stop market order will be treated the same as a regular market order and the stop limit order will be treated as a regular limit order.

Stop orders are used when an investor wants to execute an order at a specific price, but the market is not currently trading at that price. They are useful for breakout trades where an investor wants his order executed only if the market trades past a particular price. Stop orders can be used to:

i. Minimise a loss or protect a profit on an existing long or short position

Stop orders are generally used as protection against runaway prices. For instance, in a falling market, an investor who is long a particular counter may want to enter a stop sell order which will likely limit the losses faced as a result of such decline. Similarly, in a rising market, an investor who is short a particular counter may enter a stop buy order to limit the losses faced in covering the short position.

ii. Initiate a new long or short position

Stop orders benefit investors by allowing them to trade without having to constantly monitor market movements. It is particularly of use in fast-moving markets, where investors may not be able to react quickly enough to limit losses arising from trading positions.

Investors intending to use stop orders must note the following:

• The stop price may be activated by a short-term fluctuation in a stock's price.



• For stop market orders, once the stop price is reached, the stop order becomes a market order and the transacted price may be quite different from the stop price, especially in a fast-moving market or in a cascading price scenario where stock prices can change rapidly.

• It is possible to avoid the risk of a stop market order not guaranteeing a specific price by placing a stop-limit order.

An if-touched order is largely similar to a stop order. It is also an instruction containing a target price and volume that will be converted into an actual order in the order book once the target price is met. An if-touched order can either be a limit-if-touched order or a market-if-touched order, which will determine the nature of the actual order created once the trigger condition is met.

Market-if-touched order benefits investors by providing the flexibility to buy and sell at specific price levels without investors having to constantly monitor market movements. It is particularly of use in fast-moving markets, when investors may not be able to react in time to take advantage of buying or selling opportunities.

The difference between a stop order and an if-touched order is that a stop order is typically used as a loss-limiting mechanism in respect of open positions, while an if-touched order is used to create new positions in anticipation of a particular reversing trend. In a falling market, an investor may want to enter the market at a favourable price should the market rebound. Similarly, in a rising market, an investor may want to enter into a short position should the price begin to fall.

Investors intending to use if-touched orders must note the following:

• The trigger price may be activated by a short-term fluctuation in a stock's price.

• For if-touched market orders, once the trigger price is reached, the order becomes a market order and the transacted price may be quite different from the intended price, especially in a fast-moving market or in a cascading price scenario where stock prices can change rapidly.

• It is possible to avoid the risk of an if-touched market order not guaranteeing a specific price by placing an if-touched limit order. However, with limit order the rest of the unfilled order may not be executed if the price moves beyond the limit price.

Investors must take note that once the market-if-touched order is triggered, the order will be injected into the order book as a market order which comes with the associated risk of a market order. The use of a limit-if-touched order may reduce the risk of being filled at a too unfavourable price when the order is triggered.

4.4.6 Orders17

The minimum order size is 1 board lot on SGX-ST except for the unit share market. Orders may be in multiples of a board lot. An order for the unit share market may be matched in any quantity of less than 1 board lot.

SGX-ST prescribes the minimum bid size and force order range for shares, rights, options and other securities as follows:

Security Type Price Range (SGD) Price Steps No of counters

(%) Forced Order Range

Below $0.20 0.1 cent 46% +/- 20 ticks

$0.20 to below $1.00 0.5 cent 38%

17 SGX-ST Rule 8.3 — Orders



Equities, equity derivatives (e.g. structured warrants). Excludes ETFs, bonds and debentures.

$1 to below $2 0.5 cent 7%

$2 to below $10 1 cent 7%

$10 and above 1 cent 2%

Price Range (S$) Bid Size (S$) Forced Orders (Bids)

All (Excludes Singapore Government Bonds) 0.01 or 0.001 as

determined by SGX-ST +/- 30

Singapore Government Bonds (SGS bonds) 0.001 +/- 1000

Products Hong Kong Dollar Minimum Bids Schedule

Price Range (HK$) Bid Size (HK$) Forced Orders (Bids)

Securities denominated in Hong Kong Dollar

Below 0.25 0.001

+/- 10

0.25 - 0.495 0.005

0.50 - 9.99 0.01

10.00 - 19.98 0.02

20.00 - 99.95 0.05

100 - 199.90 0.10

200 - 499.80 0.20

500 and above 0.50

Products Japanese Yen Minimum Bids Schedule

Price Range (JPY) Bid Size (JPY) Forced Orders (Bids)

Securities denominated in Japanese Yen

Below 2,000 1

+/- 10

2,000 - 2,995 5

3,000 - 29,990 10

30,000 - 49,950 50

50,000 - 99,900 100

100,000 and above 1,000

Force Order Range is a pre-execution mechanism which helps investors to avoid error trades when entering prices of orders. Any orders outside the Force Order Range must be confirmed by the use of the Forced Key function before those orders can be submitted. The Force Key function is intended to complement, and not replace, Member’s responsibility to adopt adequate and appropriate measures and practices to safeguard against the execution of error trades. 18

Each order entered into the Trading System must specify the customer account code, and the price and quantity of the security contract. Each entered order is given a unique order number by the Trading System.

A “zero” account code may be used if the trading Member has not allocated an account code for a new customer. A “99999” account code may be used if the Trading Member has not allocated an account code to a new foreign customer. Amendment of trade from “zero” or “99999” account to a customer account must be made as soon as an account code is allocated to the customers and is in accordance with SGX-ST Rule 12.8.19

18 SGX ST Practice Note 8.6 – Application of Forced Order Range

19 SGX-ST Rule 12.8 - Amendment of Contract



Penalties - SGX–ST Rule 8.3 - Orders

An offence under SGX-ST Rule 8.3 may be compounded with a fine. The penalty will be dependent on factors such as the number of prior violations, and whether the offender is a Trading Member or Approved Executive Director.

4.4.7 Trading Basis20

Unless otherwise stated, trading of securities is on a “cum” basis.

“Cum” means that the security is quoted with entitlements such as dividends, rights, etc. which are reflected in the price. “Ex” basis, on the other hand, means that the security is quoted without the said entitlements being imputed into the price.

All securities designated by CDP as eligible for clearance or settlement on a book entry basis will be traded on an “ex” basis for 3 market days before and up to the book closing date for an entitlement. All other securities will be traded on an “ex” basis 5 market days (if there is a branch in Singapore) or 7 market days before and up to the book closing date for an entitlement.

A buyer of securities on an ‘ex’ basis has no right to the entitlement to the security. The seller of securities on a “cum” basis has no right to the entitlement to the security. The buyer of a securities on a “cum” basis has the rights to the entitlement and if not received may claim that entitlement from the seller. And similarly if a seller had sold on an ex-basis may claim the entitlement from the buyer.

4.4.8 Inviolability of Contracts21

SGX-ST may in its discretion cancel a contract in any of the following circumstances:

• The Trading Members who enter into an error trade have agreed to the cancellation;

• If a material mistake has led to the error trade and SGX-ST is satisfied that the trade should be cancelled;

• There is clear evidence of fraud or wilful misrepresentation in relation to the contract; or

• In SGX-ST’s opinion, it is desirable to cancel the contract to protect the financial integrity, reputation or interests of the markets established or operated by SGX-ST.

Note: A contract will not be cancelled just because there is:

(a) A failed delivery; (b) Payment is not made on delivery; or (c) The share registrar refused to register a transfer.

In cancelling a contract SGX-ST may impose conditions, reprimand or fine a Trading Representative or Trading Member who causes the cancellation. SGX-ST may take any other action it deems fit for the Trading Member or Trading Representative to comply with SGX-ST Rule 8.5.

20 SGX-ST Rule 8.4 – Trading Basis of Securities

21 SGX-ST Rule 8.5 - Inviolability of Contracts



4.4.9 Errors22

Errors do occur during trading hours but it is the duty of the Trading Member and its Trading Representatives to exercise caution when executing a trade into the Trading System to avoid unnecessary disruption in the trading process.

Investors who intend to use Price Triggered Orders (PTOs) must also note the interaction between error trade policy and PTOs. For instance, investors must note that if they are using PTOs such as stop orders to cut losses, they may end up cutting losses at inopportune time if their orders are triggered wrongly by an error trade.

In the event that a PTO is triggered due to an error trade and it resulted in a trade, this trade may be considered as an error trade too. The prevailing procedures for reviewing and cancelling these error trades will apply, i.e. if parties cannot agree to mutual cancellation, either party to the triggered trade may refer it to the SGX for review within the stipulated timelines. SGX will only review error trades referred to it for review and only error trades outside of No-Cancellation Range. In its review, SGX will consider the factors set out in its new error trade policy in determining if the triggered trade should be cancelled.

An error trade refers to a transaction effected on the Trading System as follows:

• As a result of an error in the volume of an order input

• As a result of an error in the price of an order input or

• Where SGX deems the transaction to be an error trade.

When an error trade occurs, the Trading Member which makes the mistake must do the following:

i. Immediately contact its counterparty to the trade and seek its agreement to cancel the trade.

ii. Both Trading Members must immediately take all necessary action to minimise any potential impact to the market caused by the error trade

iii. Both Trading Members must inform SGX-ST of the error:

(a) by telephone within 30 minutes from the time the error occurred; and

(b) in writing on the same day the error trade occurred. Written notification to SGX-ST must include details of the security such as name, price, volume, trade number and time of the error. The Trading Member that made the mistake must also provide the reasons for the error.

If the Trading Members cannot agree to the cancellation of an error trade, a Trading Member may escalate the matter to SGX-ST for review of the error trade under SGX-ST Rule 8.6.3 by applying the following procedures:

1. Refer the matter to SGX-ST within 60 minutes from the time the error trade occurred or before 18.00 hour on that trading day whichever is earlier; and

2. The requesting Trading Member must inform the counterparty Trading Member that it has referred the matter to SGX-ST.

SGX-ST may in its discretion allow such extension of time for the submission of information or requests for error review, taking into account the following:

• The number of error trades referred to SGX-ST as per SGX-ST Rule 8.6.3;

• The complexity of the circumstances surrounding the error trade; and

• Any other factors which SGX-ST considers relevant.

22 SGX-ST Rule 8.6 - Errors



For avoidance of doubt, a self-matched trade, which occurs when a buy or a sell order entered or the same account are matched, is not considered to be an error trade by SGX. Self-matched trades do not involve a change in beneficial ownership. They are wash sales if they are executed for reasons such as to extend the settlement period of a transaction, to affect the price of the security or to give a false impression of investor interest in the security. Hence, SGX-ST will not cancel self-matched trades.

1. Note on No-Cancellation

In SGX-ST Rule 8.6.4, SGX-ST will not review an error trade if the error in question falls at or within the upper and lower limits of a non-cancellation range applied in Rule 8.6.4A.

No cancellation range will be applied to the following instruments in SGX-ST Rule 8.6.4A:

• Structured warrants; and

• All other securities and futures contracts excluding bonds.

SGX-ST retains the discretion to apply or remove no-cancellation ranges from instruments listed on SGX-ST.

2. Fees

The Trading Member that requests for a review of error trade must pay a fee of $1,000 for each referral regardless of the outcome of the review. SGX may grant a waiver of the trade review fee where it deems it appropriate.

3. Review of Error Trades by SGX-ST

SGX-ST may review the validity of any transaction and may agree to a cancellation if it deems that the cancellation of the error trade is necessary for the proper maintenance of a fair and orderly market. In reviewing the error trade, SGX-ST takes into account the following factors23:

i. The difference between the price at which the error trade was done and the preceding traded price of the security;

ii. The market liquidity in the security at the time the trade error occurred;

iii. The trade involves a futures contract, the trading behaviour of the underlying security;

iv. The monetary loss involved if the trade is or is not cancelled24;

v. The difference between the time the erroneous order was entered and the time it was matched;

vi. The number of counterparty customers involved;

vii. Whether the force key was used when entering the erroneous order into the trading system;

viii. The impact on the settlement process;

ix. In the case of bonds, the rating, interest rate, coupon rate, maturity date and yield curve;

x. The reason(s) for the error; and

xi. Any other factors which SGX-ST considers relevant.

Error trades in securities excluding bonds will be reviewed in accordance with the following rules25:

23 SGX-ST Rule 8.6.12 – Error Trade (review factors)

24 SGX-ST Practice Note 8.6.12(4) – Computation of Monetary Loss

25 SGX-ST Rule 8.6.13A – Error Trades



i. The no-cancellation range for the security is determined as the wider of the following26:

(a) A lower limit of 20 minimum bid sizes less than the Reference Price, and an upper limit of 20 minimum bid sizes higher than the Reference Price; or

(b) A lower limit of 95% of the Reference price and an upper limit of 105% of the Reference Price.

ii. The Reference Price for no-cancellation range for the security will be price of the last good trade.

iii. The SGX-ST may use an alternative price as the Reference Price for the no-cancellation if:

(a) The price of the last good trade is not available; or

(b) SGX-ST deems the price of the last good trade to be unreliable or inappropriate as a Reference Price.

iv. Where SGX-ST is of the view that no appropriate or reliable Reference Price is available it will not establish a no-cancellation range for any error trade.

v. Upon receiving a request to review an error trade involving a security, SGX-ST will consider the validity of the error trade and may in its discretion, decide that the error trade is to be cancelled having regard to the factors set out in SGX-ST Rule 8.6.12 above.

4. Notification by SGX-ST27

After a decision has been made, SGX-ST will:

i. Notify the market that an error trade has been reported for review and its decision on the review, i.e. whether an error trade remains valid or has been cancelled; and

ii. Notify the Trading Members who are counterparties to an error trade of its decision in by telephone and in writing.


An offence under this rule may be compounded with a fine. The penalty will be dependent on factors such as the number of prior violations, and whether the offender is a Trading Member or Approved Executive Director.

4.4.10 Direct Business28

Direct business refers to business that is not done through the trading system but dealt between:

• 2 Trading Members • 2 customers of a Trading Member • A Trading Member and its customer

There are rules however for such direct business (known as married trades) which are allowed only under the following conditions:

i. The contract must be for at least :

26 SGX-ST Rule 8.6.4A – Error Trades

27 SGX-ST Rule 8.6.17 – Notification by SGX-ST of an error trade

28 SGX-ST Rule 8.7 - Direct Business



(a) 50,000 units of security or futures contract or in the case of marginable futures contract, 50,000 units of the underlying; or

(b) $150,000 in contract value

ii. A book-out trade from an error account to remedy an error; or

iii. To complete a customer’s order that was partially filled in the market, provided the original order met the minimum size and value in condition (i).

This does not mean that such direct business goes unrecorded. Trading Members must report through the married trade reporting system (part of the Trading System):

i. Within 10 minutes of execution if the direct business was executed during trading hours; or

ii. In the first 20 minutes of the Opening Routine on the following market day if the direct business was executed after trading hours.

For avoidance of doubt, the requirement to mark sell orders as set out in Rule 8A (Marking of Sell Orders) applies to Direct Business reported through the married trade reporting system.



4.4.11 Circuit Breakers and Cooling- Off Periods29

Circuit Breakers are designed to temporarily restrict trading in certain securities or futures contracts. Similarly it may prescribe Cooling-Off periods on certain securities and futures contract if an incoming order seeks to be matched, either partially or fully, with an existing order in the Trading System at a price outside the Circuit Breaker.

The Cooling-Off Period can guard against disorderly situations in the face of rapid and unchecked market movements, by allowing the market and regulators a pause to take stock of the situation. It is not intended to halt price movement. Where large price movements are justified, what the circuit breaker facilitates is a more measured market movement enabled by the imposition of pauses which allow the market to analyse market conditions and all available information before resuming. By moderating the pace of big price movements, the circuit breaker prevents alarm to the market and averts contagion risk to other markets.

Where Cooling-Off Period is activated the following rules will apply:

i. The incoming order will not be matched with the existing order in the Trading System at a price outside the Circuit Breaker; and

ii. The quantity of the incoming order which is not filled at the commencement of the Cooling-Off period will be rejected by the Trading System.

It should be noted that customers intending to use Price-Triggered Orders (PTO) should be aware of the interaction between such orders and circuit breakers. For instance, PTOs with trigger prices outside of the circuit price band will be accepted into the order book. Resting PTOs with trigger prices outside of the circuit breaker price band will not be affected as long as the trigger price condition of the PTO is not reached during the cooling off period. If the trigger price condition of the PTO is reached and the order is activated, it will be rejected or

29 SGX-ST Rule 8.10A - Circuit Breakers and Cooling-Off Periods



deleted. It is possible for incoming PTOs to trigger circuit breakers if the price trigger condition is met and the order is activated. In addition, PTOs which are triggered and entered into the order book as market orders may be partially filled if the order is rejected due to the circuit breakers.

Other Trading Rules which may be imposed to bring order to the market by SGX-ST may include:

i. Declaring a listed security to be a Designated Security , ii. Declaring a corner on listed security or suspending a security; iii. Suspend trading; and iv. Imposing a trading halt.

As these rules are intended to bring order to the market and ensure the operation of a fair market without any participant unnecessarily disadvantaged item i) to iii) above has been included in Chapter 3 on Regulatory Requirements for Market Conduct under SGX-ST’s action to prevent market misconduct.

4.4.12 Other Circumstances in Approving Off-Market Trades and Trading Controls

1. Trading Halts30

A trading halt is when SGX-ST calls for trading to be ceased on a particular security or securities or futures contracts. A Trading halt operates in the same way as an Adjust Phase described in this chapter.

Securities or futures contracts which are subject to a trading halt cease to be traded on the Trading System. A Trading Member must not execute any transactions in a security or futures contract which is a subject of a trading halt unless approved by SGX-ST.

A trading halt may be:

• Imposed by SGX-ST at the request of an Issuer;

• Lifted by SGX-ST anytime;

• Changed to a suspension by SGX-ST at any time; or

• Imposed for up to 3 market days or such other short extension as SGX-ST deems fit.

SGX-ST Practice Note 8.10.1 lists the characteristics of a suspension and trading halt as follows:

ITEM CHARACTERISTIC SUSPENSION TRADING HALT

1 Initiating party A suspension can be imposed by SGX-ST under the circumstances31. An Issuer may also request a suspension if its request for extension of a trading halt under Item 3 is not approved by SGX-ST.

A trading halt is imposed at the request of an Issuer, usually before making a material announcement to the market.

2 Status of unmatched orders

All unmatched orders in a suspended security or futures contract in the Trading System lapse.

During a trading halt, all existing orders in the ready and unit share markets remain valid. Orders can still be entered, reduced in quantity or withdrawn in the ready and

30 SGX-ST Rule 8.11 –Trading Halts

31 SGX-ST Rule 8.10.1 – Suspension and Restriction of Trading



ITEM CHARACTERISTIC SUSPENSION TRADING HALT

unit share markets but are not matched. If a trading halt is not lifted by the end of a Market Day, all unmatched orders lapse.

3 Duration of suspension or trading halt

A suspension is usually for a prolonged period.

A trading halt is usually intra-day, with a minimum duration of 30 minutes. SGX-ST may extend the duration of a trading halt beyond 3 Market Days upon the Issuers' request.

4 Upon lifting of suspension or trading halt

Upon lifting of a suspension, the suspended security or futures contract will enter into an Adjust Phase for at least 15 minutes. During this Adjust Phase, orders can be entered, reduced in quantity or withdrawn for the ready and unit share markets. At the end of this Adjust Phase, orders that can be matched will be matched at a single price computed based on the algorithm set by SGX-ST. Unmatched orders are carried forward into the respective phase the market is in when the Adjust Phase ends.

Upon lifting of a trading halt, orders that can be matched will at a single price computed based on the algorithm set by SGX-ST. Unmatched orders are carried forward into the respective phase the market is in when the trading halt is lifted.



2. Other Circumstances for Off-Market Trades32

The objective of a suspension and trading halt is to facilitate proper dissemination of material information to the market place to ensure the operation of a fair market. However, SGX-ST recognises that there may be circumstances under which off-market trading of the security or futures contract is appropriate.

Off-market trades for securities or futures contracts subject to a suspension or trading halt, may be approved by SGX-ST on a case by case basis when SGX-ST is satisfied that the reason behind the trade is more than just a buy/sell transaction.

Such circumstances include the following:

i. A seller being in financial difficulty, needs to sell a security or liquidate a futures contract in relation to a security that has been suspended for an indefinite period.

ii. A seller who short-sold a security or futures contract that is subsequently subject to a suspension or trading halt, and the clearing house requires the seller to cover the short position within a prescribed period.

iii. A security or futures contract is suspended prior to delisting on SGX-ST. The minority shareholders may wish to sell the security or futures contract to the majority shareholders.

32 SGX-ST Practice Note 8.10.3 – Approval of Off-Market Trades in a Security or Futures Contract Subject to Suspension or Trading Halt



iv. The trustees of the estate of a deceased investor needs to liquidate a security or futures contract that may be suspended for an indefinite period in order to carry out its duty under the trust.

4.4.13 Non-Compliance with SGX-ST Rules and Regulations33

SGX-ST may prohibit or limit a Trading Member from entering orders on the Trading System for a period of no more than 14 days if the Trading Member:

i. Fails to continue to satisfy admission criteria of a Trading Member or Trading Representative;

ii. Defaults on any transaction in securities on SGX-ST; or

iii. Is in SGX-ST’s opinion, in operating difficulty.

Such prohibitions or access prevention to the Trading System will be notified to the Trading Member in writing.

4.5 Settlement Procedures

4.5.1 Mode of Settlement34

All settlement of trades for securities and futures contracts designated by Central Depository (Pte) Ltd (CDP) to be eligible for clearance or settlement on a book-entry basis must be delivered or settled on book entry basis at CDP unless otherwise decided by SGX-ST. Delivery of physical certificates35 is not allowed if the securities or futures contracts are designated for settlement and clearance on a book-entry basis by CDP.

4.5.2 Maintenance of CDP Account36

Customers who transact in securities and futures contract which are designated eligible for book-entry settlement by CDP must maintain a CDP account, including Trading Members who trade for their own account. The account can be maintained directly with CDP or through a depository agent.

4.5.3 Currency of Settlement37

Trades are settled in the currency of quotation at the exchange rate quoted by Trading Member on the date of settlement unless prior agreement was entered into between a customer and a Trading Member.

4.5.4 Relationship between Customer and Trading Member38

A selling customer must look only to the Trading Member, which executes the trade for all the obligations in connection with that trade including payment of sale proceeds.

33 SGX-ST Rule 8.12.1 - Suspension of Trading Member and Prohibition of Dealings

34 SGX-ST Rule 9.1.1 – Mode of Settlement

35 SGX-ST Rule - 9.1.2 – Mode of Settlement-Physical Delivery

36 SGX-ST Rule 9.1.3 – Maintenance of CDP account

37 SGX-ST Rule 9.1.4 – Currency of Settlement

38 SGX-ST Rule 9.2 – Relationship Between Trading Member and Customer



A buying customer must look only to the Trading Member which executes that trade for all the obligations in connection to that trade including the delivery of securities or deliverable futures contract, and the relevant underlying. A buying customer must pay the Trading Member which executes the trade.

If a selling customer fails to deliver, buying-in will be performed in accordance to the Clearing Rules.

Buying-in starts on Settlement Day (LTD + 3), and will start at a price determined by CDP.39

The buying-in bid price will be 2 minimum ticks above the highest of the following:

i. the closing price of the previous day; ii. the reference transacted price, iii. the reference bid price; and

The reference transacted price and the reference bid price will be any of the last transacted prices and bid prices within the 1 hour preceding the commencement of buying-in, as determined by CDP.

In the case of a failed delivery of a contract that was made in the buy-in market on the previous Market Day, the reference price will be the transacted price of that contract.

Where necessary, CDP shall have the discretion to make adjustments to any of the prices described above to cater for corporate actions on the particular security.

If the shares are not obtained at the start of the buy-in process, CDP will raise the buying-in bid by 2 minimum ticks, from the following, in order to obtain the shares:

i. the prevailing buying-in bid price; ii. the transacted price in the ready market; or iii. the bid price in the ready market,

CDP will continue to raise the buy-in bid periodically, until the shares are obtained. As a result, the buy-in process is likely to result in an unfavourable price for the customer, compared to the market price. The customer will be required to pay for the bought-in shares, and any associated costs.

4.5.5 Relationship between Trading Member and Clearing Member40

A selling Trading Member must look only to the Clearing Member who qualifies it for payment of sale proceeds.

A buying Trading Member must look only to the Clearing Member who qualifies it for delivery of securities or in the case of a deliverable futures contract, the relevant underlying.

4.5.6 Settlement Dates41

The normal settlement dates and time for transactions as prescribed by the SGX-ST is as given in the following table:

39 CDP Rules 6.7.4 - Buying-In Procedures

40 SGX-ST Rule 9.3 – Relationship Between Trading Member and Clearing Member

41 SGX-ST Rule 9.4 – Settlement Dates



Type of Trade

Delivery by selling customer

Payment to selling customer

Delivery to buying customer

Payment by buying

customer

Force-sale against

customer

Buying in against

customer Other DVP Other Other DVP Other DVP Other

Ready Market for securities and Futures Contracts cleared by CDP

T+3

T+3 or against

delivery, whichever is

later

T+4 or against delivery,

whichever is later

T+3 T+3 T+3 T+4 T+4 T+3

Marginable Futures Contracts

LTD+3 -

LTD+4 or against delivery

whichever is later

LTD+3 - LTD+

3 - LTD+ 4 LTD+3

Ready Market for other securities

12.30 pm on T+3

-

T+4 or against delivery,

whichever is later

3 pm on T+4

- T+4 - T+5 T+3

Explanation of Terms and Notes: Notes (1) DVP = Delivery against Payment

(2) T =Trade Date (3) LTD = The Last Trading Date as defined in chapter 19. (4) LTD + 3 = The third market day after the trade date/ last trading day (5) Ready Market trades are transactions for delivery at the due date

Where T is the trade date and LTD is the Last Trading Day (and hence, T+3/LTD+3 is the third Market Day after trade date/Last Trading Day).

A Trading Member may withhold delivery to a buying customer until payment is received.

The normal timetable for force-sale against a customer will not apply if:

1. A Trading Member reasonably expects full payment from the buying customer, In such a case the Trading Member may defer force-sale for up to 4 market days for (DVP) settlement or 2 market days (for other trades); or

2. A Trading Member has allowed a buying customer to effect a corresponding sale position after the purchase but not later than the due date of the purchase contract.

When conducting force-sale, the Trading Member:

1. has discretion on price and volume put up for sale at any time;

2. need not give notice of the force-sale to the buying customer;

3. is not liable to the buying customer for any loss or damage arising out of the exercise of its discretion; and

4. may recover the losses and expenses incurred in the force-sale from the buying customer.





4.5.7 Physical Delivery42

In 4.3.1 on Mode of Settlement, it is mentioned that physical delivery for securities or futures contract designated by CDP to be book-entry settled will not be accepted. Exceptions to physical delivery will be contracts in Government Securities and Asian Currency Bonds which are settled based on agreement between the parties. Similarly, contracts with a member of an overseas securities exchange are settled as agreed between the parties.


An offence under this rule may be compounded with a fine. The penalty will be dependent on factors such as the number of prior violations, and whether the offender is a Trading Member or Approved Executive Director.

4.5.8 Delivery versus Payment ("DVP") Settlement43

DVP settlement is subject to the DVP Rules issued by CDP.

4.5.9 Foreign Market Linkages44

Singapore prides itself as a financial centre and operates an open market facilitating trades with other exchanges. In meeting this objective, SGX-ST provides linkages to foreign markets through its subsidiary company, SGX-SPV which offers services to Trading Members or Trading Participants of an overseas exchange for co-trading, clearing and settlement of selected foreign securities or selected SGX-ST securities.

The system that does the linkage is known as the “Exchange Link”.

1. Exchange Link

Exchange Link is the electronic system through which:

i. SGX-SPV routes orders for Selected Foreign Securities to the Foreign Portal Dealer and receives orders for Selected SGX-ST Securities from the Foreign Portal Dealer and

ii. A Foreign Portal Dealer routes order for Selected SGX-ST Securities to SGX-SPV and receives orders for Selected Foreign Securities from SGX-SPV.

Foreign Portal Dealer is a Foreign or Overseas Exchange or a related entity of that Foreign or Overseas Exchange that acts as intermediary to allow:

a. Singapore investors to trade, clear, and settle Selected Foreign Securities on an Overseas Market and

b. Foreign investors to trade, clear and settle Selected SGX-Securities via a Foreign or Overseas Market.

42 SGX-ST Rule 9.5 – Trades under Physical Delivery

43 SGX-ST Rule 9.6 - Delivery Versus Payment ("DVP") Settlement

44 SGX-ST Rule 10.1 – Foreign Markets Linkages

http://rulebook.sgx.com/en/display/display.html?rbid=3271&element_id=2



2. Access to Foreign Markets45

Just as there are rules for access to the SGX-ST established markets, there are similarly rules for access to Foreign Markets and participants are expected to comply with market conduct rules for trading in the Foreign Markets just as the rules of market conduct for SGX-ST.

The rules for providing such access as set by SGX-ST are as follows:

i. Direct SGX-SPV to suspend or end a Trading Member‘s or its Trading Representative’s access to a Foreign Market via the Exchange Link

ii. Direct a Trading Member or Trading Representative to access the Foreign Market via the Exchange Link only on conditions that SGX-ST may specify or

iii. Reinstate or re-establish a Trading Member’s or a Trading Representative’s access to a Foreign Market via the Exchange Link and if it deems fit, on conditions that SGX-ST may specify.



3. ASEAN Trading Linkage46

The ASEAN Trading linkage is granted to certain SGX-ST members, and similarly privileges are granted for access to SGX-ST. This includes providing “Originating Participant” status to Trading Members via the ASEAN Trading Linkage for the execution of orders and traders on a market of a Foreign ASEAN Exchange as a customer of a member of such Foreign ASEAN Exchange.

Similar to DMA, an Originating Participant who has been accorded such status by SGX-ST may sponsor customers to have access to SGX-ST via the ASEAN Trading Linkage infrastructure. These sponsored customers are known as “Sponsored Participants”.

The SGX Rules on ASEAN Trading Linkage sets out the rules on dealing and privileges and all Trading Members which have been granted participating privileges and their Trading Representatives are required to comply with the rules as set out in that chapter for their activities undertaken in connection with the linkage. Trading Members and their Representatives are also required to comply with the provisions of the SFA in carrying on business in connection with the ASEAN Trading Linkage including market conduct rules.

Trading Members who sponsor customers for access to the ASEAN Trading linkage must also comply with the rules applicable to the authorisation of sponsored access to its customers.

The products to be listed or quoted on SGX-ST which are available for trading via the ASEAN Trading Linkage are subject to the discretion of SGX-ST. SGX-ST also prescribes which exchanges and market operators as Foreign ASEAN Exchanges. All products listed or quoted on the Foreign ASEAN Exchanges are available for trading via the ASEAN Trading linkage unless specifically prohibited or excluded by the Foreign ASEAN Exchanges.

45 SGX-ST Rule 10.3 – Access To Foreign Markets

46 SGX-ST Rule 10A – ASEAN Trading Linkage



Figure 4.5.9.3 – Example of Originating Participant via ASEAN Trading Linkage

trades enters via

4.5.10 Obligations of Trading Members47

When accessing a Foreign Market via the Exchange Link to trade in Selected Foreign Securities, a Trading Member:

1. Transacts with SGX-SPV as principal;

2. Is not relieved of any obligation or liability otherwise applicable to it;

3. Is solely responsible for the accuracy of details of orders and other trading messages that are entered by it or on its behalf; and

4. Owes its obligation in relation to Orders to SGX-SPV.

The following Rules apply to an order executed on a Foreign Market via the Exchange Link by SGX-SPV:

1. The settlement obligations are owed by the Trading Member (if it is a Clearing Member) or its qualifying Clearing Member to CDP instead of SGX-SPV; and

2. SGX-SPV's settlement obligations are owed to CDP.

A Trading Member is responsible for its order, regardless of whether the Trading Member authorised the sending of the order.

4.5.11 Core Trading Principles48

The primary objective of the core trading principles is to promote proper and orderly trading of Selected Foreign Securities via the Exchange Link.

The Core Trading Principles apply to:

• A Trading Member and a Trading Representative when trading in a Selected Foreign Security on a Foreign Market via the Exchange Link;

• Orders placed via the Exchange Link; and

• SGX-SPV, in relation to Orders placed by it to close out a position or correct an error.

1. Prevention of Disorderly Markets49

A Trading Member or a Trading Representative must not enter bids or offers in Selected Foreign Securities on a Foreign Market via the Exchange Link that may result in, or have the effect of, creating a disorderly market in those securities.

47 SGX-ST Rule 10.5 – Obligations of a Trading Members

48 SGX-ST Rule 10.6.2 – Core Trading Principles

49 SGX-ST Rule 10.6.3(1) – Prevention of Disorderly Markets

Trading Member granted Originating Participant status

ASEAN Trading

Linkage

Foreign

ASEAN

Exchange

s



When accessing a Foreign Market via the Exchange Link to trade in Selected Foreign Securities, a Trading Member or a Trading Representative must:

(i) Ensure that an authorised person is available at all relevant times to communicate with SGX-SPV;

(ii) Not intentionally or deliberately take advantage of any situation resulting from a breakdown, error or malfunction of the systems, procedures or otherwise of or in connection with the Exchange Link; and

(iii) Comply with any instructions or directions issued by SGX-ST.

Penalties - SGX-ST Rule 10.6.3(1)


2. Market Manipulation and False Market50

A Trading Member or a Trading Representative must not engage in, or knowingly act with any other person in, any act or practice that will or is likely to:

(i) Create a false or misleading appearance of active trading in any Selected Foreign Securities; or

(ii) Lead to a false market on a Foreign Market.

A Trading Member must immediately inform SGX-ST if it reasonably suspects, or knows of, any attempted market manipulation or creation of a false market in a Selected Foreign Security via the Exchange Link.

A Trading Member must not participate, or knowingly assist others, in any operation which might have such a result.



3. Dealings in Suspended Securities51

Unless agreed by the Foreign Exchange concerned, a Trading Member and a Trading Representative must not trade, or make a market in, any Selected Foreign Security on the Foreign Market via the Exchange Link if that security is suspended.



4. Cancellation of Contracts52

A Trading Member may instruct SGX-SPV to request the Foreign Portal Dealer to cancel a contract made on a Foreign Market via the Exchange Link only in the circumstances allowable under the rules, customs or usages of the Foreign Market.

The Trading Member must meet any costs incurred in connection with the cancellation.

50 SGX-ST Rule 10.6.4 – Market Manipulation and False Market

51 SGX-ST Rule 10.6.5 – Dealings in Suspended Securities

52 SGX-ST Rule 10.6.6 – Cancellation of Contacts



Penalties - SGX – ST Rule 10.6.6

An offence under this rule may be compounded with a fine. The penalty will be dependent on factors such as the number of prior violations, and whether the offender is a trading member or approved executive director.

5. Corner53

A Trading Member must not act for itself or with one or more persons in concert with the object of securing or acquiring control of any security on a Foreign Market that the same cannot be obtained for delivery on existing contracts except at prices or on terms dictated by such person or persons.



6. Short Selling54

A Trading Member must not short sell any Selected Foreign Security on a Foreign Market except as permitted by the Foreign Exchange concerned.



7. Designated Securities55

A Trading Member must comply with any conditions on dealing imposed in a Foreign Market in relation to securities that may have been subject to manipulation or excessive speculation.



8. Non-Compliance with Core Trading Principles56

SGX-ST may undertake any investigation or inspection or take any other action under its Rules if it becomes aware of possible or alleged non-compliance with the core trading principles in relation to the Foreign Market Linkages.



53 SGX-ST Rule 10.6.7 - Corner

54 SGX-ST Rule 10.6.8 – Short Selling

55 SGX-ST Rule 10.6.9 – Designated Securities

56 SGX-ST Rule 10.7 – Non-compliance with Core Trading Principles

Chapter 5 - CPFIS | 124


Chapter 5:

Central Provident Fund Investment Scheme

(CPFIS)

Learning Objectives

The candidate should be able to:

Know the CPFIS and its history

Know and differentiate between the two parts of the CPFIS

Know the account opening process and operating process

Know the factors a member has to take into account before he commits to an investment using his/her CPF ordinary account’s balances

Be aware of the investments included under the CPFIS

Know the CPF investment limits for the various instruments

Know the restrictions tied to investing in securities through CPFIS

Know how profits, losses and dividend etc. are treated in CPFIS

Know that there are charges for investing in securities through CPFIS

Know the circumstances under which a member’s investments through CPFIS will be released to him

Know how bankruptcy and death cases impact the CPFIS and the use & distribution of the funds

5.1 General Information and History of CPFIS

The Central Provident Fund (CPF) savings scheme is meant to be a savings scheme for retirement. However in May 1986, the government made certain concessions and changed the CPF Act, to allow CPF members to use part of their savings in the ordinary account (OA) to invest in approved investment products to enhance their assets value by the time they retire. This scheme is known as the Approved Investment Scheme (AIS).

Over the years, more options were added to the scheme, for members to invest in with their CPF savings. In October 1993, the AIS was liberalized with a 2-tier scheme i.e. the Basic Investment Scheme (BIS) and Enhanced Investment Scheme (EIS). These two schemes were eventually merged in January 1997 to form the Central

125| Chapter 5 - CPFIS


Provident Fund Investment Scheme (CPFIS). The scheme was broadened in January 2001 to allow members to invest using savings in their Special Accounts as well.

Currently, the CPFIS has 2 parts:

CPFIS-Ordinary Account (CPFIS-OA); and

CPFIS-Special Account (CPFIS-SA).

5.2 Differences between CPFIS-OA and CPFIS-SA

Under CPFIS-OA, investments can only be made using funds from the members’ Ordinary Account Savings whilst the Special Account Savings can only be used for investments under CPFIS-SA. The types of products allowed for investment under CPFIS-OA and CPFIS-SA are also different.

A CPF Investment account is required for investments made under the CPFIS-OA but not required for CPFIS-SA.

5.2.1 Types of Investments Allowed under the Two Types of CPFIS and Investment Limits1

CPFIS-OA CPFIS-SA

Ordinary Account savings can be invested in:

Fixed Deposits

Singapore Government Bonds

Singapore Government Treasury Bills

Statutory Board Bonds

Bonds Guaranteed by Singapore Government

Annuities

Endowment Insurance Policies

Fund Management Accounts

Selected Investment-Linked Insurance Products (ILPs)

Unit Trusts

Exchange Traded Funds (ETFs)

Special Account Savings can be invested in:

Fixed Deposits



Statutory Board Bonds (secondary markets only)


Annuities


Selected ILPs2

Selected Unit Trusts2

Selected ETFs2 Up to 35% of investable savings can be invested in:

Shares

Property Funds (or Real Estate Investment Trusts)

Corporate Bonds

Up to 10% of investable savings can be invested in Gold:

Gold ETFs

Other Gold products (Only UOB offers these new gold products)

1 Refer to the list of instruments that can be invested under CPFIS (CPF website): https://www.cpf.gov.sg/Assets/members/Documents/INV_InstrumentsunderCPFIS.pdf

2 Only ILPs, unit trusts and ETFs in the lowest 3 tiers of CPF Board’s Risk Classification System Table (i.e. lower risk, low to medium risk and medium to high risk)

https://www.cpf.gov.sg/Assets/members/Documents/INV_InstrumentsunderCPFIS.pdf



Only monies in excess of $20,000 in the ordinary account and $40,000 in the special account can be invested. However, a member can continue to service his regular premium insurance policies (but NOT recurring single premium insurance policies or regular savings plans for unit trusts).

5.3 What is a CPF Investment Account?

A CPF Investment account is an account opened with a CPFIS agent bank to facilitate the settlement of a member’s purchases and sales of investment and to keep track of his/her investment holdings and transactions in his/her CPF Investment Account.

CPFIS agent banks are appointed by the CPF Board and are one of the 3 local banks i.e. Oversea-Chinese Banking Corporation Ltd (“OCBC”), United Overseas Bank Ltd (“UOB”) and DBS Bank Ltd (“DBS”). The agent banks are appointed by the CPF Board for their extensive branch network and facilities to support the investment and settlement of equities and bonds listed on the Singapore Exchange. Each member can only maintain one CPF Investment Account at any one time.

5.4 Eligibility Criteria

A CPF member who meets the following requirements is allowed to participate in the CPFIS:

1. Is at least 18 years of age

2. NOT an undischarged bankrupt

3. Have more than $20,000 in his Ordinary Account (for Investment under CPFIS-OA) and/or more than $40,000 in his Special Account (for investment under CPFIS-SA)

5.5 Opening a CPFIS Investment Account

To open an investment account under CPF Investment Scheme Ordinary Account (CPFIS-OA), a member can approach any one of the following CPFIS agent banks:

DBS

OCBC

UOB

A member will need to bring along his or her identity card and any of his CPF statement for agent bank to verify his CPF account number. He can access his statement at www.cpf.gov.sg via mycpf Online Services by using his SingPass. Members can only maintain one CPF Investment Account at any one time.

5.6 Processes for Purchase and Sale of Investments (CPFIS-OA only)

After opening a CPFIS account with an agent bank, the member must inform his dealer of the account details for settlement of transactions before entering into a transaction using his CPF funds.

The agent bank will liaise with the CPF Board and the various product providers to settle the member’s purchase and sale of investment, and keep track of his investment holdings and transactions in his CPF investment account.



A member can sell his investments which are listed on the SGX, 1 trading day after the purchase date if the purchase trade has been accepted by the agent bank as a CPFIS-OA trade. Agent banks may accept the trade if:

i. The stock broker has keyed the purchase trade on the day the purchase contract is made; the trade was successful; and

ii. The member has sufficient investible funds (and limits for stock and/or gold investments) in his/her CPF Investment and/or Ordinary Account to settle the purchase.

5.7 Service Providers under the CPFIS3

Members are required to buy or sell their investments only through service providers included under the CPF Investment schemes as provided in the table below:

Instruments Service/Product Providers

Fixed Deposits Deposit Banks

Singapore Government Bonds Bond Dealers or Brokers

Singapore Government Treasury Bills Bond Dealers

Statutory Board Bonds Bond Dealers or Brokers

Bonds Guaranteed by Singapore Government Brokers

Annuities


Investment linked Insurance products

Insurance Companies

Unit Trusts Fund Management Companies

Investment Administrators

Fund Management Accounts Fund Management Companies

Shares

Property Funds

Corporate Bonds

Exchange Traded Funds (ETFs)

Brokers

Gold

Gold ETFs

Other Gold products

For Gold ETFs: Brokers

For other Gold products:

o Sell through your Agent Bank o Buy through UOB Agent Bank and you need a UOB

investment account

3 Refer to CPF website at https://www.cpf.gov.sg/Members/Schemes/schemes/optimising-my-cpf/cpf-investment-schemes

https://www.cpf.gov.sg/Members/Schemes/schemes/optimising-my-cpf/cpf-investment-schemes



5.8 Criteria for Inclusion of Investment Products under CPFIS

All instruments (except Gold products offered by CPF Agent Banks, Singapore Government Bonds and Singapore Government Treasury Bills) under the CPFIS are only included upon the product providers’ applications and CPF Board’s review4. These instruments must meet the inclusion criteria.

All investment made under CPFIS must be in Singapore dollars except where otherwise stated. Investments under CPFIS cannot be assigned, pledged or used as collateral. The table below show the conditions attached to some of these investments:

5.8.1 Inclusion Criteria for Investment Products

Instruments Included Under the CPF Investment Scheme (CPFIS)

Instrument Criteria

Fixed Deposits (i) Must be offered by CPFIS-included Fixed Deposit Banks only;

(ii) The bank must be locally incorporated with minimum capital funds of S$1.5 billion and good credit rating;

(iii) The bank must be a subsidiary of a locally-incorporated bank which meets the criteria at (ii). The bank must continue to be a subsidiary of the locally-incorporated bank; or

(iv) If the bank is a foreign bank, it must be accorded the Qualifying Full Bank privileges.



The bonds/treasury bills are scripless.

Statutory Board Bonds5

(i) The bonds are listed on SGX;

(ii) The bonds are traded in Singapore dollars;

(iii) The bonds are not offered to institutional investors or accredited investors and certain other persons only under Section 274 or 275 of the Securities and Futures Act (“SFA”);

(iv) The bonds are not subject to trading restrictions in the secondary market; and

(v) Prospectus, which comply with the SFA requirements for the bonds, are issued. For bonds which are exempted from the prospectus requirement, an information memorandum setting out the terms of the issue, the risks of

4 Unit Trusts, Investment-linked insurance products and Exchange Traded Funds would need to be evaluated by CPF Board’s appointed Investment Consultant before they can be included under CPFIS.

5 Under CPFIS-SA, currently members can only invest in Statutory Board Bonds in the secondary market.




Instrument Criteria

investing in the bonds and other relevant information must be issued and made available to CPF members.


(i) The bonds are listed on SGX; and

(ii) The bonds are scripless.

Annuities


Investment linked Insurance products6

(i) Must be offered by Insurance Companies included under CPFIS;

(ii) Life insured must be the member himself;

(iii) Only single premium or recurring single premium policies are allowed (new regular premium policies are not allowed from 1 January 2001); and

(iv) For endowment policies, maturity date must not be later than the member’s 62nd birthday.

Unit Trusts7 (i) Must be managed by Fund Management Companies included under CPFIS;

(ii) Must be evaluated by CPF Board’s appointed Investment Consultant to be among the top 25th percentile of global peer group;

(iii) Must have Total Expense Ratio (TER) not exceeding the TER caps set by CPF Board;

(iv) Must have sales charge not exceeding 3%;

(v) Preferably have track record of good performance for at least 3 years; and

(vi) Must comply with the CPF Investment Guidelines (“CPFIG”) set by CPF Board.

Exchanged Traded Funds7

(i) Must be listed on SGX-ST;

(ii) Must be managed by Fund Management Companies included under CPFIS;

(iii) Must meet the top 25th percentile of global peer group set by CPF Board; and

(iv) Must comply with CPFIG.

Fund Management Accounts7 (CPFIS-OA only)

Fund managers are required to invest according to the CPFIG set by CPF Board.

Shares of Companies (CPFIS-OA only)

Units of Property Funds or Property

(i) Must be offered by companies incorporated in Singapore;

(ii) The shares are listed on the SGX MainBoard; and

(iii) The company allows CPF investors, who have pre-registered with CPF Agent Banks, to attend their shareholders’ meetings (if any) as observers.

6 Can be denominated in non-Singapore dollar currencies. Refer to https://www.cpf.gov.sg/Assets/members/Documents/INV_AnnexA.pdf

7 Members can use part of all of the available amount in their Ordinary Account to open a Fund Management Account (FMA) with an approved fund manager. Members must apply to CPF Board to withdraw the funds from their Ordinary Account. If Members wish to close their FMA or the fund manager is no longer approved by CPF Board, the fund manager must transfer the members’ money to their CPF Investment Account. Refer to the CPF website at https://www.cpf.gov.sg/Assets/members/Documents/RCSUT.pdf

https://www.cpf.gov.sg/Assets/members/Documents/INV_AnnexA.pdf

https://www.cpf.gov.sg/Assets/members/Documents/RCSUT.pdf




Instrument Criteria

Trusts (CPFIS-OA

only)

Corporate Bonds (CPFIS-OA only)

(i) Must be offered by companies incorporated in Singapore;

(ii) The shares are listed on the SGX MainBoard;

(iii) The bonds are not offered to institutional investors or accredited investors and certain other persons only under Section 274 or 275 of the SFA;

(iv) The bonds are not subject to trading restrictions in the secondary market;

(v) The bonds are rated at least A2 by Moody's, A by Standard and Poor's or A by Fitch; and

(vi) The prospectus, which complies with the Securities and Futures Act requirements for the bonds, is issued. For bonds which are exempted from the prospectus requirement, an information memorandum setting out the terms of the issue, the risks of investing in the bonds and other relevant information must be issued and made available to CPF members.

Gold (CPFIS-OA only) a) Gold ETFs8:

(i) Must be listed on SGX-ST;

(ii) The gold ETF is backed by physical gold that meets the London Good Delivery Rules issued by London Bullion Market Association (or other equivalent globally accepted standards);

(iii) The gold ETF is offered by a Singapore-incorporated company (for locally constituted gold ETF authorized by MAS) or through a local representative (for foreign gold ETF recognised by MAS); and

(iv) The company allows CPF investors, who have pre-registered with CPF Agent Banks, to attend their shareholders’/ unitholders’ meetings (if any) as observers.

b) Other Gold products

Only UOB offers these gold products. If you wish to invest in gold, you need an investment account with UOB.

5.9 Transfer of Monies from CPF Investment Account to CPF Ordinary Account

A member may transfer monies from his CPF Investment Account to his CPF Ordinary Account at any time using his agent bank’s facilities (e.g. ATMs/ Phone/ Internet banking facilities). The member may also make the transfer over the counter at the bank.

8 Refer to the CPF website (https://www.cpf.gov.sg/Assets/members/Documents/LISTOFGOLDEXCHANGETRADEDFUNDSINCLUDEDUNDERCPFIS.pdf) for the list of Gold ETFs traded under CPFIS & the criteria for Gold ETFs inclusions

https://www.cpf.gov.sg/Assets/members/Documents/LISTOFGOLDEXCHANGETRADEDFUNDSINCLUDEDUNDERCPFIS.pdf



The agent bank will also automatically transfer the cash balance held in the member’s CPF Investment Account to his CPF Ordinary Account (at the end of the month) if his Investment Account has been inactive (i.e. If the member has not made any investment transactions) for 2 consecutive months. If the member has been unsuccessful in an IPO application, his agent bank will transfer the unused CPF for the IPO application to his/her Ordinary Account at the end of the month.

5.10 Dividends and Profits Earned9

Any dividends, profits earned from investments under CPFIS-OA and / or CPFIS-SA are not withdrawable as the purpose of investing is to grow members’ CPF savings for retirement. However, the dividends or profits can be used for other CPF schemes, subject to the terms and conditions of these schemes. However, losses do not need to be made good.

5.11 Charges

A member will incur charges for his CPFIS investment, which can be paid out of his CPF savings. Charges may be levied by product or service providers or by the agent bank for providing the CPF Investment Account and facilitating the settlement and accounting for transactions.

5.12 Release of Investment Holdings10

Upon reaching the age of 55 years old, a member can apply to the CPF Board to withdraw his CPFIS-OA and CPFIS-SA investments as well as the cash balance in his Investment Account, as long as he has set aside the CPF Minimum Sum and Medisave Minimum Sum.

For CPFIS-OA, the Board will inform the agent bank to close the member’s CPF Investment Account. The member may approach the bank for the withdrawal of investments and cash after the Board has notified him. The member’s investment will be transferred to his own name and he may thereafter liquidate them as he wishes and have the sales proceeds paid to him directly.

For CPFIS-SA, CPF Board will inform the member’s product provider(s) to transfer the member’s investment to his own name and he may thereafter liquidate them as he wishes and have the sales proceeds paid to him directly.

If a member is unable to set aside the CPF Minimum Sum and Medisave Minimum Sum, his investments will not be transferred to him. Upon liquidating the investments, the sale proceeds will be credited to his CPF Investment Account for CPFIS-OA.

9 Refer to the CPF website (https://www.cpf.gov.sg/Members/FAQ/schemes/optimising-my-cpf/cpf-investment-schemes) for FAQs on Investment Profits & Losses.

10 Refer to the CPF website (https://www.cpf.gov.sg/Members/FAQ/schemes/optimising-my-cpf/cpf-investment-schemes), for FAQs on Withdrawal of Investment Holdings (Reaching 55)

https://www.cpf.gov.sg/Members/FAQ/schemes/optimising-my-cpf/cpf-investment-schemes

https://www.cpf.gov.sg/Members/FAQ/schemes/optimising-my-cpf/cpf-investment-schemes



5.13 Bankruptcy

Undischarged bankrupts, who had previously used their CPF monies to invest can hold or liquidate their investments. The sale proceeds upon liquidation will be credited back into their CPF Investment Account or Special Account. They are however, not allowed to use their CPF monies again for new investments.

Upon reaching the age of 55 years, an undischarged bankrupt will need to set aside the CPF Minimum Sum and Medisave Minimum Sum before his CPFIS investments and cash balance in CPF Investment Account can be withdrawn. CPFIS investments and cash balances in the CPF Investment Account are protected from claims by creditors and/or the Official Assignee as long as these remain within the CPF Investment Scheme.

5.14 Death

CPFIS Investments are not covered under CPF Nomination. When a member passes away, his investments under the CPF Investment Scheme and any cash held in his Investment Account with his agent bank will form part of his estate. CPFIS insurance policies with revocable nominations made with insurers will bypass the estate administrator/executor process, and be paid directly to the beneficiaries nominated with the insurer. In the absence of nomination, then the death proceeds will then be distributed by the administrator/executor together with the rest of the deceased’s estate. Irrevocable nomination is not allowed for CPFIS insurance policies.

The estate administrator/executor must produce the Letters of Administration/ Grant of Probate to claim the investments from the “agent” bank or product providers. Upon the death of the member, the CPFIS investments & cash in his/her Investment Account would cease to be protected and might be used to satisfy the deceased member’s creditor’s claim in accordance with the Probate and Administration Act.

133 | Chapter 6 – Prevention of Financial Crimes

Capital Markets Financial Advisory Services Examination Module 1A – Rules and Regulations for Dealing in Securities (SGX-ST Members)

Chapter 6: Prevention of Financial Crimes

Learning Objectives

The candidate should be able to understand:

What are financial crimes and the concept of key financial crimes:

• Money laundering / terrorism financing • Sanctions & embargoes • Fraud

The anti-money laundering and counter-terrorism financing regime in Singapore.

The laws and regulations against financial crimes, and the roles and responsibilities of CMS licence holders and representatives in the prevention and detection of financial crimes.

The know-your-customer, risk profiling and due diligence process (including simplified and enhanced due diligence) which must be carried out before account opening and client onboarding.

Red flags to look out for during the due diligence process, and internal policies for ongoing monitoring, reviews and operational controls.

Documentation and record keeping requirements, including the independent verification of client information.

Penalties and risks associated with non-compliance of regulatory requirements:

• Legal risks • Financial risk • Reputation risk • Civil & Commercial risk

Reporting & filing requirements

Training requirements

6.1 Introduction to Prevention of Financial Crimes

6.1.1 Definition of Financial Crimes

Financial crime is a wide and complex term that involves a range of criminal offences. The main financial crimes that impact financial institutions and systems most and are on regulators’ radar screens are:

i. Money Laundering ii. Terrorism Financing iii. Embargoes and Sanctions iv. Fraud

Chapter 6 - Prevention of Financial Crimes | 134


Banks and financial institutions1 are the major movers of funds through deposits, payments and transfers. Not only do they move cash but transfers are made through global clearing systems of securities and paper assets. Therefore, it is crucial that the international community make concerted effort to combat financial crimes. Regulators in international financial centres have to proactively manage the risks of being used as a conduit for illicit funds by putting in place a robust framework of laws and regulations against financial crimes as well as a rigorous regime of supervision on financial institutions to prevent and detect such crimes.

6.1.2 Definition of Money Laundering

Money laundering (ML) is a process intended to mask the proceeds obtained from criminal activities such as drug trafficking and other serious crimes so that they appear to have come from a legitimate source.

There are generally three steps in the process of money laundering:

1. The Placement stage refers to the physical disposal of benefits for criminal conduct. These are placed with licensed deposit-taking companies like banks and finance companies.

2. The Layering stage refers to the separation of benefits of criminal conduct from their sources by creating layers of financial transactions designed to disguise the audit trail. Criminals may buy luxury or high value goods from genuine suppliers, resell them to unknowing customers and then place the legitimate funds back in the bank as payments by cheque or wire transfers.

3. The Integration stage refers to the provision of apparent legitimacy to the benefits of criminal conduct. If the layering succeeds, the integration schemes place the laundered funds back into the financial system, making them appear as legitimate business funds.

However, these stages do not need to take place sequentially. Please refer to the diagram on the following page an illustration of the stages of the money laundering process.

Capital market transactions offer a vast array of opportunities for transforming money into a diverse range of assets, as capital market transactions are no longer predominantly cash based. The ease with which these assets can be converted to other types of assets, especially if they are liquid and marketable, further aids the layering process. Hence capital markets transactions are particularly attractive to money-launderers for layering their illicit proceeds for eventual integration into the general economy. Whilst capital markets generally do not accept cash transactions, there are still some retail capital markets intermediaries (CMIs) which would be affected by cash placements (for top ups or answering to margin calls to accounts).

Unless proper action is taken, capital market intermediaries could unwittingly facilitate the layering and integration stages through high-frequency transactions and payments to third parties or dealing with clients whose beneficial owners (BOs)2 are not clear through holdings in shell companies and whose ultimate beneficiaries could be people on sanctioned lists. Criminals may set up these companies with their ill-gotten gains in offshore jurisdictions where the laws against money laundering are not as stringent and are not committed to follow the Financial Action Task Force (FATF) standards. Ownership of these companies may not be transparent or it may be layered through holding many subsidiaries to block the audit trail of ownership. They may then use these shell companies on the pretext of investing through private bankers acting as intermediaries, who then deal through brokers or introduce them to brokers. Any of these parties could be a CMS licence holder.

1 Financial institutions refer to banks, merchant banks and holders of Capital Markets Services (CMS) licence as defined in Appendix 2 of MAS Notice SFA04-N02 (Notice on Prevention of Money Laundering and Countering the Financing of Terrorism) and MAS Notice 626 (Prevention of Money Laundering and Countering the Financing of Terrorism – Banks)

2 As defined in MAS Notice SFA 04-N02, a beneficial owner (BO) is, in relation to a customer of a CMS licence holder, as the natural person who ultimately owns or controls the customer of natural person on whose behalf a transaction is conduced or business relations are established, and includes any person who exercises ultimate effective control over a legal person or legal arrangement.



An Illustration of the Money Laundering Process (Figure 6.1.2)

1. PLACEMENT STAGE Cash deposited in banks or finance companies

Purchase of luxury or high value goods from genuine suppliers

Resells assets and high-end supplies to unknowing customer

1st Layer

2nd Layer

2. LAYERING STAGE Payments from customers by cheques or wire transfers are placed as “legitimate funds” back in banks

Proceeds from Criminal Activities

Shell Company Issues Bearer Shares

Transfer of Investment with Brokers

3. INTEGRATION STAGE Sale of Investments and return of sale proceeds from Brokers in the form of cheques or wire transfers to banks



CMS licence holders must have adequate due diligence processes to identify the ultimate beneficiaries or BO because they are at risk of unwittingly dealing for the clients who are involved in ML activities. The high frequency of transactions serves to keep ‘’washing’’ the funds which adds legitimacy to the payments and transfers as they come from licensed and regulated entities. With the funds given legitimacy, the criminal audit trail gets harder to follow as it gets circulated and eventually fully integrated in the legitimate financial system.

As a CMS licence holder often depends on other intermediaries who introduce business to them, it must conduct due diligence to satisfy itself that the intermediary is subject to and supervised for compliance with ML/CFT requirements consistent with standards set by FATF. It is important to note that the acceptance of an intermediary certificate does not diminish the responsibility of the CMS licence holder to conduct proper due diligence on its client and to the regulators for compliance.

6.1.3 Definition of Terrorism Financing

Terrorism Financing (TF) can be defined as providing funds to terrorists to carry out acts of terrorism which usually have roots in political beliefs or ideology and seek to influence or compel governments into particular course of action or intimidate the public or a section of the public. The sources of funding can be illegitimate as well as legitimate; illegitimate sources include robbery, drug trafficking, kidnapping, extortion or hacking of online accounts and legitimate sources include donations from charities, sale of publications on beliefs and ideology, legitimate business operations and self-funding by individuals.

Similar to money laundering activities, a CMS licence holder may inadvertently allow itself to be part of a TF scheme, for example when funds are transferred to a third party who is not a client of the CMS licence holder and due diligence has not been conducted on the third party. CMS licence holders should ensure that its payment policies and processes require further checks for payments to third parties. CMS licence holders should be vigilant as TF does not always involve large sums of money and can be hard to detect.

6.1.4 Criminal Liability Involving Embargoes & Sanctions

An embargo is the complete ban or prohibition of trade or financial dealings with a particular country, in order to isolate it from participating in economic activity. Different categories of embargoes include:

Embargoes affecting all relations with a particular country e.g. North Korea;

Embargoes affecting certain named individuals or entities e.g. Specially Designated Names (SDN);

Embargoes on certain sectors e.g. Armaments and Weaponry; and

Economic sanctions which also vary from imposing import duties on products from certain countries and blocking of exports of certain goods to target countries, or full blockage of a country’s products.

Sanctions are the trade prohibition on certain type of products, services or technology to another country due to various reasons, including nuclear non-proliferation and humanitarian purposes. Sanctions can be considered as “partial embargoes” as they restrict trade in certain areas.

Embargoes or sanctions are considered strong measures imposed in an effort by UN, US, EU or the embargo-imposing country, to elicit a positive reaction from the country on which it is imposed. Sanctions are used where diplomatic efforts have failed and military force remains a last resort.

Although a CMS licence holder does not deal in goods, it could unintentionally allow itself to enter into transactions with an SDN listed party for securities transactions. It may have dealt with an off-shore company where the ultimate BO is not known or is not transparent in the structure. Many sanctioned parties have created layers of shell companies to get around sanctions which were imposed to keep them out of the financial markets.



Implications

Why should CMS licence holders be concerned with embargoes and sanctions when they deal only in financial securities?

Financial assets are high value items and thus large amounts can be transacted each time. Many people may have formed layers of shell and off-shore companies making it difficult to trace the ultimate BOs. CMS licence holders may not have traced the many layers of ownership to the BOs or even if they know who the ultimate BO is on onboarding, the ultimate BOs may change over time especially if the ownership of companies are “bearer” shell companies and not “registered”.

In such situations, CMS licence holders may unwittingly be facilitating transfer of funds through sale and purchase of securities by SDNs or embargoed country nationals to fund their activities. By facilitating such transfers, they would have breached the regulations on sanctions and embargoes and this may result in fines imposed by the sanction imposing country. For example, in Singapore, if a financial institution facilitates an Iranian transfer, it would have breached MAS notice on prohibition on transactions with Iran.

“Bearer Share” companies do not list their shareholders and as the name suggests, the owner is the person who holds the share certificate. Many financial institutions these days do not accept dealings with bearer share companies and if they do, with clients they know, they require the shares to be deposited with them. This is still a risk as the shareholder can always get a replacement claiming that they have “lost” the shares. The policy in most institutions is to request clients to register the shares. A good policy is not to accept “Bearer Share” companies as clients because of the inability to know for certain the identity of the ultimate BO.

6.1.5 Fraud

Fraudulent acts are acts that involve deception and dishonesty by which a person obtains or seeks to obtain an advantage or benefit at the expense of another. It can be committed by staff or outside parties when operational risk is not properly managed or is caused by a non-alert staff.

Example – Internal Fraud

A representative may know his client’s behaviour, and be aware that the client could be out of town. Taking advantage of the situation and knowing client’s account details, the representative could instruct the sale of investments and arrange for payments to be made to a fictitious account operated by him. When the funds are received, they will be withdrawn very quickly and the representative too will disappear. In some cases, if he does not disappear, he will cover his tracks through falsifying the client’s instruction records. Therefore, operational tests and audits must be robust in CMS licence holder’s organization.

Example – External Fraud

External fraud could occur when someone outside of the institution uses a client’s name and account after discovering the details (e.g. through hacking a client’s computer system), and then instructs a CMS licence holder to sell the client’s holdings and pay to their own account which is different from the records in the books of the CMS licence holder. This is possible because very often instructions are given through the telephone.



CMS licence holders must be able to have controls in place to verify such instructions. If not, then the fraudster, after receiving the funds into his account, will withdraw it very quickly and disappear without being caught.

Therefore it is important for CMS licence holder to have a good system of control and verification process for instructions and payments. Another good practice is to have a policy in place for staff receiving telephone instructions to do a call back to the client to verify the instructions. If it is not an instruction given by the client, then the bank will be alerted and the fraud can be prevented as no transfer will be allowed.

6.2 Anti-Money Laundering and Counter-Terrorism Financing Regime in Singapore

Singapore is a member and signatory to the Financial Action Task Force (FATF) which is an Inter-Governmental body established in 1989 by the Ministers of its Member jurisdictions to set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and the financing of proliferation, and other related threats to the integrity of the international financial system. The FATF Recommendations set out a comprehensive and consistent framework of measures which countries should implement in order to combat money laundering and terrorist financing, as well as the financing of proliferation of weapons of mass destruction.

As a member of FATF, Singapore is committed to the effective implementation and enforcement of the FATF Recommendations. Regulators have found that the most efficient way to stem out the flow of funds to criminals or to starve them of their funding for criminal activities is to stop institutions from facilitating such flows by making financial institutions like banks, brokerages, investment companies etc., and their employees responsible for preventing the flow of funds to them.

6.3 The Regulatory Framework of Financial Crimes – Rules and Regulations

6.3.1 The Singapore Penal Code Cap 224

The Penal Code of Singapore sets out general principles of the criminal law of Singapore, as well as the elements and penalties of common criminal offences such as homicide, theft and cheating.

6.3.2 Corruption, Drug Trafficking and Other Serious Crimes (Confiscation of Benefits) Act (CDSA), Chapter 65A

The CDSA regulates money laundering activities and includes among others, drug trafficking, prostitution, gambling, terrorist financing and tax evasion offences. It was introduced to criminalize money laundering and to allow for investigation and confiscation of benefits from money laundering. When the CDSA was introduced, drug trafficking was the primary source of funds for money laundering. It has since been amended to include money laundering activities and confiscation of benefits and criminal conduct including bribery, criminal breach of trust, counterfeiting, theft extortion, robbery, cheating as well as tax evasion.

The following is a summary of the money laundering offences under the law:

1. Laundering Own Criminal Benefits

Any person who:

http://en.wikipedia.org/wiki/Criminal_law_of_Singapore



i. Conceals or disguises any property which (in whole or in part, directly or indirectly) represents his benefits from drug trafficking or criminal conduct; or

ii. Converts or transfers that property or removes it from the jurisdiction, shall be guilty of an offence.

2. Money Laundering by Acquisition

Any person who knowing or having reasonable grounds to believe that any property (in whole or in part, directly or indirectly) represents another person’s benefits from drug trafficking or criminal conduct, acquires that property for no or inadequate consideration shall be guilty of an offence.

3. Knowingly Assisting to Conceal

Any person who knowing or having reasonable grounds to believe that any property (in whole or in part, directly or indirectly) represents another person’s benefits from drug trafficking or criminal conduct is guilty of an offence if he or she:

i. Conceals or disguises that property; or

ii. Converts or transfers that property or removes it from the jurisdiction for the purpose of assisting any person to avoid a prosecution for a drug trafficking offence, a foreign drug trafficking offence, a serious offence or a foreign serious offence or the making or enforcing a confiscation order.

4. Knowingly assisting to retain or control by arrangement

A person who enters into or is otherwise concerned in an arrangement, knowing or having reasonable grounds to believe that by the arrangement:

i. The retention or control by or on behalf of another (referred to in Section 43 of CDSA as ‘that other person’) of that other person’s benefits from criminal conduct is facilitated (whether by concealment, removal from jurisdiction, transfer to nominees or otherwise); or

ii. That other person’s benefits from criminal conduct:

(a) are used to secure funds that are placed at that other person’s disposal, directly or indirectly, or

(b) are used for that other person’s benefit to acquire property by way of investment or otherwise.

Therefore the act of facilitating the flow of criminal funds, transferring or concealing will also be criminalized.

Table 6.3.2: Summary of Key Provisions of the CDSA

Offences Description

Section 46(1) & 47(1)

LAUNDERING OWN BENEFITS FROM DRUG TRAFFICKING

Any person who:

a) Conceals or disposes any property which is, in whole or in part, directly or indirectly, represents his benefits of Drug Trafficking or his benefits from criminal conducts; or

b) Converts or transfers that property or removes it from the jurisdiction; or

c) Acquire, possesses or uses that property;

shall be guilty of an offence.




Section 46(3) & 47(3)

MONEY LAUNDERING BY ACQUISITION

Any person who knowing or having reasonable grounds to believe that any property, in whole or in part, directly or indirectly represents another person’s benefits of drug trafficking or benefits from criminal conduct, acquires that property or has possession of or uses such property, shall be guilty of an offence.

Section 46(2) & 47(2)

ASSISTING ANOTHER TO CONCEAL, CONVERT, TRANSFER, ETC.

Any person who knowing or having reasonable grounds to believe that any property is in whole or in part, directly or indirectly represents another person’s benefit of drug trafficking or benefits from criminal conduct:

a) Conceals or disguises that property; or

b) Converts or transfers that property or removes it from the jurisdiction shall be guilty of an offence.

Section 43(1) & 44 (1)

ASSISTING ANOTHER TO RETAIN BENEFITS OF DRUG TRAFFICKING / CRIMINAL CONDUCT BY ARRANGEMENT

A person who enters into or is otherwise concerned in an arrangement, knowing or having reasonable grounds to believe that, by the arrangement:

a) The retention or control by or on behalf of another (referred to in this section as that other person) of that other person’s benefit of drug trafficking or criminal conduct is facilitated (whether by concealment or removal from jurisdiction, transfer to nominees or otherwise); or

b) that other person’s benefit from drug trafficking or from criminal conduct:

i) are used to secure funds that are placed at that other person’s disposal directly or indirectly; or

ii) are used for that other person’s benefit to acquire property by way of investment or otherwise;

and knowing or having reasonable grounds to believe that the other person is a person who carries on or has carried on drug trafficking or has benefitted from drug trafficking or who engages in or has engaged in criminal conduct, shall be guilty of an offence.

Sections 43(5), 44(5), 46(6) & 47(6)

PENALTY FOR MONEY LAUNDERING OFFENCES

A person who commits any money laundering offences stated above shall be liable to:

a) If an individual, a fine up to S$500,000, or imprisonment up to 10 years, or both; or

b) If non-individual, a fine of S$1 million.

Sections 48(1) & (2)

TIPPING – OFF OFFENCES

Disclosure Relating to Authorised Officer’s Investigation & Lodging of Suspicious Transaction Report (STR)

Any person who:

a) Knows or has reasonable grounds to suspect that an Authorised Officer is acting or is proposing to act in connection with an investigation which is being or is about to be, conducted under or for the purpose of the CDSA; or




b) Knows or has reasonable grounds to suspect that a disclosure has been or is being made to an Authorised Officer under the CDSA; and

c) Discloses to any other person information or any matter which is likely to prejudice the investigation which might be conducted following the discussion,

shall be guilty of an offence.

Section 48 (1) & (2)

PENALTY FOR BREACH OF SECTION 48(1) & 48(2)

- Fine up to S$30,000 or - Imprisonment up to 3 years or - Both

Section 49 (1)

DISCLOSURES RELATING TO PRODUCTION ORDER OR SEARCH WARRANT

Where, in relation to an investigation into drug trafficking or criminal conduct, as the case may be, an order under Section 30 (Production Order) has been made or has been applied for and has not been refused or a warrant under Section 34 (Search Warrant) has been issued, a person who, knowing or suspecting that the investigation is taking place makes any disclosure which is likely to prejudice the investigation shall be guilty of an offence.

Section 49(1) & (3)

PENALTY FOR BREACH OF SECTION 49(1) & (3)

A person who commits an offence under section 49(1) or (3) shall be liable on conviction to:

- Fine up to S$30,000 or - Imprisonment up to 3 years or - Both

Section 39(1) &(2)

OFFENCE FOR FAILURE TO DISCLOSE KNOWLEDGE OR SUSPICION OF ILLEGAL AND SUSPICIOUS TRANSACTION REPORTING (STR)

A person who knows or has reasonable grounds to suspect that any property:

a) In whole or in part, directly or indirectly represents the proceeds of;

b) Was used in connection with;

c) Is intended to be used in connection with any act which may constitute drug trafficking or criminal conduct and the information or matter on which knowledge or suspicion is based came to his attention in the course of his trade, profession, business or employment;

he shall disclose the knowledge or suspicion or the information or such matter to an authorised person (the STR Officer) who upon receiving the information shall report to the authorities (CAD and MAS).

Section 39(2)

PENALTY FOR FAILURE TO REPORT SUSPICIOUS TRANSACTIONS

Fines not exceeding S$20,000.

Sections 39(6), 43(3), 44(3) & 45(1)

STATUTORY PROTECTION IN REPORTING

Sections 39(6),43(3) &44(3) of the CDSA provide comprehensive statutory protection to an institution, and their employees in making STRs under the CDSA, specifically:

a) The disclosure shall not be treated as a breach of law, contract or rules of professional conduct prohibiting disclosure of information (e.g. secrecy laws);




b) The person making the disclosure shall not be liable for any loss arising from the disclosure or any action or omission in consequence of the disclosure to the STR Officer; or

c) The identity of the person making the STR cannot be revealed in any civil or criminal proceedings, subject to the power of the Court to prevent to permit inquiry and require disclosure under certain circumstances.

Section 37(1) & 36(1)

RECORD KEEPING

Section 37(1) provides for the statutory duty to keep records.

Institutions are required to retain Financial Transactions Documents (FTDs) for a minimum period.

a) FTDs are defined in Section 36(1) to refer to any document that relates to financial transactions carried out by the bank, and includes but is not limited to:

- Opening/closing of account - Operation of account - Opening or use of deposit box - Telegraphic or electronic fund transfer - Transmission of funds between Singapore and a foreign country/countries - Loan application forms - Customer identification records

b) Minimum period of retention is 5 years after the day the account is closed.

Section 37(3)

PENALTY FOR FAILURE TO RETAIN FTDs

Failure to retain FTDs (such as above) shall be guilty of an offence and shall be liable on conviction to a fine not exceeding S$10,000.

Section 38(1) &(2)

KEEPING REGISTER OF ORIGINAL FTDs RELEASED

An institution may be required by law to release original FTD before the end of the minimum retention period applicable to FTD. In such instances, the institution must retain a complete copy of the original FTD released until the end of the minimum period or until the original FTD is returned, whichever occurs first. It must also maintain a register of all FTDs released.

Section 38(3)

PENALTY FOR FAILURE TO RETAIN COPY OR MAINTAIN REGISTER

Failure to retain copy and maintain register is an offence and if convicted shall pay a fine not exceeding S$10,000

Section 31(1)

PRODUCTION ORDER

All institutions must comply with a Production Order issued under Section 31 (1) of the CDSA by the High Court within 7 days or period specified in the Order from the date of the Order.

Section 33(2)

PENALTY

Failure to comply with Production Order shall be liable on conviction to:

- Fine up to S$10,000 or - Imprisonment up to 2 year or - Both




Section 34

SEARCH WARRANT

All institutions must comply with a search warrant issued by the court under the CDSA.

Section 34(6)

PENALTY

Failure to comply with a search warrant and obstructing an Authorised Officer shall be guilty of an offence and on conviction shall be liable to:

- A fine up to S$10,000; or - Imprisonment up to 2 years; or - Both

Sections 4, 5 16, 17 & 18

RESTRAINT ORDER, CHARGING ORDER AND CONFISCATION ORDER

Besides a Production Order and a search warrant, all institutions must also comply with a Restraint Order, Charging Order and Confiscation Order. A person who fails to comply with such orders issued by the Court may be charged for contempt of court.

6.3.3 The Mutual Assistance in Criminal Matters Act. Cap 190A (MACMA)

MACMA was passed by Parliament in 2000 which was enacted to allow the Government of Singapore to provide mutual assistance to other countries, in relation to investigations or criminal proceedings for offences covered under the Act. This is because money laundering or terrorism financing crimes usually also involve cross-border transactions. It is difficult to only see one side of the transactions and during investigation, it is easier and more effective if both sides of the transactions are investigated and analysed. This is especially so where it involves high value ticket items where investments can be outside the country.

6.3.4 Terrorism (Suppression of Financing) Act, Chapter 325 (TSOFA)

The TSOFA was enacted to give effect to the International Convention for the Suppression of the Financing of Terrorism which Singapore signed in 2001 and the United Nations Security Council Resolution 1373. The TSOFA criminalises terrorism financing and allows for the seizure and confiscation of property related to terrorist and terrorism purposes. It also imposes a duty on all to provide information pertaining to terrorism financing to the Police, and failure to do so is a criminal offence.

6.4 MAS Notices & Regulations on Prevention of Money Laundering & Countering the Financing of Terrorism

6.4.1 MAS Notice on Prevention of Money Laundering and Countering the Financing of Terrorism (SFA 04-N02 and MAS Notice 626)

The Notice sets out the obligations for a CMS licence holder to take measures to help mitigate the risk of Singapore’s capital markets being used for money laundering or terrorist financing. All capital markets intermediaries (or CMI3) are required to comply with the Notice and Guidelines. The Notice sets out the

3 “CMI” means a person holding a capital markets services licence, unless they are exempted under the Second Schedule to the Securities and Futures (Licensing and Conduct of Business). Regulations



principles guiding the conduct of CMS licence holders in preventing the system from being used for criminal purposes and the due diligence required to be performed with proper controls to be implemented.

6.4.2 MAS Notices and Circulars to All Financial Institutions on Sanctions and Regulating Financial Institutions

MAS has issued several more guidelines on safeguarding the financial system integrity against risks emanating from dealing with sanctioned countries and sanctioned individuals or persons dealing in sanctioned activities in sanctioned countries. These guidelines include:

Taking appropriate action to meet the recommendations of the FATF;

Doing enhanced due diligence and give particular attention to business relations and transactions with persons from or in sanctioned countries;

Protecting against the use of correspondent banking relationships and front companies to shield illicit activities and be alert generally to the impact of dealing with sanctioned countries; and

Freezing assets and report suspicion of money laundering and terrorist financing when alerted, and to prevent release of assets without approval from the regulator.

6.4.3 MAS Guidelines on Safeguarding Financial System Integrity against Risks Emanating from Iran4

In the abovementioned guidelines, the MAS has advised financial institutions to take appropriate actions as recommended by the FATF. Accordingly, CMS licence holders should conduct enhanced due diligence and transactions monitoring on Iran-related business relationships. In particular, a CMS licence holder should protect against the use of correspondent banking relationships and front companies to shield illicit activities. CMS licence holders should also be alert to unilateral sanctions against Iran-related transactions – as these actions may apply extraterritorially and could have a bearing on its reputation and operations. A CMS licence holder’s Board and senior management should assess and consider their impact when making commercial decisions.

6.5 Targeted Financial Sanctions related to Anti-Money Laundering and Terrorism Financing

As a member of the United Nations (UN), Singapore is committed to implementing and giving effect to the sanctions under the UN Security Council Resolutions. These resolutions may require imposing targeted financial sanctions against specific individuals and/or entities identified by the UN Security Council which possibly present a particular threat to, or breach of, international peace and security. These sanctions are made legally binding through the MAS Regulations and are applicable to all financial institutions in Singapore.

In general, the MAS Regulations require financial institutions to:

Immediately freeze funds, other financial assets or economic resources of designated individuals and

entities;

Not enter into financial transactions or provide financial assistance or services in relation to: (i) designated

individuals, entities or items; or (ii) proliferation and nuclear, or other sanctioned activities; and

4 MAS Guidelines on Safeguarding Financial System Integrity against Risks Emanating from Iran (11 May 2012)

http://www.mas.gov.sg/Regulations-and-Financial-Stability/Anti-Money-Laundering-Countering-The-Financing-Of-Terrorism-And-Targeted-Financial-Sanctions/Targeted-Financial-Sanctions/Lists-of-Designated-Individuals-and-Entities.aspx




Notify MAS of any fact or information relating to the funds, other financial assets or economic resources

owned or controlled, directly or indirectly, by a designated individual or entity.

Under the MAS Act, a financial institution that is in breach of any MAS Regulations is guilty of an offence and will be liable on conviction to a fine not exceeding $1 million.

Before engaging in a business relationship or providing any financial service, financial institutions must ensure that they do not deal with designated individuals and entities. Financial institutions are required to conduct comprehensive screening of their prospective and existing clients against the lists of designated individuals and entities to proactively avert themselves from linking to AML/CFT activities.

CMS licence holders should refer to the lists of targeted financial sanction regulations5 and lists of designated individuals and entities6 for detailed information on their respective obligations under the UN or MAS Regulations.

6.6 Designation of Tax Crimes as Money Laundering Predicate Offences in Singapore

With effect from 1 July 2013, the offences of tax evasion and serious fraudulent tax evasion under the Income Tax Act and the Goods and Services Tax (GST) Act have been designated as money-laundering (ML) predicate offences.

6.6.1 What are the Tax Offences?

Singapore will designate tax offences under Sections 96 and 96A of the Income Tax Act and Sections 62 and 63 of the Goods and Services Tax Act as ML predicates for direct tax and indirect tax offences respectively.

6.6.2 Direct Tax Offences under Sections 96 & 96A of the Income Tax Act

1. Section 96 - Tax Evasion

Any person who wilfully with intent to evade or to assist any other person to evade tax:

i. Omits from a return made under this Act any income which should be included;

ii. Makes any false statement or entry in any return made under this Act or in any notice made under Section 76 (8);

iii. Gives any false answer, whether verbally or in writing, to any question or request for information asked or made in accordance with the provisions of this Act; or

iv. Fails to comply with Section 76(8).

2. Section 96A - Serious Fraudulent Tax Evasion

Any person who wilfully with intent to evade or to assist any other person to evade tax:

5 For the current list of targeted financial sanctions regulations, please refer to the MAS website at: http://www.mas.gov.sg/Regulations-and-Financial-Stability/Anti-Money-Laundering-Countering-The-Financing-Of-Terrorism-And-Targeted-Financial-Sanctions/Targeted-Financial-Sanctions/MAS-Regulations.aspx

6 For the current list of designated individuals and entities, please refer to the MAS website at: http://www.mas.gov.sg/Regulations-and-Financial-Stability/Anti-Money-Laundering-Countering-The-Financing-Of-Terrorism-And-Targeted-Financial-Sanctions/Targeted-Financial-Sanctions/Lists-of-Designated-Individuals-and-Entities.aspx



http://www.mas.gov.sg/Regulations-and-Financial-Stability/Anti-Money-Laundering-Countering-The-Financing-Of-Terrorism-And-Targeted-Financial-Sanctions/Targeted-Financial-Sanctions/MAS-Regulations.aspx

http://www.mas.gov.sg/Regulations-and-Financial-Stability/Anti-Money-Laundering-Countering-The-Financing-Of-Terrorism-And-Targeted-Financial-Sanctions/Targeted-Financial-Sanctions/MAS-Regulations.aspx






i. Prepares or maintains or authorises the preparation or maintenance of any false books of account or other records or falsifies or authorises the falsification of any books of account or records; or

ii. Makes use of any fraud, art or contrivance or authorises the use of any such fraud, art or contrivance.

6.6.3 Indirect Tax Offences Covered by Sections 62 & Sections 63 of the GST Act

1. Section 62 - Tax Evasion

Any person who willfully with intent to evade or to assist any other person to evade tax:

i. Omits or understate any output tax or overstates any input tax in any return made under this Act;

ii. Makes any false statement or entry in any return, claim or application made under this Act;

iii. Gives any false answer, whether verbally or in writing, to any question or request for information asked or made in accordance with the provisions of this Act;

iv. Prepares or maintains or authorises the preparation or maintenance of any false books of account or other records or falsifies or authorises the falsification of any books of account or records; or

v. Makes use of any fraud, art or contrivance whatsoever or authorises the use of any such fraud, art or contrivance.

2. Section 63 - Improperly Obtaining Refunds

Any person who knowingly:

i. Causes;

ii. Attempts to cause;

iii. Does any act with intent to cause; or

iv. Makes default in performance of any duty imposed upon him by this Act with intent to cause; the refund to that person by the Comptroller of any amount in excess of the amount properly so refundable to him.

Implications - What does this mean for the industry?

Financial institutions must apply the full suite of anti-money laundering/countering the financing of terrorism measures as contained in the relevant MAS Notices, to prevent the laundering of proceeds from serious tax crimes. This involves the conduct of rigorous customer due diligence and transactions monitoring, as well as, proper reporting of suspicious transactions. Financial institutions must adequately identify and assess tax related risks and take action to appropriately manage and mitigate those risks. These requirements will apply to both new and existing accounts.

6.7 The Three Lines of Defence

The board of directors and senior management of a CMS licence holder are ultimately responsible and accountable for ensuring compliance with AML/CFT laws, regulations and notices. CMS licence holders must identify and assess ML/TF risks on an enterprise-wide level, as well as have policies and procedures to assess ML/TF risks presented by an individual customer. The board of directors and senior management should also set a clear risk appetite and develop a compliance culture throughout their organisation.



6.7.1 The 1st Line of Defence – Business Units

Business units (e.g. front office, customer-facing functions and operations within the business) are the 1st line of defence in identifying, assessing and controlling ML/TF risks of their businesses. Robust controls are needed to detect illicit activities, and there should be sufficient resources allocated to perform these functions effectively. Employees and representatives in business units should be adequately trained and CMS licence holders should clearly communicate their policies, procedures and controls on AML/CFT and provide clear guidance and instructions to ensure compliance with prevailing AML/CFT rules and regulations.

6.7.2 The 2nd Line of Defence – Compliance and AML / CFT Unit Functions

The 2nd line of defence includes the AML/CFT functions within the financial institutions, as well as other support functions such as risk management and permanent control. These functions work together to identify ML/TF risks and are responsible for ongoing monitoring of AML/CFT obligations of the CMS licence holders. The AML/CFT compliance function should alert the senior management or the board of directors of the CMS licence holders of any potential breaches or ML/TF risks and concerns. The AML/CFT compliance function is typically the contact point regarding all AML/CFT issues for domestic and foreign supervisory or law enforcement authorities and financial intelligence units.

6.7.3 The 3rd Line of Defence – Internal Audit Function

The internal audit function is the 3rd line of defence and plays an important role in conducting independent and periodic evaluations on the AML/CFT risk management framework, policies, procedures and controls of the CMS licence holder and reports to the audit committee of CMS licence holder which is typically formed by the board of directors, or a similar oversight body.

6.8 Client Onboarding

When onboarding clients, it is important to obtain information from the client to assess his source of funds and wealth, as well as his reputation. CMS licence holders must ensure that they do not open any anonymous accounts or accounts in fictitious names. Much time and effort would be required to be spent on:

(a) Legal due diligence by the lawyers on the legal aspects (in particular for foreign based companies, on the legality of the ownership of assets and operating businesses, the identity of the ultimate and beneficial shareholders and the obtaining of all necessary registrations and licences); and

(b) Audit due diligence by the accountants or external auditors on the accounting aspects (in particular, whether the accounts have been properly drawn up, whether there are material weaknesses in the business and accounting framework and going through the profit projections in detail).

Besides relying on publicly available information, independent private investigators may be appointed to uncover more background information on the promoters, especially if they are politically connected, in particular on their character and integrity and to carry out spot checks on ascertain whether the foreign based companies are truly ongoing concerns with actual production taking place on a sustained basis.

6.8.1 Gathering Personal Information

When gathering information it is important to obtain:

Client’s personal details such as age, education, address / residency, identification, employment, family, health and any other information which can be obtained in order to form any opinion of the client if he is



an individual. This information is important to assess his lifestyle and whether his wealth seems to commensurate with his income from employment and family background.

If it is a corporate body then it is important to know the country of incorporation, the country of activity and the type of business the client is in, the financials and organisation structure of the company, shareholders and directors to determine the standing of the company and the risk score and profile of the company for money laundering assessment purposes.

If the customer is a partnership or a limited liability partnership, it is important to also identify the partners. An example of a natural person with executive authority in a partnership is the Managing Partner.

If the customer is not an individual, any persons with authority to act on behalf of them must also be identified.

6.8.2 Account Opening – Know Your Client

Before opening an account for a client, it is important for a representative to:

Investigate the client’s background, including close family members

Verify sources of wealth, both historical and current

Investigate current business and income

Investigate political connections, business associates and close friends

Learn about the client’s investments experience and knowledge

Determine risk appetite

Establish objective for the account

1. Where to get information about clients?

Internet

Newspapers and other news sources

Company reports

Official subscribed databases such as: Factiva or Complinet

Intermediary Introduction certificates and disclosures

Others – e.g. grapevine

2. Which information source is the most reliable?

Official subscribed databases and original identification records are reliable because official databases provide indemnity and assurances of accuracy of information but is expensive. Original documents issued by regulatory bodies are accepted because they are issued by regulatory bodies. Other sources like newspapers, internet and the grapevine must not be taken as accurate but can be used to make further checks. Information which is not authenticated should not be relied upon fully. Intermediaries’ disclosures should only be relied upon if its reputation and reliability has been assessed. Otherwise it is best to carry out due diligence directly.

6.8.3 Documentation and Verification of Client Information

Documentation which can be used to verify client information includes:

Individual – ID/passports, address proof

Corporates – business constitution documents, board resolutions, ID documents of ultimate beneficial owner, signatories

Offshore companies – as above, plus certificate of incumbency & good standing. Determine whether shares are registered or bearer.



Trust structures – trust deed, trustee’s resolution, letter of reference from trustee, Identity documents of ultimate beneficial owner.

6.8.4 Client Acceptance Checks

The following checks should also be done to determine whether the client should be accepted:

Checks in subscribed databases such as Factiva.com, Complinet.com, Internet

Origin of wealth

Reputation risk

Whether it is a Listed Company

All other relevant information deemed fit and then allocate accordingly

Sensitivity criteria

Before a CMS licence holder establishes business relations or undertakes any transaction without opening an account, if the CMS licence holder has reasonable grounds to suspect that the assets or funds of a customer are proceeds of drug dealing or criminal conduct as defined in the CDSA, or are related to terrorism financing , the CMS licence holder shall:

i. Not establish business relations with, or undertake a transaction for the client; and ii. File an STR, and extend a copy to MAS for information.

6.8.5 Questions to Ask During Client Onboarding

1. Client’s Activities

Questions or important issues to consider include:

Is the company’s ownership transparent?

Is the tax corporate structure designed for tax efficiency or to hide bad business practices?

Does the company’s trading record make sense?

Does the company generate unusually large amounts of cash and if so, do large amounts of cash make sense for this kind of company?

Are there contacts that do not make financial sense?

2. Shareholders & Ultimate Beneficial Owners

CMS licence holders must take reasonable measures to identify the identities of the ultimate BOs. If the customer is not a natural person, reasonable steps must be taken to understand the customer’s ownership and control structure. Questions or important issues to consider include:

Is the client or any of its shareholders, directors, beneficial owners, authorised signatories and members of management a politically exposed person such as a member of government or the armed forces, or a diplomat who might have derived unusual wealth from illicit activities?

Do customer behaviour and service requests indicate a desire for an inappropriately high level of anonymity such as hiding behind trusts and offshore companies?

When sending or receiving funds, are the sources consistent with the customer’s profile?

What are their sources of wealth?



Unless there are other reasons to suspect money laundering, CMS licence holders are not required to inquire if any of the customer’s ultimate BOs are:

i. A Singapore government or foreign government entity;

ii. An entity listed on SGX or any stock exchange outside of Singapore that is subject to regulatory disclosure requirements and requirements relating to adequate transparency in respect of its beneficial owners (imposed through stock exchange rules, law or other enforceable means);

iii. A financial institution supervised by MAS (other than holders of a money changer’s or remittance licence);

iv. A financial institution incorporated or established outside Singapore that is subject to and supervised for compliance with AML/CFT requirements consistent with standards set by the FATF; or

v. An investment vehicle where the managers are (i) financial institutions supervised by MAS; or (ii) incorporated or established outside Singapore but are subject to and supervised for compliance with AML/CFT requirements consistent with standards set by the FATF.

3. Source of Funds

Questions or important issues to consider include:

Are you satisfied with the legitimacy of source of funds?

Have funds come from unexpected sources?

Can the ownership of funds be established?

Are the transactions consistent with the customer’s profile?

Does the source of funds and the wealth of the client tally with the nature of the transaction?

Does the flow of funds reflect the type and nature of business the customer is in?

Are the payment to and/or from jurisdictions with inadequate AML/CFT laws?

6.8.6 Risk Based Approach to Client On-Boarding

CMS licence holders must give particular attention to business relations and transactions with any customers from or in countries and jurisdictions that are known to have inadequate AML/CFT measures. Under the Risk Based Approach, CMS licence holders are allowed to accord higher or lower risk scores to different customers, which determine how frequently the customers’ accounts should be reviewed. Generally, most financial institutions use most of the following risk rating criteria depending on each institution’s internal policies:

i. PEP (refer to Section 6.8.15) ii. Country iii. Activity (Client data base) iv. Size of wealth v. Flow through (finance system) vi. Last client visit date vii. Complex structure viii. Unusual services ix. Origin and destination of funds x. Any “other criteria” that may be appropriate

These factors would enable CMS licence holders to allocate a risk score to the client to determine the appropriate follow up response, i.e. whether to monitor or take immediate action on the client. An example of a risk evaluation matrix that a CMS licence holder might use is shown on the following page:



Figure 6.8.6(1) – Example of a Risk Evaluation Matrix

Source: FATF Guidance on National Money Laundering & Terrorist Financing Risk Assessment (February 2013)

CMS licence holders should score their ML/TF risks accordingly and ensure that they have a dynamic scoring system which can account for changes in transaction volumes or other relevant information. 1. Country Risk Rating

Different countries may be accorded with different risk ratings depending on factors such as governance, transparency, financial sector standards, etc. According to the Basel AML Index Scores & Rankings7, some countries which are considered low risk or high risk include:

• Low risk countries - Australia, New Zealand, Singapore, United Kingdom • High risk countries - Cambodia, Guinea, Kenya

The table on the following page shows an extract from the Basel AML Index Report 2015.

7 Basel AML Index 2015 Report, 4th edition on 18 August 2015, page 2. This version includes a slightly adjusted methodology accounting

for changes in the FATF evaluations, which is one of the key components used to calculate the Basel AML Index. Refer to https://index2015.baselgovernance.org/sites/index/documents/Basel_AML_Index_Report_2015.pdf for more details

https://index2015.baselgovernance.org/sites/index/documents/Basel_AML_Index_Report_2015.pdf



Table 6.8.6(2): Basel AML Index Scores and Rankings 2015

2. Business Risk Rating

Some examples of businesses which might be exposed to higher ML/TF risks include:

Personal investment companies

Trusts, gambling and sports-betting related enterprises

Alternative remittance systems and money service business

Precious metals & diamond related businesses

Cash-intensive businesses such as travel agencies, pawnbrokers, restaurants, convenience stores, money changers which may mix proceeds from genuine businesses with illegitimate income.



Example – Risk Scoring of a Potential Client

Mr A is a potential client. He operates a trading company incorporated in Cambodia. He trades with a counterpart in Kenya who is in the precious stones industry. He seems to be a reclusive person who does not visit often and the company he is using to open the account is incorporated in Panama, and he has asked his employee to operate the account for him with a limited power of attorney. According to the Basel AML Index Scores & Rankings 2015, Cambodia is a high risk country, as well as Kenya and Panama.

What would you consider this account’s risk score to be?

Cambodia - High Kenya - High Panama - High

His business activity dealing in precious stones business is high risk. If you add up all the factors, it will have a high risk score. This should trigger Enhanced Due Diligence and even after proper validation and acceptance, he should be put on the annual review cycle.

3. Other Business Activities Exposed to Risk

Accountants, Lawyers, Notaries, Trustees, Offshore Trustees - These professions set up accounts for third parties, which may be conduits for money laundering whereby the beneficiary of the account makes use of the credibility attached to the accountant, lawyer, notary or Trustee’s name as a front.

Import/ Export of Retail items, Shipping Companies - These business activities can be used for trade-based money laundering through false trade pricing, multiple invoicing or fabricating shipments.

Example - Kiting

A company set up by a reputable law firm may be used for a scam to defraud banks via “kiting”. Kiting is a process whereby a person deposits an overseas bank’s cheque for a certain sum into his account which usually is a very large sum. Knowing that there will be no funds upon presentation for clearing and that it takes longer for foreign cheques to be cleared and notification of funds availability to be made, the person then takes advantage of the time gap, and arranges for withdrawal of the amount against the uncleared effects. Once the withdrawal is done, the ultimate BO disappears with the funds. By the time the bank is notified of the non-clearance of the cheque deposited, he would have fled and the bank discovers that the company is merely a shell.

As the company was set up by a reputable firm, it was assumed that the persons behind the company were good for the credit. Financial institutions should not make such assumptions but should have policies in place for independent checks on the customer. This can happen to capital market intermediaries too when payments are made by cheques for securities purchases. It should have policies in place not to allow release of securities until the cheques have been cleared.

It is important to look at the country’s risk, the client’s business activity, whether it come through intermediaries and whether its shareholders and ultimate beneficiary can be clearly traced so that the assigned risk rating provides guidance to the need to focus attention when on-boarding or monitoring the account.

6.8.7 Non-Face-to-Face Business Relations or Customers

CMS licence holders should implement policies and procedures to address specific risks related with business relationships or transactions where there is no face-to-face verification.



CMS licence holders should also keep abreast with the ML/TF risks associated with new technological and cross-border developments, as it may create specific risks associated with non-face-to-face business relations with a client or transactions for a client. For example, CMS licence holders must be able to distinguish specific risks and develop policies and procedures to mitigate these risks that arise from mobile or online trading, as ML/TF risks may be aggravated due to the ease of unauthorised access, absence of physical documents, and so on.

The policies and procedures for establishing new customer relationships or conducting ongoing due diligence should ensure that the due diligence measures carried out for such non-face-to-face business relations are as stringent as those that would be performed if there was face-to-face contact. CMS licence holders should also perform additional checks if there is no face-to-face contact with the business or the customer, such as robust anti-fraud checks.

6.8.8 Timing for Verification

CMS licence holders must complete verification of the identity of a customer, natural persons appointed to act on behalf of the customer and beneficial owners of the customer:

i. before the CMS licence holder establishes business relations with the customer; or

ii. before the CMS licence holder undertakes any transaction of a value exceeding S$20,000 for the customer, where the customer has not otherwise established business relations with the CMS licence holder.

However, there are some circumstances where CMS licence holders may establish business relations with a customer before verifying its identity, if it is essential in order not to interrupt the normal conduct of business operations is securities trades, where timely execution of trades is critical given changing market conditions.

A technique which CMS licence holders may apply to effectively manage the ML/TF risks arising from the deferral of completion of verification is to put in place appropriate limits on the financial services available to the customer (e.g. limits on the number, type and value of transactions that can be effected) and employ closer monitoring procedures, until the verification has been completed. CMS licence holders should develop and implement internal risk management policies and procedures concerning the conditions under which such business relations may be established prior to verification. They should also ensure that:

(a) verification is completed as soon as is reasonably practicable;

(b) completion of verification should not exceed 30 business days after the establishment of business relations;

(c) if verification remains uncompleted 30 business days after the establishment of business relations, CMS licence holder should suspend business relations with the customer and refrain from carrying out further transactions (except to return funds to their sources, to the extent that this is possible);

(d) if verification remains uncompleted 120 business days after the establishment of business relations, the CMS licence holder should terminate business relations with the customer; and

(e) these time limitations are factored into its policies, procedures and controls.

6.8.9 Screening

CMS licence holders must conduct screening of their customers before establishing business relationships, irrespective of the customers’ risk profiles. If the screening results in a positive hit against sanctions lists, they are obligated to freeze the funds or assets of designated persons and entities that it has control over, in order to comply with applicable laws and regulations in Singapore. Such assets should be reported promptly to the relevant authorities and a Suspicious Transaction Report (refer to Section 6.8.17 for details).



Screening is normally conducted as an automated process against available databases, so CMS licence holders should consider the nature, size and risk profile of their business and should be aware of any shortcomings in their automated screening systems (e.g. when using “fuzzy matching” to identify non-exact matches).

Periodic screening should be conducted to monitor any changes in customers’ status or risks, or to assess whether to impose additional ML/TF risk mitigation measures (e.g. enhanced CDD measures). CMS licence holders should also ensure that there are adequate arrangements to perform screening of their customer database when there are changes to the lists of sanctioned individuals and entities. CMS licence holders should implement “four-eye checks” or quality assurance checks on alerts from sanctions reviews before closing alerts.

6.8.10 Simplified Customer Due Diligence

As CMS licence holders are allowed to do risk-based Customer Due Diligence (CDD), simplified CDD can be considered if the money laundering risks are low, or if the customer is a specified type of financial institution under MAS’ supervision. The following could be considered as ‘’low-risk’’:

a) For companies listed on stock exchange and subject to regulatory disclosure requirements (relating to adequate transparency in respect of beneficial owners (imposed through stock exchange rules law or other enforceable means);

b) Where reliance can be placed on another regulated financial intermediary incorporated or established outside Singapore that is subject to and supervised for compliance with AML/CFT requirement consistent with standards set by the FATF but with a confirmation that due diligence has indeed been carried out and is satisfactory.

c) The customer is a financial institution under MAS supervision; and

d) The customer is a Singapore government entity. However, if there are reasons to believe there may be questionable information on a potential client then full due diligence should be conducted. For example, when an intermediary is on MAS sanctioned list or warning list, or when intermediary is unwilling to provide information or document. Simplified CDD should not be performed if the CMS licence holder suspects that money laundering or terrorist financing is involved.

Reliance on Third Parties

There is a separate provision permitting a CMS licence holder to rely on a third party (namely, specific types of financial institutions), subject to certain conditions. Reliance on such a third party does not diminish the responsibility of the CMS licence holder in fulfilling its obligations to the regulations and regulator. In instances where CMS licence holders or financial institutions rely on intermediaries to perform CDD, the financial institutions would need to immediately obtain the CDD information from the intermediaries. If this is not done, CMS licence holders should carry out their own due diligence.

6.8.11 Enhanced Due Diligence (EDD)

When the Risk Score is high, a CMS licence holder and its Representative must carry out EDD. EDD is conducted on potentially high risk customers, geographical risk and product/service/transaction or delivery channel risk as well as local and foreign politically exposed persons. Examples of “high risk” clients include clients who:

• conduct business in higher risk businesses activities/sectors identified by the CMS licence holder or in Singapore’s National ML/TF Risk Assessment (NRA);

• have an ownership structure that appears unusual or excessively complex given the nature of the legal person’s or legal arrangement’s business;



• are legal persons or legal arrangements that are personal asset holding vehicles;

• conduct their business relationships under unusual circumstances (e.g. significant unexplained geographic distance between the bank and the client);

• are companies that have nominee shareholders or shares in bearer form; or

• are cash intensive businesses

Examples of higher geographic risk include countries or jurisdictions which have been as identified by the FATF or other credible international bodies such as Transparency International as having significant levels of corruption, terrorism financing, inadequate ML/TF mitigating measures or other criminal activity.

Examples of product/service/transaction or delivery risk include:

• anonymous transactions (which may involve cash); or

• frequent payments received from unknown or associated third parties.

6.8.12 Red Flags in Account Opening

Examples of red flags to watch out for include:

Prospective client is evasive about source of funds

Business activity is inconsistent with business profile

Client’s background and profile do not match the size of account relationship and conduct of account

Windfall or lump sum payments that are unexplained

Unclear purpose of account

Non-transparent ownership

6.8.13 Escalation

Due diligence is an on-going process, so for those accounts with “higher risk”, an annual review is necessary. Representatives must determine whether the client’s background and profile matches the size of account relationship and conduct of the account. As a representative, if you identify any red flags or potential AML/CFT issues when managing the client relationship, these should be highlighted to your supervisor or compliance immediately. You can recommend ending the business relationship with client for AML/CFT reasons. The decision and reason to close the account must be recorded and filed.

6.8.14 Politically Exposed Person (PEP)

1. Who is a Politically Exposed Person (PEP)?

A person who has a prominent public function, in Singapore or overseas

Immediate family members of such a person

Close associate of such a person

“Prominent public functions” includes role held by heads of state, heads of government, government ministers, senior civil servants, senior judicial or military officials, senior executives of state owned corporations and senior political party officials.

There are different sensitivities for PEPs and PEPs should be classified based on such sensitivities, for example:

Whether the person is a current PEP, a high ranking official or an active PEP who has retired;

Subscription to databases for checking PEP names;



System scanning of PEPs through the client database even after the relationship has commenced. The client may not be a PEP when the account was opened but may have become a PEP subsequently; or

Higher Risk Score to be accorded to PEPs.

In addition to performing CDD measures specified above, a CMS licence holder should also put in place proper policies and procedures for EDD including but not limited to the following:

i. Implementing appropriate internal policies, procedures and controls to identify and determine if a customer or BO is a PEP i.e. a PEP policy;

ii. Obtaining the approval from the CMS licence holder’s senior management to establish or continue business relations where the customer or BO is a PEP or subsequently a PEP; and

iii. Establishing the source of wealth and source of funds of any customer or BO by appropriate and reasonable means.

2. When Does One Carry Out Enhanced Due Diligence?

A CMS licence holder shall perform EDD for customers, business relations or transactions which the CMS licence holder has assessed to present a higher risk of money laundering and terrorist financing. A CMS licence holder shall perform EDD for political exposed person or PEP (i.e. a natural person, who has prominent public functions in Singapore or a foreign country). EDD measures include:

Implementing appropriate internal policies, procedures and controls to determine if customers is a PEP;

Obtaining approval from senior management to establish or continue business relations in case where there

are sensitivities e.g. one of client’s group company is on a sanctioned list. Do we proceed with on-boarding?

Establishing the customer’s source of wealth or funds; and

Conducting enhanced monitoring of business relation with customer.

6.8.15 Personal Data Protection Act

The Personal Data Protection Act (PDPA) governs the collection, use, disclosure and care of personal data. Therefore, the PDPA has implications on CMS licence holders from such as legal action for sharing information or disclosing information if regulatory requests are made. It is important that the CMS licence holders incorporate disclosure clauses related to PDPA to the terms and conditions for account opening to provide for such situations. Failing which CMS licence holder may breach the PDPA which serves to maintain the confidentiality of clients’ information. It should be noted that express consent from customer is needed and should be obtained. CMS licence holders should add disclosure clauses or update its Terms & Conditions in account opening documents and check the “Do Not Call Registry” (DNC) if marketing calls is intended.

6.8.16 Record Keeping

All documents of checks and transactions with the client has to be kept for audit trail purposes and the retention period is for 5 years after termination of business with a client for client information and 5 years after the completion of each transaction.

6.8.17 Reporting Suspicious Transactions

CMS licence holders shall report any suspicious transactions to the Commercial Affairs Department (CAD) of the Singapore Police Force, as well as extend a copy of the report to MAS. When a suspicion arises, an investigation should be conducted by Compliance and management, and a Suspicious Transaction Report (STR) should be filed



within 15 days. For example, a transaction or circumstance could be considered suspicious and warrant filing a STR to the relevant authorities if the customer:

Is unable to complete CDD measures;

Is reluctant, unable or unwilling to provide any information requested by the CMS licence holder; or

Decides to withdraw a pending application to establish business relations or a pending transaction or to terminate existing business relations.

Additional reporting requirements are set out in the Notice on Reporting of Suspicious Activities and Incidents of Fraud. A CMS licence holder must lodge a report to the MAS, upon discovery of any suspicious activities and incidents of fraud where such activities or incidents are material to the safety, soundness or reputation of the CMS licence holder.

STRs should be filed to the Suspicious Transaction Reporting Office, Commercial Affairs Department of the Singapore Police Force, as required under the various Prevention of Money Laundering and Countering the Financing of Terrorism Notices applicable to it. For incidents of fraud, the CMS licence holder should lodge a police report and submit to the MAS a copy of the report. Where the CMS licence holder has not lodged a police report, it should notify the MAS of the reasons for its decision.

6.8.18 Policies & Procedures for Ongoing Monitoring

CMS licence holders must establish appropriate policies and procedures to combat financial crimes and appoint a central contact point or liaison for regulators.

During the course of business relations, CMS licence holders and representatives should observe the conduct of the customer’s account and transactions undertaken to ensure that the customer’s behaviour is consistent with their knowledge of the customer, its business and risk profile and where appropriate, the source of funds. Complex or unusually large transactions or unusual patterns of transactions that have no apparent or visible economic or lawful purpose should be given further scrutiny and attention.

CMS licence holders and representatives should make further inquiries into the background and purpose of any unusual transactions and document its findings with a view to making this information available to the relevant authorities should the need arise.

Periodic review of customer identification and beneficial ownership information should be conducted to ensure the information is kept up to date, particularly for higher-risk categories of customers.

6.8.19 Summary of a “KYC” Framework

A KYC framework can be summarised as follows:

Know Your Customers / customer selection

Maintain KYC documentation

Monitor Transactions

Report suspicious transaction to Management as well as to Compliance

Work with Compliance and Management to determine if transaction needs to be reported to the police/ central bank

Avoid tipping off A flowchart of the KYC process is shown on the following page.



Work Flow of the KYC Process (Figure 6.8.20)

KYC, Client Onboarding & Customer Due Diligence

CMS licence holder/ Representative gathers information about client (E.g. age, investment experience, source of funds)

Ask questions, perform identification and verification checks for red flags & simulate risk

Risk Score: LOW

Potential Clients

Yes Accept Client

No

Reject Client

Risk Score: High Conduct Enhanced Due Diligence

Yes

No

Checks Validated;

Red Flags Assessed;

Escalated to Senior Management

Accept Client



6.9 Enterprise-Wide Risk Assessment In addition to assessing the ML/TF risks presented by an individual customer, a CMS licence holder shall identify and assess ML/TF risks on an enterprise-wide level. This will include a consolidated assessment of its ML/TF risks that exist across all its business units, product lines and delivery channels.

In conducting an enterprise-wide risk assessment, the broad ML/TF risk factors that the CMS licence holder should consider include target customer markets and segments; countries or jurisdictions the CMS licence holder is exposed to, especially countries or jurisdictions with relatively higher levels of corruption, organised crime or inadequate AML/CFT measures, as identified by the FATF as well as the nature, scale, diversity and complexity of the business activities undertaken by the CMS licence holder. The scale and scope of the enterprise-wide ML/TF risk assessment should be commensurate with the nature and complexity of the CMS licence holder’s business. As far as possible, a CMS licence holder’s enterprise-wide ML/TF risk assessment should entail both qualitative and quantitative analyses to ensure that it accurately understands its exposure to ML/TF risks. A quantitative analysis of the CMS licence holder’s exposure to ML/TF risks should involve evaluating data on its activities using the applicable broad risk factors set out in the above paragraph. A CMS licence holder shall take into account all its existing products, services, transactions and delivery channels offered as part of its enterprise-wide ML/TF risk assessment, and make its own determination as to the risk weights to be given to the individual factor or combination of factors. To ensure its enterprise-wide assessments are up-to-date, a CMS licence holder should review its risk assessment at least once every 2 years or when material trigger events occur, whichever is earlier. Material events may include the acquisition of new customer segments or delivery channels, or the launch of new products and services by the CMS licence holders. The results of these reviews should be documented and approved by the senior management even if there are no significant changes to the CMS licence holder’s enterprise-wide risk assessment.

6.10 Operational Risk Controls to Prevent Financial Crimes

6.10.1 Prevention & Operational Control - “A Risk Management Framework”

In the Technology Risk Management Guidelines issued in June 20138, MAS had outlined its expectations of controls that have to be implemented to prevent fraud and other security breaches. These include:

Physical Security Controls through access to premises & controlled areas

Access control over systems and control of data integrity. Breaches of security will impact:

Banking Secrecy provisions in the Banking Act

Personal Data Protection Act

Civil Action

Fines

8 MAS Technology Risk Management Guidelines (June 2013)



Imprisonment Terms

Reputation

6.10.2 Responsibilities of Board of Directors and Senior Management

Board of Directors and senior management are responsible for instilling the following controls:

People selection (staff, vendors, contractors etc.)

Password access to premises & controlled areas

Password access to systems and information on a “Need to Know” or “Need to Have” basis

Requirement for periodic change of Password

No sharing of password to “sensitive” systems

Clean Desk Policy

Dual or Independent Control of Payment Instructions

Hold-mail Control

Training on IT awareness & Fraud

Audit

6.10.3 FRAUD – Prevention & Detection in Summary

F – Follow Policies & Procedures. If you don’t know what these are, ask compliance where to find them.

R – Report any suspicious transaction or inconsistencies to Compliance and Management through a whistle blowing process.

A – Act if you suspect and investigate.

U – Unite with Management, Compliance & Enforcement Agencies to bring perpetrators to justice.

D – Disciplinary action to be taken and criminal charges Imposed.

6.11 Reporting & Filing Requirements

A CMS licence holder shall have policies and procedures in place for the reporting of any suspicious transaction9 or client and an appropriate escalation process in place for the reporting of suspicious transactions. It should have a single reference point to whom all staff are instructed to promptly refer all transactions which are suspected of money laundering or used for terrorist activities.

This is to enable quick investigations to take place so that a decision can be taken to file a Suspicious Transaction Report (STR).

Once a decision is made to file an STR such filing must be done within 15 days of the case being referred to by the relevant staff. Such reports are to be filed with the Commercial Affairs Department of the Singapore Police with a copy to MAS. The report should include the investigation report and analysis with the reason to conclude why an STR is to be filed.

The CMS licence holder must maintain proper records of all transactions leading to the filing of the STR and these should be retained for the minimum retention period required of 5 years. A proper register of all STR filed and the supporting documents must similarly be maintained and retained for the minimum period. (Please refer to Appendix E for Examples of Suspicious Transactions)

9 MAS Notice SFA 04-N02 Appendix B – Examples of Suspicious Transactions



6.12 Penalties & Risks for Non- Compliance There are severe penalties for non-compliance with laws and regulations governing AML/CFT and sanctions and embargoes. It is also important to note that tipping offences carry with it both fines and imprisonment terms.

6.12.1 What is Tipping-off?

A person who knows or has reasonable grounds to suspect that:

(a) An authorised officer is acting or is proposing to act, in connection with an investigation which is being or is about to be conducted under or for the purposes of the CDSA; and

(b) Discloses to any other person information or any matter which is likely to prejudice any investigation which might be conducted following the disclosure, shall be guilty of an offence.

6.12.2 Penalties for Tipping-off

The penalty for tipping-off offences carries: - Fines up to $30,000; or - Imprisonment up to 3 years; or - Both a fine and imprisonment

The penalty for ML offences carries: - Fines up to $500,000; or - Imprisonment up to 10 years or - Both a fine and imprisonment

Failure to report a suspicious transaction faces a penalty of fine up to $20,000.

Failure to maintain financial transaction records carries fine up to $10,000.

Failure to maintain a register of all STR filed and records for the minimum period required will carry a fine of up to $10,000.

Failure to comply with a Production Order both under CDSA or MACMA will face a penalty of - Fine of up to $10,000 or - Imprisonment of up to 2 years or - Both a fine and imprisonment

Note that the penalties include fines and imprisonment terms which means the liability for non-compliance is a personal one as institutions can pay fines but cannot go to prison which implies that individuals are the ones who face the prison terms.

In addition to the above fines which are not exhaustive, it is also important to note that failure to comply may lead to:

i. Regulatory sanctions ii. Reputation Risks iii. Loss of business and thus face financial risks.



6.13 Training, Audit and Internal Control Framework

A CMS licence holder must have internal policies, procedures and an internal control framework to prevent financial crimes. These policies and procedures must be properly communicated to all staff. Such policies and procedures must include the naming of a central point of referral, reporting and filing of STR.

Compliance control programmes to include key performance indicators as well as control tests and procedures to check on PEPs, transactions and documentation requirements are in place after CDD or EDD. The Compliance function must be staffed by appropriately qualified staff and senior head of department.

A CMS licence holder must have an internal audit function that is adequately resourced and independent, and is able to regularly assess the effectiveness of its controls and compliance with regulatory requirements.

A training program should be in place to ensure that staff attends regular training on AML/CFT, fraud and other financial crimes prevention. It is important that such training be refreshed on a yearly basis. Training can be in the form e-learning, face-to-face training (whether internal or externally provided training, etc.) and such training received should be recorded for audit purposes.

In addition, there has to be proper policies and procedures in place for the proper selection of staff and their screening when hiring.

Appendix A - Criteria for the Assessment of a Customer Account Review | 164


Appendix A Criteria for the Assessment of a Customer Account Review1

1. A Customer who satisfies any of the following may be assessed as possessing the knowledge or experience in derivatives for the purpose of opening of a specified investment product trading account:

(a) The customer holds a diploma or has higher qualifications in accountancy, actuarial science, business, business administration, business management, business studies, capital markets, commerce, economics, finance, financial engineering, financial planning, computational finance and insurance;

(b) The customer has a professional finance-related qualification (e.g. Chartered Financial Analyst Examination conducted by CFA Institute, USA and the Association of Chartered Certified Accountants (ACCA) Qualifications);

(c) The customer has transacted in Specified Investment Products which are listed or quoted on a securities market or a futures market at least 6 times in the preceding 3 years; or

(d) The customer has a minimum of 3 consecutive years of working experience in the past 10 years, in the development of, structuring of, management of, sale of, trading of, research on or analysis of investment products; or the provision of training in investment products. Work experience in accountancy, actuarial science, treasury or financial risk management activities will also be considered relevant experience.

2. Where a customer is assessed to not possess knowledge or experience in derivatives, but subsequently

demonstrates sufficient understanding of the features and risks of derivatives through a learning module provided by an independent body as set out in the Practice Note on the Sale of Investment Products [SFA PN-01], the customer may be deemed to possess the knowledge to transact in specified investment products which are listed or quoted on a securities market or a futures market.

1 SFA04-N12 Notice on the Sale of Investment Products

165 | Appendix B - Criteria for the Satisfaction of the Customer Knowledge Assessment


Appendix B Criteria for the Satisfaction of the Customer Knowledge Assessment1

1. A Customer who satisfies any of the following may be assessed as possessing the knowledge or experience

in the unlisted specified investment product for the purpose of the satisfaction of the Customer Knowledge Assessment in the specified investment product concerned:

i. The customer holds a diploma or has higher qualifications in accountancy, actuarial science, business/business administration/business management/business studies, capital markets, commerce, economics, finance, financial engineering, financial planning, computational finance and insurance;

ii. The customer has a professional finance-related qualification (e.g. Chartered Financial Analyst Examination conducted by CFA Institute, USA and the Association of Chartered Certified Accountants (ACCA) Qualifications);

iii. The customer has invested in the following unlisted specified investment products:

(a) For transactions in collective investment schemes (referred to as “CIS”) and investment-linked life insurance policies (referred to as “ILPs”), the customer has transacted in CIS or ILPs at least 6 times in the preceding three years; or

(b) For transactions in specified investment products which are neither listed nor quoted on a securities market or a futures market (excluding CIS and ILPs), the customer has transacted in any specified investment products which are neither listed nor quoted on a securities market or a futures market (excluding CIS and ILPs) at least 6 times in the preceding 3 years; or

iv. The customer has invested in the following unlisted specified investment products has a minimum of 3 consecutive years of working experience in the past 10 years in the development of, structuring of, management of, sale of, trading of, research on and analysis of investment products or the provision of training in investment products. Work experience in accountancy, actuarial science, treasury or financial risk management activities will also be considered relevant experience.

2. Where a customer is assessed to not possess knowledge or experience in understanding to understand an unlisted specified investment product, but subsequently demonstrates sufficient understanding of the features and risks of that unlisted specified investment product through a learning module provided by an independent body as set out in the Practice Note on Recommendations on Investment Product [FAA PN-02], the customer may be deemed to possess the knowledge to trade in that unlisted specified investment product.


Appendix C - Risk Warning Statement for Overseas-Listed Investment Products | 166


Appendix C Risk Warning Statement for Overseas-Listed Investment Products

RISK WARNING

An overseas-listed investment product* is subject to the laws and regulations of the jurisdiction it is listed in. Before you trade in an overseas-listed investment product or authorise someone else to trade for you, you should be aware of:

The level of investor protection and safeguards that you are afforded in the relevant foreign jurisdiction

as the overseas-listed investment product would operate under a different regulatory regime.

The differences between the legal systems in the foreign jurisdiction and Singapore that may affect your ability to recover your funds.

The tax implications, currency risks, and additional transaction costs that you may have to incur.

The counterparty and correspondent broker risks that you are exposed to.

The political, economic and social developments that influence the overseas markets you are investing in.

These and other risks may affect the value of your investment. You should not invest in the product if you do not understand or are not comfortable with such risks. *An “overseas-listed investment product” in this statement refers to a capital markets product that is listed for quotation or quoted only on overseas securities exchange(s) or overseas futures exchange(s) (collectively referred to as “overseas exchanges”).

1. This statement is provided to you in accordance with paragraph 29D of the Notice on the Sale of Investment

Products [SFA04-N12].

2. This statement does not disclose all the risks and other significant aspects of trading in an overseas-listed investment product. You should undertake such transactions only if you understand and are comfortable with the extent of your exposure to the risks.

3. You should carefully consider whether such trading is suitable for you in light of your experience, objectives, risk appetite, financial resources and other relevant circumstances. In considering whether to trade or to authorise someone else to trade for you, you should be aware of the following:

Differences in Regulatory Regimes

(a) Overseas markets may be subject to different regulations, and may operate differently from approved exchanges in Singapore. For example, there may be different rules providing for the safekeeping of securities and monies held by custodian banks or depositories. This may affect the level of safeguards in place to ensure proper segregation and safekeeping of your investment products or monies held overseas. There is

167 | Appendix C - Risk Warning Statement for Overseas-Listed Investment Products


also the risk of your investment products or monies not being protected if the custodian has credit problems or fails. Overseas markets may also have different periods for clearing and settling transactions. These may affect the information available to you regarding transaction prices and the time you have to settle your trade on such overseas markets.

(b) Overseas markets may be subject to rules which may offer different investor protection as compared to Singapore. Before you start to trade, you should be fully aware of the types of redress available to you in Singapore and other relevant jurisdictions, if any.

(c) Overseas-listed investment products may not be subject to the same disclosure standards that apply to investment products listed for quotation or quoted on an approved exchange in Singapore. Where disclosure is made, differences in accounting, auditing and financial reporting standards may also affect the quality and comparability of information provided. It may also be more difficult to locate up-to-date information, and the information published may only be available in a foreign language.

Differences in legal systems

(d) In some countries, legal concepts which are practiced in mature legal systems may not be in place or may have yet to be tested in courts. This would make it more difficult to predict with a degree of certainty the outcome of judicial proceedings or even the quantum of damages which may be awarded following a successful claim.

(e) The Monetary Authority of Singapore will be unable to compel the enforcement of the rules of the regulatory authorities or markets in other jurisdictions where your transactions will be effected.

(f) The laws of some jurisdictions may prohibit or restrict the repatriation of funds from such jurisdictions including capital, divestment proceeds, profits, dividends and interest arising from investment in such countries. Therefore, there is no guarantee that the funds you have invested and the funds arising from your investment will be capable of being remitted.

(g) Some jurisdictions may also restrict the amount or type of investment products that foreign investors may trade. This can affect the liquidity and prices of the overseas-listed investment products that you invest in.

Different costs involved

(h) There may be tax implications of investing in an overseas-listed investment product. For example, sale proceeds or the receipt of any dividends and other income may be subject to tax levies, duties or charges in the foreign country, in Singapore, or in both countries.

(i) Your investment return on foreign currency-denominated investment products will be affected by exchange rate fluctuations where there is a need to convert from the currency of denomination of the investment products to another currency, or may be affected by exchange controls.

(j) You may have to pay additional costs such as fees and broker’s commissions for transactions in overseas exchanges. In some jurisdictions, you may also have to pay a premium to trade certain listed investment products. Therefore, before you begin to trade, you should obtain a clear explanation of all commissions, fees and other charges for which you will be liable. These charges will affect your net profit (if any) or increase your loss.

Counterparty and correspondent broker risks

(k) Transactions on overseas exchanges or overseas markets are generally effected by your Singapore broker through the use of foreign brokers who have trading and/or clearing rights on those exchanges. All transactions that are executed upon your instructions with such counterparties and correspondent brokers are dependent on their respective due performance of their obligations. The insolvency or default of such

Appendix C - Risk Warning Statement for Overseas-Listed Investment Products | 168


counterparties and correspondent brokers may lead to positions being liquidated or closed out without your consent and/or may result in difficulties in recovering your monies and assets held overseas.

Political, Economic and Social Developments (l) Overseas markets are influenced by the political, economic and social developments in the foreign

jurisdiction, which may be uncertain and may increase the risk of investing in overseas-listed investment products.

ACKNOWLEDGEMENT OF RECEIPT OF THIS RISK WARNING STATEMENT I acknowledge that I have received a copy of the Risk Warning Statement and understand its contents. Signature of customer: ______________________ Name of customer: _______________________

Date: ______________________

169 | Appendix D - Excluded Investment Products


Appendix D Excluded Investment Products1

Unless otherwise provided here, the terms used or referred to in this Annex shall have the same meanings assigned to them in section 2 of the Act or section 2 of the Financial Advisers Act (Cap. 110), where applicable.

“Excluded Investment Product” means:

i. any stocks or shares issued or proposed to be issued by a corporation or body unincorporate, other than where such corporation or body unincorporate is a collective investment scheme;

ii. any unit of a share which represents ownership of the underlying share, where –

(a) the underlying share is held on trust for the unit-holder by a custodian; and

(b) no additional consideration (other than administrative fees) is payable by the unit-holder in the event that he converts the unit of share into the underlying share;

iii. any right, option or derivative issued or proposed to be issued by a corporation or body unincorporate in respect of its own stocks or shares;

iv. any unit in a business trust;

v. any derivative of units in a business trust;

vi. any unit in a collective investment scheme, such collective investment scheme being an arrangement:

(a) that is a trust;

(b) that invests primarily in real estate and real estate-related assets specified by the Authority in the Code on Collective Investment Schemes; and

(c) all or any units of which are listed for quotation on a securities exchange;

vii. any unit in a collective investment scheme, where the constitutive documents of the scheme contain covenants that bind the manager of the scheme, or where the prospectus of the scheme or any document issued in connection with an offer of units in the scheme (being an offer that is not required to be made in or accompanied by a prospectus under section 296(1) of the Act), contains restrictions that bind the manager of the scheme:

(a) to invest only in:

(A) deposits; or

(B) any products specified in paragraphs (a) to (j) in this Annex; and

(b) not to engage in securities lending or repurchase transactions for the scheme;

viii. any debenture other than:

(i) asset-backed securities as defined in section 262(3) of the Act; or

(ii) structured notes as defined in regulation 2(1) of the Securities and Futures (Offers of Investments) (Shares and Debentures) Regulations 2005;


Appendix D - Excluded Investment Products | 170


ix. any contract or arrangement the effect of which is that one party agrees to exchange currency at an agreed rate of exchange with another party, where such currency exchange is effected immediately; or

x. two or more products specified in paragraphs (a) to (i) in this Annex that are linked together in a stapled manner such that one product may not be transferred or otherwise dealt without any of the other product(s).

171 | Appendix E – Examples of Suspicious Transactions


Appendix E1 Examples of Suspicious Transactions

1. General Comments

The list of situations given below is intended to highlight some basic ways in which money may be laundered or used for TF purposes. While each individual situation may not be sufficient to suggest that ML/TF is taking place, a combination of such situations may be indicative of a suspicious transaction. The list is intended solely as an aid, and must not be applied as a routine instrument in place of common sense. The list is not exhaustive and may be updated due to changing circumstances and new methods of laundering money of financing terrorism. CMS licence holders are to refer to STRO’s website for the latest list of red flags2. A customer's declarations regarding the background of such transactions should be checked for plausibility. Not every explanation offered by the customer can be accepted without scrutiny. It is reasonable to be suspicious of any customer who is reluctant to provide normal information and documents required routinely by the CMS licence holder in the course of the business relations. CMS licence holders should pay attention to customers who provide minimal, false or misleading information or, when applying to open an account, provide information that is difficult or expensive for the CMS licence holders to verify.

2. Transactions Which Do Not Make Economic Sense

(i) Transactions that cannot be reconciled with the usual activities of the customer, for example switching from trading only penny stocks to predominantly blue chips.

(ii) A customer relationship with the CMS licence holder where a customer has a large number of accounts with the same CMS licence holder, and has frequent transfers between different accounts.

(iii) Transactions in which assets are withdrawn immediately after being deposited3, unless the customer’s business activities furnish a plausible reason for immediate withdrawal.

(iv) Transactions which, without plausible reason, result in the intensive use of what was previously a relatively inactive account, such as a customer’s account which shows virtually no normal personal or business related activities but is used to receive or disburse unusually large sums which have no obvious purpose or relationship to the customer or his business.

1 MAS Notice No: SFA 04-N02, Appendix B

2 The website address as at 24 April 2015: http://www.cad.gov.sg/aml-cft/suspicious-transaction-reporting-office/suspicious-transaction-reporting

3 For CMIs or CMS licence holders, this could mean depositing of funds into trust accounts, margin accounts, as collaterals or for fund management purposes

http://www.cad.gov.sg/aml-cft/suspicious-transaction-reporting-office/suspicious-transaction-reporting

http://www.cad.gov.sg/aml-cft/suspicious-transaction-reporting-office/suspicious-transaction-reporting

Appendix E – Examples of Suspicious Transactions l 172


(v) Unexpected repayment of a delinquent account without any plausible explanation.

(vi) Corporate finance transactions under consideration that do not make economic sense in respect of the business operations of the customer, particularly if the customer is not a listed company.

(vii) Request by a customer for investment management services where the source of funds is unclear or not consistent with the customer’s apparent standing.

(viii) Buying and selling of security with no discernible purpose or in circumstances which appear unusual.

(ix) Large amounts of funds deposited into an account, which is inconsistent with the salary of the customer.

3. Transactions Involving Large Amounts of Cash

(i) Frequent withdrawal of large cash amounts that do not appear to be justified by the customer’s business activity.

(ii) Provision of funds for investment and fund management purposes in the form of large cash amounts.

(iii) Customers making large and frequent cash deposits but cheques drawn on the accounts are mostly to individuals and firms not normally associated with their business.

(iv) Large cash withdrawals from a previously dormant/inactive account, or from an account which has just received an unexpected large credit from abroad.

(v) A large amount of cash is withdrawn and immediately deposited into another account.

(vi) Provision of margin collaterals in the form of large cash amounts.

(vii) Payments made via large amounts of cash. A guideline to what constitutes a large or substantial cash amount would be a cash amount exceeding S$20,000 (or its equivalent in any currency).

(viii) Company transactions, both deposits and withdrawals, that are denominated by unusually large amounts of cash, rather than by way of debits and credits normally associated with the normal commercial operations of the company (e.g. cheques, letters of credit, bills of exchange).

(ix) Crediting of customer trust or margin accounts using cash and by means of numerous credit slips by a customer such that the amount of each deposit is not substantial, but the total of which is substantial.

(x) Payments or deposits containing counterfeit notes or forged instruments.

(xi) Unusual settlements of securities transactions in cash form.

4. Transactions Involving CMIs (or CMS Licence Holders’) Accounts

(i) Substantial increases in deposits of cash or negotiable instruments by a professional firm or company, using customer accounts or in-house company or trust accounts, especially if the deposits are promptly transferred between other customer company and trust accounts.

(ii) Transfers of funds from a company’s account to an individual account of an employee or persons related to the employee and vice-versa.

(iii) Multiple depositors using a single account.

173 | Appendix E – Examples of Suspicious Transactions


(iv) Paying in large third party cheques endorsed in favour of the customer in settlement for securities purchased, or for other financial services provided.

(v) Frequent deposits of a company’s cheques into an employee’s account.

(vi) An account operated in the name of an offshore company with structured movement of funds.

(vii) Purchase of securities to be held by the CMS licence holder in safe custody, where this does not appear appropriate given the customer’s apparent standing.

(viii) Requests for refunds of unaccountable “erroneous” payments to CMS licence holders or customers’ trust accounts by unknown persons.

(ix) Transfers of funds from various third parties into an account, which is inconsistent with the nature of the customer’s business.

5. Transactions Involving Transfers Abroad

(i) Large and regular payments that cannot be clearly identified as bona fide transactions, from and to countries or jurisdictions associated with (a) the production, processing or marketing of narcotics or other illegal drugs or (b) other criminal conduct.

(ii) Cross border transactions involving acquisition or disposal of high value assets that cannot be clearly identified as bona fide transactions.

(iii) Substantial increase in injection of funds by a customer without apparent cause, especially if such injections are subsequently transferred within a short period of time out of the account or to a destination not normally associated with the customer.

(iv) Repeated transfers of large amounts of money abroad accompanied by the instruction to pay the beneficiary in cash.

6. Transactions Involving Unidentified Parties

(i) Transfer of money to another CMS licence holder without indication of the beneficiary.

(ii) Payment orders with inaccurate information concerning the person placing the orders.

(iii) Use of pseudonyms or numbered accounts for effecting commercial transactions by enterprises active in trade and industry.

(iv) Holding in trust of shares in an unlisted company whose activities cannot be ascertained by the CMS licence holder.

(v) Provision of collateral by way of pledge or guarantee without any discernible plausible reason by third parties unknown to the CMS licence holder and who have no identifiable close relationship with the customer.

(vi) Customers who wish to maintain a number of trustee or customers’ accounts that do not appear consistent with their type of business, including transactions that involve nominee names.

(vii) Requests by a customer for investment management services where the source of funds is unclear.

Appendix E – Examples of Suspicious Transactions l 174


7. Tax Crimes Related Transactions

(i) Negative tax-related reports from the media or other credible information sources.

(ii) Unconvincing or unclear purpose or motivation for having accounts opened in Singapore.

(iii) Originating sources of multiple or significant deposits/withdrawals are not consistent with the declared purpose of the account.

(iv) Inability to reasonably justify frequent and large fund transfers from or to a country or jurisdiction that presents higher risk of tax evasion.

(v) Reinvestment of funds back into the original country or jurisdiction after being transferred to another country or jurisdiction, often a tax haven with poor track record on CDD or record keeping requirements.

(vi) Accounts managed by external asset managers who may not be adequately regulated and supervised.

(vii) Purchase or sale of large amounts of precious metals by a customer which is not in line with his business or background.

(viii) Purchase of bank cheques on a large scale by a customer.

8. Other Types of Transactions

(i) Account activity is not commensurate with the customer’s known profile (e.g. age, occupation, income).

(ii) The customer fails to reasonably justify the purpose of a transaction when queried by the CMS licence holder.

(iii) Transactions with countries or entities that are reported to be associated with terrorism activities or with persons that have been designated as terrorists.

(iv) Frequent changes to the address or authorised signatories.

(v) A large amount of funds is received and immediately used as collateral for margining or financing facilities.

(vi) When a young person (aged about 17-26) opens an account and either withdraws or transfers the funds within a short period, which could be an indication of terrorism financing.

(vii) When a person receives funds from a religious or charitable organisation and utilises the funds for purchase of assets or transfers out the funds within a relatively short period.

(viii) The customer uses intermediaries which are not subject to adequate AML/CFT laws.

(ix) Transactions that are suspected to be in violation of another country’s or jurisdiction’s foreign exchange laws and regulations.

175 | Appendix F - Review Questions


Appendix F Review Questions

Candidates should note that the sole purpose of the Review Questions is to familiarise candidates with the scope and general nature of the examinations, and the format of the examination questions. The Review Questions are not intended to be used as preparatory study material for the examinations, nor do the questions cover all the material tested in the examination.

Chapter 2 – Licensing & Business Operations 1. Who is allowed to operate a stock account?

a. A remisier b. A Director, or his designate c. A customer d. An accounts clerk

2. A trading representative when acting as an agent_______

a. shall inform his client that he is acting as agent b. must sign all contract notes in the capacity as agent c. shall disclose to his client the commission directly or indirectly receivable from the transaction d. All of the above

3. Which of the following transaction information is NOT required to be recorded by a CMS licence holder

under the record keeping requirements of the SFA and SFR (LCB)? a. Quantity of assets that are subject to the transaction b. Price and fee arising from the transaction c. Name of the customer and counterparty on whose behalf the transaction is entered into d. Location of the transaction

4. A CMS licence holder must seek the Monetary Authority of Singapore's approval for the appointment of

____________. a. Chief Executive Officer b. Executive Directors c. Chief Executive Officer and Executive Directors d. Chief Executive Officer and Directors

5. Money received on account of a customer does NOT include money:

a. From a sale or purchase of futures contract or a transaction connected with leveraged foreign exchange trading

b. Which is to be used to defray the CMS licence holder’s brokerage and other proper charges c. From a sale of securities d. Received in the course of the business of the CMS licence holder

Appendix F - Review Questions |176


6. Who is authorised to approve customers' accounts in a Trading Member Company?

I. Senior Management staff independent of sales or dealing II. Senior Management staff of a related corporation charged with account approval function III. Head of Retail and Institutional Sales IV. Director of Institutional Dealing

a. I only b. I & II c. II & III d. II, III & IV 7. The SGX-ST rule on Precedence of Customer’s Orders applies to ____________. a. Trading Members only b. Trading Representatives only c. Trading Members and Trading Representatives d. Trading Members, Trading Representatives and Customers

Chapter 3 – Market Conduct

8. Which of the following is TRUE in relation to excessive trading / churning?

Excessive trading / churning is:

I. Defined as intentional trading for the sole purpose of generating commissions for the broker II. Done to create large commissions by entering into many trades which generate little or no profit for the

customer III. Allowed if the customer gives his consent IV. An offence under the SFA and SGX-ST Rules

a. I, II & III b. I, II & IV c. I, III & IV d. II, III & IV

9. Which of the following is/are considered a form of market misconduct under the SFA?

I. Insider Trading II. False Trading III. Over-Trading

a. I only b. I & II c. II & III d. I, II, III & IV



10. Which of the following is NOT a typical technique used in the circulation of false or misleading statements and information? a. Using electronic means such as message boards or other electronic media to spread rumours about a

security to raise or lower its market price b. Passing around ‘hot tips’ by word of mouth c. Sending the audited annual report of a company to a client d. Putting out favourable but unverified information about a particular security via media sources

11. What types of penalties / liabilities will a person face for committing market misconduct offences under the

SFA?

I. Criminal penalties II. Civil penalties III. Criminal liabilities IV. Civil sanctions

a. I, II & III b. I, II & IV c. I, III & IV d. II, III & IV

Chapter 4 – The Trading System and Infrastructure 12. A ________ of securities on a/an __________ basis has no right to the entitlement to the security.

I. buyer, ex II. buyer, cum III. seller, ex IV. seller, cum

a. I & II b. III & IV c. I & IV d. II & III

13. Direct business can only be transacted between ______________.

a. 2 Trading Members b. 2 Customers of a Trading Member c. a Trading Member and its customer d. All of the above

14. A buying customer must look only to ________ for delivery of securities.

a. the selling SGX-ST Trading Member b. the SGX-ST Trading Member which executes the trade c. the Central Depository (Pte) Ltd d. the Singapore Exchange Securities Trading Limited (SGX-ST)



15. An order for the unit share market can be matched in quantity of __________. a. less than 1 board lot b. exactly 1 board lot c. more than 1 board lot d. All of the above

16. A trading halt is for a minimum duration of _____________.

a. 15 minutes b. 30 minutes

c. 1 hour d. 1 day 17. Can a Trading Member short sell any Selected Foreign Security on a Foreign Market?

a. Yes, since SGX does not prohibit it b. No, since the foreign exchange might prohibit short selling c. Yes, since the security is settled by CDP and not the foreign exchange d. No, unless permitted by the foreign exchange

Chapter 5 – Central Provident Fund Investment Scheme (CPFIS) 18. Which of the following CPF members cannot make use of CPF funds to invest under CPF Investment Scheme?

a. Those above 55 years old b. Those below 18 years old c. Those residing outside Singapore d. A discharged bankrupt

19. Which of the following types of investments is NOT allowed under the CPF Investment Scheme – Special

Account? a. Annuities b. All Investment-Linked Insurance Products c. Fixed Deposits d. Singapore Government Bonds 20. Only monies in excess of ________________in a CPF Member's Ordinary Account and ___________in the

Special Account can be invested under the CPF Investment Scheme (CPFIS). a. $40,000, $60,000 b. $20,000, $40,000 c. $40,000, $20,000 d. $60,000, $40,000 21. Which of the following is NOT included in the types of investments allowed under CPF Investment Scheme

– Ordinary Account? a. Fixed deposits b. Annuities c. Singapore Government Bonds d. SGX Singapore Dollar Interest Rate Futures



Chapter 6 – Prevention of Financial Crimes 22. Sources of terrorism financing may be derived from _________________________.

I. kidnapping II. extortion III. donations IV. sale of publications

a. I & II b. III & IV c. I, II & III d. I, II, III & IV

23. The minimum period of retention of Financial Transaction Documents is ___________ years after the day

the account is closed. a. 2 b. 4 c. 5 d. 7

24. The document retention policy under the MAS Notice on Prevention of Money Laundering and Countering

the Financing of Terrorism allows for documents to be retained for a period of ________. a. 1 year b. 3 years c. 5 years d. 7 years

25. Money laundering is an offence in Singapore under the _________________.

a. Securities and Futures Act b. Corruption, Drug Trafficking and Other Serious Crimes (Confiscation of Benefits) Act c. Banking Act d. None of the above

26. Sources of terrorism financing are _____________________ and involves amounts that are ____________.

a. always illegitimate, not always large b. always illegitimate, always large c. not always illegitimate, not always large d. not always illegitimate, always large

27. Representatives must have training at regular intervals to remind themselves of their responsibilities to

combat money laundering and be informed of new development. Refresher training should be held at least once every __________. a. quarter b. 6 months c. year d. 2 years



Answers to Review Questions

Chapter 2 – Licensing & Business Operations

1. b. Section 2.8.10 – Stock Account

2. c. Section 2.2.8 – Trading Practices and Conduct

3. d. Section 2.9.1 – Keeping of Books and Furnishing of Returns

4. d. Section 2.2.6 – Approval of CEOs and Directors

5. b. Section 2.10.1 – Definitions

6. b. Section 2.6.9 – Approval of Customer Accounts

7. c. Section 2.2.8 – Trading Practices and Conduct

Chapter 3 – Market Conduct

8. b. Section 3.11.1 – Excessive Trading/Churning

9. b. Section 3.2 – Market Misconduct under the SFA and SGX-ST

10. c. Section 3.5 – False or Misleading Statements and Information

11. b. Section 3.15 – Penalties for Misconduct under the SFA

Chapter 4 – The Trading System and Infrastructure

12. c. Section 4.4.7 – Trading Basis

13. d. Section 4.4.10 – Direct Business

14. b. Section 4.5.4 – Relationship between Customer and Trading Member

15. a. Section 4.4.6 – Orders

16. b. Section 4.4.12 – Other Circumstances in Approving Off-Market Trades and Trading Controls

17. d. Section 4.5.11 – Core Trading Principles

Chapter 5 – Central Provident Fund Investment Scheme (CPFIS)

18. b. Section 5.4 – Eligibility Criteria

19. b. Section 5.2.1 – Types of Investments Allowed under the 2 Types of the CPFIS and Investment Limits

20. b. Section 5.4 – Eligibility Criteria

21. d. Section 5.2.1 – Types of Investments Allowed under the 2 Types of the CPFIS and Investment Limits; Section 5.8.1 – Inclusion Criteria for Investment Products

Chapter 6 – Prevention of Financial Crimes

22. d. Section 6.1.3 – Definition of Terrorism Financing

23. c. Section 6.3.2 – Table: Summary of Key Provisions of the CDSA

24. c. Section 6.11 – Reporting and Filing Requirements

25. b. Section 6.3.2 – Corruption, Drug Trafficking and Other Serious Crimes (Confiscation of Benefits) Act (CDSA), Chapter 65A

26. c. Section 6.1.3 – Definition of Terrorism Financing

27. c. Section 6.13 – Training, Audit and Internal Control Framework

181 | Appendix G – Essential Readings


AAppppeennddiixx GG EEsssseennttiiaall RReeaaddiinnggss

1. Securities and Futures Act Available online on Attorney-General’s Chambers website - Singapore Statutes Online

(http://statutes.agc.gov.sg/) 2. Securities and Futures (Licensing and Conduct of Business) Regulations Available online on Attorney-General’s Chambers website – Singapore Statutes Online

(http://statutes.agc.gov.sg/) 3. Securities and Futures (Financial & Margin Requirements for Holders of Capital Markets Services

Licences) Regulations Available online on Attorney-General’s Chambers website – Singapore Statutes Online

(http://statutes.agc.gov.sg/) 4. Guidelines on Criteria for the Grant of a CMS Licence (Guideline No. SFA 04-G01) Available online on Monetary Authority of Singapore website (www.mas.gov.sg) 5. Guidelines on Fit and Proper Criteria (Guideline No. FSG-01) Available online on Monetary Authority of Singapore website (www.mas.gov.sg) 6. Notice on Reporting of Misconduct of Representatives by Holders of CMS Licence and Exempt

Financial Institutions (Notice No. 04-N11) Available online on Monetary Authority of Singapore website (www.mas.gov.sg) 7. Notice on Minimum Entry and Examination Requirements for Representatives of Holders of CMS

Licence and Exempt Financial Institutions (Notice No. 04-N09) Available online on Monetary Authority of Singapore website (www.mas.gov.sg) 8. Circular on Due Diligence Checks and Documentation in Respect of the Appointment of Appointed,

Provisional and Temporary Representatives (CMI 01/2011) Available online on Monetary Authority of Singapore website (www.mas.gov.sg) 9. Notice on Sale of Investment Products (Notice No. SFA 04-N12) Available online on Monetary Authority of Singapore website (www.mas.gov.sg) 10. SGX-ST Rules Available online on SGX website – Rule Books (http://rulebook.sgx.com/)

http://statutes.agc.gov.sg/


http://www.mas.gov.sg/






http://rulebook.sgx.com/

Appendix G – Essential Readings |182


11. Banking Secrecy Act Available online on Attorney-General’s Chambers website – Singapore Statutes Online

(http://statutes.agc.gov.sg/) 12. Personal Data Protection Act Available online on Personal Data Protection Commission website - (http://www.pdpc.gov.sg/) 13. Central Provident Fund Investment Scheme Available online on Central Provident Fund website (www.cpf.gov.sg) 14. Corruption, Drug Trafficking and Other Serious Crime (Confiscation of Benefits) Act Available online on Attorney-General’s Chambers website – Singapore Statutes Online

(http://statutes.agc.gov.sg/) 15. Mutual Assistance in Criminal Matters Act Available online on Attorney-General’s Chambers website – Singapore Statutes Online

(http://statutes.agc.gov.sg/) 16. Terrorism (Suppression of Financing) Act Available online on Attorney-General’s Chambers website – Singapore Statutes Online

(http://statutes.agc.gov.sg/) 17. Notice to Capital Markets Intermediaries on Prevention of Money Laundering and Countering the

Financing of Terrorism (Notice No. SFA04-N02) Available online on Monetary Authority of Singapore website (www.mas.gov.sg) 18. Guidelines to MAS Notice SFA04-N02 on Prevention of Money Laundering and Countering the

Financing of Terrorism Available online on Monetary Authority of Singapore website (www.mas.gov.sg)

19. MAS Notice on Prevention of Money Laundering & Countering the Financing of Terrorism – Banks (Notice No. 626) Available online on Monetary Authority of Singapore website (www.mas.gov.sg)

20. Income Tax Act Available online on Attorney-General’s Chambers website – Singapore Statutes Online

(http://statutes.agc.gov.sg/) 21. Goods and Services Tax (GST) Act Available online on Attorney-General’s Chambers website – Singapore Statutes Online

(http://statutes.agc.gov.sg/)


http://www.pdpc.gov.sg/








No part of this Study Guide may be reproduced, stored in a ...

Documents

Transcript of No part of this Study Guide may be reproduced, stored in a ...