CAPITAL MARKETS AND FINANCIAL ADVISORY SERVICES

(CMFAS) EXAMINATIONS

STUDY GUIDE

RES 1B RULES, ETHICS AND SKILLS FOR

SECURITIES DEALERS OF NON-EXCHANGE
MEMBERS
i|

© ALL RIGHTS RESERVED

The Institute of Banking and Finance

February 2024 (Version 1.0)

No part of this Study Guide may be reproduced, stored in a retrieval system, or transmitted in any form by
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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 as of 30 September 2023.
For the latest set of rules and regulations, the reader or user is advised to refer to the latest set of rules and
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You shall not modify, remove, delete, augment, add to, publish, transmit, sell, resell, license, create derivative
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Acknowledgements
IBF would like to express its gratitude to all members of the CMFAS Examinations Board and CMFAS
Examinations Industry Panel – Securities for their contributions and support in the development of CMFAS
Study Guides and Examinations.

Study Guide Writers

IBF would like to thank the following study guide writers* for reviewing and updating the Study Guide text:

Mr Jeth Lee, Vice President and Lead Counsel, Singapore Exchange Limited
Ms Yvette Cheak, ACE Compliance Pte Ltd

[*Information accurate as at date of appointment.]

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Preface
RES 1B – Rules, Ethics and Skills for Securities Dealers of Non-
Exchange Members

The objective of the CMFAS RES 1B – Rules, Ethics and Skills for Securities Dealers of Non-Exchange Members
(RES 1B) 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, ethical codes, standards of professional conduct and
fundamental skills relating to 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 the Monetary
Authority of Singapore (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 on Competency Requirements for Representatives of Holders of Capital Markets Services Licence and
Exempt Financial Institutions under the Securities and Futures Act (SFA 04-N22).

The Study Guide contains regulatory requirements for Capital Markets Services licence holders and their
representatives conducting regulated activities of dealing in capital markets products under the Securities
and Futures Act 2001 (SFA). Candidates should take note that some of the regulatory requirements, in
particular, the business conduct requirements, are also applicable to exempt financial institutions (EFIs), such
as banks and their representatives, who conduct the same type of regulated activities. For example,
Regulation 54 of the Securities and Futures (Licensing and Conduct of Business) Regulations applies certain
provisions of the SFA to EFIs and their representatives.

Candidates who have passed the CMFAS Examinations are encouraged to continue their learning journey by
attending IBF accredited programmes. For more information, please visit https://www.ibf.org.sg.

Organisation of the Study Guide

The Study Guide consists of 7 chapters, starting with rules and regulations governing securities dealings,
followed by the ethical codes and conduct and elementary skills relating to securities dealings in
Singapore.

The emphasis in each Chapter is to ensure that candidates have a good understanding of the rules and
regulations, ethical principles and skills relevant to perform their roles effectively. Examples and case
studies are also used where appropriate in the Study Guide to enhance candidates’ understanding of key
learning points and application of the topics discussed.

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A summary of each Chapter is provided below:

Chapter 1: The Capital Markets Industry in Singapore and 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 the business

operations of Capital Markets Services licence holders and representatives in
securities dealing.

Chapter 3: Market Conduct

Provides an overview of the rules and regulations prohibiting market misconduct in

relation to securities dealing.

Chapter 4: Ethics, Codes and Standards of Professional Conduct for Securities Dealing

Defines ethics and ethical behaviour in the context of securities dealing. Discusses
ethical issues or ethical dilemmas faced by securities dealing representatives, and the
applicable ethical codes and professional standards of conduct that securities dealing
representatives should uphold in their professional capacities.

Chapter 5: Securities Dealing Practices and Skills

Describes key aspects of the client onboarding process. The Chapter also discusses
client servicing and communication requirements, best execution practices and some
aspects of risk management and internal controls to securities dealing.

Chapter 6: Central Provident Fund Investment Scheme (CPFIS)

Provides an overview of CPFIS.

Chapter 7: Prevention of Financial Crimes

Provides an overview of the relevant legislation, rules and regulations for the
prevention of money laundering and countering the financing of terrorism.

To assist candidates in their preparation of the examination, we have included a set of Review Questions
with the answers highlighted in bold.

A list of essential readings is also provided in Appendix H. Candidates should ensure that they complete
the essential readings before attempting the examination.

The Appendices are provided for candidates’ reference and to enhance their understanding of the
important concepts covered in this Study Guide.
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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 Updates to the Study Guides Page on the IBF website to check for the
latest updates.

Important Notes about the Exam

The RES 1B Exam is conducted at the IBF Assessment Centre.

The examination includes questions that test candidates’ knowledge, understanding and application of the
relevant rules, ethics and skills for securities exchange dealing.

The examination comprises 60 multiple-choice questions and multiple response questions for a duration of
1 hour 30 mins. The passing mark is 75%.

Candidates should note that they will NOT be tested on the amount of penalties applicable under the laws
and regulations, associated codes, notices and guidelines governing dealing in capital markets products.

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

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Table of Contents
Acknowledgements ............................................................................................................................................ ii
Preface ............................................................................................................................................................... iii
RES 1B – Rules, Ethics and Skills for Securities Dealers of Non-Exchange Members ........................................ iii
Organisation of the Study Guide ....................................................................................................................... iii
Study Guide Updates .......................................................................................................................................... v
Important Notes about the Exam ....................................................................................................................... v
Chapter 1: The Capital Markets Industry in Singapore and Participants in the Capital Markets ....................... 1
1.1 Introduction ............................................................................................................................................. 2
1.2 Institutional Participants in the Capital Markets ..................................................................................... 3
1.3 The Regulatory Framework and Regulatory Bodies ................................................................................. 5
1.4 SGX Listing Framework........................................................................................................................... 10
Chapter 2: Licensing and Business Operations................................................................................................. 22
2.1 Introduction ........................................................................................................................................... 22
2.2 Grant of Capital Markets Services Licence ............................................................................................. 23
2.3 Registration of Representatives ............................................................................................................. 27
2.4 Regulatory Requirements for Advertising .............................................................................................. 31
2.5 Customer Accounts ................................................................................................................................ 32
2.6 Privacy of Customer Information ........................................................................................................... 36
2.7 Management of Customers’ Trading Accounts...................................................................................... 38
2.8 Keeping of Books and Audit Trails.......................................................................................................... 40
2.9 Customers’ Moneys and Assets ............................................................................................................. 43
Chapter 3: Market Conduct .............................................................................................................................. 54
3.1 Introduction ........................................................................................................................................... 54
3.2 Market Misconduct under the SFA ........................................................................................................ 55
3.3 False Trading and Market Rigging Transactions..................................................................................... 56
3.4 Securities Market Manipulation............................................................................................................. 57
3.5 Dissemination of False or Misleading Statements and Information ...................................................... 58
3.6 Fraudulently Inducing Persons to Deal in Capital Markets Products ..................................................... 58
3.7 Employment of Manipulative and Deceptive Devices ........................................................................... 59
3.8 Dissemination of Information about Illegal Transactions ...................................................................... 59
3.9 Insider Trading........................................................................................................................................ 60
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3.10 Securities Hawking ..................................................................................................................... 64

3.11 Other Market Conduct Rules and Guidelines ............................................................................... 64
3.12 Penalties for Misconduct under the SFA ...................................................................................... 67
Chapter 4: Ethics, Codes and Standards of Professional Conduct for Securities Dealing ................................ 69
4.1 Introduction ............................................................................................................................... 69
4.2 The Ethical Framework ............................................................................................................... 71
4.3 Ethical Dilemmas ........................................................................................................................ 74
4.4 Professional Ethics, Codes and Standards of Professional Conduct for .......................................... 75
Securities Dealing ................................................................................................................................ 75
4.5 Applying the Ethical Framework to Resolve Ethical Dilemmas ...................................................... 89
Chapter 5: Securities Dealing Practices and Skills ............................................................................................ 91
5.1 Introduction to the On-boarding and Advisory Process ................................................................ 91
5.2 Client On-boarding Process ......................................................................................................... 92
5.3 Present Coherent View of Investment and Trading Strategies .....................................................101
5.4 Best Execution Practices for Securities Dealing ...........................................................................101
5.5 Risk Management and Internal Controls for Securities Dealing ...................................................106
5.6 Types of Accounts......................................................................................................................109
5.7 Developing a Strong Client Relationship Built on Trust ................................................................111
5.8 Credit Risk Management............................................................................................................113
Chapter 6: Central Provident Fund Investment Scheme (CPFIS).................................................................... 114
6.1 General Information and History of CPFIS...................................................................................114
6.2 Differences between CPFIS-OA and CPFIS-SA ..............................................................................115
6.3 What is a CPF Investment Account? ...........................................................................................116
6.4 Eligibility Criteria .......................................................................................................................116
6.5 Opening a CPFIS Investment Account .........................................................................................117
6.6 Processes for Purchase and Sale of Investments (CPFIS-OA only) ................................................117
6.7 Service Providers under the CPFIS ..............................................................................................118
6.8 Criteria for Inclusion of Investment Products under CPFIS ...........................................................119
6.9 Transfer of Monies from CPF Investment Account to CPF Ordinary .............................................122
Account ..............................................................................................................................................122
6.10 Dividends and Profits Earned .....................................................................................................122
6.11 Charges .....................................................................................................................................123
6.12 Release of Investment Holdings .................................................................................................123
6.13 Bankruptcy ................................................................................................................................123

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6.14 Death ........................................................................................................................................124

Chapter 7: Prevention of Financial Crimes ..................................................................................................... 125
7.1 Introduction to Prevention of Financial Crimes ...........................................................................126
7.2 Anti-Money Laundering and Counter-Terrorism Financing Regime in ..........................................132
Singapore ...........................................................................................................................................132
7.3 The Regulatory Framework of Financial Crimes – Rules and ........................................................133
Regulations.........................................................................................................................................133
7.4 MAS Notices and Regulations on Prevention of Money Laundering and Countering the Financing of
Terrorism ..................................................................................................................................140
7.5 Targeted Financial Sanctions related to Anti – Money Laundering and ........................................141
Terrorism Financing ............................................................................................................................141
7.6 Designation of Tax Crimes as Money Laundering Predicate Offences...........................................142
in Singapore........................................................................................................................................142
7.7 The Three Lines of Defence ........................................................................................................144
7.8 Governance ...............................................................................................................................146
7.9 Client Onboarding .....................................................................................................................147
7.10 Enterprise-Wide Risk Assessment ..............................................................................................166
7.11 Risk Controls for New Products, Practices and Technologies .......................................................167
7.12 Operational Risk Controls to Prevent Financial Crimes ................................................................168
7.13 Reporting and Filing Requirements ............................................................................................169
7.14 Penalties and Risks for Non- Compliance ....................................................................................169
7.15 Internal Policies, Compliance, Audit and Training .......................................................................170
7.16 Effectiveness of AML/CFT Framework ........................................................................................171
Appendix A: Guidelines on Fit and Proper Criteria........................................................................................ 174
Appendix B: Criteria for the Assessment of a Customer Account Review .................................................... 179
Appendix C: Criteria for the Satisfaction of the Customer Knowledge Assessment ..................................... 180
Appendix D: Risk Warning Statement for Overseas-Listed Investment Products ......................................... 182
Appendix E: Excluded Investment Products .................................................................................................. 185
Appendix F: Examples of Suspicious Transactions ........................................................................................ 187
Appendix G: Review Questions ..................................................................................................................... 192
Appendix H: Essential Readings...................................................................................................................... 200

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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 and self-regulating organisation in the regulation of the capital markets
industry:
• Monetary Authority of Singapore (MAS);
• Singapore Exchange Securities Trading Limited (SGX-ST);
• The Central Depository (Pte) Limited (CDP);
• Singapore Exchange Derivatives Trading Limited (SGX-DT);
• Singapore Exchange Derivatives Clearing Limited (SGX-DC); and
• Singapore Exchange Regulation Pte Ltd (SGX RegCo).

✓ Origin of the relevant rules and requirements governing securities and derivatives trading and
clearing including:
• Securities and Futures Act 2001 (SFA);
• Securities and Futures Regulations (SFR);
• SGX-ST Mainboard and Catalist Rules;
• SGX-ST Rules;
• CDP Clearing Rules;
• CDP Settlement Rules;
• CDP Depository Rules;
• SGX Futures Trading Rules; and
• SGX-DC Clearing Rules.

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1.1 Introduction

1.1.1 The Capital Markets in Singapore

1.1.1.1 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.

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.

1.1.1.2 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, issuer or company
warrants and leverage certificates.

The markets operated by the Singapore Exchange Limited (SGX) and its subsidiaries provide capital-raising and
risk management opportunities to the global market through their product offerings (refer to Table 1.1.1).

Table 1.1.1: Examples of Products Offered by SGX for Capital Raising and Risk Management

Capital Raising Risk Management

• Shares • Issuer Warrants
SGX-ST
• Bonds • Leverage Certificates
• Company Warrants
SGX-DT • Futures
-
• Options

1.1.2 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 capital markets product.

An exchange provides a centralized market where buyers and sellers can congregate. This allows for the
efficient discovery of the prices and quantities at which each participant is interested to buy or sell capital
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markets products. 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.

1.1.3 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 can 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 (CMS) 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 middle agents to
match selling interest and buying interest or route sell or buy orders to an exchange for matching.

1.2 Institutional Participants in the Capital Markets

1.2.1 Banks

There are different types of banks licensed under the Banking Act 1970 which may provide capital markets
services, e.g. dealing in capital markets products1.

The types of banking licences include:

i. Qualifying Full Banks/ Full Banks;
ii. Wholesale Banks; and
iii. Merchant Banks.

1.2.1.1 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
also provide capital markets products, custodial business, underwriting, corporate finance activities and some
even offer insurance products as distributors for insurance companies. As 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 accredited and
institutional clients.

1 SFA Second Schedule, Part II – Interpretation-“Dealing in capital markets products” means (whether as principal or agent) making or
offering to make with any person, or inducing or attempting to induce any person to enter into or to offer to enter into any agreement
for or with a view to acquiring, disposing of, entering into, effecting, arranging, subscribing for, or underwriting any capital markets
products.
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1.2.1.2 Wholesale Banks

Wholesale Banks provide the full range of banking business but are restricted in their deposit taking activities.
Wholesale Banks are allowed to take foreign currency deposits in any amount but are restricted to take
deposits in Singapore dollars. They can accept Singapore dollar fixed deposits of at least S$250,000. While they
may operate Singapore dollar saving or current accounts, such Singapore dollar savings or current account
should not be interest-bearing when such account is opened for a Singapore resident who is a natural person
except with prior approval of MAS.

Many wholesale banks therefore prefer to solicit business from high net-worth individuals through their
private banking arms. Such clients are usually more interested in capital markets products for investment.

1.2.1.3 Merchant Banks

Merchant Banks are licensed under section 55S of the Banking Act since 1 July 2021. They are not allowed to
accept Singapore deposits or borrow Singapore dollars from the public in any form except from banks, finance
companies, their shareholders and companies controlled by their shareholders. Merchant banks are not found
in the retail space but can undertake banking business or deposit taking business in accordance with the
Banking Act and Banking (Merchant Banks) Regulations 2021.

1.2.2 Capital Markets Services (CMS) Licence Holders

CMS licence holders which deal in capital markets products include (amongst others):
i. Broker / dealer companies;
ii. Corporate finance advisory companies; and
iii. Providers of custodial services for capital markets products

1.2.2.1 Broker / Dealer Companies

Apart from banks, broker/dealer companies are another class of financial intermediaries. Unlike banks, these
companies do not engage in deposit-taking 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 services to their customers, allowing the customers to
trade on the exchange2.

1.2.2.2 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.

1.2.2.3 Providers of Custodial Services for Capital Markets Products

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

2 Refer to Sections 1.3.1.2 to 1.3.1.7 for details about the Trading and Clearing Members of the SGX securities and futures markets.

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of the movement of capital markets products to and from their clients’ accounts and are the interface for their
clients to the exchanges for the settlement and delivery of capital markets products. Some custodians also
provide product financing3 and specified products lending4 services. Specified products lending is deemed as
dealing in capital markets products and consequently, an entity which carries out specified products lending
is required to have a CMS licence in respect of dealing in capital markets products. Product financing and
specified products lending are not similar activities and require a different type of CMS licence.

1.2.2.4 Others (Non-CMS Licence Holders) – Finance Companies or Remote Trading and Clearing
Members5

Finance companies are licensed under the Finance Companies Act 1967 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 Finance Companies Act
and are exempted institutions. In providing such financing services, finance companies also provide custodial
services 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.

Overseas-based remote trading and clearing members of a Singapore exchange, recognised market operator
or clearing house are exempted from holding a CMS licence6. This is provided that the remote member:
i. is incorporated outside of Singapore;
ii. is a member of an approved exchange or clearing house or recognised market operator or clearing house
under the SFA, as the case may be, on which the relevant securities or derivatives are traded or cleared;
iii. does not serve any customer resident in Singapore;
iv. is not a regulated financial institution in Singapore;
v. carries on business in a jurisdiction where the relevant regulator has an arrangement with the MAS for
information exchange and co-operation in respect of derivatives supervision; and
vi. is regulated in respect of such activities by the relevant regulator in its home jurisdiction

In addition, a SGX remote clearing member cannot have FI affiliate regulated by MAS. This criterion does not
apply to a remote trading member.

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:
i. Keeping risks at acceptable levels to maintain both the stability of the financial system as a whole and the
soundness of individual institutions;
ii. Maintaining a safe and efficient financial market infrastructure;

3 SFA Second Schedule, Part II – Interpretation.

4 SFR (LCB) Regulation 45 – Specified Products Borrowing and Lending.
5 Securities and Futures (Exemption from Requirement to Hold Capital Markets Services Licence) Regulations.
6 Securities and Futures (Exemption from Requirement to Hold Capital Markets Services Licence) Regulations, Regulation 4.

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iii. Ensuring fair, orderly and transparent organised markets; and

iv. Keeping customers well-informed and empowered.

To achieve these objectives, the securities and derivatives markets, in particular, are regulated by regulatory
bodies including:
• MAS;
• SGX;
• SGX RegCo;
• SGX-ST;
• CDP;
• SGX-DT; and
• 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:
• SFA and SFR;
• SGX-ST Mainboard and Catalist Rules;
• SGX-ST Rules;
• CDP Clearing Rules;
• CDP Settlement Rules;
• CDP Depository Rules;
• SGX Futures Trading Rules; and
• SGX-DC Clearing Rules.

1.3.1 Roles of the Regulatory Bodies

1.3.1.1 Monetary Authority of Singapore (MAS)

MAS was established under the MAS Act, 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:
i. 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;
ii. Conduct integrated supervision of financial services and financial stability surveillance;
iii. Manage the official foreign reserves of Singapore; and
iv. Develop Singapore as an international financial centre.

MAS is responsible for, amongst others, the administration of the following legislations which are relevant to
the capital markets industry, including:
• SFA, the main legislation governing the capital markets industry in Singapore;
• Securities and Futures (Licensing and Conduct of Business) Regulations (SFR(LCB));

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• Securities and Futures (Organised Markets) Regulations;

• Securities and Futures (Clearing Facilities) Regulations;
• Securities and Futures (Financial and Margin Requirements for Holders of Capital Markets Services
Licence) Regulations (SFR(FMR));
• Securities and Futures (Corporate Governance of Approved Exchanges, Approved Clearing Houses and
Approved Holding Companies) Regulations; and
• Financial Services and Markets Act 2022.

The SFA gives MAS a wide range of powers to enable the sound development of the capital markets. These
include (but are not limited to) the power to:
• Approve 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 an exchange, a person operating an exempt market, a clearing house, a person
operating an exempt clearing facility, a holder of a CMS 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.

1.3.1.2 Singapore Exchange Limited (SGX)

SGX is Asia’s leading and trusted market infrastructure, operating equity, fixed income and derivatives markets
to the highest regulatory standards. As Asia’s most international, multi-asset exchange, SGX provides listing,
trading, clearing, settlement, depository and data services, with a large proportion of listed companies and
bonds originating outside of Singapore.

SGX is the world’s most liquid offshore market for the benchmark equity indices of China, India, Japan and
ASEAN and offers commodities and currency derivatives products. Headquartered in AAA-rated Singapore,
SGX is globally recognised for its risk management and clearing capabilities.

SGX offers a fully integrated value chain from trading and clearing, to settlement and depository services.

In conducting its regulation of the markets, SGX has adopted six guiding principles:
i. 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.
ii. 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.
iii. Guiding Principle Three: Risk-Based Targeting of Regulatory Activities - SGX adopts a pragmatic risk-
based approach. Supervisory activities focused on Guiding Principles One and Two are tailored according
to risk profiles developed for issuer sponsors and Member firms. Resources are allocated to those matters

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it considers as posing the greatest risks to achieving a fair, orderly, and transparent market and safe and
efficient clearing outcomes.
iv. 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.
v. 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.
vi. 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) of the Singapore Police Force and the Accounting and Corporate
Regulatory Authority (ACRA) on matters such as regulatory policies, risk management, regulatory oversight,
and enforcement actions.

1.3.1.3 Singapore Exchange Securities Trading Limited

SGX-ST is a subsidiary of SGX which is incorporated under the Companies Act 1967. 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 Members are required to adhere to the 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 Catalist. The Mainboard caters to the needs of
more established companies, with higher entry and listing requirements such as minimum profit and market
capitalisation levels. Catalist 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 to be listed on Catalist, there is no 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 Manual7, which contains the rules and regulations for among others:
i. Listing requirements;
ii. Acquisitions;
iii. Realizations;

7 The SGX-ST Listing Manual contains the Mainboard Listing Rules and the Catalist Listing Rules. Refer to the SGX website for further
details https://rulebook.sgx.com/.

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iv. Takeovers; and

v. Timely disclosure of corporate information.

1.3.1.4 The Central Depository (Pte) Limited

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

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+28. 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. SGX has introduced, in 2021, an Intra-day Settlement Run, to facilitate earlier
settlement of securities, thereby reducing counterparty risks in the securities clearing system.

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 participants and ensures there is
a simultaneous exchange of cash and securities. 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 following applicable CDP Rules:

• CDP Clearing Rules;

• CDP Settlement Rules; and

8 SGX-ST Rule 9.2 – Settlement Basis and Eligibility for Clearing by CDP. Refers to 2 exchange business days after the trade day.

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• CDP Depository Rules.

1.3.1.5 Singapore Exchange Derivatives Trading Limited (SGX-DT)

SGX-DT, established in 1978, is a wholly owned subsidiary of SGX. It 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 the United States. These are contained in the Futures Trading Rules, which govern
SGX-DT Trading Members.

1.3.1.6 Singapore Exchange Derivatives Clearing Limited (SGX-DC)

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

• Products listed and traded on SGX-DT; and
• OTC commodity and financial derivatives trades registered for clearing via the SGX Titan OTC platform.

SGX-DC is now a Qualifying Central Counterparty (Qualifying CCP). Bank members and subsidiaries of a banking
group (which are SGX-DC Members) are subject to lower capital requirement for their trade and default fund
exposures under the Basel III framework introduced by the Basel Committee on Banking Supervision (BCBS).
Similarly, this means that as an SGX-DC bank member or participant, one will benefit from lower capital costs.

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

1.3.1.7 Singapore Exchange Regulation Pte Ltd (SGX RegCo)

In 2017, SGX established SGX RegCo as an independent regulatory subsidiary of SGX to enhance the
governance of SGX as a self-regulatory organisation and explicitly segregate the exchange’s regulatory
functions from its commercial and operating activities. SGX RegCo undertakes all the front-line regulatory
functions and has a separate board of directors from SGX.

1.4 SGX Listing Framework

SGX-ST 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 on SGX-ST must first apply for listing to SGX-ST. 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 that allows it to advise on
corporate finance matters. The company then authorises the issue manager to deal with SGX-ST on its behalf.

The issue manager plays an active role in the listing process. It will gather the required information, liaises
with SGX-ST on matters relating to the application and makes the final submission. Services of legal and

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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

1.4.2.1 Main Board

A company seeking to list on the Main Board of the SGX-ST must appoint an accredited issue manager to act
as the sponsor for the applicant's listing on SGX-ST. The issue manager lodges the listing application and liaises
with SGX-ST on all matters relating to the listing application. There are two parts to the timeline: pre-
submission preparation, when diligence is undertaken and materially completed and post-submission
approval and listing. Prior to the submission of the full listing application, the issue manager, on behalf of the
company, may submit a pre-consultation application to SGX-ST to consult on specific issues that may
materially affect the issuer’s eligibility to list.

The submission process comprises two stages, which should be submitted sequentially to the SGX-ST:

• Section (A), which sets out general information of the company and highlights the key matters relating to
the issuer (e.g., board of directors and key management, corporate structure and business model,
regulatory compliance and historical financials) for SGX-ST's attention; and

• Section (B), which sets out additional information on the company and the invitation structure and which
should be submitted together with the full listing application (including the relevant
undertakings/confirmations required under the Listing Manual and the prospectus/shareholders'
circular).

The average timeline from submission to listing approval and trading is as follows:
i. Review of Section (A) by SGX-ST – 4 to 6 weeks if there are no material issues;
ii. Review of Section (B) by SGX-ST and concurrent pre-lodgement review of the draft prospectus by the
MAS - typically 4 weeks;
iii. Research blackout (if any) – 2 weeks;
iv. Lodgement and public exposure on MAS Offers and Prospectuses Electronic Repository and Access
(OPERA) - minimum 7 calendar days;
v. Registration and launch – 1 to 2 weeks; and
vi. Listing and trading commences.

1.4.2.2 Catalist

A company seeking to list on Catalist must appoint a full sponsor. The sponsor submits the pre-admission
notification and listing confirmation to SGX-ST, lodges the offer document with SGX-ST (acting as agent on
behalf of the MAS) on behalf of the company and liaises with SGX-ST on all matters relating to the listing. There
are two parts to the timeline: pre-submission preparation and post-submission approval and listing. Prior to
the submission of the pre-admission notification, the sponsor may consult SGX-ST to seek pre-clearance on
any material issues to reduce any delays in the processing of the pre-admission notification.

The pre-admission notification is then submitted to the SGX-ST with the full listing application (including the
relevant undertakings/confirmations required under the Listing Manual and the offer document).

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The average timeline from pre-admission to listing approval and trading is as follows (refer to Figure 1.4.2):

i. SGX-ST review of the pre-admission notification – 2 weeks to 4 weeks;

ii. Lodgement and public exposure on SGX-ST’s website – 2 weeks;
iii. Registration and launch – 1 to 2 weeks; and
iv. Listing and trading commences.

Figure 1.4.2: Timeline to Launch

ii) Lodgement and Public

i) MAS or SGX-ST iii) Registration and iv) Trading
Exposure on MAS OPERA/
approval Launch Commences
SGX-ST Website

1.4.3 Listing Requirements

1.4.3.1 Methods of Listing

Primary Listing - Companies must meet SGX-ST’s initial listing requirements outlined below for either a
Mainboard or Catalist Listing. After listing, companies must comply with all of SGX-ST’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-ST Mainboard without having to comply with SGX-ST’s
continuing listing obligations. Secondary-listed companies must make announcement to SGX-ST 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.

1.4.3.2 Global Depositary Receipts (GDRs)

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-ST’s Mainboard. GDRs are specialist products offered only
to institutional and accredited investors. GDR issuers must provide all information and documents (in English)
to SGX-ST at the same time as such information are released to the home exchange.

1.4.4 Initial Public Offering or Introduction

A company seeking listing on SGX-ST, 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 listing process, the prospectus will be subject to public comments for up
to 2 weeks.
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ii. 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-ST which is to be prepared based on the requirements in the relevant regulations. The
introductory document will not be subjected to public comments.

1.4.5 Mainboard Admission Requirements

An entity seeking to list on the Mainboard via an IPO must meet the admission requirements9 summarized in
the Table 1.4.5. Review of (i) the listing documents is done by SGX-ST; and (ii) the prospectus is done by SGX-
ST and MAS.
Table 1.4.5: Mainboard Admission Criteria

Entities intending to join SGX-ST’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
Quantitative share capital with operating track record of at least 3 years; or
Requirements
• 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.
The entity must be in a healthy financial position, having regard to whether its group
has a positive cashflow from operating activities.
Financial Position
and Liquidity Prior to listing, all debts owing to the group by its directors, substantial
shareholders, and companies controlled by the directors and substantial
shareholders must be settled.
A MOG listing aspirant unable to satisfy the Quantitative Requirements and/or the
positive cashflow requirement for listing, may list its securities if they satisfy the
following additional conditions:
Mining, Oil and Gas • Has market capitalisation of not less than S$300 million based on the issue
(MOG) price and post-invitation issued share capital; and
Requirements
• Discloses its plans, milestones and capital expenditure to advance to
production stage. These plans must be substantiated by the opinion of an
independent qualified person.

9 Refer to SGX website: https://www.sgx.com/securities/mainboard

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Requirement for all MOG companies:

• Have established existence of a meaningful portfolio of reserves in a defined
area, which must be substantiated by an independent qualified person’s
report;
• Have sufficient working capital for 18 months from listing; and
• Have at least one independent director with appropriate industry experience
and expertise.

• For market capitalisation < S$300 million, 25% of issued shares are in the hands
of at least 500 shareholders (For market capitalisation > S$300 million,
shareholding spread varies between 12-20%); and
Shareholder Spread • 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
established framework and arrangement to facilitate the movement of shares,
at least 500 shareholders are in Singapore or 1,000 shareholders worldwide.

• At least 2 independent directors for all issuers.

Independent
• For foreign issuers, there must be at least 2 Singapore resident independent
Directors
directors.

• Where an issuer satisfies the profitability test, promoters cannot sell any of
their shareholdings for 6 months after listing.
• Where an issuer satisfies the market capitalisation test, promoters cannot sell
any of their shareholdings for 6 months after listing, and 50% of their
shareholdings thereafter for the next 6 months.
Moratorium
• 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 are subjected to a moratorium period of 6 months after IPO.
The profit portion is calculated by multiplying the percentage difference
between the IPO price and price paid by the investor for the shares, by the
number of shares held.

IPO Documentation Prospectus to be lodged on MAS OPERA website.

Accounting Singapore Financial Reporting Standards (International), International Financial

Standard Reporting Standards, or US Generally Accepted Accounting Principles10.

Domicile At the discretion of the issuer.

Trading and
At the discretion of the issuer.
Reporting Currency
Business Operations No requirement for operations in Singapore.

10 Securities and Futures (Offers of Investments) (Securities and Securities-based Derivatives Contracts) Regulations, 5th Schedule,
Part 9 – Financial Information, paragraph 8(a); SGX Mainboard Rule 220 – Chapter 2 Equity Securities, Part V Listing Requirements
for Foreign Issuers.
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Rules relating to disclosure of material information, periodic reporting, additional

Continuing
share issuance, corporate transactions, corporate governance guidelines, interested
Obligations
persons transaction and free float will apply.

1.4.6 Catalist Listing

1.4.6.1 Sponsorship

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

Full and Continuing Sponsors are authorised by SGX-ST 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 a minimum number of qualified
professionals who must be registered by SGX-ST as “Registered Professionals”.

Full Sponsors are responsible for the admission of listing applicants for listing on Catalist. Continuing Sponsors
are responsible for advising Catalist companies on the interpretation and compliance with their continuing
obligations under the Catalist Rules as SGX-ST no longer undertakes direct supervision over admission and
continuing obligations of companies listed on Catalist. Such admission and supervision have been transferred
to the sponsors.

A company seeking listing through Catalist must comply with listing requirements even though there is no
minimum quantitative entry criteria set by SGX-ST. The admission of the company is based on the sponsor’s
assessment of its suitability for listing. SGX-ST will normally admit a listing applicant to Catalist on receipt of
conforming documents from the Full Sponsor. However, SGX-ST may impose conditions on an admission, or
delay or refuse an admission.

A company on Catalist must engage a Continuing Sponsor on an ongoing basis for as long as they are listed on
Catalist. Continuing Sponsors take direct supervision responsibility of the company listed on Catalist, but SGX-
ST retains the power to discipline them for breaches of rules and regulations. Refer to Table 1.4.6.1 on the
summary of Catalist Admission Criteria.

Table 1.4.6.1: Catalist Admission Criteria

Quantitative
• No minimum quantitative criteria required by SGX-ST.
Requirements
• Have established existence of resources in a defined area, which must be
Mining, Oil and Gas substantiated by an independent qualified person’s report. The resources
(MOG) must be at least Inferred Resources (for minerals) or Contingent Resources
Requirements (for oil and gas); and
• Have sufficient working capital for 18 months from listing.

• 15% of post-invitation share capital in public hands;

Shareholder Spread
• At least 200 shareholders.
Independent
• At least 2 independent directors for all issuers.
Directors

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• For foreign issuers, there must be at least 1 Singapore resident independent

director.

• At the time of IPO, if promoters as a group hold more than 50% of the post-
invitation share capital, they may sell but must retain at least 50%. If they hold
less than 50% of the post-invitation share capital at IPO, they may not sell
any shares at the time of IPO.
• 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.

Moratorium • For Pre-IPO investors who had acquired their shares within the 12-month
period prior to IPO, the “profit portion” of their shareholdings is subjected to
a moratorium period of 12 months after IPO. The profit portion is calculated
by multiplying the percentage difference between the IPO price and price paid
by the investor for the shares, by the number of shares held.
• Promoters of an MOG company are not to sell any of their shareholdings for
12 months after IPO. They may sell up to 50% of their shareholdings for the
next 6 months.

• Offer document;
IPO Documentation
• Lodged on SGX Catalodge website.

Accounting Singapore Financial Reporting Standards (International), International Financial

Standard Reporting Standards, or US Generally Accepted Accounting Principles

Domicile At the discretion of the issuer.

Business Operations No requirement for operations in Singapore.

• Rules relating to disclosure of material information, periodic reporting,

additional share issuance, corporate transactions, corporate governance
Continuing guidelines, interested persons transaction and free float will apply.
Obligations
• Additional requirement to retain a Sponsor at all times will apply to Catalist
companies.

1.4.6.2 Offer Document

Before registering with Catalist, the company has to lodge an Offer Document on SGX’s Catalodge website.
The Offer Document must comply with the same disclosure requirements as a prospectus prepared in
accordance with the Securities and Futures (Offer of Investments) (Securities and Securities-based Derivatives
Contracts) Regulations. This includes the provisions relating to civil and criminal liability under the SFA.

The Offer Document is to be lodged with SGX-ST, 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.

1.4.6.3 Differences between the Mainboard and Catalist Listing Requirements

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The main differences between the Mainboard and Catalist Listing requirements are shown in Table 1.4.6.3:

Table 1.4.6.3: Differences between the Mainboard and Catalist Listing Requirements

Mainboard Catalist

Target Companies Established Companies Fast Growing Companies

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

Review of IPOs and SGX-ST Sponsors

Post-IPO Supervision

Key Advantages to • Established Mainboard branding • Faster time to market

Companies
• Access to wider range of • Easier subsequent fundraising,
institutional investors acquisitions and disposals
• Open to more product type • Ongoing Sponsor guidance

Quantitative Yes No
admission criteria

For IPOs For IPOs

Maximum thresholds
• There is no maximum allocation
for fund-raising • Nil
to retail investors but a
minimum of 5% of the number, For Secondary Offerings
or S$50 million in value, of the • Non-Pro-rata: 50% to 100%
securities offered, whichever is
lower, must be allocated to the • Pro-rata: 100%
public subscription tranche11

For Secondary Offerings

• Non-pro-rata (not offered to
existing shareholders): 20%
• Pro-rata (offered to existing
shareholders in proportion to
their shareholdings): 50%

Thresholds for 20% or more of ratios calculated in • Acquisition: 75% or more of

Shareholder Approval comparison to specified benchmarks Benchmarks
for Acquisitions and (Benchmarks)
• Disposal: 50% or more of Benchmark
Disposals

11 SGX Mainboard Rule 233A (1) – Chapter 2 Equity Securities, Part IX Methods of Offering, Public Subscription Tranche.

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Mainboard Catalist
• Fundamental change in business

1.4.7 Mainboard and Catalist Continuing Listing Obligations

Both methods of listing require similar continuing listing obligations.

1.4.8 Roles and Responsibilities of the Sponsor and SGX-ST regarding Catalist

1.4.8.1 Sponsors’ Roles and Responsibilities

SGX-ST may authorise a sponsor to act as a full sponsor or continuing sponsor12. Full sponsors may undertake
activities relating to bringing an applicant to list on Catalist, including IPO, and post-IPO continuing
sponsorship. Continuing sponsors only undertake sponsorship of issuers already listed on Catalist.

The sponsor’s main obligations are summarized below and include:

i. Ensuring that it continues to fulfil the eligibility criteria or conditions imposed by SGX-ST;
ii. Seeking SGX-ST’s advice if a situation may adversely affect the reputation of the Exchange or the integrity
of the market;
iii. Seeking SGX-ST’s advice about the application or interpretations of rules;
iv. Notifying SGX-ST promptly on the employment of new professionals 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 responsibility 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-ST’s rules and thus allowing
itself to discharge its obligations under the rules.

1.4.8.2 SGX’s Role and Responsibilities

SGX-ST’s role is to lay down the rules and review the performance, processes and controls of the sponsors
against these rules. In carrying out their reviews, they ascertain:
i. The quality and due diligence standards of the sponsor’s assessment process;

12 SGX-ST Catalist Rule 203 – Chapter 2 Sponsors, Part I Scope of Chapter.

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ii. The quality of its continuing activities; and

iii. Whether there are breaches of the rules.

1.4.8.3 SGX’s Actions for Non-Compliance on Sponsors and Registered Professionals

In the event of breaches of the rules by the sponsors or its registered professionals, SGX-ST can take the
following actions:
i. Reprimand the sponsor or registered professionals privately or publicly;
ii. Require the sponsor or registered professionals to attend an education program focused on complying
with the rules;
iii. Require rectification measures to be taken by the sponsor or registered professionals;
iv. Impose conditions and restrictions on the activities of the sponsor or registered professionals; or
v. Suspend the sponsor or registered professionals from carrying out some or all its activities for a period of
time, with the suspension possibly being announced to the market.

1.4.9 Explanation of Terms

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

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

1.4.10 Access to Material Information about Listed Issuers

Listed issuers must announce all material information which investors would reasonably require to have 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 https://www.sgx.com/.

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

Apart from this general obligation to announce all material information, listed issuers are required to make
specific disclosures, for example in the case of a major acquisition or a major disposal.

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. At least 14 days’ notice of every such meeting shall
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be given by advertisement in the daily press. Listed issuers are required to hold all general meetings in
Singapore, unless prohibited by laws and regulations in the jurisdiction of incorporation.

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 their behalf. All
resolutions at general meetings shall be voted by poll.

1.4.12 SGX’s Actions on Breaches whether on Mainboard or Catalist 13

Breaches of the SGX-ST Mainboard Rules or Catalist Rules may be investigated by SGX-ST and further
disciplinary actions may be brought after a disciplinary hearing process. The enforcement actions that SGX-ST
may take include but are not limited to the following:
i. issuing a private warning to an issuer, its directors, executive officers and issue managers (Relevant
Persons);
ii. offering a composition sum to an issuer;
iii. requiring an issuer to implement an effective education or compliance programme or undertake an
independent review of internal controls and processes;
iv. requiring a Relevant Person to perform remedial actions to rectify the consequences of contraventions;
v. suspending or restricting the activities of an issue manager if the integrity of the market may be
adversely affected or if the Exchange thinks it necessary in the interests of the public or for the
protection of investors;
vi. halting or suspending trading of listed securities of an issuer;
vii. removing an issuer from the Official List; and/or
viii. imposing any other requirements on a Relevant Person which the Exchange considers appropriate.

The Disciplinary Committee may impose a range of sanctions against a Relevant Person, including issuing
public reprimands against a Relevant Person14.

1.4.13 Listing of Debt Securities on SGX-ST

Besides listing on SGX-ST Mainboard and Catalist, entities can list debt securities on SGX-ST, which gives them
access to the debt capital markets in Singapore. Types of debt securities listed on SGX-ST include fixed and
floating-rate bonds, convertible and exchangeable bonds, covered bonds, asset-backed securities, loan
participation notes, and hybrid capital securities (e.g. preference shares).

The listing of debt securities is similarly subject to listing requirements regarding the issuer’s profile, trustee
and trust deed, offering memorandum, listing fees and continuing obligations15.

13 SGX Mainboard Rule 1405(3)(c) – Chapter 14 Disciplinary and Appeals Procedures, and Enforcement Powers of the Exchange, Part III
Administrative and Enforcement Powers of the Exchange.
14 SGX Mainboard Rule 1417(2) – Chapter 14 Disciplinary and Appeals Procedures, and Enforcement Powers of the Exchange, Part IV

Disciplinary Proceedings, The written grounds of the Disciplinary Committee and sanctions.
15 Refer to SGX website for further info: https://www.sgx.com/fixed-income/listing-debt-securities.

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1.4.14 Listing of Special Purpose Acquisition Companies (SPACS) on SGX-ST

Early 2022, SGX introduced the Special Purpose Acquisition Companies (SPACs) Framework to introduce a new
listing vehicle to the Singapore market. SPACs are formed to raise capital through IPOs for the sole purpose of
acquiring operating business(es) or asset(s) (i.e. business combination). Such acquisitions may be in the form
of a merger, share exchange or other similar business combination methods. Prior to a business combination,
SPACs are listed investment vehicles with no prior operating history and revenue-generating business/asset
at IPO. Unlike traditional IPOs, SPAC listings have a shorter time to market due to the absence of business
fundamental operations and financials at IPO. SPACs have no historical financial results to disclose, assets
description, and minimal business-related risks at IPO. More information on a SPAC’s target assets/business
can be found upon announcement of a proposed business combination agreement (i.e. a proposal to acquire
or combine with an operating company.

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Chapter 2:
Licensing and Business Operations
Learning Objectives
The candidate should be able to understand:
✓ The regulatory requirements for the grant of a Capital Markets Services Licence.

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

✓ 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 requirements16 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 licence17 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, provisional
or temporary representatives under the SFA18, unless otherwise exempted.

MAS supervises 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.

16 These include transitional requirements that could apply to obligations specified in this Chapter.
17 SFA Section 86(1) - Grant of CMS Licence.
18 SFA Section 99B – Acting as representative.

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Confidence and stability are core to an efficient and well-functioning capital markets. Therefore, in addition
to requiring CMS licence holders to be licensed, MAS requires them to conduct their 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 Capital Markets Services Licence

A CMS licence will only be granted to a corporation. 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 Schedule
to the SFA19 or is an exempt institution20.

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, are granted a CMS licence.

2.2.1 Base Capital Requirements

A corporation granted a CMS licence needs to satisfy the Base Capital Requirements (BCR)21 for its proposed
regulated activities22. The BCR for dealing in capital markets products that are securities, units in Collective
Investment Scheme (CIS) and/or exchange-traded derivatives are in Table 2.2.1:

Table 2.2.1: Entity Classification and Base Capital Requirements

Entity classification BCR (S$)

Clearing member23 5 million
Trading member24 1 million
Non-member25 1 million
Introducing broker26 500,000

19 SFA Third Schedule – Specified Persons.

20 SFA Section 99 – Exemptions from requirement to hold CMS Licence; SFR (LCB) – Second Schedule (Exemptions from Section 82(1)
and 99B(1) of the Act; SFR (Exemption from Requirement to Hold CMS Licence) Regulations.
21 SFR (Financial and Margin Requirements for Holders of CMS Licences) First Schedule – Base capital requirements; MAS Guidelines

on Criteria for the Grant of a CMS licence other than for Fund Management and Real Estate Investment Trust Management (SFA04-
G01) - Annex 1(AA).
22 Where more than one BCR is applicable, the amount of BCR required shall be the highest of the applicable BCRs.
23 Refers to a corporation which is a member of an approved clearing house.
24 Refers to a corporation (not being an introducing broker or a corporation who qualifies for S$50,000 base capital under table AA)

which is a member of an approved exchange.

25 Refers to a corporation (not being an introducing broker or a corporation who qualifies for S$50,000 base capital under table AA)

which is not a member of an approved exchange.

26 Refers to a corporation that does not carry any customer’s positions in those capital markets products, 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 of those capital
markets products from any customer; 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 those capital markets products by that customer.
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Entity classification BCR (S$)

Others27 50,000

CMS licence holders who are Members of any Approved Exchange are required to satisfy the higher of the
base capital requirements as stipulated in (i) the First Schedule of the SFR(FMR), and (ii) the rules of the
respective Approved Exchange in relation to the relevant class of membership.

2.2.2 General Criteria for CMS Licence Holders28

The applicant should be primarily engaged in the business of conducting one or more of the regulated activities
specified in the Second Schedule to the SFA 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 consider 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 should be subjected to proper supervision by its home
regulatory authority, where applicable. In addition, the applicant, its officers, employees, representatives and
substantial shareholders must be “fit and proper” persons in accordance with the MAS Guidelines on Fit and
Proper Criteria (FSG-G01)29.

2.2.3 Criteria for the Board of Directors, Chief Executive Officer (CEO) and Representatives of
the Applicant30

The board of directors and senior management of the applicant should uphold good corporate governance
standards and practices in directing and managing the applicant’s business. The board of directors should
comprise a minimum of 2 members, at least one of whom is resident in Singapore. The CEO31 of the applicant
should also be a resident in Singapore.

The applicant must obtain MAS’ approval before appointing a person as:
i. its CEO;
ii. in the case of a locally incorporated company, its director who resides in Singapore or is to reside in
Singapore; or
iv. in the case of a foreign company, its director who resides in Singapore or is to reside in Singapore; and
v. its director who is directly responsible for its business in Singapore.

27 Refers to a corporation which deals in securities, units in a collective investment scheme or exchange-traded derivatives contracts
which (i) does not carry any customer’s positions in those capital markets products, margins or accounts in its own books; (ii) deals in
those capital markets products only with accredited investors, expert investors or institutional investors; (iii) does not accept money
or assets from any customer as settlement of, or as a margin for, or to guarantee or secure, any contract for the purchase or sale of
those capital markets products by that customer; and (iv) does not enter into any transaction with any customer to deal in those capital
markets products as principal.
28 MAS Guidelines on Criteria for the Grant of a CMS Licence other than for Fund Management and Real Estate Investment Trust

Management (SFA04-G01), Paras 3.1 to 3.8.

29 MAS Guidelines on Fit and Proper Criteria (FSG-G01).
30 MAS Guidelines on Criteria for the Grant of a CMS Licence other than for Fund Management and Real Estate Investment Trust

Management (SFA04-G01), paragraphs 3.9 to 3.15.

31 SFA Section 2(1) – Interpretation.

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The applicant must also obtain MAS’ approval to change the nature of the appointment of a person as a
director from one that is non-executive to one that is executive32. The applicant should also inform MAS of
any person ceasing to hold office as its CEO or director.

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 licensed 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 by CMS Licence Holders

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 licensed for, or if there is a change in the CMS licence holder’s
records33 as follows:
1. The CMS licence holder’s name;
2. The address of the principal place of business in respect of the licensed activity;
3. The regulated activity or activities, or where such activity concerns any type or types of capital markets
products, 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.

These changes must 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
or upon any other occurrence that may be prescribed by the MAS. MAS may also revoke or suspend a CMS
licence if, among other things, it has reasons to believe that the CMS licence holder or its representatives or
officers had failed to discharge its/his duties efficiently, honestly and fairly, or had not acted in the best interest
of its/his customers or had breached the conditions imposed their licences34.

Heavy financial penalties are imposed if a CMS licence holder continues to carry on business after its licence
had lapsed or been suspended or revoked. This is to ensure that participants are not misled into dealing with
errant CMS licence holders which may result in financial losses or credit issues for the unknowing participants.

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 its CEO or

32 SFR (LCB) Regulation 12(1) – Application for appointment of chief executive officer and director.
33 SFA Section 94(1) - Records of holders of CMS Licence.
34 SFA Section 95 - Lapsing, Revocation and Suspension of CMS Licence.

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directors35. 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
entered into a compromise or scheme of arrangement with creditors or have unsatisfied judgement debts.

This expectation of CMS licence holders to meet the “fit and proper” criteria requirement continues even after
a CMS licence has been granted and is monitored on a continuing basis. MAS has the power of authority to
direct the CMS licence holder to remove its CEO or directors if they fail to meet the “fit and proper” criteria,
e.g. if they had been convicted of an offence involving fraud or dishonesty, is an undischarged bankrupt, or
had failed to discharge their duties of office in ensuring the CMS licence holder’s compliance with its duties
set out in Regulations 13A of the (SFR(LCB).

2.2.7 Duties of CMS Licence Holders

CMS licence holders must 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 must
institute adequate internal controls commensurate with the nature, scale and complexity of the business36.
These include:
1. Implementing effective written policies on all operational areas, including financial policies, accounting
and internal controls, and internal audit and complying with these policies.;
2. Putting in place 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 good practice 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 of the CMS licence holder or holding company (if any) include inquiring into
the CMS licence holder’s compliance with all relevant laws and all relevant business rules of any approved
exchange and approved 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, 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 CMFAS examinations or are

35 SFA Section 96(1) - Approval of Chief Executive Officer and Director of Holder of CMS licence; SFR (LCB) Regulation 12 - Application
for Appointment of Chief Executive Officer and Director.
36 SFR (LCB) Regulation 13 - Duties of Holder of CMS Licence.

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exempted from the examinations 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 examinations.

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 failed to meet the “fit and proper” criteria or have committed
acts relating to market misconduct within 14 days after the discovery of the misconduct37.

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

Individuals intending to conduct any regulated activity under the SFA must be notified as an appointed
representative, temporary representative38 or provisional representative39 in respect of that type of regulated
activity. They can only commence the regulated activities after they have satisfied the competency
requirements for that type of regulated activity under the SFA (refer to Section 2.3.2) and their names have
been entered into the Public Register of Representatives on MAS’ website, where applicable (refer to Section
2.3.5.1).

CMS licence holders 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 SFA
or are otherwise exempted40.

Any person who carries on regulated activities without being registered with MAS, will be guilty of an offence
and will be liable on conviction, to a fine and/or imprisonment term.

2.3.1 Acting for One Principal

A representative of a CMS licence holder can act for only one principal unless he has the approval of MAS to
act for more than one principal, or if the principals are related corporations41. 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.

37 MAS Notice on Reporting of Misconduct of Representatives by Holders of CMS Licence and Exempt Financial Institutions (SFA 04-
N11).
38 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 the Frequently Asked Questions on Licensing and Business Conduct (Other than for Fund Management
Companies) under the SFA.
39 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, provisional representatives must be currently or previously licensed, authorised or otherwise
regulated for at least 12 months (and not more than 12 months ago) for the relevant activity in an overseas jurisdiction with a
regulatory regime that is comparable to that of Singapore. Refer to the Frequently Asked Questions on Licensing and Business
Conduct (Other than for Fund Management Companies) under the SFA.
40 SFA Section 99B (3) - Acting as Representative.
41 SFA Section 99J - Representative to Act for Only One Principal.

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

1. To provide clarity to investors on the status of the 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.

2.3.2 Minimum Competency Requirements

All appointed representatives who represent CMS licence holders must meet minimum competency
requirements42.

To be eligible for registration as a Representative, an individual must fulfil all the following conditions:
1. Be at least 21 years old.
2. Has a minimum education level 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 individuals who sat for the GCE O Levels in or before 1980);
3. Has satisfied the CMFAS examination requirements for those regulated activities he will deal in.
4. Be a fit and proper person43, which includes:
• Possessing qualities of honesty, integrity and sound reputation;
• Competence and capability; and
• Financial soundness, e.g. not an undischarged bankrupt, whether in or out of Singapore.

Please refer to Appendix A of the Study Guide for an extract of the MAS Guidelines on Fit and Proper Criteria,
which set out guidance on the factors to be considered in assessing fitness and propriety.

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 representative44:
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 on representative’s past records which include 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

42 MAS Notice on Competency Requirements for Representatives of Holders of Capital Markets Services Licence and Exempt Financial
Institutions under the Securities and Futures Act (SFA 04-N22).
43 MAS Guidelines on Fit and Proper Criteria (FSG-G01).
44 MAS Circular on Due Diligence Checks and Documentation in Respect of the Appointment of Appointed, Provisional and Temporary

Representatives (CMI 01/2011).

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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 bodies
or associations, 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 1953.
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) Pte Ltd.

2.3.4 Revocation and Refusal of Notification of Representative45

MAS has broad powers to decide whether to register or revoke a representative’s registration. The decision
whether to register a representative or to revoke a registration depends on several factors, which may include
but are not limited to the following:
1. The seriousness or severity of circumstances surrounding the person’s failure to meet a specific criterion;
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 criterion.

Representatives are required to fulfil the fit and proper criteria as long as they continue to engage in the
respective regulated activities.

2.3.5 Representative Notification Framework

CMS licence holders can register representatives as appointed46, provisional47 or temporary48 representatives
with MAS through the Representative Notification Framework (RNF). The RNF allows CMS licence holders to
lodge notifications with MAS electronically via the online system for their representatives who intend to
conduct regulated activities. As part of the notification, CMS licence holders 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 Public Register of Representatives on MAS website.

2.3.5.1 Public Register of Representatives

Besides the name of the representative, the regulated activities which the representative can conduct, the
principal company(ies) which the representative has worked for within the past 3 years and any formal

45 SFA Section 99M - Power of Authority to Refuse Entry or Revoke or Suspend Status of Appointed, Provisional or Temporary
Representative.
46 SFA Section 99D - Appointed Representative.
47 SFA Section 99E - Provisional Representative.
48 SFA Section 99F - Temporary Representative.

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regulatory action taken by MAS against the representative, would be displayed on the Public Register of
Representatives.

2.3.5.2 Importance of RNF Number

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

2.3.5.3 Cessation of Status of Representatives

The status of an appointed 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.

2.3.6 Change of Particulars of Representatives

An appointed, provisional or temporary representative is required to inform his principal company of any
change in his identification 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.

2.3.7 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

49 SFA Section 99H (5) -Lodgement of Documents; SFR (LCB) Regulations, Regulation 5 – Change of Particulars and Additional Regulated
Activity of Representative.

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relevant to the activities they conduct50. 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.

The Continuing Professional Development (CPD) activities can be a combination of:

• Relevant ethics and market conduct requirements51;
• Relevant product knowledge;
• Relevant compliance-related matters; or
• Other relevant skills or competencies

2.4 Regulatory Requirements for Advertising

To prevent the investing community from being misled, SFA52 has rules and regulations governing the use of
advertisements in relation to securities dealing. CMS licence holders and Representatives must adhere to
these rules when publishing advertisements, market letters or similar information, collectively referred to as
“advertisements”.

2.4.1 Securities and Futures (Licensing and Conduct of Business) Regulations (SFR(LCB))

The SFR(LCB)53 stipulate that product advertisements have to meet the following requirements:
1. the product advertisement is not false or misleading;

2. the product advertisement provides a fair and balanced view of the capital markets products to which it
relates;

3. the product advertisement presents information in a clear manner, regardless of whether such
information is in text or otherwise;

4. where the product advertisement appears in any medium of communication in visual form, the product
advertisement is clearly legible;

5. where the product advertisement appears in any electronic mail or website, the product advertisement
adheres to the font size requirements in Regulation 46(2)(e) of the SFR (LCB);

6. the product advertisement contains the following statement: "This advertisement has not been reviewed
by the Monetary Authority of Singapore."; and

50 MAS Notice on Competency Requirements for Representatives of Holders of CMS Licence and Exempt Financial Institutions (SFA
04-N22).
51
SFA 04-N22 states that an appointed representative must complete minimum of a 6 Core CPD Hours in ethics or rules and
regulations or both, which are relevant to the regulated activity which the representative carries out and accredited by IBF. In
addition, an appointed representative must complete a minimum of 3 Supplementary CPD hours in relevant training.
52 SFR (LCB) Regulation 46 – Product Advertisements; SFR (LCB) Regulation 46A - Certain representations prohibited.
53 SFR (LCB), Regulation 46 – Product advertisements.
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7. the product advertisement has been approved by a person specified in Regulation 46AA of the SFR(LCB)
in the manner set out in that regulation prior to its dissemination or publication. This may include the
senior management, an agent or a committee of the CMS licence holder. In each case, the relevant
person(s) must be satisfied that the advertisement complies with the requirements, records its reasons
for satisfaction in writing, and gives its written approval.

As for non-product advertisements, they must comply with the following requirements 54:
1. the non-product advertisement is not false or misleading;

2. the non-product advertisement does not contain any statement to the effect that any report, analysis or
other service will be furnished free or without charge, unless such report, analysis or service is in fact or
will in fact be furnished in its entirety without any condition or obligation; and

3. the non-product advertisement does not contain any exaggerated statement which is calculated to exploit
an individual’s lack of experience and knowledge.
Under Regulation 46AD of the SFR (LCB)R, a non-product advertisement refers to an advertisement, other
than a product advertisement, that is in respect of the provision of any product or service that is regulated by
the SFA.

2.5 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 CMS licence holder 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 CMS licence holder has to obtain the particulars of a
customer and understanding of the customer’s investment objectives. The purpose is to ensure that the CMS
Licence holder abides by the know-your-customer principle.

2.5.1 Specified Investment Products (SIPs) Trading Account55

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. Refer to Table 2.5.1 for examples of SIPs.

Table 2.5.1: Examples of SIPs

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

• Certain exchange traded funds and notes • Structured notes (e.g. equity-linked structured notes,
• Structured warrants credit linked structured notes)
• Futures • Certain unit trusts
• Certificates • Certain investment-linked life insurance policies

54 SFR (LCB), Regulation 46AD – Advertisement other than product advertisement.

55 MAS Notice on the Sale of Investment Products (SFA 04-N12).
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2.5.1.1 Customer Account Review and Customer Knowledge Assessment

Not all customers have the knowledge or experience to assess a SIP’s complex features. As such, CMS licence
holders must conduct the following for any customer who wish to trade in listed or unlisted SIPs:
i. Customer Account Review (CAR) based on criteria set out in Annex 2 of the MAS Notice on Sale of
Investment Products (SFA 04-N12)) before opening a SIP trading account for a customer who is a retail
investor56 to transact in any SIP which is listed for quotation or quoted on an organised market; or
ii. Customer Knowledge Assessment (CKA) based on the criteria set out in Annex 3 of SFA 04-N12 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 an organised market.

The criteria for the assessment of CAR and CKA can also be found in Appendices B and C of this Study Guide.

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.

For the purpose of the CAR and CKA, a CMS licence holder must take into consideration information on a
customer’s educational qualifications, investment experience and work experience. If a customer does not
provide such information, he shall be deemed as not possessing knowledge or experience in listed SIPs (for
CAR) or in 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 will assess a customer’s investment experience according to the:
a) Classification of the capital markets products previously transacted by the customer; and
b) Listing status of such capital markets products,

at the time that the customer had transacted in such capital markets products.

A CMS licence holder 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.

2.5.1.2 Approval to Open SIP Trading Accounts

56 SFA Section 4A – Specific Classes of Investors:

(i) Retail Investor refers to an investor who is not an accredited investor, institutional investor or expert investor.
(ii) Accredited Investor (AI) meets the requirements set out by MAS and has opted in to be treated as such. AI includes an
individual whose net personal assets exceed in value $2 million, whose financial assets (including banking deposits,
investment products and other assets prescribed by regulation, but net of liabilities) exceed $1 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. In
determining the value of an individual’s net personal assets, the value of the individual’s primary residence is net of any
outstanding secured credit facility and is capped at $1 million.
(iii) Institutional Investor refers to the Government, a statutory board, an entity wholly and beneficially owned by a central
government of a country and whose principal activity is to manage funds and any entity whose funds are so managed, a
foreign central bank, government or agency, a prescribed multilateral or international agency, a bank, a merchant bank, a
finance company, a company/co-operative society licensed as an insurer in Singapore, a trust company, a CMS licence holder
for securities dealing, approved exchanges and clearing houses, recognised market operators and clearing houses, licensed
trade repositories, an approved holding company, a depository under the SFA, a foreign entity or trust that carries on a
financial or regulatory function similar to the Singapore authorities under relevant statutes, a pension fund or collective
investment scheme, a person carrying on the business of dealing in bonds with accredited/expert investors, a trustee of a
prescribed trust, or any other such person as prescribed by the MAS.
(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, the trustee of a trust prescribed by the MAS or such other person as may be
prescribed by the MAS.
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A CMS licence holder must not open a listed SIP trading account for a customer unless its senior management
(or designated personnel) 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, that the customer has knowledge or
experience in derivatives, and has approved the opening of the customer’s listed SIP trading account. If the
customer is assessed not to have knowledge or experience in derivatives but nonetheless seeks to open a
trading account, a CMS licence holder’s senior management (or designated personnel) would need to be
satisfied that the customer is aware of the implications and risks. Regardless of the outcome of the CAR, a
CMS licence holder 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 CMS licence holder shall provide advice to the
customer provided the CMS licence holder is also an exempt financial adviser .

A CMS licence holder must not allow a customer to transact in an unlisted SIP unless it is satisfied, based on
the CKA, that the customer has knowledge or experience in the unlisted SIP.

Notwithstanding a positive outcome of the CKA, CMS licence holders should offer to provide advice concerning
the unlisted SIP to the customer. If the customer does not wish to receive advice, CMS licence holders 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 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.

2.5.1.3 Requirements where Customers are Assessed Not to Possess Knowledge or Experience in
Derivatives or Unlisted SIPs

The CMS licence holder 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 listed
SIP trading account, the CMS licence holder 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 products that he intends to transact using the SIP trading account.

The CMS licence holder shall inform the customer of the outcome of the CKA if they are assessed not to possess
knowledge or experience in unlisted SIP following the CKA. If the customer intends to proceed transact in an
unlisted SIP, the CMS licence holder 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 is also an exempt financial adviser, it shall provide financial advisory services
to the customer in accordance with the standards set out in the MAS Notice on Recommendations on
Investment Products issued under the Financial Advisers Act 2001 (FAA)57.

57 MAS Notice on Recommendations on Investment Products (FAA-N16).

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2.5.1.4 Validity of the Outcome of CAR58

The CMS licence holder must not allow a customer to transact in a listed SIP through the listed 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 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 has conducted a new CAR for the customer or has relied on a new CAR conducted
by a third party for the customer.

2.5.1.5 Validity of the Outcome of CKA59

If a customer is assessed to have knowledge or experience to transact in an unlisted SIP, the CMS licence
holder 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 shall conduct a new CKA on the customer or rely
on a new CKA conducted by a third party for the customer, before it transacts on behalf of the customer in
any unlisted SIP.

2.5.1.6 Documentation and Record Keeping60

A CMS licence holder shall obtain information on a customer’s profile and update the customer profile at least
annually. Every CAR and CKA conducted for each customer shall be documented. 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, as the case may be; and
iv. The approval of its senior management or designated personnel to open the customer’s listed SIP trading
account, where applicable.

Where a CMS licence holder transacts in any listed SIP on behalf of a customer, the CMS licence holder 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.

2.5.1.7 Requirements on CMS Licence Holders Dealing in Overseas-Listed Investment Products61

Overseas-listed investment products carry a different set of risks and levels of protection for investors. As
such, CMS licence holders are required to warn retail customers of the possible risks prior to the customer’s

58 Notice on the Sale of Investment Products (SFA 04-N12) – Paragraph 16 Validity of the Outcome of CAR.
59 Notice on the Sale of Investment Products (SFA 04-N12) – Paragraph 26 Validity of the Outcome of CKA.
60 Notice on the Sale of Investment Products (SFA 04-N12) – Paragraphs 27-29 Documentation and Record Keeping.
61 Notice on the Sale of Investment Products (SFA 04-N12) – Paragraphs 29D-29K Requirements on Licensed Persons and Exempt
Financial Institutions Dealing in Overseas-Listed Investment Products.
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first purchase of an overseas-listed investment product. They have to provide the risk warning statement62 as
set out in Appendix D of this Study Guide and obtain the customer’s acknowledgement of the risk warning
statement, in written form or otherwise, before allowing the customer to transact63 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 the:
• 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; and
• 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 and its representatives must maintain records of the customer’s acknowledgement
for a period of not less than 5 years as per section SFA 102(3) of the FAA - Keeping of Books and Furnishing of
Returns.

Where a CMS licensed holder offers an overseas-listed investment product to its customers, the CMS licence
holder may implement a system to identify and determine that the overseas-listed investment product is to
be classified as an Excluded Investment Product (EIP) (refer to Appendix E of this Study Guide for list of EIPs).

Where a CMS licensed holder does not implement a system to identify and determine that an overseas-listed
investment product is to be classified as an EIP, the overseas-listed investment product shall be classified as a
SIP, and the requirements to conduct the CAR shall apply to a CMS licence holder dealing in the overseas-listed
investment product for a customer.

Where a CMS licence holder has classified an overseas-listed investment product as an EIP, it shall ensure the
classification of the overseas-listed investment product concerned always remains accurate and current.

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

2.6 Privacy of Customer Information

CMS licence holders and their representatives must protect and keep customers’ information confidential. All
intermediaries are required under common law and the Personal Data Protection Act 2012 (PDPA) to
safeguard the confidentiality of their customer information.

62 Notice on the Sale of Investment Products (SFA 04-N12) – Annex 4 Risk Warning Statement for Overseas-Listed Investment
Products.
63 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.
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2.6.1 Confidentiality Obligations

2.6.1.1 Banking Privacy

Under Section 47 of the Banking Act 1970, a bank in Singapore or any of its officers cannot disclose customer
information to any third party except as permitted under the Banking Act. Please refer to the Third Schedule
of the Banking Act for a full list of circumstances. Some examples of permitted circumstances include:
1. Where the bank has the prior written consent of the customer, and the disclosure is in accordance with
the terms of the consent;
2. The disclosure is necessary for the operations and risk management of the bank and for the purpose of
audit by internal and external auditors, lawyers, or consultants approved or engaged by the bank; and
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).

When a request is received to disclose customer information, it is a good practice to refer the request to the
bank’s legal or compliance department to professionally assess 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 they also have an obligation to safeguard confidentiality or bear the
consequence of a breach. Any person who discloses information in contravention of Section 47 of the Banking
Act, the PDPA and the applicable requirements on customer information confidentiality under the SFA may
face penalties and litigation risks.

2.6.1.2 Securities and Futures Regulations (Licensing and Conduct of Business) Regulations64

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 approved exchange, recognised market operator approved or
recognised clearing house, as the case may be; or
3. Required by MAS.

2.6.2 Personal Data Protection Act (PDPA)

The PDPA governs the protection of personal data. 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 should establish clear policies and procedures to comply with the provisions of the PDPA
and other confidentiality obligations which include requiring their representatives to:

64 SFR(LCB) Regulation 47(2) - Trading Standards.

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1. Check with the “Do Not Call” registry before making marketing calls to a Singapore telephone number;
and
2. Seek clear and unambiguous consent through written forms and such as other means as may satisfy the
PDPA.
Violation of the “Do Not Call” provisions of the PDPA may lead to civil and/or criminal liabilities.

2.7 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, should the customer then be allowed to trade within his investment
profile.

2.7.1 Contract Notes65

Under the SFR (LCB), a CMS licence holder must send its customer a contract note for the purchase or sale of
capital markets products by the next business day following a transaction. 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 contain information specified in the SFA. Such details include:
1. The name under which the CMS licence holder carries on its business of dealing in capital markets
products, and the address of the principal place of business;
2. A statement informing the customer that the CMS licence holder is dealing in capital markets products as
a principal (other than for futures contracts) or is dealing against its customer (for futures contracts), if
the CMS licence holder is doing so;
3. The name and address of the recipient of the contract note;
4. The date on which the transaction is entered into;
5. The quantity and type of the securities, units in a collective investment scheme, derivatives contracts or
transactions in connection with spot foreign exchange contracts for the purposes of leveraged foreign
exchange trading, that is transacted;
6. The price per unit of the transaction;
7. The amount of the consideration for the transaction;
8. Any amount that is to be added or deducted from the settlement amount for the transaction;
9. The rate and amount of commission (if any) charged for the transaction by the CMS licence holder; and
10. The amount of all stamp duties or other duties or taxes payable in connection with the transaction.

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 that his transaction is 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

65 SFR(LCB) Regulation 42(2) - Contract Notes.

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be prepared and sent to him monthly on the movement in the account and the position at each reporting
period.

In the case of transactions done on an overseas exchange, the contents of the contract note can follow the
requirements of the overseas exchange.

2.7.2 Provision of Statements to Customers 66

2.7.2.1 Monthly Statements

Under the SFR (LCB) and SGX-ST rules, a CMS licence holder shall send monthly statements of account to
customers.

The statement must contain the following information:

i. The customer’s transactions in securities or units in a collective investment scheme and the prices at
which the transactions are entered into;
ii. The customer’s outstanding positions in derivatives contracts and spot foreign exchange contracts and
the prices at which the positions are acquired and the net unrealised profits or losses in all marked-to-
market positions;
iii. 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 specified products lending or held as collateral;
iv. The date, amount and reason for movement of the assets of the customer;
v. The movement and balance of money in the customer account; and
vi. 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 CMS licence holder does not need to send a monthly statement to a customer if67:
a) The information that is to be contained in the statement has already been sent to the customer by CDP,
as clearing house or depository, which the CMS licence holder is a member of;
b) Periodic reconciliation is performed between capital markets products transactions and positions held by
the CMS licence holder and its customers;
c) There has been no change to the customer’s account in the month; or
d) The customer is an accredited investor, expert investor, institutional investor or a corporation related to
the CMS licence holder, 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.

2.7.2.2 Quarterly Statement

66
SFR(LCB) Regulations 40(1) and (2) - Provision of Statement of Account to Customers.
67 SFR (LCB) Regulations 40(1A), (4), (5) and (6).
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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 account68.

2.8 Keeping of Books and Audit Trails

2.8.1 Keeping of Books and Furnishing of Returns

Under the SFA69, 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 the returns and records when notified by MAS in writing, and
provide information relating to its business as MAS may require.

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

2.8.1.1 Customer Details

• Particulars of every customer, and their guarantors;
• Particulars of authorized traders;
• 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 the asset 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;
o The date and amount of, and the reason for, each disposal of collateral from the trust account or
custody account;
o Whether the customer shares the same trust or custody account with other customers; and
o The name of custodians with whom the CMS licence holder deposits customer monies and assets.

2.8.1.2 Customer Correspondence

68 SFR(LCB) Regulation 40(3) - Provision of statement of account to customers.

69 SFA Section 102 - Keeping of Books and Providing of Returns.
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i. Every power of attorney or other document authorising the CMS licence holder or its representatives to
operate the customer account on a discretionary basis;
ii. Every written agreement entered into by the CMS licence holder with its customer;
iii. Every disclosure made to a customer under Regulation 18A or 27A of the SFR(LCB);
iv. Every acknowledgment of a customer received under Regulation 47DA(1)(b) of the SFR(LCB);
v. Every document relating to the opening of a customer trading account for the purpose of entering into
OTC derivatives contract transactions;
vi. Every acknowledgment of a customer received under Regulation 47E(1)(b) of the SFR(LCB),which shall be
in Form 13;
vii. Every acknowledgment of a customer received under Regulation 47E (2) of the SFR(LCB), which shall be in
Form 14;
viii. Every statement acknowledging receipt of assets from a customer indicating the person in whose name
the assets are registered;
ix. Every order prepared or received in the course of the business of the CMS licence holder;
x. 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;
xi. 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 CMS licence holder;
xii. Written confirmation of every transaction to purchase or sell any capital markets products and every
purchase and sale contract note and statement of account in respect of such transaction, being a
transaction to which any of the following is a party: (i) the CMS licence holder; (ii) except where the CMS
licence holder is one referred to in sub-paragraph (iii), an executive director of the CMS licence holder, if
the transaction is a personal transaction of such executive director; and (iii)where the CMS licence holder
is a branch or subsidiary of a foreign company with its head office located outside Singapore, an executive
director of the holder who is directly involved in its operations and business, if the transaction is a personal
transaction of such executive director;
xiii. Written confirmation of every transaction carried out on behalf of customers prepared by the CMS licence
holder, and every purchase and sale contract note and statement of account in respect of such transaction
prepared by the CMS licence holder, or received from any other party; and
xiv. In respect of every underwriting and placement transaction entered into by the CMS licence holder,
documentation stating the basis of allotment to each subscriber or placee.
2.8.1.3 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.

2.8.1.4 Particulars of all income and expenses of the CMS licence holder, including:
• Particulars of all liabilities (including contingent liabilities) of the CMS licence holder;
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• 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; and
• Particulars of every over-the-counter derivatives transaction carried out on behalf of or with customers.

The list of records cited above are not exhaustive.

2.8.2 Audit

CMS licence holders must appoint an auditor to audit its accounts70 and prepare a true and fair profit and loss
account and a balance sheet for each financial year71. 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.

2.8.3 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 approved exchange if the CMS licence holder concerned is a member
of an approved 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.

2.8.4 Offence to Destroy, Conceal, Alter Books72

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

70 SFA Section 106 - Appointment of auditors.

71 SFA Section 107 - Lodgement of annual accounts, etc.
72 SFA Section 111 - Offence to destroy, conceal, alter, etc., books.
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and be liable on conviction to a fine and/or to imprisonment.. 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.

2.8.5 Safeguarding of Books

Section 112 of the SFA requires a CMS licence holder to take reasonable precautions to prevent falsification
of books required to be kept under the SFA and to facilitate the discovery of any falsification of books73. Any
CMS licence holder who contravenes this section shall be guilty of an offence under the SFA.
2.9 Customers’ Moneys and Assets

2.9.1 Definitions74

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 “moneys received on account of a customer” of the CMS licence holder includes:
i. Moneys received from, or on account of, the customer in respect of a sale or purchase of any capital
markets products;
ii. Moneys received from, or on account of, the customer for the purchase of or holding of any capital
markets products, or the maintenance of a trading account for any capital markets products by the
customer;
iii. Moneys received from, or on account of, the customer, where the CMS licence holder provides product
financing to the customer;
iv. Moneys received from, or on account of, the customer for the purpose of managing the customer’s funds;
and
v. Moneys received from, or on account of, the customer in the course of the business of the CMS licence
holder,

but does not include:

a) Moneys which are to be used to reduce the amount owed by the customer to the CMS licence holder;
b) Moneys which are to be paid to the customer or in accordance with the customer’s written direction;
c) Moneys which are to be used to defray the CMS licence holder’s brokerage and other proper charges;
d) Moneys which are to be paid to any other person entitled to the moneys; and

73 SFA Section 112 - Safeguarding of books.

74 SFR(LCB) Regulation 15 - Definitions of this Part.
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e) Moneys received from or on account of a customer who is an institutional investor in connection with any
OTC derivatives contract entered into by the CMS licence holder with the customer, which is not cleared
or settled by a clearing facility and is booked in Singapore.

“Customer’s assets”, in relation to the CMS licence holder, means securities and assets , including Government
securities and certificates of deposits, that are beneficially owned by a customer of the CMS licence holder,
but does not include moneys, and securities and assets received from or on account of a customer who is an
institutional investor in connection with any OTC derivatives contract entered into by the CMS licence holder
with the customer, is not cleared or settled by a clearing facility and is booked in Singapore.

2.9.2 Customers’ Moneys

2.9.2.1 Moneys Received on Account of Customer75

The CMS licence holder must treat and deal with all moneys received on account of its customer as belonging
to that customer.

Where its customer is a retail customer, it shall deposit all moneys received on account of that customer (i)
for OTC derivatives contracts, in a trust account and (ii) in any other case, in a trust account maintained in
accordance with Regulation 17 of the SFR(LCB) or any other account directed by the customer, to which the
customer has legal and beneficial title and which is maintained with a financial institution specified under the
SFR (LCB) (refer to Section 2.9.2.2).

Where its customer is not a retail customer, the moneys must be deposited in a trust account or in any other
account directed by the customer.

Moneys received from customers must be deposited no later than the next business day76 after receipt. The
customer’s moneys 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.

Other than for OTC derivatives contracts, the CMS licence holder may commingle monies from different
customers into the same trust account. Where the CMS licence holder offers the customer an option of having
a segregated account from other customers for moneys deposited or paid for in relation to OTC derivatives
contracts, it shall disclose to the customer the additional costs and differences in protection that such
arrangement attracts.

2.9.2.2 Maintenance of Trust Account with Specified Financial Institutions77

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 licensed under the Banking Act ; or
iii. A finance company licenced under the Finance Companies Act 1967.

75 SFR (LCB) Regulation 16 – Money Received on Account of Customer.

76 “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.
77 SFR (LCB) Regulation 17 - Maintenance of Trust Account with Specified Financial Institutions.
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Other than moneys received from a retail customer in respect of OTC derivatives contracts, the CMS licence
holder may deposit customer’s moneys which are denominated in a foreign currency in a trust account or
customer’s segregated 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.

The CMS licence holder must, before depositing retail customer moneys in the trust account, disclose to the
retail customer78:
i. That the moneys are held by a specified financial institution on behalf of the holder;
ii. That the CMS licence holder may withdraw the retail customer’s moneys from the trust account and
deposit the moneys with an approved or recognised clearing facility or a member of a clearing facility or
organised market;
iii. Whether the moneys are deposited in the same trust account, and commingled with the moneys of other
customers;
iv. Where the moneys are deposited in the same trust account, and commingled with the moneys of other
customers, the risk of such commingling;
v. The consequences for the retail customer’s moneys if the approved or recognised clearing facility or
member of the clearing facility or organised market becomes insolvent, if applicable; and
vi. Where the moneys are placed with a custodian outside Singapore, if applicable, that the laws and practices
of the jurisdiction under which the custodian is based may be different from those in Singapore and that
such differences may affect the ability of the customer to recover the deposited funds.

2.9.2.3 Suitability of Specified Financial Institutions79

The CMS licence holder shall before opening a trust account, conduct initial and periodic due diligence on the
suitability of the specified financial institution for its customers. It must document the procedures for the
conduct of such due diligence, including the frequency of periodic reviews and the approval of its senior
management for such procedures80. Records of the grounds on which it has satisfied itself of the financial
institution’s suitability must also be maintained.

2.9.2.4. Notification and Acknowledgement from Specified Financial Institutions81

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 moneys.

If a trust account or segregated account is opened with a custodian outside of Singapore, the CMS licence
holder shall, before depositing customer moneys in such an account, give written notice to the custodian and
obtain a similar acknowledgement as described above.

78 SFR (LCB) Regulation 18A – Disclosure to customers in relation to moneys received on account of customers.
79 SFR (LCB) Regulation 17(4) and (5) – Maintenance of Trust Account with Specified Financial Institutions.
80 SFR(LCB) Regulation 17(3) and (4) - Maintenance of Trust Account with Specified Financial Institutions.
81 SFR (LCB) Regulation 18 - Notification and Acknowledgement from Specified Financial Institutions.
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2.9.2.5 Customer’s Moneys Held with a Clearing House, etc.82

A CMS licence holder which deals in capital markets products may deposit customer’s moneys ( other than
moneys received on account of a retail customer for OTC derivatives contracts) with (i) an approved or
recognised clearing house or (ii) a member of a recognised market or of a clearing house, for the purpose of
facilitating positions and transactions in capital markets products traded, entered, settled or cleared on such
entities or for any other purpose specified under the business rules and practices of the clearing house or
exchange, as the case may be.

2.9.2.6 Investment of Moneys Received on Account of Customers83

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 an organised market 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 moneys 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.

2.9.2.7 Moneys Received from Retail Customers84

CMS licence holders shall not enter into any arrangement for the transfer of right, interest benefit or title
relating to retail customer moneys, unless the arrangement is in connection with the lending of the customer’s
specified products and it is in compliance with Regulation 45 of the SFR(LCB).

2.9.2.8 Withdrawal of Moneys from Trust Account85

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

82 SFR (LCB) Regulation 19 - Customer’s Money Deposited with Approved Clearing House, etc.
83 SFR (LCB) Regulation 20 - Investment of Moneys Received on Account of Customer.
84 SFR (LCB) Regulation 20A – Moneys Received from Retail Customer.
85 SFR (LCB) Regulation 21 - Withdrawal of Money from Trust Account.
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i. Making a payment to another person entitled thereto;

ii. Making a payment to meet obligation of a customer whose moneys are deposited in that account; being
an obligation that arises from any dealing in capital markets products 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 (except that a
withdrawal must not be made from a retail customer’s trust account to meet any obligation of the CMS
licence holder in relation to any transaction for the benefit of the holder);
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) Regulation 2386, 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 a clearing house or
exchange or for an investment in accordance with SFR(LCB) Regulation 2087;
vii. Making a payment or withdrawal that is authorised by law.

2.9.2.9 Interest Arising from Trust Account88

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 moneys in accordance with Regulation 20 of the SFR (LCB) 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.

2.9.2.10 Placement of CMS Licence Holder’s Own Moneys in Trust Account89

A CMS licence holder may advance sufficient moneys 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 where it is maintained with a specified financial
institution or custodian.

The CMS licence holder may retain any interest earned and return arising on the moneys which it has advanced
to the account. Subject to Regulation 21(1)(e) of the SFR(LCB), any moneys belonging to the CMS licence holder
that is deposited into a customer’s trust account may be used for the purpose of payment to the customer.

2.9.2.11 No Effect on Lawful Claims or Liens90

Nothing in SFR (LCB) Division 291 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 the Division or any money
belonging to a customer before the money is paid into a trust account.

86 SFR(LCB) Regulation 23 - Placement of Licensee’s Own Money in Trust Account.

87 SFR(LCB) Regulation 20 - Investment of moneys received on Account of Customers.
88 SFR (LCB) Regulation 22 - Interest arising from Trust Account.
89 SFR (LCB) Regulation 23 - Placement of Licensee’s Own Money in Trust Account.
90 SFR(LCB) Regulation 24 - No Effect on Lawful Claims or Liens.
91 SFR(LCB) Division 2 – Customer’s Moneys.
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2.9.3 Customer’s Assets

CMS licence holders are required to comply with the 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
holder92.

2.9.3.1 Duties of CMS Licence Holders upon Receipt of Customers’ Assets93

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. In the case where the customer is a retail investor, the CMS licence
holder shall deposit the customer’s assets in an account directed by the customer only if the customer has
legal and beneficial title to the account and it is maintained with a specified custodian (refer to Section 2.9.3.2).

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.

A customer’s assets may be commingled with the assets of another customer and deposited in the same
custody account.

2.9.3.2 Maintenance of Custody Account with Specified Custodians94

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 licensed under the Banking Act;
iii. A finance company licensed under the Finance Companies Act;
iv. A depository agent within the meaning of section 81SF of the SFA for the custody of securities listed for
quotation or quoted on SGX-ST or deposited with CDP;
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.

The CMS licence holder may maintain the custody account itself where it is licensed under the SFA 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.

92 SFR(LCB) Regulation 25 - Application of this Division i.e. Division 3 – Customer’s Assets.

93 SFR(LCB) Regulation 26 – Duties of Holder on Receipt of Customer’s Assets.
94 SFR(LCB) Regulation 27 - Maintenance of Custody Account with Specified Custodians.
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The CMS licence holder must, before depositing retail customer assets in the custody account, disclose to the
customer95:
i. That the moneys are held on behalf of the customer in accordance with Regulation 27 of the SFR (LCB) ;
ii. That the CMS licence holder may withdraw the retail customer’s assets from the custody account and
deposit the assets with an approved or recognised clearing house or member of a clearing facility or
organised market;
iii. Whether the assets are deposited in the same custody account, and commingled with the assets of other
customers and the risks of such commingling;
iv. The consequences for the retail customer’s assets if the custodian with which the custody account is
maintained becomes insolvent;
v. Where the assets are placed with a custodian outside Singapore, if applicable, that the laws and practices
of the jurisdiction under which the custodian is based may be different from those in Singapore and that
such differences may affect the ability of the customer to recover assets deposited in the custody account.

2.9.3.3 Notification and Acknowledgment from Specified Custodian96

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 customers; 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 CMS licence holder deposits
its own assets.

2.9.3.4 Suitability of Custodian97

The CMS licence holder which maintains its customer’s assets in a custody account must:
i. Before opening the custody account, conduct initial and periodic due diligence as to the custodian’s
suitability for the CMS licence 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.

2.9.3.5 Customer’s Assets Held with Clearing House, etc.98

The holder of a CMS licence to deal in capital markets products may deposit customer assets with (i) an
approved or recognised clearing house or (ii) a member of a recognised market or of a clearing house, for the
purpose of facilitating positions and transactions in capital markets products traded, entered, settled or
cleared on such entities or for any other purpose specified under the business rules and practices of the
clearing house or exchange, as the case may be.

2.9.3.6 Customer Agreement99

95 SFR (LCB) Regulation 27A – Disclosure to customers in relation to assets received on account of customers.
96 SFR(LCB) Regulation 28 – Notification and Acknowledgment from Specified Custodian.
97 SFR(LCB) Regulation 29 - Suitability of Custodian.
98 SFR (LCB) Regulation 30 - Customer’s Assets Held with Clearing House, etc.
99 SFR(LCB) Regulation 31 - Customer Agreement.
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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;
ii. Any lien over or security interest in the assets by the CMS licence holder or a third party;
iii. The circumstances under which the CMS licence holder may realise the assets held as collateral to meet
the customer’s liabilities to the CMS licence holder;
iv. Where the customer’s assets are to be held with a custodian other than the CMS licence holder, the
liability of the CMS licence holder in the event of default by the custodian;
v. Where the CMS licence 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 CMS licence 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 assets to the customer;
and
ix. All applicable fees and costs for the custody of the assets.

2.9.3.7 Custody Agreement100

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 CMS holder’s instructions; and
the records shall identify the assets as belonging to the CMS holder’s customer and the assets shall be
kept separate from any asset belonging to the CMS 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 CMS 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 CMS holder in order that the CMS holder
may comply with its record-keeping obligations under SFA, SFR(LCB) or under any other law;
v. The person in whose name the assets are registered;

100 SFR(LCB) Regulation 32 – Custody Agreement.

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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.

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.

2.9.3.8 Lending of Customer’s Specified Products101

A CMS licence holder may lend or arrange for a custodian to lend its customer’s assets which are specified
products 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.

Paragraph (i) above does not apply to a CMS licence holder who lends or arranges for a custodian to lend the
specified products of a customer who is an accredited investor, expert investor or institutional investor.

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 specified products
are to be lent. If the CMS licence holder arranges for a custodian to lend a customer’s specified products, it
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.

2.9.3.9 Mortgage of Customer’s Assets102

Where the customer owes moneys to the Trading Member, the Member may mortgage, charge, pledge or
hypothecate its customer's assets for a sum not exceeding the amount the customer owes the Member.

This, however, does not apply if there is an excess arising on any day through the reduction of the amount
owed by the customer on that day, but only if the Member pays or transfers to the mortgagee, charge or
pledgee concerned any moneys or assets of an amount sufficient to reduce such excess as quickly as possible
after the excess occurs and, in any event, no later than the next business day.

A CMS licence holder 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 CMS licence holder must, before mortgaging, charging, pledging or hypothecating a retail customer’s
assets, inform the retail customer that it would do so only for a sum not exceeding the amount owed by

101 SFR(LCB) Regulation 33 - Lending of Customer’s Specified Products.

102 SFR(LCB) Regulation 34 - Mortgage of Customer’s Assets.
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the customer to the CMS licence holder, explain the risks involved to the retail customer and obtain the
retail customer’s written consent.
iii. The CMS licence holder 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 CMS licence holder on that day, but
only if the CMS licence holder pays or transfers to the mortgagee, chargee or pledgee concerned moneys
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 CMS
licence holder; and
b) The claim to which each customer’s assets are subject to as a result of such mortgage, charge, pledge or
hypothecation does not exceed the amount owed by the customer to the CMS licence holder.

2.9.3.10 Assets Received from Retail Customer103

CMS licence holders shall not enter into any arrangement for the transfer of any right, interest, benefit or title
relating to a retail customer’s assets, unless the arrangement is in connection with the borrowing or lending
of the customer’s specified products and complies with the relevant regulations.

2.9.3.11 Withdrawal of Customer’s Assets104

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 capital markets products by the CMS licence
holder for the customer;
iii. Transferring the asset to any person or account in accordance with the customer’s written directions
(except that a transfer must not be made to meet any obligation of the CMS licence holder in relation to
any transaction for the benefit of the CMS licence holder);
iv. Specified products lending;
v. Mortgaging, charging, pledging or hypothecating the assets in accordance with Regulation 34 of the
SFR(LCB);
vi. Making a deposit in accordance with Regulation 30 of the SFR(LCB); or
vii. Making a transfer that is authorised by law.

2.9.3.12 No Effect on Lawful Claims or Liens

103 SFR (LCB) Regulation 34A – Assets Received from Retail Customer.
104 SFR(LCB) Regulation 35 – Withdrawal of customer’s Assets.
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Nothing in SFR (LCB) Division 3105 shall be construed as avoiding or affecting any lawful claim or lien which any
person has in respect of any moneys held in a custody account in accordance with the Division or any moneys
belonging to a customer before the moneys are paid into a custody account.

105 SFR(LCB) Division 3 – Customer’s Assets.

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Chapter 3:
Market Conduct
Learning Objectives
The candidate will understand:
✓ What constitutes market conduct and prohibited conduct.

✓ Different types of market misconduct under the Securities and Futures Act (SFA).

✓ Different types of market misconduct penalties under the SFA.

✓ Trading related acts, rules and regulations under the SFA and the Securities and Futures (Licensing and
Conduct of Business) Regulations (SFR(LCB)).

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, that reflects genuine forces of supply and demand,
enhances the liquidity, efficiency and stability of the capital markets.

Rules regulating trading activities under the SFA and SGX-ST rules, effective surveillance and robust
investigations are part and parcel of the overall enforcement strategy against misconducts in the capital
markets.

All capital markets 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.

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3.2 Market Misconduct under the SFA 106

A high standard of ethical conduct is expected from all participants of the capital markets. This is covered in
the market conduct rules under the SFA and SFR(LCB).

The rules apply to acts occurring in Singapore with respect to any capital markets products, 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 Singapore107. Similarly, the rules apply to acts occurring
outside Singapore with respect to capital markets products listed or quoted on an organised 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 a Singapore-based exchange, then that act of price manipulation will be regarded as having taken
place in Singapore for purpose of market misconduct offences. Any persons found guilty will face the
penalties of a fine and/or to imprisonment.

Practices that give 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 markets must abide by the regulations
that guide market conduct.

The severity of the fines and imprisonment terms reflects how serious MAS is in deterring market misconduct
and ensuring personal liability for any persons breaching the laws on market conduct.

The SFA spells out the following as prohibited market conduct:

• False Trading and Market Rigging Transactions;

• Securities Market Manipulation;

• False or Misleading Statements and Information;

• Fraudulently Inducing Persons to deal in Capital Markets Products;

• Employment of Manipulative and Deceptive Devices;

• Dissemination of Information about Illegal Transactions; and

• Insider Trading.

106
MAS-SGX Trade Surveillance Practice Guide. https://www.mas.gov.sg/-/media/MAS/News-and-Publications/Monographs-and-
Information-Papers/MAS-SGX-Trade-Surveillance-Practice-Guide.pdf. Further information could also be found from (i)
https://api2.sgx.com/sites/default/files/2018-05/Trade%20Surveillance%20Hand%20Book.pdf; and (ii)
https://api2.sgx.com/sites/default/files/2018-05/20180523%20SGX_Trade%20Surveilance%20Handbook_S2.pdf
107 SFA Section 196 – Application of this Division, Part 12 – Market Conduct, Division 1 – Prohibited Conduct – Capital Markets
Products.
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3.3 False Trading and Market Rigging Transactions 108

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 take place. 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
their licences.

False Trading includes:

• Creating or intending to create an appearance of active trading in any capital markets product;
• Buying and selling any capital markets product without a change in beneficial ownership to maintain,
change or cause fluctuations in the market price of the capital markets product 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 capital markets products if the person is reckless as to whether
doing that act would so create or be so likely to create such a false or misleading appearance; or
• Creating transactions that are intended to give a false and misleading appearance with respect to the
market for, or the price of, any capital markets products.

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 or more commonly known as “wash sale” or
“wash trade”; and
2. Matching orders which are specifically spelt out to in Section 197(3)(a) to (c) of the SFA as prohibited.

Example – (1) No change in beneficial ownership

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 capital markets product. Section 197(5) of the SFA109 provides that there is no change in the beneficial
ownership if a person who had an interest in the capital markets product (or any person associated with such
person) before the purchase or sale continues to have an interest in the capital markets product after the
purchase or sale.

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

108 SFA Section 197 – False Trading and Market Rigging Transactions.
109 SFA Section 197 - False Trading and Market Rigging Transactions.
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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 a false or misleading impression of active
trading in the capital markets product or the market for, or the price of the capital markets product.

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.

3.4 Securities Market Manipulation 110

Market manipulation involves the intentional interference with the free forces of supply and demand to
deceive or defraud investors, or to achieve some other ulterior purpose.

To prevent market manipulation, there are provisions in the SFA111 which disallow any person from directly or
indirectly effecting two or more transactions in securities or securities-based derivatives contracts of a
corporation if the transactions have the effect of raising, lowering, maintaining or stabilising the price of such
capital markets products on an organised market, with the intent to induce other persons to deal in such
capital markets products.

Example - Securities Market Manipulation

Market manipulation happens when a person (Person X) executes trades using his account and the accounts
of several of his customers to trade at prices above the previous traded price. This 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.

110 SFA Section 198 –Market Manipulation in relation to securities and securities-based derivatives contracts.
111 SFA Section 198(1) – Market Manipulation in relation to securities and securities-based derivatives contracts.
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3.5 Dissemination of False or Misleading Statements and Information 112

The dissemination of information or statements that are false or misleading in a material particular that is
likely to:
• Induce the subscription of any securities, securities-based derivative contracts, or units in a collective
investment scheme by other persons;

• Induce the sale or purchase of securities, securities-based derivatives contracts, or units in a collective
scheme by other persons; or

• Raise, lower, maintain or stabilise the market price of securities, securities-based derivatives contracts, or
units in a collective scheme,

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 ought reasonably to 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;

• the media; or

• word of mouth.

CMS licence holders or their representatives should not knowingly with intent make or publish any statement,
forecast or promise that is false or misleading to induce others to deal in securities, securities-based
derivatives contracts, or units in a collective investment scheme. If a CMS licence holder or its representative
recklessly does so through wilfully concealing material facts which are recklessly published, stored or
recorded, they will be contravening the SFA.

3.6 Fraudulently Inducing Persons to Deal in Capital Markets Products 113

Under Section 200(1) of the SFA, it is an offence for any person to induce or attempt to induce another person
to deal in capital markets products by:
1. Knowingly 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 he
knows is false or misleading in a material particular.

112 SFA Section 199 - False and Misleading Statements.

113 SFA Section 200(1) – Fraudulently Inducing Persons to Deal in Capital Markets Products.
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3.7 Employment of Manipulative and Deceptive Devices 114

Under Section 201 of the SFA, it is an offence for any person to directly or indirectly, in connection with the
subscription, sale or purchase of any capital markets products to:
1. Employ any device, scheme or artifice to defraud;
2. Engage in any act, practice or course of business which operates or is likely to operate 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 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, and is an offence under the SFA.

3.8 Dissemination of Information about Illegal Transactions 115

Just as the use of manipulative devices are 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.

Section 202 of the SFA 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 or
securities-based derivative contracts of a company or a business trust, the price of a class of derivatives, or
the price of a class of spot foreign exchange contracts for the purposes of leveraged foreign exchange
tradingwill, or is likely, to rise or fall or be maintained as a result of an illegal transaction.

114 SFA Section 201 – Employment of Manipulative and Deceptive Devices.

115 SFA Section 202 – Dissemination of Information about Illegal Transactions.
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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 capital
markets products 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, directly or indirectly, any consideration or benefit for circulating or
disseminating the information or authorising or being concerned in 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.

It is an offence to be involved, whether directly or indirectly, in the circulation and/or dissemination of any
information about illegal transactions if such transactions have an impact on the price of such securities and
such person either effected the transaction or expected to derive a benefit from disseminating such
information.

3.9 Insider Trading 116

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 or value of securities, securities-based derivatives contracts or
units in a collective investment scheme. A reasonable person would be taken to expect information to have a
material effect if the information is likely to influence persons or a class of persons who commonly invest in
such capital markets products in deciding whether or not to buy, subscribe for or sell such capital markets
products117.

Information is considered to be “generally available” if118:

i. It consists of readily observable matter;

ii. Without limiting the generality of (i),

116 SFA Section 218 and 219 – Prohibited conduct by connected and other persons in possession of inside information.
117 SFA Section 216 – Material effect on price or value of securities, securities-based derivatives contracts or CIS units.
118 SFA Section 215 – Information generally available.
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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, securities-based derivative contracts or CIS units 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.

“Persons who commonly invest”, in relation to investment in any kind of securities, securities-based
derivatives contracts or CIS units, means a section of the public that is accustomed, or would be likely, to deal
in capital markets products of that kind. The MAS has issued guidelines on the interpretation of this concept119.

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, securities-based derivatives contracts or CIS
units must not enter into transactions in such capital markets products. 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.

3.9.3.1 A Connected Person120

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 securities or securities-based derivatives contracts
of that corporation.

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:

119 Guidelines on the Interpretation of “Persons Who Commonly Invest” in Division 3 of Part XII of the SFA (SFA 12-G01).
120 SFA Section 218(5) and (6) – Prohibited conduct by connected person in possession of inside information.
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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

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 insiders121.

3.9.3.2 Non-connected persons122

In the case of a non-connected person, it has to be proven that the person knew that the information in his
possession was not generally available, and that if it was generally available, it might be price sensitive and a
reasonable person would expect it to have material effect on the price or value of the securities, securities -
based derivatives contracts or units in a collective investment scheme.

It is irrelevant where the information came from. Such a non-connected person is not permitted to subscribe
for or trade in capital markets products or procure another person to do so and must not cause the information
to be communicate to any other person if it is likely to result in another person dealing in such capital markets
products.

It is not necessary to prove that the non-connected person did not have an intention to use the inside
information in contravention of the relevant SFA provisions123.

3.9.4 Exceptions and Defences124

There are excepted categories of individuals and situations found within the SFA. These are:
i. The redemption by trustees or managers in respect of a CIS unit, subject to certain conditions (Section 222
of the SFA);
ii. Persons acting as underwriters and pursuant to the performance of their roles (Section 223 of the SFA);

121 Appendix 7.1, Part X Policy on Insider Trading, Paragraphs 27 and 28 of the SGX-ST Mainboard Listing Rules; Appendix 7A, Part X
Policy on Insider Trading, Paragraphs 29 and 30 of the SGX-ST Catalist Listing Rules.
122 SFA Section 219 – Prohibited conduct by other persons in possession of inside information.
123 SFA Section 220 – Not necessary to prove intention of use.
124 SFA Sections 222 to 229 – Exceptions and Attribution of knowledge.

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iii. The purchase or sale of securities, securities-based derivative contracts or CIS units pursuant to legal
requirements such as requirements imposed by written law or a court order (Section 224 of SFA);
iv. Price-sensitive information communicated pursuant to legal requirements such as requirements imposed
by written law or a court order (Section 225 of the SFA);
v. Knowledge within corporation – knowledge of an officer is typically regarded as knowledge of the
corporation, unless Chinese walls apply (Section 226 of the SFA);
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
(Section 227 of the SFA);
vii. Knowledge by virtue of a natural person’s own transactions (Section 228 of the SFA); and
viii. Knowledge of a corporation’s own transactions (Section 229 of the SFA).

Besides the above exceptions and defences, Section 231 of the SFA 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.

Section 231 of the SFA 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, securities-based derivatives contracts or CIS units, 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 capital markets
products can trade such products if it or its representatives entered into the transaction on behalf of a
principal, where the instruction of the principal was not solicited by the CMS licence holder or its
representatives, the principal was not advised by the CMS licence holder or its representatives in relation to
the transaction, 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.

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 Person A after MAS commenced civil proceedings against him
in the courts.

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3.10 Securities Hawking 125

Securities hawking refers to making an offer of securities, securities-based derivatives contracts or CIS units 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 such capital markets
products, during any unsolicited meetings with clients or other investors. This requirement does not apply to
offers made to CIS units, securities or securities-based derivatives contracts that do not need a prospectus,
such as those to institutional investors or accredited investors126.

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 a capital markets 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 in listening to the sales pitch before approaching the customer.

3.11 Other Market Conduct Rules and 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.

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; and

• Specified Products Borrowing and Lending.

3.11.1 Short Selling127

The SFA sets out requirements on short selling disclosures. Short selling is defined as the sale of specified
capital markets products128 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).

125 SFA Section 309 – Securities Hawking Prohibited.

126 SFA Section 304 - Offer made to institutional investors; SFA Section 305 - Offer made to accredited investors and certain other
persons.
127 Part VIIA of the SFA.
128 Any capital markets products listed on an approved exchange that are prescribed by regulations under SFA Section 137ZM.

Regulation 5 of the Securities and Futures (Short Selling) Regulations prescribe any share of a corporation listed on an approved
exchange, any unit in a business trust listed on an approved exchange, and any unit in a real estate investment trust to be specified
capital markets products.
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In ‘covered’ short selling, at the time of the sale, the seller has borrowed the capital markets products or has
otherwise made arrangements to fulfil his obligation to deliver the products. In ‘uncovered’ short selling, at
the time of the sale, the seller is not in possession of products or has not otherwise made arrangements to
meet his delivery obligation.

The motivation for short selling is that the person believes that a product’s price will decline, so it sells the
products first, hoping that he or she can buy the products 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
do not possess securities for delivery on settlement day (the 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 CDP129.

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, the SFA requires the 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 markets, therefore aiding investigation and
enforcement.

Although it is good to gather information on short selling to 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.

3.11.2 Marking Sell Orders130

To ensure that short sell information is captured comprehensively, both the SFA and SGX-ST Rules set out
disclosure requirements for short sales. MAS requires investors to report their short positions and short sell
orders in securities listed on the Singapore Exchange. MAS Guidelines on the Regulation of Short Selling
explain how MAS administers the legislative provisions and exemptions relating to the disclosure of short sell
orders and short positions.

129 CDP Clearing Rule 6.7.4 – Buying-In Procedures.

130 SFA Section 137ZJ – Disclosure of Short Sell Orders; Securities and Futures (Short Selling) Regulations; MAS Guidelines on the
Regulation of Short Selling (SFA 07A-G01).
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A person who makes a short sell order on any approved exchange must, before or at the time of the short sell
order, disclose to the approved exchange that it intends to make (or is making) a short sell order and the
quantity, volume or value of the specified capital markets products that this relates to.

The SGX-ST Rules provide that a Trading Member and its Representatives shall not enter a sell order in the
Trading System if a customer has not indicated whether the sell order is a Short Sell Order or a normal sell
order, or has not provided the relevant information relating to quantity, volume or value of the specified
capital markets product in which the customer intends to make or is making a short sell order.

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 considered 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.

3.11.3 Reporting of Short Position131

The SFA requires that where a person’s (A) net short position in relation to any specified capital markets
products crosses a threshold prescribed by the MAS132, the person shall report to the MAS directly or through
another person (B):
1. Information on the identity and business activities of A and B (if applicable);

2. Information on A’s short position in relation to the products; and

3. Any change to the information above.

3.11.4 Specified Products Borrowing and Lending133

Just as short selling is allowed subject to conditions including having pre-arrangements for ‘covered’ short
selling, specified products borrowing and lending is allowed as a market practice subject to conditions as
outlined in Regulation 45 of the SFR (LCB).

When a CMS licence holder borrows from an owner of specified products (who is not an accredited investor,
expert investor or institutional investor), the CMS licence holder must ensure that it provides collateral of up
to 100% of the market value of the products borrowed. Similarly, if the CMS licence holder lends products,
including those belonging to its customers, it must obtain collateral from the borrower of at least 100% of the
market value of the products borrowed.

The value of the collateral throughout the borrowing and lending arrangement must be 100% of the market
value of the specified products. Such borrowing and lending must be clearly documented in writing and must
comply with the following:

131 SFA Section 137ZK – Reporting of Short Position.

132 Securities and Futures (Short Selling) Regulations, Schedule – Short Position Threshold.
133 SFR (LCB) Regulation 45 – Specified Products Borrowing and Lending.

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1. State the capacities in which the arrangement was entered into, as agent or principal.
2. Provide for the transfer of title to and the interest in the specified products to the CMS licence holder from
the borrower or from the CMS licence holder to the lender, as the case may be.
3. 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 specified products borrowed by
the CMS licence holder from the lender or lent by the CMS licence holder to the borrower, as the case
may be.
4. Provide the rights to document the borrowing and lending arrangement including the treatment of
dividend payments, voting and other rights and arrangement for dealing with any corporate action.
5. Provide for the daily mark to market valuation of the collateral to determine the procedure for calculating
margin and treatment of shortfalls, if any.
6. Provide the procedures for the return of specified products lent and borrowed.
7. Provide for the termination of agreement, setoff of claims, default conditions, calculation of lending or
borrowing fees, as the case may be.
8. 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.

The collateral arrangements above do not apply if the CMS licence holder borrows from an accredited investor,
expert investor or institutional investor. However, such arrangements and conditions must be documented in
a written agreement in accordance with the requirements of Regulation 45(7)(b) of the SFR (LCB).

3.12 Penalties for Misconduct under the SFA

Any contravention of the market conduct rules under the SFA attracts substantial criminal and civil penalties
and liabilities. Further, the offender’s licence may be suspended or revoked depending on the severity of the
offence. Reputational loss (including the loss of customers’ confidence) is also a likely knock-on effect.

3.12.1 Criminal and Civil Penalties134

Offences for market misconduct are criminal and carry heavy penalties, which include fines and/or
imprisonment.

In addition to criminal penalties, the CMS Licence Holder or its Representatives may also face civil action
brought by the MAS in court.

134 SFA Section 204 – Penalties under this Division; SFA Section 232 – Civil Penalty.

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3.12.2 Civil Sanctions, Financial and Reputation Loss135

In addition to potential criminal and civil penalties, an offending CMS Licence Holder or its Representatives
may also be liable to compensate any person who:
i. Had entered into similar trades at the time of the offence; and
ii. Had suffered market losses due to the effects of the offence.

This is in addition to the possibility of facing further lawsuits (apart from those contemplated under the SFA)
from market players for losses incurred. Such actions may require damages to be paid resulting in financial
loss.

135 SFA 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.
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Chapter 4:
Ethics, Codes and Standards of
Professional Conduct for
Securities Dealing
Learning Objectives
The candidate should be able to:
✓ Define the concept of ethics and ethical behaviour in the context of capital markets transactions, namely
securities dealing.
✓ Explain the importance of ethical behaviour.
✓ Recognise and interpret ethical issues arising from ethical dilemmas in the capital markets environment.
✓ Define and describe professional ethics and ethical expectations for representatives engaged in
securities dealing.
✓ Recognise and use the codes of ethics and standards of professional conduct as guidelines to best
practices in securities dealing.
✓ Demonstrate professional ethical standards that are expected of securities dealing representatives.
✓ Recognise and demonstrate recommended procedures for compliance in the context of securities
dealing.
✓ Apply the ethical framework to resolve ethical dilemmas.

4.1 Introduction

This Chapter aims to provide guidance to professionals to understand ethical principles and issues when faced
with dilemmas in their capacity as representatives in the securities dealing environment. Representatives must
know the relevant professional codes and standards applicable to securities dealing activities and be aware of
the professional and ethical behaviour expected of them in their dealings with clients and other market
participants.

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Representatives must appreciate the importance of doing business ethically because their professional and
personal conduct can have wider repercussions on the financial markets and the business ecosystem. By
applying the relevant ethical frameworks, securities dealing professionals can evaluate potential ethical
conflicts and seek practical solutions to deal with them. Ethical frameworks can help instil awareness and
vigilance so that the practitioners are able to make decisions and execute transactions with integrity and
professionalism.

4.1.1 Definition of Ethics in the Capital Markets Industry

The CFA Institute defines Ethics in its Code of Ethics and Standards or Professional Conduct: as:

“…… a set of moral principles or rules of conduct that provide guidance for one’s behaviour when it affects
others136”.

The dictionary defines ethics as:

A system of moral principles; or
A complex framework of moral precepts held, or rules of conduct followed by an individual.

Everyone’s moral fabric differs and is influenced by education, spiritual or religious beliefs and culture etc.
Ethics goes beyond regulations and the law and can be simply described as “doing the right thing even when
no one is looking to prevent hurting others.”

4.1.2 The Importance of Ethics

Unethical behaviour by individuals not only affect their own lives and careers but can also damage investors’
confidence, erode the public’s trust and, in severe cases, lead to market contagion. Unethical practices such
as creating a false market or cornering a specific stock, the Ponzi schemes, mis-selling of sub-prime bonds,
accounting frauds, market manipulations and other insider trading schemes have led to the destabilization of
markets. Such destabilizations are not always contained within domestic markets but can spread globally.
Financial markets have become more interconnected with cross border investment flows and international
distribution of financial products, which are developed in a particular domestic market and sold to investors
in other regions.

By having well-functioning financial markets, capital can flow efficiently to places with the most attractive
investment prospects and financial returns. Efficient capital markets enable the matching of borrowers/issuers
of securities, who are looking for capital to grow their business, with investors, who are seeking to grow their
wealth by directing funds into assets which generate positive returns. For the needs of both parties to be
served, fair and transparent market mechanisms must be in place to facilitate such transactions.

The capital markets depend on a solid ethical foundation to guide the behaviours and actions of market
participants. Therefore, it is important to instil the right ethical values so that securities dealing professionals
are aware of their responsibility to protect the integrity of the financial ecosystem, putting the wider interests
of society and markets before their own. In light of the numerous acts of misconduct and scandals in recent
years, governments and financial regulators have introduced numerous regulatory reforms to help combat
unethical and destabilising behaviour in their financial markets.

136 Code of Ethics and Standards of Professional Conduct, 12th edition (KIV rollout from 1 Jan 2024) and Standards of Practice Handbook,

11th Edition., CFA Institute.

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4.2 The Ethical Framework

Significant codes and standards of professional conduct would be embedded within rules and regulations as
discussed in Chapters 2 to 4. Most codes of ethics and standards of professional conduct generally serve as
just guidance for best ethical or industry practice behaviours. When the codes are violated, and the relevant
laws and regulations are not enforced, acts of misconduct can result in penalties being imposed on the
individual representatives and their firms. They may also be subject to civil and criminal liabilities.

The key to resolving ethical dilemmas largely relies on the sound individual judgement of the representatives,
to do the right thing when they find themselves in grey areas or in positions where they face temptations
seemingly too good to resist. An ethical framework can serve as a good foundation, which representatives can
rely upon for guidance and direction, when they need to make the right decisions. Furthermore, organisations
can also adopt such a framework to help create a positive and supportive workplace culture which promotes
ethical behaviour.

Figure 4.2: The Ethical Framework for the Capital Markets Professionals

Products /
Services

Understand Analyse Risks

Suitability / Representative Objective/Careful

Honesty /Independent

Serves Customers Execute Solutions

Quickly / Fairly /
Transparently

Figure 4.2 shows the four components of the ethical framework. The main objective is always to serve the
best interests of the client with integrity. This means understanding the specific products thoroughly, analysing
all the risks involved and executing solutions that best address the needs of the clients.

1. Understanding and Comprehension - Representatives dealing in capital markets products are expected
to have good understanding of the products and services that they are offering for clients’ consideration.
This includes understanding the risks involved and whether the products are suitable for the clients. In
assessing product suitability, the clients’ investment profile and risk tolerance should also be taken into
consideration.

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2. Analyse Risks - The risks associated with the proposed financial products and services must be discussed
in detail with the clients. Representatives dealing in capital markets products should ensure that any
advice given takes into consideration the risk tolerance and financial capacity of the clients.

3. Execute Solutions - Upon formulating and executing solutions for the clients, securities dealing
representatives should ensure that the process is smooth and efficient. Most importantly, the process
must be transparent and carried out in a fair manner.

4. Serve Clients - Representatives dealing in capital markets products should always do their utmost to
ensure that they serve the clients with integrity and for their best interest within the framework of rules
and regulations. Representatives should never place their self-interests over that of the clients.

5. Safeguarding Reputation – In accessing the feasibility and executing a transaction, representatives dealing
in capital markets products should carry out their work objectively and professionally recognizing that the
reputation of their employer and the integrity of the industry could be undermined by unethical
behaviour.

4.2.1 Why People Engage in Unethical Behaviour

External factors can influence an individual’s actions which could result in unethical conduct. An example
would be when the client puts pressure on the representative to act in a way that violates the ethical rules of
the firm, industry code of conduct or worse, circumvents prescribed rules and regulations. The representative
may feel pressured because if he does not do as the client asks, it could result in the loss of the current deal
or diminish future business opportunities with the client.

Internal factors can also contribute to unethical behaviour. Some examples are:
• An individual may commit unethical acts due to the lack of understanding and experience, proficiency, or
misinterpretation of rules that he would be expected to follow when carrying out a task. This could be due
to the person’s inadequate skills or knowledge, the lack of proper supervision, or a combination of both.
• A representative performs deliberate acts driven purely by the desire to make financial gains, or to seek a
non-financial benefit, such as gain recognition or attain a position of personal or professional advantage.
Seeking the desired outcome overrides any ethical and moral considerations, justifying the use of any
means to achieve the result.
• Pressure from one or more colleagues within an organisation. It could happen in a work environment
where there is an intense push to close deals and generate fees, even when it may not be in the client’s
best interests. The representative may succumb to influence from peers or seniors to conform, especially
if he is a junior staff member. It is a scenario that should not be discounted especially if the organisation
has a weak ethical and workplace culture.

4.2.2 Preparing to Understand the Ethical Role

To reinforce ethical thinking and action, it is important for the individual to be familiar with ethical frameworks
which can help them recognise and deal with ethical dilemmas. There are six main steps to consider and follow:
i. Putting clients’ interest first
• Ensuring that the client’s needs and interest are given priority over self.
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• Balancing between personal growth and the benefit of the capital markets and financial system.
ii. Emphasizing Integrity, competence, diligence and respect
• Ensuring that there is no conflict of interest and abstaining from making decision when conflicted.
• Observing competition laws and regulations and comply with gifts and entertainment policies.
• Attending training courses when new products are introduced into the markets or when new
rules/regulations are introduced.
• Ensuring that the charges, commissions and expenses incurred are fair, transparent and
communicated clearly to clients.
iii. Exercising care and independent professional judgement.
• Ensuring proper understanding of products and their risks before making recommendations.
• Ensuring proper understanding of client’s needs, financial goals and risk appetite before making
recommendations
• Providing factual information and explaining different scenarios to clients.
• Observing best execution rules and priority of clients’ orders above self- interests.
iv. Building trust with clients and ensuring respect of market conduct rules to prevent abuse of the market
• Maintain secrecy and confidentiality of client’s data and information.
• Proper handling of clients’ funds and assets.
• Maintaining transparency in communication with clients throughout the life of the product.
• Observing internal controls of the employer.
• Establishing a strong trusting client / professional relationship.
• Observe and complying with proper complaints handling procedures.
• Observing and complying with designated channels for whistle blowing.
v. Disassociating oneself from the deal or transaction
• Exercising objectivity upon facilitating the transaction and refrain from taking sides.
• Demonstrate professionalism when executing the transaction.
• Advise the client to reconsider the client’s strategy if his transaction has an impact on the market
(e.g. resulting in price or volume spikes in the share counter).
vi. Seek guidance from compliance and legal departments whenever in doubt
• Engaging in frequent communication with supervisors on the applicable codes of ethics and standards
of professional conduct.
• Approaching the relevant parties for assistance when facing ethical dilemmas.
• Ensuring that any transactions undertaken are always within the compliance and legal rules set out by
the relevant authorities.

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4.3 Ethical Dilemmas

4.3.1 What are Ethical Dilemmas?

Ethical dilemmas are situations when an individual has to decide whether to carry out an action which runs
contrary to his own ethical standards, rules and regulations or the provisions of a professional code of conduct.
Ethical dilemmas can come in various forms, such as conflicts of interest, confidentiality issues or even
committing something that is fraudulent and illegal.

Whenever a situation is deemed to be unethical, the primary consideration are the relevant factual evidence
and the ethical issues involved to assess if any violations have been committed. When identifying potential
ethical dilemmas, it is always important to refer to the core of ethics and standards, as listed in Section 4.4.

Example – An Ethical Dilemma

John, a security dealing representative, is under heavy pressure from his superiors to meet his commission
target. John is currently working with a client, whom he believes can enable him to close a huge transaction
and the commissions earned would more than meet his target.

To increase the success of closing the transaction, he recommends investment products to his client which
he knows are unsuitable in terms of the client’s risk appetite and profile. John is aware that such action is
unethical; however, if he does not close the deal, he will not meet his target and may be subsequently fired
by his firm. This is an example of an obvious ethical dilemma.

4.3.2 Identifying Potential Ethical Dilemmas

It is important to be vigilant and alert to situations where compliance with the organisation’s and individual’s
core ethical values is threatened. Any identified threat should be evaluated and managed swiftly to reduce or
eliminate the potential ethical conflicts. The threats faced typically arise due to:

• Self-Interest: The threat of a personal interest (e.g. monetary benefits) that will negatively affect the
behaviour or judgement of the representative.
• Self-Review: Lack of objectivity in analysing the recommendations made to clients or the professional
actions being carried out. This could be due to an inherent bias which results in the favouring and
approving of work done by oneself. A more holistic review and feedback process involving other
independent party is needed to ensure checks and balances.
• Influence: Being influenced by individuals or groups (e.g. clients, superiors or departments). This could
have a bearing on one’s judgement, quality of decisions, and ultimately one’s behaviour.

Representatives must be aware and attentive to identify any ethical issues or dilemmas that they may
encounter during the course of their work.

With greater awareness, representatives should be able to assess the underlying root causes of their own
ethical dilemmas and work to resolve them in a decisive manner.

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4.4 Professional Ethics, Codes and Standards of Professional Conduct for

Securities Dealing

Professional ethics is a set of behaviour and conduct expected of the representatives in a particular industry.
Representatives of the capital markets industry should be guided by the spirit of a code of ethics137 as
guidelines to best practices in securities dealing as follows:
1. Act with integrity, competence, diligence, and respect and in an ethical manner with the public, clients,
prospective clients, employers, employees, colleagues in the securities dealing profession, and other
participants in the global capital markets.
2. Place the integrity of the securities dealing profession and the interest of clients above their own personal
interests.
3. Use reasonable care and exercise independent professional judgement when conducting investment
analysis, making investment recommendations, taking investment actions, and engaging in other
professional activities.
4. Practice and encourage others to practice in a professional and ethical manner that will reflect credit on
themselves and the profession.
5. Promote the integrity and viability of the global capital markets for the ultimate benefit of society.
6. Maintain and improve their professional competence and strive to maintain and improve the competence
of other investment professionals.

All professionals in the capital markets eco-system are expected to comply with these basic ethical principles
as well as the ethics and codes covered in their specific industry.

4.4.1 Standards of Professional Conduct

4.4.1.1 Professionalism

(i) Knowledge of the Law

Representatives must understand and comply with all applicable laws, rules and regulations of any
government, regulatory organization, licensing agency, or professional association governing their
professional activities. They must not knowingly participate or assist in and must dissociate from any violation
of such laws, rules, or regulations. This includes the Securities and Futures Act (SFA), applicable obligations
under the Financial Advisers Act (FAA) set out by MAS and the rules and regulations of any applicable
regulatory organization, licensing agency or professional association regulating securities dealing activities.

(ii) Independence and Objectivity

Representatives should apply reasonable care and judgement to achieve and maintain independence and
objectivity in their professional activities. They must not offer, solicit or accept gift, benefit, compensation, or

137 Code of Ethics and Standards of Professional Conduct 12th Edition and Standards of Practice Handbook, 12th Edition CFA Institute.

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consideration that reasonably could be expected to compromise their own or another’s independence and
objectivity.

Representatives should also comply with internal guidelines issued in relation to gifts and entertainment
within their respective employment and observe industry codes and practices on the same. Representatives
should resist internal pressure from their firms when making investment recommendations to prevent conflict
of interest. This is especially crucial during order execution where client’s interest is priority to that of their
firms or their own.

Example – Independence and Objectivity

Jonathan, a trader working for an investment firm, is facing pressure to hit his target commissions. To make a
quick buck, he manages to convince his client about a trade idea that he thinks may be a winner. However, in
his haste to close the deal, he failed to conduct further research to support this recommendation.

Jonathan must ensure that he exercises independence and objectivity in carrying out his duties and separate
them from his personal issues. Even though he is under pressure to meet his targets, any recommendations
made to his client must ultimately be based on thorough analysis of the facts to maintain independence and
objectivity.

(iii) Misrepresentation

Representatives must not knowingly make any misrepresentations relating to investment analysis,
recommendations, actions, or other professional activities.

A misrepresentation occurs when a representative provides advice which is not based on facts and are false
or where material information has been omitted. Representatives should not knowingly make any
representations relating to investment analysis, recommendations, actions or any other professional activities
that are not factual or true, to induce clients’ choice of investment products that will bring them additional
income or commissions. Clients generally rely on their representatives to make informed decisions for their
investments. Any misrepresentations or omission of information by the representatives could alter the clients’
investment decision making processes.

Example – Misrepresentation

Timothy, a professional trader at a reputable company, has created a personal blog about his research reports.
His personal blog gives the impression that he is acting as an independent analyst.

On his blog, Timothy has several recommendations for which the companies’ stock prices are expected to
increase. However, he does not disclose his contractual relationships with the companies that he has covered
on his personal blog.

Timothy’s personal blog can be misleading to potential investors. Even though the recommendations Timothy
has made may reflect his true personal opinions, his non-disclosure of his relationship with the companies he
is recommending is tantamount to misrepresentation. There is a conflict of interest that Timothy has failed to
highlight to his blog visitors.

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(iv) Misconduct

Representatives must not engage in any professional conduct involving dishonesty, fraud, or deceit or commit
any act that reflects adversely on their professional reputation, integrity, or competence.

Such behaviours include lying, cheating and not observing rules of conduct or not giving clients’ orders priority
over his own trades. Representatives should comply with accounting policies, procedures and disclosure
requirements within their specific industry. Other ethical conduct requirements may include declaring
personal investments honestly and accurately so as not be deemed in breach of closed window periods of
investments or conflict of interest provisions. Typically, reputable CMS licence holders have well-defined codes
of conduct as their compliance requirements to be fulfilled by their staff and representatives on a regular
basis.

(v) Competence

Representatives should continuously maintain or improve the competence required by their professional
responsibilities. Over time, representatives’ role may expand, requiring new or different knowledge, skills and
abilities. They should therefore develop and refine their skills and abilities throughout their professional
careers.

4.4.1.2 Integrity of Capital Markets

(i) Material Non-public Information

Representatives who possess material non-public information that could affect the value of an investment
must not act or cause others to act on the information.

Information is “material” and “non-public” only if its disclosure has the potential to impact the price of a
security and has not yet been disseminated to the general marketplace. Representatives who are in possession
of such information must not act or cause others to act on them to accord unfair advantage over other
investors. Such information includes but are not limited to:

• Earnings;
• Merger and acquisitions;
• Changes in assets and asset quality;
• New business, products, licences, processes;
• Changes in management;
• Auditors qualified opinions or legal disputes;
• Bankruptcies;
• Regulatory breaches and sanctions;
• Change in credit ratings.

Any investment or trading decisions made based on the material non-public information would result in an
unfair advantage gained by the investor and can potentially undermine the integrity of the capital markets.
This would also constitute to a breach of regulation on insider trading under Section 216 of the SFA “Material
Effect on price or value of securities, securities-based derivatives contracts or CIS units”. Please refer to
Chapter 3 guide for a more detailed discussion of insider trading and ‘’inside’’ information.

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4.4.1.3 Duties to Clients

(i) Loyalty, Prudence and Care

Representatives have a duty of loyalty to their clients and should act with reasonable care and exercise
prudent judgement. They are to act for the benefit of their clients and place their clients’ interest before their
employer’s or their own interest.

A representative has a duty to place his client’s interests first and has a duty of loyalty to manage the client’s
investments to the best of his abilities according to what he believes is in his client’s best interest. All known
facts and information must be provided to the client for him to make informed decisions and due care, skills
and diligence has been applied in the relationship. A representative should not take advantage of his client
and must always carry out the client’s investment transaction prior to his own. Most importantly, any
investment recommendation made, or action taken by the representative should take into consideration the
client’s needs and objectives.

Example – Loyalty, Prudence and Care

Leonard is a representative who works for an investment firm, SmartInvest. After providing a performance
report on a client’s account to the external-facing departments before its release to the client, Leonard noticed
that the performance report has omitted a trade which recorded a large loss. If the omission is rectified and
included in the report, it will severely affect the performance on the report. The client has previously placed
SmartInvest on a watch-list for termination if the performance of their investments continues to do badly.
Leonard clearly knows that it is undesirable news but nevertheless proceeds to correct the error before the
report is released to the client.

Even though Leonard’s actions may lead to the potential termination of the services of SmartInvest by the
client, purposefully withholding information would not be in the best interest of the client. Leonard has
recognised this and demonstrated loyalty, prudence and care towards to the client.

(ii) Fair Dealing138

Representatives ought to deal fairly and objectively with all clients when providing investment analysis,
making investment recommendations, taking investment action, or engaging in other professional activities.

They have to advise and disclose the CMS licence holders’ policies and procedures with regard to the
investment services to their clients from the beginning of the investment relationships. Investment decisions
executed must be informed to the clients immediately and any change must be informed to the clients with
justifications. Communications have to be up to date and media of information dissemination has to be made
known i.e. whether through phone, fax or only through official correspondences, including how performance
reports are to be sent and their frequency.

Fair dealing practices are applicable especially to representatives who provide advice. Fair dealing also
includes being fair when handling executions and ensure that clients’ wishes are complied with and in
accordance with the agreed risk profile and portfolio mix.

138
MAS Guidelines on Fair Dealing – Board and Senior Management Responsibilities for Delivery of Fair Dealing
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For representatives who provide advice or make a recommendation to his/her client to buy or sell an
investment product, such advice would constitute financial advice even though the trade may not be executed
subsequently.

In circumstances where representatives provide execution related advice139 (ERA) on listed Excluded
Investment Products140 (EIPs) to clients, they are required to include the rationale for their recommendations.

Representatives who wish to provide financial advisory services beyond the scope of ERA in respect of listed
EIPs must also be appointed as representatives under the FAA. However, if they confine themselves to ERA
with respect of listed EIPs, they can be exempted from being regulated under the FAA.

Distinction is also made for the provision of ERA and the distribution of research reports which is separately
regulated under FAA. Distribution of research reports refers to research opinions made by researchers for
general distribution without regard to any specific investor in mind.

(iii) Suitability
1. When representatives are in an advisory relationship with a client, they must ensure that they have a
reasonable basis for making an investment recommendation to the client141:
a. Make reasonable inquiries into a client’s or prospective client’s investment objectives, financial
situation and particular needs prior to making any investment recommendation or taking investment
action and must reassess and update this information regularly;
b. Determine that an investment or trade recommendation is suitable to the client’s risk appetite,
financial situation and is consistent with the client’s written financial objectives, mandates, and
constraints before making an investment recommendation or taking investment action; and
c. Judge the suitability of investments/trades in the context of the client’s total portfolio.
2. When representatives are responsible for managing a portfolio to a specific mandate, strategy, or style,
they are to make only investment recommendations or take only investment actions that are consistent
with the stated objectives and constraints of the portfolio.

Suitability refers to the matching of product risk to the client’s risk profile. A representative must always
understand the risks in a product before determining which product category investors may invest in. The risk
profile and appetite of the client is an important assessment consideration prior to entering into a transaction
on behalf of the client. For details on best execution practices for securities dealing, please refer to Section
5.4 of Chapter 5.

When observing the professional standard of suitability, it is important for representatives to ensure that
clients’ needs, and interest are given priority over their own interests. Even if a representative has an interest
in transacting in a certain security, priority of transaction must be given to their clients’ instructions to execute
the same product.

139 Under Financial Advisers Regulations 33A (8), execution-related advice is defined as advice that is provided by a dealer, or a trading
representative of the dealer, to a client of the dealer where –
a) the advice concerns any listed excluded investment product;
b) the advice is provided to the client directly or through any publication or writing, whether in electronic, print or other form (other
than through the issuance or promulgation of any research analysts or research report, whether in electronic, print or other form);
c) the provisions of the advice is solely incidental to the carrying out of any execution activities by the dealer or the trading
representative (as the case may be); and
d) no discrete fee is charged by the dealer or trading representative (as the case may be) for the advice.
140 A list of the excluded investment products can be found in the Fifth Schedule of the Financial Advisers Regulations.
141
FAA Section 36: FAA Notice on Recommendations on Investment Products (FAA-N16).
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Representatives must make effort to understand the client’s risk appetite and profile based on several factors
as covered in Section 5.2 of Chapter 5. The client’s investment mandate must also be respected, and their
interests safeguarded, by awarding a more conservative profile and therefore investing only in lower-risk
products if it is appropriate, notwithstanding the regulatory definition of investor classification. Respecting
the client’s desires and wishes are crucial elements to successful client relationship management.

Representatives providing financial advice must comply with the FAA requirements as above. Those who
confine themselves to execution-related advice for listed EIPs are however exempted from the FAR
requirements142 such that:
a) At account opening, the representative shall provide the client with a prominent disclosure in writing
that the ERA does not consider the client’s investment objectives, financial situation and particular
needs and highlight to the client that it is his/her responsibility to ensure the suitability of the product
recommended;
b) The representative to state the rationale for the ERA provided to the client; and
c) A CMS licence holder must maintain a register on representatives who provide ERA on listed EIPs and
are not specified in the public register of representatives as appointed representatives in respect of
any type of financial advisory service.
On 7 October 2023, MAS, in conjunction with the Association of Banks in Singapore (ABS), Association of
Financial Advisers (Singapore) (AFAS) and Life Insurance Association (LIA), launched a Basic Financial Planning
Guide to help Singaporeans take steps to enhance their financial well-being. The Guide outlines a few rules of
thumb, for individuals to start taking proactive steps to address their savings, insurance, and investment needs
(Go.gov.sg).

Example – Suitability
Lauren, a securities dealer, had just on-boarded a new client, Thomas. Thomas is new to investing and is unsure
which investment products to invest in and asked for Lauren’s recommendation. Thomas had stated in his
client profile to Lauren that he is seeking for investment products that provide capital preservation and stable
income with minimal risks. This is so as Thomas is saving up for his children’s education expenses. Lauren, on
the other hand, persuades Thomas that he can afford to take on more risk than he should as his full-time job
is paying well and that he should take advantage of the booming markets.

In this instance, even though Thomas has a steady stream of high income, Lauren did not consider the
suitability of her recommendations to both Thomas’ financial objectives and risk appetite. Even though if there
are opportunities to be taken in a booming market, Lauren should be prioritizing Thomas’ financial objectives
instead of looking at investments as opportunities not to be missed out.

(iv) Performance Presentation

When communicating investment performance information, representatives must make reasonable efforts to
ensure that it is fair, accurate, and complete.

Performance presentation refers to the report presented to a client which shows how his investment portfolio
has performed. This includes whether investments have gained in value or face losses. The basis of valuation
must be communicated together with the values. Such valuations must be supported by appropriate source
of information.

142 Financial Advisers Regulation, Regulation 33A (4) and (5) – Exemption from section 27 for dealers and related exemptions.

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(v) Preservation of Confidentiality

Representatives must keep information about current, former, and prospective clients confidential unless the:
1. information concerns illegal activities on the part of the client or prospective client;
2. disclosure is required by law; or
3. client or prospective client permits disclosure of the information.

The relationship between clients and their representatives requires a high level of trust. This means that client
information must be kept confidential and this includes not only the personal information of the client but
also his r portfolio information. Information must be preserved and not shared with others. The principle of
“need to know” must apply within the institution and the provisions of the Personal Data Protection Act
(PDPA) must be observed. Any breach in confidentiality may lead to litigation and reputation risk.

Example – Preservation of Confidentiality

Ross works as a market maker in a trading desk at QRS Bank. Chandler, a C-level executive at a major firm
called Central Perk Corporation (CPC), is in the process of selling the bulk of his personal shares in CPC
through QRS Bank, where Ross is the one to execute the trade. However, this trade information has not
been made public yet.

Rachel, another client of Ross, also has interests in CPC. Because Rachel enjoys a close-knit relationship with
Ross, Ross lets her in on the trade made by Chandler. Anticipating that the share price of CPC will fall, Rachel
immediately contacts her broker to sell her CPC shares.

Ross should have exercised his professionalism by not disclosing material information about his client to
third parties. By doing so, Ross has damaged the integrity of the financial markets.

Other examples of the need to preserve client confidentiality are the Panama Papers, Portcullis Trust and the
HSBC’s Swiss private bank’s leakages. In all 3 cases, trust of clients has been compromised. High net worth
clients and private banking clients generally prefers to deal very confidentially with the institutions they bank
with. They expect their information to be protected and secure so that their wealth is not known to others
except the representatives they deal with. Unless with their specific consent they expect their information to
be secret and only for release for specific purposes. However, confidential information of clients was leaked
and made public. This caused a public outcry and caused regulators all over the world to investigate if there
were tax evasion and other proceeds of crime. It caused embarrassment to their clients who may not have
committed any wrongdoing but have their account exposed to the public causing misunderstanding and
unnecessary problems in dealing with regulators. It also caused them to lose trust and faith in the firm which
resulted in many of them closing their accounts.

In the cases of Portcullis Trust and HSBC’s Swiss private bank, the information was leaked by employees. By
leaking the information, the employees betrayed the employer’s trust and caused much embarrassment to
the firm and made clients lose trust in it. This result in clients closing their accounts and loss of business for
the firm.

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4.4.1.4 Duties to Employers

(i) Loyalty
In matters related to their employment, representatives must act for the benefit of their employers and not
deprive their employers of the advantage of their skills and abilities, divulge confidential information, or
otherwise cause harm to their employers.

In addition to his duties to clients, a representative must also protect the interest of the firm by refraining
from conduct that would risk the reputation of the firm, deprive it of profit or not giving due time and applying
skills and abilities to benefit the firm in which he is employed.

The standard of loyalty provides guidance on the following areas:

• Employer responsibilities.
• Employee responsibilities.
• Whistle blowing.
• When leaving an employer (including non-solicitation and appropriation of clients list,
misappropriation of trade secrets, misuse of confidential information).

a) Employer Responsibilities
Employers have a duty to set out clear policies and procedures on their expectations of conduct of
employees, which include having a clear employee code of conduct detailing such expectations.
Training must be provided to staff and representatives on the internal Code of Conduct and clearly
spell out remuneration strategies including non-sales or other non-business indicators such as
compliance with laws and regulations, honesty and Integrity requirements, banking secrecy and
confidentiality, what to do in conflicts of interest situations, personal account dealing requirements
and the need to observe Gifts and Entertainment policies including incorporating whistle blowing
procedures.

b) Employee Responsibilities
Representatives are expected, as part of their employment, to comply with their firms’ code of
conduct and follow a set of behaviour which includes protecting the reputation of the firms. They are
expected to act in good faith, honestly and diligently with respect to the firms’ clients, avoiding
complaints and ensuring all dealings are transparent but confidential. They are expected to remain fit
and proper143 at all times.

c) Whistle Blowing
Observing market integrity is an important aspect of ensuring good market performance. A
representative should be aware of that clients’ interest, employer loyalty and his or her personal
interest accounts to the integrity of the capital market. If he or she believes that the integrity of the
market will be compromised by certain actions of the clients or the employers, he or she should whistle
blow to the right authority to prevent interruption of the market or for the price mechanism to be
interfered with. It is important to note that if a representative is aware of a wrongdoing or an ethical
behaviour, he or she is obliged to whistle blow as to remain “silent” may be construed as being in
collusion if it is found that the representative was aware and part of the process, although not directly
responsible.

143 MAS Guidelines on Fit and Proper Criteria (FSG-G01).

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Example – Whistle Blowing

You are an employee in a broking firm and noticed that senior management members of the firm seem
to be putting in bids towards the end of the market day just before closing of trading on a particular
counter. You note that it may be a situation where they are trying to manipulate the price of that counter
without meaning to follow through with transactions in the meantime.

You are faced with a dilemma whether to remain loyal to the employer and not reveal anything, or to
act according to your conscience and be honest by whistle blowing.

You have obligation to whistle blow as to remain “silent” may be construed as being in collusion.

d) When Leaving the Employer

When leaving their employers, representatives must continue to act in the employers’ best interest
by observing the following:
• No solicitation - The representatives must not take records of files to the new employer, unless
with written permission of the previous employer;
• Misappropriation of trade secrets - These include not taking the policies and procedures in certain
businesses without the permission of the employers such as broker relationship policies or trading
strategies; and
• Misuse of confidential information - All representatives are bound by confidentiality rules and
must continue to keep confidential information of their previous employers confidential.

Example – Soliciting Former Clients

Jacob is a representative with XYZ Brokerage, but has become disillusioned with his career prospects
in the firm. He has been offered a job at ABC Brokerage.

Before leaving XYZ Brokerage, Jacob calls up several of his most important clients and asks them to
open accounts with ABC Brokerage. He also persuades some prospective clients of XYZ Brokerage to
switch to ABC Brokerage instead.

By doing so, Jacob has failed to observe his duty to act for his employer’s (XYZ Brokerage) benefit.
Instead, he was acting out for his own personal gain and his solicitation of XYZ Brokerage’s clients was
unethical.

(ii) Additional Compensation Arrangements

Representatives must not accept gifts, benefits, compensation, or consideration that compete with or might
reasonably be expected to create a conflict of interest with their employers’ interest unless they obtain written
consent from all parties involved.

Additional compensation arrangement arises where a representative negotiate for additional compensation
outside of the official fees that was agreed and documented unknown to his employer. Such arrangements
are not allowed as all fees, commissions and charges must be clear and transparent and a representative must
not arrange payments to himself without the knowledge of the employer.
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(iii) Responsibilities of Supervisors

Representatives must make reasonable efforts to ensure that anyone subject to their supervision or authority
complies with applicable laws, rules, regulations, codes and standards.

MAS places the responsibility for the proper market conduct of representatives on the board of directors and
senior management of a CMS licence holder. Before a representative can be registered under the
Representative Notification Framework (‘’RNF’’), the CEO must affirm that the representative meets the Fit
and Proper criteria as mentioned earlier in this section under Employee Responsibilities.

As the CEO and the board of directors cannot supervise everyone directly, this duty is delegated to supervisors
who are then charged with the responsibility to ensure proper supervision of the staff and representatives
under them. This means ensuring that they observe the code of conduct and as well as all internal control
procedures of the firm. They must ensure that the staff and representatives are properly trained and know
the regulatory framework of the business they are in and undertake. Remuneration and benefits of the staff
and representatives are not just based on financial key performance indicators (KPIs) but should be assessed
together with other non-financial KPIs such as complying with laws and regulations, not breaching any codes
of conduct or rules, and not being abusive to other staff or representatives.

4.4.1.5 Investment Analysis, Recommendations and Actions

(i) Diligence and Reasonable Basis

Representatives are to:
1. exercise diligence, independence, and thoroughness in analysing investments, making investment
recommendations, and taking investment actions; and
2. have a reasonable and adequate basis, supported by appropriate research and investigation, for any
investment analysis, recommendation, or action.

Before making any recommendations on investments or taking actions, the representative must first
understand the product and the related risks and if it concerns shares and stocks of individual entities, he must
research them carefully with facts available. Every investment recommendation must be based on known facts
and understood at the time and any investigation done must be thorough. Third party research relied upon
must be sourced after due diligence on the reputation of the third party and only reports of approved third
party suppliers which are considered sound and reputable are used.

(ii) Record Retention

Representatives should develop and maintain appropriate records to support their investment analyses,
recommendations, actions, and other investment - related communications with clients and prospective
clients.

All records of communication with clients are to be kept for audit trail purposes. This includes personal notes
from meetings, call reports, press releases, official reports, risk analysis reports and other computer printouts
given to clients and the bases of recommendation. A file on the clients should be maintained.

(iii) Communication with Clients and Prospective Clients

When communicating with clients or prospective clients, it is important that representatives ensure that they:

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1. disclose to clients and prospective clients the basic format and general principles of the investment
processes they use to analyse investments select securities, and construct portfolios and must
promptly disclose any changes that might materially affect those processes;
2. disclose to clients and prospective clients the significant limitations and risk associated with the
investment process;
3. use reasonable judgement in identifying which factors are important to their investment analyses,
recommendations, or actions and include those factors in communications with clients and
prospective clients; and
4. distinguish between fact and opinion in the presentation of investment analysis and
recommendations.
5. disclose the nature of services provided and information about the costs associated with those
services to the clients and prospective clients.

Communication of the information to the clients must be clear and with only relevant information for them
to make informed decisions, in whichever form given. Scenarios must be included to assess the consequences
of changes in the investment environment. The risks in the different scenarios must be well explained. Other
forms of communications such as e-mails, phone messages, facsimiles, blog posts etc. need to be cleared with
the legal and compliance unit of the firm to limit liability for usage. Some firms have mobile phones policy
which does not allow mobile phone usage and if called requires call back to the LAN lines. Some do not allow
e-mails and each representative must be aware of their firms’ policies on such communications. Where
indemnities are required, representatives must endeavour to obtain the signed indemnities from their clients.

4.4.1.6 Conflicts of Interest

(i) Avoidance and Disclosure of Conflicts

Representatives must avoid or make full and fair disclosure of all matters that could reasonably be expected
to impair their independence and objectivity or interfere with respective duties to their clients, prospective
clients, and employers. They must ensure that such disclosures are prominent, are delivered in plain language,
and communicate the relevant information effectively.

Representatives should avoid being in actual or potential conflict of interest situations. If conflicts do arise,
they must make full and fair disclosure of all matters that could reasonably be expected to impair their
independence and objectivity or interfere with their duties. Such disclosures must be clear and disclosure
details must be properly and prominently communicated.

Conflicts of interest often arise in the investment profession and can occur between the interests of the client,
the employer, and other members of the exchange as well as the representative. Examples of conflicts include
the following (note that these are not exhaustive):
• Conflict to clients, e.g. personal investments of the representative, or his employer’s investments,
cause conflict with the clients’ interests such that clients’ transactions are not given priority over
proprietary or personal investment positions. Allocation of investments could also not be fairly carried
out, favouring one set of customers over others;
• Conflict to employers, e.g. where an employer has interest in a high-profile profitable investment
project, an employee whose family also has interest in the same project, must declare his interest and
recuse himself from being involved in the employer’s project . Failing which he may cause conflict
between himself and his employer;

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• Cross-department conflicts, such conflicts can occur where one department is acting for a client for
an investment to be launched for raising funds and another department is acting for a private banking
client for the acquisition of the investment. Information must be closed from flowing from one
department to another. This is when policies and procedures on Chinese walls must apply so as not to
allow conflicts;
• Conflicts with stock ownership, this happens when a joint venture is to be sold and each joint venture
wishes to divest its shareholdings without wishing to buy out the other. Adviser who owns stocks in
the parent of the joint venture partners respectively would be in conflict as to which joint venture to
advise as they are conflicted by owning shares in the parent respectively; and
• Conflicts as a director, e.g. Directors having interest in client’s business or representatives having
outside employments which conflict with their work. This also breaches the SFA144 which requires
representatives to represent only one principal, unless the principals are related.

If conflicts cannot be avoided, their existence must be clearly and completely disclosed. Once disclosed, the
employer, clients, and other stakeholders can evaluate the situation objectively and act according to the
circumstances and information provided.

Where conflicts or potential conflicts arise, it is important for representatives to recognise them, refrain from
making decisions in those circumstances, disclose the conflicts and escalate the matter to an independent
dedicated party for dealing with such conflict for assessment of the conflicts so that appropriate action can be
taken to deal with the conflicts.

(ii) Priority of Transactions

Representatives must always give priority to the transactions of their clients first. If a representative happens
to want to enter transactions of his own, he must not transact for his own account until the client’s transaction
has been completed.

Example – Priority of Transactions

Britney owns 500,000 shares of a wellness company, 24HourFitness, which is a substantial number of shares
for that company. Justin, who is Britney’s broker, receives a market order from Britney to sell the entire of her
500,000 shares of 24HourFitness.

Justin personally holds stocks in 24HourFitness and expects the share price of 24HourFitness to plummet once
Britney’s sell orders are executed. To avoid huge capital losses, Justin put in a sell order for his personal shares
before entering Britney’s sell order.

Justin has prioritised his personal transactions over that of his client’s due to a conflict of interest. Justin owes
a fiduciary responsibility to Britney. This is an example of failure of a representative to observe priority of
transactions.

(iii) Referral Fees

Referral fees are fees paid to firms for referring clients or for distribution of products. Such fees are spelt out
in a referral agreement between two firms in an arrangement for such services. A representative must not
negotiate further fees on his own privately outside of the agreed arrangement.

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

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4.4.2 Recommended Procedures for Compliance

CMS licence holders and their representatives ought to observe the standards of professional conduct as
illustrated in section 4.4.1 by establishing following protocols to ensure compliance to the standard practices
discussed above.

4.4.2.1 Segregation of Sales/Dealing and Research Staff

Business activities should be segregated, and Chinese walls should be established with written policies and
procedures to limit the flow of confidential and price-sensitive information that prevent insider dealing, front-
running and conflict of interest. Representatives should look to the guidance of these rules as a check against
standard conduct. Front office activities should be physically away from back office functions and staff
reporting lines are to be clearly segregated. Investment decision making process is to be kept separate and
independent of the dealing process. Similarly, proprietary activities are to be segregated from client-related
activities. Risk Management, compliance and internal audit functions have distinct reporting lines from front
office to ensure independent controls of breach reporting.

Proper segregation of duties between sales and research staff ensure material non-public information are
kept confidential so that staff does not take advantage of having insider information and deals to benefit
themselves or cause market disruption. Research staff may have confidential information from their visits and
research done on entities which they are not supposed to disclose. Any leakage of material non-public
information to the sales staff may result in such staff taking advantage of the information and taking positions
in advance of the release of information to profit themselves.

4.4.2.2 Resist Undue Influence from Sponsoring Companies

External sources may try to influence the investment process by offering analysts and portfolio managers with
a variety of benefits. Corporations may seek expanded research coverage issuers. Underwriters may wish to
promote new securities offerings. Brokers may want to increase their commissions and business while
independent rating agencies may be influenced by the company requesting the rating. (Refer to Section 4.4.1.1
(ii)).

To prevent undue influence, CMS licence holders have internal rules on gifts and entertainment to prevent
excessive gifts and entertainments to be received or inducing favourable outcomes or giving excessive gifts
and entertainment to induce more business. Moderate gifts and entertainment can build good client
relationships, but excessive expenditure goes against the principle of fair competition which, if done, may
breach the Competition Law in Singapore.

MAS has set out guidelines and conduct requirements for persons acting as financial advisers under the FAA145,
including, where appropriate, conduct requirements for representatives who perform any financial advisory
service on behalf of financial advisers. Integrity, objectivity, confidentiality, competence and due care of
diligence are exemplary qualities required of a representative to prevent conflict of interest. Generally, CMS
licence holders must have policies and procedures in place for representatives to declare their gifts and
entertainment in compliance with all applicable laws, rules and regulations and guidelines relevant to their
business activity.

145FAA-G04 on Guidelines on Standards of Conduct for Financial Advisers and Representatives.

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Example – Resistance to undue influence from Sponsoring companies

Trion Pte Ltd (Trion) is a shipping company listed on the SGX-ST. The management of Trion had entertained
James Lim, a representative who is a well-known securities dealer and acclaimed stock researcher. Trion
entertained James lavishly, including buying him a luxury watch with wine and entertainment so that he would
write a positive opinion of Trion, which was facing some issues with SGX for non-reporting of material
information such as key personnel movement and financial developments that would be detrimental to the
share price of the company.

As a representative, James should have declined the entertainment and gifts and evaluate Trion based on
independent opinion, objective investigation and analysis of the company to uphold independence,
objectivity and unbiased recommendations.

4.4.2.3 Protecting Integrity of Opinions

CMS licence holders ought to achieve fair balance in compensation between business achievements and
compliance with ethical standards of behaviour. Representatives should be compensated not solely on
business indicators but also compliance with high standards of conduct.

For example, CMS licence holders should establish policies stating that every research report concerning the
securities of a corporate client should reflect the unbiased opinion of the analyst. Firms should also design
compensation systems that protect the integrity of the investment decision process by maintaining the
independence and objectivity of the analyst.

To ensure compliance, most firms would have ‘’Staff Personal Investment Policies’’ which cover approval,
reporting and declaration of conflicts requirements. Restricted lists are also drawn up for reporting to an
appointed officer, which is usually the compliance. Representatives are to comply strictly with such
requirements to ensure fair and unbiased integrity of opinions.

Example – Protecting the Integrity of Opinions

Justin, a vice president at Queen Banking Corporation (Queen), has thoroughly analysed and concluded that
the current trading price of mortgage-backed securities (MBS) are overvalued.

However, he is concerned that a negative report may jeopardize his close relationship with his superiors at
Queen, as most of them are long on the housing markets. Justin thinks that this may potentially result in
management retaliation, such as being cut off from conference meetings or side-lined from new business
opportunities.

In spite of his concerns, Justin’s analysis should still be independent and objective. Any pressure that comes
from Queen is inappropriate. Justin should seek to protect and reinforce the integrity of his opinions by
ensuring that his investment research reports are based on a fair analysis of the asset fundamentals and
relative valuation.

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4.5 Applying the Ethical Framework to Resolve Ethical Dilemmas

To apply the ethical framework effectively, representatives should diligently go through a fact-finding process
so as to identify and resolve the ethical issues. Some key factors to consider and appropriate questions to ask
are:

1. Gather relevant facts and identify existing problem

• Have I acquired all the necessary information to properly assess the situation at hand?
• What assumptions am I making? What facts can be used to replace the assumptions made?
• What is the source of the ethical dilemma? What factors are causing the problem?

2. Consider the ethical issues involved

• What are the ethical issues involved? Consider the professional, regulatory and personal code of ethics
and standards of professional conduct.
• What are the threats to complying with these fundamental ethical issues? Are there any obvious
ethical conflicts?
• Would these issues compromise the integrity of the investment and trading profession?
• Would these issues affect the interest of the public?
• Would these issues affect the capital markets at large?
• Would these issues affect the clients’ interests?
• What are my personal interests in this issue? Is my judgement clouded by my personal biases?

3. Identify the affected parties

• Who are the key stakeholders that are involved in this issue?
• Is it at an individual, departmental or an organisational level?
• What are the conflicts between the different stakeholders?
• Who are my allies? Do I have any colleagues or superiors that I can trust with this information?
• Would my decision and action cause ripples in the market and create market instability?

4. Refer to the firm’s internal reporting procedures

• What are my firm’s policies and procedures in reporting issues of ethical conflicts?
• Does my firm have an internal whistle blowing mechanism in place?
• When should I start seeking help from external sources if things do not go as planned?

5. Evaluate alternatives to resolve the issue

• Are there any better alternatives to resolve the issue?
• Will alternative actions result in better outcomes for others?

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• Which course of action would best benefit the capital markets industry and society?

6. Implement the best course of action and monitor its progress

• Monitor the results of the action you have taken.

Document your thought processes and decision making upon implementing the action. Written records will
prove very useful in ascertaining the ethical issue at hand, as well as justifying your actions.

Example – Application of the Ethical Framework

Rick is a remisier. He has a client Aaron, who runs a noodle stall. Aaron had little education but has strong
financial capacity as his popular cash-based business which he ran for more than a decade has allowed him
to amass a certain amount of wealth. More importantly his wealth has been given an additional boost
recently after he received an inheritance from his deceased uncle who had no children. Notwithstanding his
wealth, Aaron was assessed as having a low risk profile because he lacks knowledge and experience in
investments. Therefore, high-risk or complex financial products would not be suitable for him.

Rick must meet sales targets as he is below his given sales quota. He realized that there is a recent high-risk
product which has been approved for client investment with very dynamic risk profile that will allow anyone
who sold it to receive very large commissions. Training was given about the product, but Rick missed the
product training. Therefore, he is not certain about the risks of the product.

As Aaron has the financial capacity, Risk decided to purchase that investment product for him to earn that
commission. Rick put in an execution order quickly to take advantage of early sale to gain early commission
which will soon be computed as it was close to end of the month.

Applying the Ethical Framework

1. Understanding the Products/Services - Rick failed to understand the product and its risks as he did not
make any attempt to go for the product training.
2. Analyse Risks Objectively/Carefully/Independently - Rick also did not assess the product
independently and consider whether the risks would match Aaron’s risk profile. He failed to consider
the client’s interest and the client’s risk profile.

3. Execute Solutions Quickly/Fairly/Transparently – Rick executed the product quickly to earn his
commission and did not make good efforts to secure the best purchase price of the investment for his
client.

4. Serve Customers with Honesty and Integrity - Rick prioritised his own interest in earning more
commissions rather than the interest of the client in protecting the client’s portfolio risk. He did not
serve his client honestly and with integrity and therefore had betrayed the trust of the client.

What Rick should have done was to ensure that he attended the product training and understood the risks
related to the product. He then should have considered the low risk profile of Aaron and not endeavour to
invest in the risky product for Aaron, thereby meeting suitability requirements. Rick should consider client’s
interest before his own. He should not have executed the transaction to earn the higher commission.

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Chapter 5:
Securities Dealing Practices and
Skills
Learning Objectives
The candidate should be able to:
✓ Explain what is required for the client on-boarding process which includes:
• Determining the type of investor they are dealing with, such as retail investors, accredited
investors (A), institutional investors (II) or Expert Investors (EI);
• Determining the financial capacity of clients and their understanding and experience of capital
markets products and markets;
• Considering other factors to consider in profiling the risk of the clients and their risk appetite;
and
• Understanding risks of the different products, matching them to the risk profile of the clients
and formulating appropriate investment strategies in compliance with the principle of
suitability.
✓ Interpret the client servicing and communication requirements and apply the highest service standards
of the securities dealing industry.
✓ Describe best execution practices for securities dealing representatives.
✓ Recognise the importance of credit risk management and understand credit risk exposure.

5.1 Introduction to the On-boarding and Advisory Process

A representative who is a securities dealer, remisier or a researcher with a Capital Market Services (CMS)
licence holder offering brokerage and research services, must understand the rules and regulations that
govern these activities. The first step for all representatives would be to meet the fit and proper criteria and
comply with examination requirements under the Securities and Futures Act (SFA) and the Financial Advisers

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Act 2001146. Representatives need to be aware of the provisions of the SFA and Securities and Futures
Regulations (V) and the rules of relevant exchange or SGX-ST. These rules and requirements are discussed in
Chapters 2 and 3.

This Chapter discusses several important practices and skills considerations for representatives when dealing
in capital markets products with respect to securities on behalf of their clients. When dealing with clients and
executing their requirements, representatives may also provide financial advisory services and therefore the
FAA and Financial Advisers Regulations (FAR) will also apply to them. In addition, they need to follow client
on-boarding practices to determine the type of customers they are dealing with, profile their risks based on a
number of factors, understand the products and the related risks before introducing or recommending any
type of products deemed appropriate for their clients.

5.2 Client On-boarding Process

Whenever a representative or a CMS licence holder has acquired a new client, they must take the client
through the on-boarding process which involves gathering information and data about the client which is
required to commence the business relationship with the client. When on-boarding a client, the “know your
client” (KYC) process must also be carried out.

The KYC process serves two purposes:

i. To assess the anti-money laundering (AML) and countering the financing of terrorism (CFT) risk of the
potential client to the institution, to prevent money laundering (ML) and counter terrorism financing (FT);
and
ii. To assess the potential client’s investment objectives and risk appetite to determine the type of products
suited to meet his investment objectives and personal risk profile to formulate an appropriate investment
strategy for the client.

When assessing the ML and TF risks of a potential client, a CMS licence holder could either perform a simplified
customer due diligence (CDD) or an enhanced customer due diligence (EDD). Simplified CDD will be performed
if the CMS licence holder considers that it is adequate to effectively identify and verify the identity of the client
and it is satisfied that the risks of ML and TF are low. The assessment of low risks must be supported by a
thorough analysis of the risks, with simplified CDD measures being undertaken that are commensurate with
the appropriate level of risk as identified by the CMS licence holder.

CMS licence holders are required to perform EDD when dealing with higher risk clients, for example clients
who are politically exposed persons (PEPs), their family members and close associates, international
organisation PEPs147, or clients who operate in high-risk business activities. Screening148 is intended to be
another preventive measure of ML and TF, in addition to simplified and enhanced CDD, and should be done

146 MAS Guidelines on Fit and Proper Criteria (FSG-G01), Notice on Reporting of Misconduct of Representatives by Financial Advisers
(FAA-N14), Notice on Reporting of Misconduct of Representatives by Holders of CMS Licence and Exempt FIs (SFA 04-N11), Notice
on Competency Requirements for Holders of Capital Markets Services Licence and Exempt Financial Institutions under the SFA (SFA
04-N22) and Notice on Competency Requirements for Representatives of Licensed Financial Advisers and Exempt Financial Advisers
(FAA-N26).
147 FATF Guidance: Politically Exposed Persons (Recommendations 12 and 22) Jun 2013, international organisation PEPs are persons

who are or have been entrusted with a prominent function by an international organisation and refers to members of senior
management or individuals who have been entrusted with equivalent functions, i.e. directors, deputy directors and members of
the board or equivalent functions.
148 Paragraph 6.15 of the Guidelines to MAS Notice SFA 04-N02 on Prevention of Money Laundering and Countering the Financing of

Terrorism, explaining Notice Paragraphs 6.39 to 6.41 on Screening.

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before the commencement of any business, irrespective of the client’s risk profile. CMS licence holders and
their representatives should also conduct additional KYC to understand their specific customers’ risk profiles.
Thorough conduct of simplified or enhanced CDD during periodic screening allows for timely detection and
obligations by CMS licence holders in implementing swift actions required to mitigate ML and TF risks. Please
refer to Chapter 7, Section 7.8 for further details on CDD, EDD and screening.

In this Chapter, we will discuss the second purpose with regard to exercising due diligence in assessing a
potential client’s risk profile and classifying him into the proper class of investors.

5.2.1 Clients’ Risk Profiling and Determining their Risk Appetite

To profile the risk of a client, it is important to have a robust data gathering process when on-boarding the
potential client. The representative has to:
i. Gather information to determine background of the potential client, such as identification, age,
educational qualifications, work experiences for an individual and the country of incorporation,
primary business activity, the financials and organisational structure of the company for a company;
ii. Determine the client’s financial objectives for establishing the relationship. For example, is the client
seeking capital investment, capital preservation or capital appreciation regardless of risk? It is
important to capture such information of the potential client to determine what products would then
be suitable for him to invest in.
iii. Determine if the potential client has experience in trading and investing, the type of products that he
intends to invest in and whether the client has sufficient financial means to invest in products to meet
the financial objectives;
iv. Determine the economic activity the client is engaged in and whether he is still economically active or
retired. For example, if the client is retired, does he or she have passive income and other assets to
sustain his financial obligations?
v. Determine whether the client’s investments will be carried out as an individual account or through a
company structure. The representative must check the types of structures, related or associated
parties that are relevant for the client; and
vi. Establish the investment horizon of the client. For example, high returns will carry high risk and
depending on the client’s investment horizon, such expectations must be managed and balanced
accordingly to achieve his investment objectives.

CMS licence holders are required to assess a retail client’s investment knowledge and experience before selling
investment products to the client149. In line with these requirements, representatives who deal in capital
markets products or provide financial advice on investment products must pass the relevant CMFAS
examinations150. The intent of these requirements is to ensure that CMS licence holders properly disclose the
features and risks of investment products, that representatives offering investment products to clients meet
certain requirements, and that there is a reasonable basis when recommending investment products to
clients.

Representatives must conduct a Customer Knowledge Assessment (CKA) before opening an account for a retail
client to transact in unlisted SIPs or a Customer Account Review (CAR) if client wishes to open an account to

149MAS Notice on Sale of Investment Products (SFA 04-N12).

150 MAS Notice on Competency Requirements for Representatives of Holders of Capital Markets Services Licence and Exempt Financial
Institutions (SFA 04-N22).
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transact in listed SIPs listed on an exchange. (Please refer to Chapter 2, Section 2.5.1 for more details on SIPs
and conducting the CKA and CAR).

For retail investors who wish to trade SIPs but do not satisfy the CAR assessment, representatives may require
them to complete the SGX Online Education module on ‘’Specified Investment Products” to confirm their
understanding of the risk and features of such complex financial products. Successful completion of both the
CAR and/or the SGX Online Education module on “SIPs” by a retail investor does not automatically qualify the
investor’s eligibility to trade in SIPs. Ultimately, representatives must make an independent assessment to
gauge the suitability of their client to trade in SIPs based on several factors, including the results of the CAR
and the SGX Online Education module on SIPs.

Every CMS licence holder would have its own data gathering form and questionnaire to assess the knowledge
and experience of potential clients. Securities dealing representatives must ensure that their client’s
information and data are captured accurately and are verifiable through documentation. They need to ensure
that the questionnaire capturing all the client’s personal information, financial capacity, experience and
knowledge and risk tolerance is completed.
As judgement is applied during the assessment, it would be prudent practice to have a supervisor or dedicated
person review the first assessment to arrive at the final assessment objectively based on the written policies
and procedures that are in place in the firm. For example, applying the “four eyes principle” of internal
control151 reduces subjectivity. Once the risk assessment of the client’s risk profile is arrived at, the
representative should explain to the client how he or she was assessed. If the client agrees with the
assessment, the representative should ensure that client signs off on his assessed risk profile.
From the data provided, it would be good practice to classify clients after assessing their risks, objectives and
investment horizons and categorise the potential client into risk categories, for example:
• Low Risk;
• Low - Medium Risk;
• Medium - High Risk; or
• Very High Risk.

After the client’s risk profile has been assessed, the representative can determine the type of investments that
can be recommended based on the risks of the product. Some firms may have a product risk matrix that
determines which products can be sold to the different risk categories of clients to serve as guide to their
advisers or dealers.
Some clients may not agree with the risk rating or risk profile that was arrived at and may wish to have a higher
risk profile even though the available information reflects a lower risk. In such situations, it is general industry
practice for the representative to advise against changing the client’s risk rating152, and the advice must be put
in writing for the client to sign off. Such statements dealing with exceptions are usually available in standard
form.

Example – Mismatch of Client’s Profile with Investment Interests

Conner is a young professional with 2 years of work experience. His only source of income is from his
employment as an engineer. He started to invest in the financial markets about a year ago and he invested
in small lots of listed blue chips in Singapore with a securities brokerage firm, BLSH Securities (BLSH).

151 The four eyes principle recommends that a business transaction must be approved by at least two individuals before it can be
carried out. The principle is based on the fact that while neither individual might detect all errors, two reviewers or readers are
likely to spot different errors so that overall, more errors will be caught.
152 FAA Section 36 - Recommendations by licensed financial advisers.

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Now, he wishes to open another securities trading account with Simon, who is a representative in another
securities brokerage firm, Excel Securities (Excel). Conner wants to invest in securities listed in emerging
markets although he is not familiar with those markets. Currencies in emerging markets have been volatile
recently, therefore there also exist foreign exchange risks in such investments, in addition to the unfamiliar
and less structured market rules in those markets.

Simon advised Conner not to invest in the emerging market securities, as these securities were deemed to
be unsuitable for him based on Connor’s risk profile which was assessed by Simon and his supervisor at
Excel.

Conner’s case is clearly a mismatch of his profile with the risk of the investment product (i.e. emerging
market securities) and such products are not suitable for him due to his current salary and his limited
investment experience which is mainly investing in stable blue-chip companies in the Singapore market.
Simon acted responsibly by advising Connor against investing in the emerging market securities.

5.2.2 Different Categories of Investors

During the on-boarding process, in addition to gathering information and verifying the data collected, it is
important to determine which category of investor the client fits into. The SFA153 as well as FAA have
definitions on AIs, IIs, EIs and others which do not fall under any of those categories are considered Retail
Investors.

5.2.2.1 Accredited Investors

AIs can be individuals, corporations, trustee or a trust, entities (other than a corporation) as well as specific
types of partnerships. Figure 5.2.2.1 illustrates the different types and characteristics of AIs in Singapore.

Figure 5.2.2.1 – Types of AIs

Accredited
Investors

Partnership (other
Entity (Other than than a limited
Individual Corporation Trustee of a Trust
a corporation) liability
corporation)

• Net personal • Net assets • Any trust, all the • Net assets • Every partner is
assets exceed exceeding S$10 beneficiaries of exceeding an AI.
S$2 million, million which are S$10 million in
provided that individuals, value.

153 SFA Section 4A - Specific classes of investors; Securities and Futures (Classes of Investors) Regulations 2018 – Section 2 – Persons
prescribed for definition of “accredited investor”.

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primary • The entire corporations or

residence share capital other persons
value can of which is owned prescribed as
only by one or more accredited
contribute up persons, all of investors.
to S$1 whom is an AI.
• Any trust, all the
million.
settlors of which
• Financial (i) individuals,
assets (net of corporations or
liabilities) other persons
exceed S$1 prescribed as
million. accredited
investors, (ii)
• Income is not
have reserved to
less than
themselves all
S$300,000 in
powers of
the preceding
investment and
12 months.
asset
• Holder of a management
joint account functions under
with an AI, in the trust; and
respect of have reserved to
dealings themselves the
through that power to revoke
joint account. the trust.
• Any trust, the
subject matter of
which exceeds
S$10 million in
value.

A person who satisfies the AI thresholds under the SFA may only be treated as an AI if he opts in to being
treated as such. An AI may also opt out of being treated as an AI (and instead opt to be treated as a retail
investor) at any time.

A CMS licence holder must provide the potential AI with a statement that it has assessed the investor to be an
AI, give a prescribed warning of the risks involved154 and sufficient information to allow the investor to make
an informed decision, and request for the investor’s consent to be treated as an AI. The investor may at any
time withdraw his or her consent in this regard.

It should be noted that the AI status of a customer has a material impact on the manner in which a CMS licence
holder or a representative may deal with the customer. This includes the level of disclosure required, the
instruments that the customer may trade, and the applicability of other exemptions from conduct of business
requirements.

154 Securities and Futures (Classes of Investors) Regulations 2018, First Schedule.

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5.2.2.2 Institutional Investors

IIs include the following:

• The Government of Singapore and any statutory body established under any Act in Singapore;
• An entity wholly and beneficially owned by a central government of a country and whose principal
activity is to manage funds and any entity whose funds are so managed;
• A foreign central bank, government or agency;
• A prescribed multilateral or international agency;
• Licensed banks;
• Licensed merchant banks;
• Licensed finance companies;
• licensed insurers;
• Licensed trust companies;
• Pension funds or collective investment schemes;
• CMS licence holders;
• Approved exchanges and clearing houses, recognised market operators and clearing houses, licensed
trade repositories, an approved holding company and a depository under the SFA;
• A foreign entity or trust that carries on a financial or regulatory function similar to the Singapore
authorities under relevant statutes;
• Persons (other than individuals) who carry on the business of dealing in bonds with AIs or EIs;
• Trustees of such trust as the MAS may prescribe; and
• Persons prescribed by the MAS155, including:
- Designated market makers;
- Headquarters companies or finance and treasury centres which carry on fund management
(where such business has been approved as a qualifying service);
- Singapore residents who undertake fund management on behalf of not more than 30 qualified
investors;
- Service companies which carry on business as agents of a member of Lloyds;
- Corporations where the entire share capital owned by an II or persons all of whom are IIs; and
- Partnerships in which each partner is an II.

5.2.2.3 Expert Investors

EIs include the following:

• Persons whose business involves the acquisition and disposal, or the holding, of capital markets
products (whether principal or agent);

155 Securities and Futures (Classes of Investors) Regulation 4.

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• Trustee or such trust as the Authority may prescribe, when acting in that capacity; and
• Persons prescribed by the MAS.

5.2.2.4 Retail Investors

All other investors who do not fall under the definition of AI, II and EI will be deemed to be retail investors.

5.2.3 Importance of Properly Categorising Clients and Investors

Under Singapore law, the highest protection is accorded to retail investors. This is because for the 3 other
categories of investors (AIs, IIs and EIs), they are assumed to be knowledgeable, experienced, have strong
financial capacity and access to information that allows them to make informed decisions. Therefore, certain
exemptions are allowed when dealing with AIs, IIs and EIs. These include exemptions from the following (and
are not exhaustive):
i. Disclosure of certain interests in respect of underwriting agreement156;
ii. Specified products borrowing and lending157; and
iii. Dealing in SIPs or Overseas Listed Investment Products158.

Therefore, to comply fully with the laws and regulations, a representative must categorise his clients and
investors correctly and ensure that retail investors are given due disclosures and information on any product
which is then matched to their risk appetite and profile.

Suitability of investment products which are properly mapped to the investor’s risk profile is the key
consideration for any securities dealing representatives, both at the on-boarding stage and at the execution
level. Representatives must have a clear understanding of which type of client they are dealing with and accord
the appropriate risk rating or profile, because the client’s categorisation and rating will influence which
products are chosen, what risks must be explained, and documentation and communication procedures.
Clients should also be provided with scenarios to explain how investment values can be impacted as a result
of market conditions and other changes. Investments do not always appreciate but may also result in
depreciation, therefore both negative and positive scenarios should be used to demonstrate movements for
the client to consider before making decisions.

Example – Product sold that is not suitable to the client

Jessica is a housewife with primary school education. She is married to a banker whose family has
shareholdings in many financial institutions. Therefore, she is well provided for as her husband bears all the
financial responsibility of their family and she receives a generous monthly allowance. She has decided to
invest her savings in the financial markets although she does not have knowledge or experience in this area.
There is no urgency for funds and neither does she need to see it grow substantially.

Jessica decides to open an account with Joan, who is a remisier, and asks Joan to formulate a strategy for
her portfolio. Joan is aware of Jessica’s financial circumstances and knows that she has strong financial
capacity.

156 SFR(LCB) Regulation 47A - Disclosure of certain interests in respect of underwriting agreement.
157 SFR(LCB) Regulation 45 – Specified products borrowing and lending.
158 MAS Notice on Sale of Investment Products (SFA 04-N12).

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A new bond product for the oil and gas industry has just been launched, which promises high returns but
also carries high risk. As the commission for this product is very attractive for Joan, she decides to place
more than 50 % of Jessica’s funds into this product so Joan can reach her commissions target for the month.
Given the high risk of the product and the fact that Jessica has little education and understanding of the
financial markets, despite Jessica’s strong financial capacity, Joan should not have invested 50% of Jessica’s
portfolio in the new bond product. This investment decision and action did not fit into Jessica’s conservative
profile.

In this example, the interest of the client is not considered. Joan is putting her own interest before Jessica’s
by recommending unsuitable products to her. She has failed to meet the principle of only recommending
products that are suitable to the client.

When on-boarding clients for the reason of assessing their risk appetite and profile, it is important to note
that in addition to assessing their investor category, a CMS representative must ensure that the client or
person that he is dealing with is of sound mind and have not lost his mental capacity as defined under the
Mental Capacity Act. If there is reason to suspect that the potential client may be of unsound mind or suffering
from dementia and or is being coerced by another party, representatives should escalate the matter to their
supervisor to have a second opinion or to confirm any suspicions.

5.2.4 Recommendations on Capital Markets Products159

The CMS licence holder 160 and its representatives are expected to have sufficient knowledge of their client’s
investment objectives, financial situation and needs before they advise on sales or purchases of capital
markets products suitable for the client. Thus, it is not normally possible for the CMS licence holder and its
representatives to offer such advice to a new client before the relevant information is obtained.

Obtaining relevant information about the client is usually done at the time when the relationship is first
established. If execution-related advice is provided on an on-going basis, a CMS licence holder and its
representative should update the client’s profile and conduct a needs analysis at least once a year. This is also
consistent with good business practice of reviewing customers’ profiles and needs on a regular basis.
Additionally, where products are traded on a margin basis, the CMS licence holder and its representatives
should highlight the risk of such products to the clients.

When a client does not wish to accept any of the product recommendation given by the CMS licence holder
and its representative, the CMS licence holder and its representatives can proceed with the client’s request.
This should be followed by a documentation of the client’s decision and a warning to the client that any
recommendation made, or advice given would not take into account his investment objectives, financial
situation and risk tolerance. Ultimately, it is the client’s responsibility to ensure the suitability of the product
recommendation.

159 MAS Guidelines on Conduct of Business for Execution-Related Advice (FAA-G08), Paragraphs 7-10.
160 Under FAR Regulation 33A(8), a CMS licence holder falls under the definition of “dealer” which means a person exempt from
holding a financial adviser’s licence under section 23(1)(a), (b) or (d) of the Act and who carries on a business of providing
execution-related advice. Dealers or their representatives are exempted from such requirements if they merely carry out a client’s
instructions without making any recommendation, or where they recommend a listed excluded investment product (subject to
fulfilling conditions under FAR Regulation 33A).

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5.2.5 Documentation and Record Keeping161

It is the duty of the CMS licence holder and its representatives to maintain the client’s profile and to record
the recommendation or warning made to the client. The recording can be in the form of file notes or tapes of
a conversation. This will assist both the client and the CMS licence holder and its representatives in resolving
any disputes regarding the advice or execution instructions provided, based on the client’s investment profile.
Please refer to Section 5.7 for details on the record-keeping requirements of client communication and
documentation.

As best practice, MAS recommends that CMS licence holders and representatives maintain their records for
at least 5 years. The nature of the records to be kept can be determined by the CMS licence holder and its
representatives ,taking into consideration the nature of the client’s business and factoring in the likelihood of
a client disputing that the advice was given without due consideration of the client’s investment profile and
financial needs.

Record keeping and documentation are important elements in ensuring trust between the employer and
employee and helps to keep the reputation of the entity and industry. Good record keeping and
documentation that can stand up to scrutiny is important and helps with the audit trail. Documentation can
also help to protect the CMS licence holder and representatives against any wrongful complaints or complaints
arising from poor advice or inept execution. Clear records and documents can serve as evidence of how the
advisory or execution was conducted to prevent wrongful accusations.

5.2.6 Disclosure of Conflicts of Interest162

The CMS licence holder and its representatives should disclose any potential conflict of interest to its clients,
either in writing or orally. However, once disclosed, the CMS licence holder and its representatives are not
required to make such a disclosure every time they make a recommendation or provides execution-related
advice to a client, provided that:
i. The previous disclosure remains up-to-date, accurate and comprehensive; and
ii. The client can be reasonably expected to be aware of the previous disclosure.

The CMS licence holder and its representatives should also take note whether there is a long lapse between
the current recommendation and the previous disclosure. Consideration should also be given as to whether
the client is likely to assume that the current recommendation given by the CMS licence holder and its
representative no longer applies to the previous disclosure. If ever in doubt, the CMS licence holder and its
representative should not hesitate to disclose to the client about any conflicts of interest that could potentially
occur.

5.2.7 Disclaimers163

The CMS licence holder and its representatives can choose to include formal disclaimers in their documents
to their clients that they are in the business of only executing trades for their clients. If these disclaimers are

161 MAS Guidelines on Conduct of Business for Execution-Related Advice (FAA-G08), Paragraphs 11 and 12.
162
MAS Guidelines on Conduct of Business for Execution-Related Advice (FAA-G08), Paragraphs 13 and 14.
163
MAS Guidelines on Conduct of Business for Execution-Related Advice (FAA-G08), Paragraphs 15 and 16.

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made, the CMS licence holder and its representative should ensure that they set up procedures and systems
for them not to provide advice to their clients.

All CMS licence holder and its representatives will still be subject to the same rules and regulations by the
authorities. Such disclaimers stating that it is the responsibility of the client to ensure the validity of the
recommendation will not remove the CMS licence holder and its representatives of their liabilities imposed
under the SFA or the FAA, which are designed to protect retail investors.

5.3 Present Coherent View of Investment and Trading Strategies

Trading strategies that are designed must be clearly communicated to the client. The portfolio mix which is
suggested as part of the strategy, including the types of products, asset classes and geographies to be invested
in, must be properly explained with reasons for inclusion. This would include the relevant ratios or percentage
to be invested in with explanation on how the portfolio mix was arrived at. Explanations must be documented
which has to include why it matches the risk profile of the client.

CMS licence holder and its representatives should periodically communicate with the client on the portfolio
performance and provide justification for not meeting the agreed or pre-determined targets or why the
portfolio is performing better than expected. Reviews should include where performance is trending based on
market conditions at the time. Where a change is proposed to the strategy, the basis for the proposal must be
advised to the client clearly and the time frame for the investment. All related communications must be
properly documented to reduce the likelihood of claims and subsequent disputes that the advice was rendered
without due consideration of the client’s investment objectives, financial capacity and needs.

5.4 Best Execution Practices for Securities Dealing

This section seeks to give guidance on the elements of best execution practices, where CMS licence holders
and their representatives should also be aware of and incorporate such guidelines into providing the best
trade execution services for their clients.

Best execution is the responsibility of the securities dealing representatives of CMS licence holders. A
representative must take reasonable steps to obtain the most advantageous trade result for his client. This
includes considering the price, costs, speed, likelihood of execution and settlement, size, execution quality or
any other factor that is relevant to the order execution. It is also essential that representatives ensure that
their clients fully understand the nature and potential risks of the product offered to them, before the
transactions are executed164.

Under FAA-G04165, a financial adviser should take all reasonable steps to execute client orders promptly, in
accordance with the instructions of clients and on the best available terms. The financial adviser should also
provide its clients with prompt written confirmation or documentation that the clients’ orders have been
executed. Similarly, CMS licence holders and their representatives should familiarize themselves with
applicable obligations under the FAA in executing transactions on behalf of clients.

164 The Singapore Guide to Conduct and Market Practices for the Wholesale Financial Markets, April 2018.
165 Guidelines on Standards of Conduct for Financial Advisers and Representatives (FAA-G04) Section 5.3 – Prompt and Best Execution.

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MAS has issued a Notice in September 2020 together with accompanying guidance on best execution
requirements for financial institutions166, including CMS licence holders. A CMS licence holder which places
and/or executes customers’ orders for capital markets products must, in a manner that is commensurate with
the nature, scale and complexity of its business, implement written policies and procedures to deal with:

i. customers’ orders on the best available terms; and

ii. comparable customers’ orders in accordance with the time of receipt of such orders.

To achieve the best available terms for customers’ orders, the CMS licence holder should consider different
factors holistically, including but not limited to price, costs, speed and likelihood of execution. The relative
importance of the factors should consider the circumstances of the order and type of capital markets product.
A CMS licence holder should also not receive Payment for Order Flow (PFOF) in placing and/or executing
customers’ orders. PFOF refers to commission or other form of payment which a CMS licence holder receives
from another broker/counterparty in return for routing customers’ orders to that broker/counterparty. The
receipt of PFOF introduces conflicts of interests and the CMS licence holder may be incentivised to pursue
commission or other form of payment from another broker/counterparty by routing customers’ orders to that
broker/counterparty for its own benefit.

The CMS licence holder should monitor the effectiveness of its best execution policies and procedures. It
should also provide adequate disclosure to customers on such policies in a clear and easily understood
manner.

5.4.1 Elements of Best Execution Practices

5.4.1.1 Speed and Likelihood of the Execution

Levels of volatility affect both price and volume, thus the CMS licence holders and their representatives should
seek to execute client orders as fast as reasonably possible. When prices are volatile, a client placing orders
with large volumes can create order imbalances and backlogs, affecting the speed and likelihood of the
execution.

5.4.1.2 Price Improvement and Overall Consideration of Costs

Price improvement would consist of the opportunity, but not the guarantee, for an order to be executed at a
better price than what is quoted publicly. Orders in over the counter (OTC) and listed derivatives products are
routed to market makers and/or market centres if there are opportunities for price improvement. The criteria
to be used by other market-makers and/or market centres include:
• Automatically filling pending limit order with incoming market and limit orders; and
• Crossing transactions where price improvement is offered to one or both sides of the trade.

5.4.1.3 Size Improvement

CMS licence holders should always seek markets which provide the greatest liquidity and the possibility for
execution of large orders. They should always be on the lookout for opportunities for client orders to benefit
from order-size guarantees offered by exchanges and other CMS licence holders.

166MAS Notice on Execution of Customers’ Orders (SFA 04-N16) and MAS Guidelines to MAS Notice SFA 04-N16, The Notice and
Guidelines took effect on 3 March 2022.
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5.4.1.4 Overall Execution Quality

When determining how and where to route or execute an order, CMS licence holders should draw on the
professional knowledge and experience with various markets and market makers and focus on an accurate
and efficient execution.

5.4.1.5 Client-Specific Instructions

Whenever there is a specific instruction from the client on how to execute the order, the CMS licence holder
should always execute the client’s order according to the instructions given. Consequently, if a client requires
an order to be executed in a particular manner that is not in accordance with best execution principles, the
client should clearly state the desired method of execution when he or she places the order.

5.4.1.6 Holistic Consideration of Factors

To achieve the best available terms for customers’ orders, the CMS licence holder should consider the different
factors above holistically. The relative importance of the factors should consider the circumstances of the
order and type of capital markets product.

5.4.1.7 Monitoring

A CMS licence holder should also establish adequate systems or arrangements to monitor, on a periodic basis,
its compliance with its best execution policies and procedures and their effectiveness. The monitoring systems
or arrangements should be commensurate with the nature, scale and complexity of the business of the CMS
licence holder.

5.4.1.8 Disclosure to Customers

Prior to the placement and execution of customers’ orders, a CMS licence holder should provide sufficient
information to customers on its best execution policies and any material changes made to the policies
thereafter. The information must be provided to the customers in writing, including via electronic means
provided the customer is aware of the mode of communication The information must be presented in a clear
and easily understood manner.

Example – A Client Who Traded through Direct Market Access (DMA)

A client chooses to execute an order via a broker’s DMA system, with the client selecting certain parameters
of the trade. In this case, the representative will be deemed to have satisfied its duty of best execution, if
the trade was executed respecting those parameters specifically instructed by the client.

If, however the representative had not respected the parameters, he should justify his actions and may be
deemed not to have met the duty of best execution for his client.

In the event that a client’s instruction is unclear, the representative will determine any non-specified
components of the execution in accordance with these best execution principles.

The responsibility of the representatives to provide best execution not only relates to price but also involves
the consideration of various factors, including cost, speed and likelihood of execution and settlement. Even if
a trade has not been executed at the best possible price, this does not necessarily constitute a violation of
best execution practices.
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Naturally, price would be of high priority in obtaining the best result possible for clients. However, in certain
circumstances, the CMS licence holder may prioritize the speed and likelihood of execution over immediate
price and cost factors, if these factors are critical in delivering the optimal result. This typically occurs when
there are large client orders with illiquid shares or when a stop-loss has been triggered.

5.4.1.9 Foreign Exchange/Non-Deliverable Forward Dealing Practices 167

Sufficient measures must be taken to ensure that both the clients and only authorized staff can deal in foreign
exchange (FX)/non-deliverable forwards. Transacting in rollovers of FX transactions at off-market rates is not
recommended as deals done on off-market rates could be used to conceal profit or loss, or to perpetuate a
fraud. Henceforth, representatives who are not authorised to deal in the stated transactions as defined by
their entity must refrain from dealing in those products.

5.4.1.10 Order Types

The FX Global Code specifies that a representative should be aware of how different order types may have
specific considerations for executions when handling clients’ orders168. Representatives have the responsibility
to adhere to these specific considerations when faced with different order types such as stop loss orders, fixing
orders or partial fill orders.

Example – Stop Loss Order

A client leaves an order for Maple Bank to sell $50 million USD/CAD at 1.27 on a stop loss with instructions
to execute the order once 1.27 USD/CAD has traded.

Maple Bank starts executing the order once 1.27 trades in the market. Maple Bank immediately notifies the
client that the stop-loss order has been executed and is filled at 1.2695 which is in line with the client’s
expectation based on the time of the day and the volume traded at the time the order is executed. In this
case, the client’s stop loss order was appropriately handled.

5.4.2 Principles for Best Execution Practices169

5.4.2.1 Roles and Capacities of a Representative

Representatives should clearly distinguish their roles and capacities in managing and executing trades for their
clients (or principals). They may have an agreement with the client as to their roles regarding executing trades,
or they may manage their relationship by determining their roles before executing each trade.

The representative receiving a client order may either act as an agent or principal. A representative or agent
executes order on behalf of the client which is strictly governed by the investment mandate. However, a

167 The Singapore Guide to Conduct and Market Practices for the Wholesale Financial Markets, April 2018, Chapter VI Foreign
Exchange/Non-Deliverable Forward Dealing Practices.
168 The FX Global Code July 2021, Execution, Principle 10.
169 The FX Global Code July 2021, Execution; IMAS Code of Ethics and Standards of Professional Conduct 2010 Section 3 and 4; The

Singapore Guide to Conduct and Market Practices for the Wholesale Financial Markets, April 2018, Chapter III, General Dealing
Principles and Market Conduct.

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representative acting as a principal can take on more risks with that order and they act on their own behalf.
There is no obligation to execute the order until both parties have reached an agreement.

5.4.2.2 Fairness and Transparency

Representatives should handle clients’ orders with fairness and transparency. When communicating with
clients about the execution of their trades, they should always be truthful in their statements and should use
clear and unambiguous language. Representatives should also establish procedures in place to analyse and
advise on the trades made by the client and record the client’s trades before and after the execution.

5.4.2.3 Cross Trades

CMS licence holders should have a policy in place to regulate cross-trading and only facilitate the purchase
and sale transactions between client accounts where it is in the best interest of both clients. This must be
appropriate and relevant to the investment objectives of both clients and must adhere to the guidelines and
restrictions provided. Cross-trading between staff personal accounts and client accounts should be prohibited.
Cross-trading using a house account, where it can be both controlled by the representative and client, should
also be prohibited.

5.4.2.4 Late Trading

Late trading refers to the activity where the investor is allowed to place an order to subscribe, switch, cancel
or redeem the units/shares in securities which comprise collective investment schemes (CIS), after the dealing
deadline set out in the prospectus or trust deed but receives price per unit/share calculated as of the dealing
deadline. Late trading should not be allowed as it could lead to the dilution of the value of the CIS and could
allow speculators to take advantage of price fluctuations of the CIS that occurred after the net asset value was
calculated.

To prevent late trading, representatives should comply with dealing deadlines and only honour orders which
are received by the deadline. CMS licence holders should implement procedures and measures to ensure that
all orders from clients as well as internal parties comply with the applicable dealing deadlines.

5.4.2.5 Risks

It is important that the representative ensure the clients are aware of the risks associated with the trades they
want to be executed. The clients should clearly communicate to representatives their expectations in
executing the orders.

5.4.2.6 Other General Dealing Principles and Market Conduct

All representatives have a duty to make clear whether the prices they are quoting are firm or merely indicative.
Prices quoted by representatives should be taken to be firm in marketable amounts unless otherwise qualified.
They are strictly prohibited from making frivolous quotes which they have no intention of honouring and which
are designed merely to mislead market participants.

There must be strict adherence to after-hours and off-premises dealing rules to prevent any denial of deals
transacted. Under no circumstances should representatives engage in artificial transactions for the purpose
of concealing positions or transferring profits and losses as such activities, sometimes referred to as “points”
or “position” parking, which not only undermines the integrity of the markets but may also attract legal liability
for the representatives or CMS licensed holders concerned.

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5.5 Risk Management and Internal Controls for Securities Dealing

The importance of risk management and internal control cannot be overstated. Risk management is the
process of identifying possible risks or problems and developing strategies to mitigate the risks before they
happen. A system of effective internal controls is fundamental to the safe and sound management of business
operations within capital markets intermediaries.

5.5.1 Key Risk Management Practices

The MAS Guidelines on Sound Risk Management Practices170 sets out recommendations to provide CMS
licence holders with guidance on risk management practices, some of which include the following:
i. CMS licence holders should have comprehensive and sound policies and procedures for prudent
management of significant risks arising from their operations;
ii. The Board of Directors and/or senior management should ensure that policies and procedures are
approved and are consistent with the nature, complexity and materiality of the CMS licence holder’s
activities;
iii. Policies and procedures should be documented and periodically reviewed to ensure that they reflect
current practices and the appropriate controls are in place;
iv. CMS licence holders should establish a comprehensive code of conduct commensurate with their
structure, size and complexity of operations, to promote a strong ethical corporate culture. The code of
conduct should prescribe a set of ethical values that CMS licence holders expect representatives to
observe in discharging their duties. It could, for instance, include guidelines on acceptance of gifts and
entertainment, conflict of interest, personal benefits, confidentiality of information and personal
investments;
v. There must also be adequate segregation of duties to mitigate the risk of unauthorised transactions or
fraudulent activities;
vi. Periodic reviews should be conducted on the responsibilities of key personnel to minimise areas of
potential conflict of interest and ensure independent checks are in place. An example would be that an
individual should have segregated responsibility for trade execution and operations functions such as
trade settlement.
vii. CMS licence holders are expected to adopt conservative and consistent accounting policies for the
treatment of profits and losses, especially those arising from treasury and financial derivatives
transactions designated as hedged or trading positions. Open trading positions have to be marked-to-
market on a daily basis, with resultant losses recognised promptly in the institution’s profit and loss
account. Minimum retention periods for taped telephone conversations and documents, taking into
account the relevant laws, rules and regulations are to be established;
viii. There must also be adequate management information systems (MIS) to facilitate the effective
management and control of all aspects of operations. An accurate, informative, and timely MIS is also
essential to the risk management process. Exposures and profit and loss positions should be reported at
least daily to managers who supervise but do not themselves engage in position-taking activities, and to
risk managers who report independently and regularly to the Board of Directors and/or senior
management on the risk-taking activities of the institution;

170Relevant risk management practices guidelines are available on MAS website https://www.mas.gov.sg/.
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ix. CMS licence holders should ensure that there is adequate physical security for their place of business and
cash-in-transit. Access to sensitive areas such as the dealing room, computer room and funds transfer area
should also be strictly granted on a need-to basis to minimise the risk of unauthorised transactions, fraud
or disruption to operations;
x. There should be clear policies and procedures for the independent, fair and proper valuation of assets.
Prices, interest rates, exchange rates and volatility factors used in the revaluation process for the financial
accounting of treasury and financial derivatives transactions have to be obtained from independent
sources or be independently verified, and not decided by the CMS licence holders or its representatives;
xi. There should be proper verification and reconciliation procedures for ascertaining the accuracy of
transaction details and activities. Staff performing verification checks must be independent of those
responsible for originating the transaction or preparing the data. For instance, reconciliation of trade data
should be performed by staff independent of deal/trade execution function. As far as possible, customers
should be required to indemnify representatives and their principal companies against losses for accepting
instructions given verbally, via facsimile or via electronic mail. All telephone conversations, where
institutions receive transaction-related instructions, should be tape recorded where practicable as they
could aid in the resolution of disputes;
xii. Customer orders should be promptly processed in accordance with instructions given and on the best
available terms. CMS licence holders should ensure that controls are in place to ensure trades matching
and confirmations are performed as soon as possible after execution. Early detection would help to avoid
errors in recording trades, which could result in increased risks and costs; and
xiii. CMS licence holders should, where possible, establish standardised settlement instructions in their
systems. Changes to these instructions should be reviewed to ensure that they have been properly
authorised by the customers/counterparties. Procedures should also be in place for validating funds
transfer requests, which could include, among other things, telex testing, call-back and signature
verification.
The complexity of some financial derivatives products increases a CMS licence holder’s vulnerability to
reputational risk. As such, the organisation needs to formulate clear written policies, approved by the Board
of Directors and/or senior management, to address issues relating to the appraisal of customers and risk
disclosure and to reduce the risk of misunderstandings and contractual disputes. Further to that, CMS licence
holders should implement procedures to assess customer suitability. When the representative believes that a
particular transaction may not be appropriate for a customer, but the customer wishes to proceed with the
transaction, the representative should document his or her own analysis and any risk disclosure information
provided to the customer. This would protect the representative and firm’s position in the event that the
customer makes a claim for indemnification against losses. In addition, it is recommended that such
transactions be independently reviewed by the relevant department or personnel of competence and, where
necessary, escalated for the attention of the senior management of the institution and/or customer.

5.5.2 Key Internal Controls

With respect to internal controls171 of business processes, CMS licence holders are to establish and maintain
adequate control systems by:
i. Having comprehensive and explicit policies on suitability and risk disclosure of products to customers;
ii. Establishing sound customer due diligence policies and procedures;
iii. Placing adequate controls over accounting and record-keeping process;

171 MAS Guidelines on Risk Management Practices - Internal Controls 2014.

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iv. Setting adequate MIS in place for effective management and control of all aspects of operations,
including monitoring of compliance with internal controls and regulatory requirements, such as setting
credit or positions limits and monitoring positions to manage market and credit risks, and comply with
notification requirements on monitoring thresholds as prescribed by the Exchange;
v. Monitoring margin calls and managing customers’ accounts that are in margin deficit or fail to meet
settlement obligations;
vi. Defining and managing sources of liquidity to ensure that there are sufficient liquidity facilities to meet
increased settlement obligations;
vii. Allowing access to sensitive areas such as the dealing room, computer room and funds transfer area
granted on a strict need-to basis;
viii. Ensuring that prices, interest rates, exchange rates and volatility factors used in revaluation obtained
from independent sources or independently such as the computation and collection of margins,
including the conducting daily valuation of customers’ positions and collateral;
ix. Setting adequate verification and reconciliation processes for ascertaining the accuracy of transaction
details and activities
x. Having timely confirmation of trades with customers performed independently of the
dealing/execution function;
xi. Establishing procedures for validating funds transfer requests;
xii. Limiting the impact of significant market movements through the use of tools such as cashflow
projections, stress testing or credit limits; and
xiii. Meeting such other requirements as the Exchange may prescribe from time to time.

When executing transactions, care should be taken to execute transactions which fit into the risk profile of the
client. Before taking instructions to execute any deals, the representative must take care to follow the policies
and procedure of the firm which generally includes: -
i. Checking the profile of the client against the risk of the product. If it does not match, the
representative should not carry out the instruction and should advise the client against the
transaction, and have the advice documented and the signature of the client obtained;
ii. Checking the portfolio mix which was agreed at the commencement of the business relationship, so
that the product risk mix does not exceed each risk level and exemptions are prevented;
iii. If the client insists on carrying out the transaction against the representative’s advice, this should be
escalated to management for a decision;
iv. Adhering to internal trading and control policies which may include prohibition against trading in
certain financial products during stipulated black-out periods by the firm;
v. Ensuring that there is no conflict of interest between the client, the representative and the firm, and
making the proper disclosures to resolve any conflicts;
vi. Ensuring that even if there is no conflict of interest, that the client’s transaction is executed first before
any of the representative’s own transactions;
vii. Checking that the transactions was not done in the name of a third party or other connected persons
who are not officially authorised to transact on the account.
viii. Checking that the transaction did not originate from material non-public information sources;

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ix. Remembering to observe the rules, regulations and industry codes of conduct and ethical standards
and prevent market misconduct; and
x. Checking the account mandates to ensure that instructions are accepted from the authorised parties
of the account only.

5.6 Types of Accounts

5.6.1 Personal Accounts

Personal accounts are simple to manage as there is only a single person owning the account and only one
decision maker. Although there is no minimum age threshold legally for opening and operating an account, it
is important to note that there may be risks in opening accounts for minors due to constraints and related
concerns in handling transactions both from the suitability and credit perspectives. Losses incurred by minors
may become irrecoverable.

Individual accounts may be maintained as cash accounts or margin accounts. It is easier to manage cash
accounts for purchases and sales as before making the purchases for the client, all the representative has to
do is to ensure that there is sufficient funds in the account to pay for the purchases. If there are insufficient
funds, then the representative should advise the client not to proceed with the purchase. In the case of a sale,
all proceeds are credited back to the account.

Margin accounts are more complex as not only is it important to know the securities, the number of unit and
the value of the securities, the representative is expected to know the financing margin agreed with the client.
The value of the securities must be updated to the current date and further purchases must be kept within
the financing margin that was agreed at the outset.

Before any purchase, a representative should check whether the agreed terms are maintained and if the
margins are breached, he should advise the client accordingly before a transaction is carried out. Even without
transactions, margins can be breached depending on the market situation which may cause reduction in the
value of the portfolio. As a result, there may be a need to call for top ups to the account, either with cash or
securities to bring the account to within the agreed margin levels. Sale of securities may also be necessary to
bring account to within the margin but before carrying out the sales, the representative has to check the
agreed contract as the margin terms on each contract differ from one contract to another. Therefore, before
a sale is carried out it is important to give the client adequate notice of the intention to sell in accordance with
the Margin Account terms. A single personal account holder will be easier to handle under such circumstances.

The credit status or standing of a personal account is not dependent on another person’s credit standing.
Personal accounts also limit unauthorised usage of accounts. In some cases, the single account holder may
execute a Power of Attorney (POA), and when this happens there is an increased risk of conflict over
unauthorised transactions and disputes by the account holder. Where a POA has been given, it is important
to check the terms of the POA to prevent accepting instructions wrongly. The other disadvantage of single
accounts is that they are subject to the probate process where in the event the account holder passes away,
the court will order and supervise the process of gathering the account holders’ assets and distributing them
to creditors and inheritors.

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5.6.2 Joint Accounts

There is no legal restriction to the number of persons in a joint account. It is important to be clear who can
operate the account and what conditions have to be met before instructions can be accepted or authorised.
The credit standing of a party to the account may affect the credit standing of the account as a whole and the
other parties to the account. The risk of dispute between or among parties to the account is higher than a
single account, thus increasing the risk of the firm when dealing with joint account holders especially they are
not related to each other.

For the representative, it is important to ensure that the dealing mandate is clear and that all parties of the
joint account are liable for the account’s transactions. A joint account of many individuals will also be subject
to a probate process should one party pass on which may result in the freezing of the account’s assets.

5.6.3 Personal Investment Holding Company Accounts

Personal investment holding company accounts are set up usually to avoid or minimize estate duties and the
probate process. A personal investment holding company usually has greater flexibility in investing in different
asset classes and usually has a professional investment manager acting on its behalf. It is therefore important
to establish who is mandated to operate the account and maintain the documents to support such
authorisation.

The risk profile of the company has to be supported by its investment objectives in writing, and proper
investment mandates must include all authorisations for operating the account as well as the investment
portfolio, asset classes and geographies. The representative is responsible for ensuring that the client’s
investment mandate is complied with. Failing to comply or having exceptions to the mandated portfolio mix
may result in litigation risk, which may lead to higher reputation and financial risk for the CMS licence holder.

5.6.4 Trust Accounts

Trust accounts are usually set up to protect the privacy of the settlor and his assets. The trust deed spells out
the powers of the trustees. It is important for a representative to be clear who are the parties he should be
dealing with and taking instructions from.

With trust structures, the assets of the trust are protected in the event of any litigation against the
beneficiaries, as no single individual owns the assets. Trust accounts are usually managed by professional
trustees who are deemed to be knowledgeable in the law and investments. Therefore, when dealing with trust
accounts, the representative must obtain a copy of the trust deed and ascertain the powers of the trustee to
act on behalf of the trust because the trust deed is the key document which lists out the requirements of the
trust.

5.6.5 Corporate or Institutional Entity Accounts

The accounts of corporate or institutional entities are run mostly by professional investment managers and
ownership is generally separate from the management. The operation of such accounts is usually covered by
authorisation through a Board Resolution naming the authorised employees who can operate the account.

It is therefore critical when managing such accounts to establish who the main contact person is. For example,
who are the parties mandated to give instructions for investment, movement of funds and make decisions for
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the account? A representative who takes any action outside of such mandates will run the risk of possible
litigation. Therefore, the litigation risk of such accounts is high and the key to preventing this risk is to ensure
that there are no exceptions to the mandate as given. The investment strategy must be clearly discussed,
communicated and documented before commencing. Reputation risk is also higher for corporate or
institutional accounts. Compliance with internal control processes when dealing with such accounts are
usually not compromised because of the high risk of litigation and loss of reputation resulting in loss of client
base.

Corporates and individuals may also register or set up offshore companies in tax havens or countries with low
tax regimes, sometimes for genuine tax efficiency and to avoid unnecessary taxes but there are times when
some corporations or Special Purpose Vehicles (SPVs) are set up for tax evasion to take advantage of the
privacy around shareholders and beneficiaries.

It is therefore important when on boarding SPVs, which are set up in such offshore jurisdictions, to take extra
care in performing due diligence. Usually enhanced due diligence is expected for such entities incorporated in
offshore low tax jurisdictions as the risk of money laundering and terrorism financing is higher as source of
funds are harder to trace. Many institutions require that the Certificate of Incumbency and Good Standing be
obtained from the Registrar.

Under MAS regulations, ownership of such entities must be traced to an individual person who is the ultimate
beneficial owner and merely obtaining a declaration of beneficial ownership is not adequate. There are
however exemptions, for example if the SPV is established by a company that is listed in an exchange of a
FATF172 member country, with the objective of holding certain assets and are part of a syndicated loan, then
tracing back to the ultimate beneficiary is not required. In the case of individuals who set up SPVs, it is
important to exercise enhanced due diligence especially in establishing the source of wealth and funds and
purpose for setting up the SPVs.

Offshore jurisdictions usually emphasize clients’ privacy and therefore it is difficult to get information needed
to assess the ML/TF risks. Given the FATCA173 and AEOI174 requirements that have been placed on banks as
intermediaries, the nationality and tax obligations of clients must be clearly identified. Notwithstanding the
difficulties, it is important that information is obtained before client acceptance. An example of reputation
risk is in the case of the Panama Papers where information on clients was leaked and the world of finance was
shocked by parties who had accounts in offshore centres through offshore vehicles.

It is important to note, however, that not all offshore vehicle owners are tax evaders, but the onus is on the
representative to ensure due diligence is conducted vigilantly and to onboard only reputable parties with
legitimate sources of wealth and funds.

5.7 Developing a Strong Client Relationship Built on Trust

Trust is the key in building a strong client relationship. To earn the trust of the client, in addition to ensuring
that client interest comes first, it important for a representative to show that he is competent, diligent and
respects his client’s wishes. To demonstrate these characteristics, representatives need to:

172 Financial Action Task Force (FATF) is an intergovernmental agency which aims to combat money laundering.
173 Foreign Account Tax Compliance Act (FATCA) is a federal law by the United States which requires all US persons including those
living outside the U.S. to file yearly reports on their non-U.S. financial accounts.
174 Automatic exchange of information (AEOI) refers to the regular exchange of financial account information between jurisdictions for

the purpose of detecting tax evasion.

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i. Keep updated on rules and regulations to prevent breaches of such rules and regulations;
ii. Continue to attend training on products, processes and ensure they know the control processes of
their organisation;
iii. Make sure all risk disclosures are communicated to clients for them to make informed decisions;
iv. Follow up with documentation;
v. Independently study the product risks, originators reputation, product features and all terms and
conditions;
vi. Respect clients’ risks appetites and objectives;
vii. Disclose all costs, fees with no hidden costs;
viii. Avoid conflict of interest and declare, if there is any; and
ix. Ensure priority of execution for clients’ orders and getting the best price.

5.7.1 Relationship Management with Clients

Relationship management refers to an approach in which a continuous and consistent level of engagement is
conducted with the clients. It ultimately aims to create and build a relationship and loyalty between the
institution and client, rather than being merely transactional. Relationship management can be performed at
the client or at institutional level, and can include a variety of communication tools, such as electronic mailing
lists, newsletters or any other forms of engagement, e.g. when there is a new product release. However, the
representative ultimately must consistently follow up with the client on any updates on his investment
portfolio.

5.7.2 Periodic Review and Updates of Accounts

As part of the review process, CMS licence holders and representatives will require their clients to update on
their “Know-Your-Customer” (KYC) information. Other than procuring updated personal information from the
clients, representatives should seek to actively update changes on the client’s financial situation as well. Both
CMS licence holders and representatives are expected to keep KYC information regularly updated.

CMS licence holders and representatives should follow up on any discrepancies on a timely manner. If the
periodic review process is not kept up-to-date and vigilant, the professional relationship with the existing client
base may be undermined.

5.7.3 Professionalism in Client Communication

Client communication plays a vital role in establishing rapport with a client. Particularly when investment
strategies and policies can be complex, it is the professional duty of the representative to disclose any material
information that may affect the client’s decision.

Representatives must:

i. Ensure that the principles of the entire investment process are disclosed to the client, including the
process which they used to analyse investments and other instruments;
ii. Disclose to clients any risks or significant limitations about the investment strategy formulated;

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iii. Use reasonable judgement to identify factors that are critical to the investment strategy. Such factors
include investment analysis, recommendations or implementation;
iv. Carefully distinguish between an opinion or a fact during the presentation of investment strategy and
recommendation to the client; and
v. Ensure that client communication is properly documented and stored in the event that the client or trader
or licensed representative would like to review the conversation in future.

5.8 Credit Risk Management

Credit risk is defined as the risk of losses that arise when a counterparty fails to perform its obligations under
a contract or when its ability to perform such obligations is impaired. Credit risk could stem from activities
both on and off the balance sheet of a CMS licence holder. CMS licence holders are increasingly facing credit
risk from diverse financial instruments such as trade finance and acceptances, internal transactions, foreign
exchange, financial futures, swaps, bonds, equities, options, commitments and guarantees, and settlement of
transactions.

To effectively manage credit risk, a CMS licence holder must first establish a credit strategy that determines
the level of credit risk it is prepared to bear. It is followed by adopting a risk management structure that
commensurate with its size and business activities.

The size of the limits, to any single customer or groups of connected customers, should be based on the credit
strength of the customer and the CMS licence holder’s risk tolerance level. CMS licence holders should also
establish appropriate limits for particular industries, economic sectors, or geographic regions to control
concentration risk. Credit limits should be reviewed on a periodic basis to account for changes to credit
strength and economic conditions.

When a client wishes to have credit extension, a representative must assess his financial capacity for the credit
line by gathering information on his financial position, assessing repayment ability and credit record,
considering if the asset coverage is adequate for cases where the client wants the credit collateralised against
assets.

Credit may be given in the form of margin accounts where the initial deposit of securities forms the collateral
for the credit. Nonetheless, it is good practice for representatives to consider the client’s financial position to
prevent overextension or any forced sales if margins breach the agreed thresholds.

Once the line of credit is determined and approved, it is important that the percentage of financing is observed
through monitoring the exposures. If the value of collateral falls below the threshold, quick action must be
taken to call for top-ups or decision has to be made to liquidate some assets if calls are not acted upon. If the
client ignores continuous calls for top-ups or the collateral no longer supports the credit, legal action may have
to be initiated.

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Chapter 6:
Central Provident Fund
Investment Scheme (CPFIS)
Learning Objectives

The candidate should be able to:

✓ Know the Central Provident Fund Investment Scheme (CPFIS).

✓ 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 consider 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 and distribution of the funds.

6.1 General Information and History of CPFIS

The Government first allowed CPF members in 1987 to use part of their savings in the Ordinary Account (OA)
to invest in approved investment products. Over the years, more options were added to the scheme, for
members to invest in with their CPF savings. The scheme was broadened in January 2001 to allow members
to invest using savings in their Special Account (SA) as well.
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Currently, the CPFIS has 2 parts:

• CPFIS-Ordinary Account (CPFIS-OA); and

• CPFIS-Special Account (CPFIS-SA).

These give CPF members who are financially savvy and willing to take on some risk more options to invest
their CPF savings to enhance their retirement savings. However, CPF members should consider their own
investment objectives, time horizon, risk appetite and financial decision to make an informed investment
decision. They also need to consider the investment risks and compare the expected return against the interest
rate their money would have earned in their CPF accounts.

6.2 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.

6.2.1 Types of Investments Allowed under the 2 Types of the CPFIS and Investment Limits 175

Table 6.2.1 on Types of Investments Allowed under CPFIS and Investment Limits

Table 6.2.1 illustrates Types of Investments Allowed under CPFIS and Investment Limits.

CPFIS-OA CPFIS-SA

Ordinary Account savings can be invested in: Special Account Savings can be
invested in:
• Fixed Deposits
• Singapore Government Bonds • Fixed Deposits
• Singapore Government Treasury Bills • Singapore Government Bonds
• Statutory Board Bonds • Singapore Government
• Bonds Guaranteed by Singapore Government Treasury Bills
• Annuities • Statutory Board Bonds
• Endowment Insurance Policies (secondary markets only)
• Fund Management Accounts • Bonds Guaranteed by Singapore
• Investment-Linked Insurance Products (ILPs) Government
• Unit Trusts • Annuities
• Exchange Traded Funds (ETFs) • Endowment Insurance Policies

Up to 35% of investable savings can be invested in:

175 Refer to the list of instruments that can be invested under CPFIS (CPF website):
https://www.cpf.gov.sg/content/dam/web/member/growing-your-savings/documents/CPFISInvestmentProducts.pdf
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CPFIS-OA CPFIS-SA
• Shares • Selected ILPs176
• Property Funds (or Real Estate Investment Trusts) • Selected Unit Trusts323
• Corporate Bonds • Selected ETFs323

Up to 10% of investable savings can be invested in Gold:

• Gold ETFs
• Other Gold products (Only UOB offers these new gold
products)

The first $60,000 in a CPF member’s combined CPF accounts earns extra interest (capped at $20,000 from the
Ordinary Account). To enable CPF members to optimise the extra interest on the first combined $60,000, only
monies in excess of $20,000 in the Ordinary Account and $40,000 in the Special Account can be invested via
the CPF Investment Scheme. 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) and agent
bank fees with CPF savings, even if the Ordinary Account balance falls below $20,000.

6.3 What is a CPF Investment Account?

A CPF Investment account is an account opened with a CPFIS agent bank177 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 SGX-ST. Each member can only maintain one CPF Investment
Account at any one time.

6.4 Eligibility Criteria

A CPF member who meets the following requirements can participate in the CPFIS:
• Is at least 18 years of age
• is NOT an undischarged bankrupt
• 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)

176 Generally 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).
177
Refer to section 7.5 for listing and explanation of CPF Agent Bank.
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From 1 October 2018, any new CPFIS investor will be required to take the Self-Awareness Questionnaire (SAQ)
before the member can commence investing under CPFIS178. This is to help them assess their basic financial
knowledge and whether CPFIS is suitable for them.

6.5 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 can apply for his investment account online or at the agent banks’ branches. He will need to bring
along his or her identity card, Self-Awareness Questionnaire status document, 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 my cpf
Online Services by using his SingPass. Members can only maintain one CPF Investment Account at any one
time.

6.6 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 SGX-ST, 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.

178 Refer to the CPF website https://www.cpf.gov.sg/member/faq/growing-your-savings/cpf-investment-schemes for FAQs on First-

Time Investment of your CPF.

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6.7 Service Providers under the CPFIS 179

Members are required to buy or sell their investments only through service providers included under the CPF
Investment schemes as provided in Table 6.7:

Table 6.7 on Service Providers for Different Instruments

Instruments Service/Product Providers

Fixed Deposits Fixed 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 Insurance Companies

• Endowment Insurance Policies
• ILPs

Unit Trusts • Fund Management Companies

• Investment Administrators

Fund Management Accounts Fund Management Companies

• Shares Brokers
• Property Funds
• Corporate Bonds
• Exchange Traded Funds (ETFs)

Gold • For Gold ETFs: Brokers

• Gold ETFs • For other Gold products:
• Other Gold products (such as Gold o Sell through your Agent Bank
certificates, Gold savings accounts, o Buy through UOB Agent Bank and you need a UOB
Physical Gold) investment account

179
Refer to CPF website at https://www.cpf.gov.sg/content/dam/web/member/growing-your-
savings/documents/CPFISInvestmentProducts.pdf
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6.8 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 review180. 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. Table 6.8.1 shows the conditions attached to
some of these investments:

6.8.1 Inclusion Criteria for Investment Products181

Table 6.8.1: Inclusion Criteria for Investment Products

Table 6.8.1 illustrates the criteria for instruments to be included under CPFIS.

Instruments Included Under the CPF Investment Scheme (CPFIS)

Instrument Criteria

Fixed Deposits (i) Must be offered by CPFIS-included Fixed Deposit Banks182 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.

• Singapore
Government
Bonds
The bonds/treasury bills are traded in Singapore dollars and are scripless.
• Singapore
Government
Treasury Bills

Statutory Board (i) The bonds are issued by a Statutory Board of the Singapore Government;
Bonds183
(ii) The bonds are listed on the SGX-ST Main Board;
(iii) The bonds are traded in Singapore dollars;

180Unit 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.
181
https://www.cpf.gov.sg/content/dam/web/member/business-
partners/documents/APPLICATIONANDADMISSIONCRITERIAFORFUNDSMANAGEDBYFMC.pdf
182 DBS, OCBC, UOB and Malayan Banking Berhad.
183 Under CPFIS-SA, currently members can only invest in Statutory Board Bonds in the secondary market.
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Instruments Included Under the CPF Investment Scheme (CPFIS)

Instrument Criteria
(iv) 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);
(v) The bonds are not subject to trading restrictions in the secondary market; and
(vi) 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
investing in the bonds and other relevant information must be issued and
made available to CPF members.

Bonds Guaranteed by (i) The bonds are listed on the SGX-ST Main Board; and
Singapore
(ii) The bonds are traded in Singapore dollars.
Government

• Annuities (i) Must be offered by Insurance Companies included under CPFIS;

• Endowment (ii) Life insured must be the member himself;
Insurance Policies (iii) Only single premium or recurring single premium policies are allowed (new
• Investment linked regular premium policies are not allowed from 1 January 2001); and
Insurance (iv) For endowment policies, maturity date must not be later than the member’s
products184 62nd birthday.

Unit Trusts329 (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) No sales charge;
(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 (i) Must be listed on SGX;

Funds329
(ii) Must be managed by Fund Management Companies included under CPFIS;
(iii) Good prospects of tracking index efficiently with low tracking error
(iv) Total expense ratios will be taken into consideration
(v) No sales charge
(vi) Physical replication (full or partial)

184
Refer to the CPF website https://www.cpf.gov.sg/content/dam/web/member/business-
partners/documents/RCSILP1.pdf
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Instruments Included Under the CPF Investment Scheme (CPFIS)

Instrument Criteria
(vii) Preferably have good tracking record for at least 3 years; and
(viii) Must comply with CPFIG.

Fund Management The Fund Management Company that manages the account must pass the
Accounts185 (CPFIS- qualifying criteria set out by the CPF Board.
OA only)

Shares of Companies (i) Must be offered by companies incorporated in Singapore;

(CPFIS-OA only)
(ii) The shares are listed on the SGX-ST Main Board as a primary listing (provided
that the shares are not new Catalist shares or shares transferred from the
SGX-ST Main Board to Catalist, except for former SESDAQ shares);
(iii) The shares are traded in Singapore dollars;
(iv) The company allows CPF Agent Banks to appoint all CPF shareholders as
proxies to attend and vote at shareholders’ meetings; and
(v) The shares are not placed on an SGX-ST watch list.

Property Funds (i) Must be offered by companies incorporated in Singapore;

(CPFIS-OA only)
(vi) The fund is listed on the SGX-ST Main Board;
(vii) The fund is traded in Singapore dollars; and
(viii) The company allows CPF Agent Banks to appoint all CPF unitholders as proxies
to attend and vote at meetings.

Corporate Bonds (i) Must be offered by companies incorporated in Singapore;

(CPFIS-OA only)
(ii) The shares are listed on the SGX-ST Main Board;
(iii) The bonds are traded in Singapore dollars;
(iv) The bonds are not offered to institutional investors or accredited investors
and certain other persons only under Section 274 or 275 of the SFA;
(v) The bonds are not subject to trading restrictions in the secondary market;
(vi) The bonds are rated at least A2 by Moody's, A by Standard and Poor's or A by
Fitch; and
(vii) The prospectus, which complies with the SFA 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.

185Members 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/content/dam/web/member/business-
partners/documents/CRITERIAFORFUNDMANAGEMENTCOMPANIES.pdf
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Instruments Included Under the CPF Investment Scheme (CPFIS)

Instrument Criteria

Gold (CPFIS-OA only) a) Gold ETFs186:

(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 the CPF Agent Bank to appoint all CPF unitholders of
the gold ETF as proxies to attend and vote at meetings.
b) Other Gold products
Only UOB offers these gold products. If you wish to invest in gold, you need an
investment account with UOB.

6.9 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.

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.

6.10 Dividends and Profits Earned 187

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.

186 Refer to the CPF website https://www.cpf.gov.sg/content/dam/web/member/business-

partners/documents/LISTOFGOLDEXCHANGETRADEDFUNDSINCLUDEDUNDERCPFIS.pdf
187 Refer to the CPF website https://www.cpf.gov.sg/member/faq/growing-your-savings/cpf-investment-schemes for FAQs on
Investment Profits and Losses.

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6.11 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.

Since October 2018, the caps on these charges have been revised to reduce the costs of investing. In the first
phase of reduction, the sales charge cap was reduced from 3% to 1.5%, and the wrap fee cap was reduced
from 1% to 0.7%. The second phase was rolled out in October 2020, where sales charges were removed, and
the wrap fee cap was further reduced to 0.4%.

6.12 Release of Investment Holdings 188

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
Full Retirement Sum (FRS) or the Basic Retirement Sum (BRS) with sufficient property charged /pledge in the
Retirement Account (RA).

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 FRS or the BRS with sufficient property charge/pledge in the RA, 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 or Special Account for CPFIS-SA.

6.13 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 FRS or BRS with
sufficient charge/pledge in the RA before his CPFIS investments and cash balance in the 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 if these remain within the CPF Investment Scheme.

188 Refer to the CPF website https://www.cpf.gov.sg/member/faq/growing-your-savings/cpf-investment-schemes/can-i-withdraw-my-

cpf-investment-scheme-cpfis-investments, for FAQs on Withdrawal of Investment Holdings (Reaching 55)

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6.14 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
and 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.

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Chapter 7:
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 (ML) / terrorism financing (TF);
• Sanctions and embargoes; and
• 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 capital markets
intermediaries and their representatives in the prevention and detection of financial crimes.
✓ The know-your-customer (KYC), 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.
✓ The need for ongoing monitoring of transactions and reviews of the risk profile especially if there are
changes in the account behaviour.
✓ Penalties and risks associated with non-compliance of regulatory requirements:
• Legal risks;
• Financial risk;
• Reputation risk; and
• Civil and Commercial risk.
✓ Reporting and filing requirements.
✓ Training requirements.

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7.1 Introduction to Prevention of Financial Crimes

7.1.1 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 (ML);
ii. Terrorism Financing (TF);
iii. Embargoes and Sanctions; and
iv. Fraud.

Banks and financial institutions189 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 a concerted effort to combat financial
crimes. Regulators in international financial centres must 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.

Capital markets intermediaries (CMIs) 190 in Singapore are required to conduct their business activities and
operations based on the following principles outlined in the MAS Notice on Prevention of Money Laundering
and Countering the Financing of Terrorism – Capital Markets Intermediaries (SFA04-N02) (Notice): -

a) exercise due diligence when dealing with customers, natural persons appointed to act on the person’s
behalf, connected parties of the customer and beneficial owners of the customer;

b) conduct its business in conformity with high ethical standards, and guard against establishing any
business relations or undertaking any transaction, including a digital token transaction, that is or may
be connected with, or facilitates or may facilitate ML or TF; and

c) assist and cooperate with the relevant law enforcement authorities in Singapore to prevent ML and
TF.

7.1.2 Definition of 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:

189
Financial institutions refer to banks, merchant banks and holders of Capital Markets Services (CMS) licence as defined in Appendix
2 of MAS Notice on Prevention of Money Laundering and Countering the Financing of Terrorism – Capital Markets Intermediaries
(SFA04-N02).
190 A CMI refers to a person holding a capital markets services licence under the Securities and Futures Act, a fund management
company registered under paragraph 5(1)(i) of the Second Schedule to the Securities and Futures (Licensing and Conduct of
Business) Regulations (SFR(LCB) or a person exempted from the requirement to hold such a licence under paragraphs 3(1)(d) or
7(1)(b) of the Second Schedule to the SFR(LCB).
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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 Figure 7.1.2 for an illustration
of the stages of the money laundering process.

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Figure 7.1.2: An Illustration of the Money Laundering Process

1. PLACEMENT STAGE
Cash deposited in
banks or finance
companies

Proceeds from
Criminal Activities

2. LAYERING STAGE
1st Layer
Payments from Purchase of luxury
customers by cheques Resells assets and high-end or high value
or wire transfers are supplies to unknowing goods from
placed as “legitimate customer genuine suppliers
funds” back in banks
2nd Layer

3. INTEGRATION STAGE
Sale of Investments and
return of sale proceeds
from Brokers in the
form of cheques or wire
transfers to banks Shell Company
Issues Bearer Shares

Transfer of Investment
with Brokers

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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 CMIs which would
be affected by cash placements (for top-ups or answering to margin calls to accounts).

Unless proper action is taken, CMIs 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)191 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 ML 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.

CMIs must have adequate due diligence processes to identify the ultimate BOs 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 CMI often depends on other intermediaries who introduce business to them, it must conduct due
diligence to satisfy itself that the intermediaries are subject to and supervised for compliance with anti-
money laundering and countering terrorism financing (AML/CFT) requirements consistent with standards set
by FATF.

Under the Notice, the Monetary Authority of Singapore (MAS) allows for a risk-based approach to be
adopted by CMIs. CMIs need not inquire if there exists any BO for certain types of customers which are
further discussed in Section 7.9.5.2.

Where the CMI has doubts about the veracity of the Customer Due Diligence (CDD) information or suspects
that the customer or business relation may be connected to ML, it should conduct full due diligence on the
client or transaction due to the increased risk. The responsibility on the CMI for preventing ML is not
diminished by relying on intermediary information.

7.1.3 Definition of 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 actions or
intimidate the public or a section of the public. The sources of funding can be illegitimate as well as legitimate;

191 As defined the MAS Notice on Prevention of Money Laundering and Countering the Financing of Terrorism – Capital Markets
Intermediaries (SFA 04-N02), a beneficial owner (BO) is, in relation to a customer of a CMI, the natural person who ultimately owns
or controls the customer or the natural person on whose behalf a transaction is conducted or business relations are established and
includes any person who exercises ultimate effective control over a legal person or legal arrangement.

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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 ML activities, a CMI may inadvertently allow itself to be part of a TF scheme, for example when funds
or assets are transferred to a third party who is not a client of the CMI and due diligence has not been
conducted on the third party. CMIs should ensure that their payment policies and processes require further
checks for payments or transfers to third parties. CMIs should be vigilant as TF does not always involve large
sums of money and can be hard to detect.

7.1.4 Criminal Liability Involving Embargoes and Sanctions

An embargo is the complete ban or prohibition of trade or financial dealings with a particular country, to
isolate it from participating in economic activity. Different categories of embargoes include:
i. Embargoes affecting all relations with a particular country, e.g. North Korea;
ii. Embargoes affecting certain named individuals or entities, e.g. Specially Designated Names (SDN);
iii. Embargoes on certain sectors, e.g. armaments and weaponry; and
iv. 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 the United Nations (UN),
United States of America (US), European Union (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 CMI does not deal in goods, it could again unintentionally allow itself to enter into transactions
with an SDN listed party for securities transactions. It may have dealt with an offshore 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 imposed, which was intended to keep them out of the financial
markets.
In the Notice, CMIs are required where there are legal arrangements and structures, especially through
offshore vehicles, to trace to a natural person or persons exercising control or ownership (including through a
chain of control or ownership). This due diligence requirement is aimed at reducing the risk of dealing with
sanctioned parties that hide behind structures or a chain of vehicles.

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Implications
Why should CMIs 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 offshore companies making it difficult to
trace the ultimate BOs. CMIs 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”.

“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 – the policy in most institutions is to
request that clients register the shares. Even if they do accept dealings, it is only with clients
they know, and they require their client’s shares to be deposited with them. This is still a
risk as the shareholder can always get a replacement share certificate by claiming that they
have “lost” the original share certificates. Therefore, a good policy is not to accept “Bearer
Share” companies as clients at all because of the inability to know for certain the identity of
the ultimate BO.

In such situations, CMIs may unwittingly facilitate the transfer of funds in the sale and
purchase of securities by SDNs or embargoed country nationals. 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 a transfer to North Korea, it would have breached the
Financial Services and Markets (Sanctions and Freezing of Assets of Persons - Democratic
People’s Republic of Korea) Regulations 2023, which prohibits transactions with North
Korea192.

The embargo against Iran has been lifted. However, it does not mean there are no sanctions
against Iran. There are still sanctions on certain SDNs, trade, sectors and financial services
against Iran issued by the UN Security Council as well as the MAS. Financial institutions and
its representatives must be vigilant and exercise care when faced with issues concerning
Iran and are advised to consult their legal and compliance functions before entering into
transactions with Iran.
There is still an embargo against North Korea - a CMI and its representatives are not to
enter into transactions with North Korea.

A new Notice has been issued by MAS on 14 March 2022 prohibiting entering into financial
transaction or providing financial assistance or services, etc, in relation to the raising of new
funds for the Russian Government and the Central Bank of the Russian Federation. A CMI has
to exercise due diligence to prevent offering services to parties whose ultimately aim is to
raise funds for the Russian Government through a layer of special purpose vehicles whose
BOs are not clear.

192 Regulation 10 of the Financial Services and Markets (Sanctions and Freezing of Assets of Persons — Democratic People’s Republic
of Korea) Regulations 2023 - Prohibition against entering into financial transactions or providing financial assistance or services,
etc., in relation to trade.

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7.1.5 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, and the
risk increases where the operational risk is not properly managed.

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 the 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 checking systems, controls and audits must be robust in CMIs.

Example – External Fraud

External fraud could result 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 CMI to sell the
client’s holdings and pay the proceeds to his own account (which is different from the records in the books
of the CMI). This is possible because very often instructions are given through the telephone. The CMI must
be able to have controls in place to verify such instructions. If it fails to have such controls, then the
fraudster - after receiving the funds into his account - may withdraw the funds very quickly, disappear and
evade capture.

Therefore, it is important for a CMI 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 an independent call back to the client to verify the instructions. If it is not an instruction given by the
client, then the bank should be alerted, and no transfer should be allowed.

7.2 Anti-Money Laundering and Counter-Terrorism Financing Regime in

Singapore

Singapore is a member and signatory to the 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 ML, TF 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 to combat ML and
TF, as well as the financing of proliferation of weapons of mass destruction.

As a member of the FATF, Singapore is committed to the effective implementation and enforcement of the
FATF Recommendations.

Regulators have found that the most efficient way to stem the flow of funds to criminals or to starve them of
their funding for criminal activities is to stop institutions from facilitating such flows. This in turn is done by
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making financial institutions (e.g. banks, brokerages, investment companies) and their employees or
representatives responsible for preventing the flow of funds to criminals.

7.3 The Regulatory Framework of Financial Crimes – Rules and

Regulations

7.3.1 The Singapore Penal Code 1871

The Penal Code of Singapore sets out general principles of criminal law in Singapore, as well as the elements
and penalties of criminal offences such as homicide, theft and cheating.

7.3.2 Corruption, Drug Trafficking and Other Serious Crimes (Confiscation of Benefits) Act,
1992 (CDSA)

The CDSA regulates money laundering activities and includes (among others) drug trafficking, prostitution,
gambling, TF and tax evasion offences. It was first introduced to criminalize ML and to allow for investigation
and confiscation of benefits from ML. At the time of the introduction of the CDSA, drug trafficking was the
primary source of funds for money laundering.

The CDSA has since been amended to include drug dealing and other criminal conduct including bribery,
criminal breach of trust, counterfeiting, theft extortion, robbery, cheating, etc. In 2013, tax evasion was added
as a listed crime in the CDSA.
Table 7.3.2(1) sets out a summary of the money laundering offences under the law.

Table 7.3.2(1): Summary of Key Provisions of the CDSA

Offences Description

Sections 53(1) ACQUIRING, POSSESSING, USING, CONCEALING OR TRANSFERRING BENEFITS FROM

and 54(1) DRUG DEALING OR FROM CRIMINAL CONDUCT
(1) Any person who:
a) Conceals or disguises any property which is, in whole or in part, directly or indirectly,
represents the person’s benefits of drug dealing or the person’s benefits from
criminal conduct; 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.

Sections 53(3) ACQUIRING, POSSESSING, USING, CONCEALING OR TRANSFERRING BENEFITS OF DRUG

and 54(3) DEALING
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 benefits of drug
dealing or benefits from criminal conduct, acquires that property or has possession of or
uses such property, shall be guilty of an offence.
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Offences Description

Sections 53(2) ACQUIRING, POSSESSING, USING, CONCEALING OR TRANSFERRING BENEFITS OF DRUG

and 54(2) DEALING
Any person who, knowing or having reasonable grounds to believe that any property is,
or in whole or in part, directly or indirectly, represents, another person’s benefits of drug
dealing 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.

Sections 50(1) ASSISTING ANOTHER TO RETAIN BENEFITS OF DRUG DEALING / FROM CRIMINAL
and 51(1) CONDUCT
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 (called in this section as that
other person) of that other person’s benefits of drug dealing or benefits from
criminal conduct is facilitated (whether by concealment, removal from jurisdiction,
transfer to nominees or otherwise); or
b) That other person’s benefits of drug dealing 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 that other person is a person
who carries on or has carried on drug dealing or has benefitted from drug dealing or who
engages in or has engaged in or has benefited from criminal conduct shall be guilty of an
offence.

Sections 50(5), PENALTY FOR MONEY LAUNDERING OFFENCES UNDER SECTIONS 50-51 AND SECTIONS
51(5), 53(5), 53-54
54(5)
Any person who commits any of the offences stated above shall be liable on conviction:
a) If the person is an individual, to a fine up to S$500,000 or imprisonment up to 10
years, or both; or
If the person is not an individual, to a fine up to S$1 million or twice the value of the
benefits of drug dealing or criminal conduct in respect of which the offence was
committed, whichever is higher.

Section 55 POSSESSING OR USING PROPERTY REASONABLY SUSPECTED TO BE BENEFITS FROM

DRUG DEALING, ETC.
Any person who possesses or uses any property that may be reasonably suspected of
being, or of in whole or in part, directly or indirectly, representing, any benefits of drug

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Offences Description
dealing or benefits from criminal conduct shall, if the person fails to account satisfactorily
how the person came by the property, be guilty of an offence.

A person who commits an offence under this section shall be liable on conviction:
a) If the person is an individual, to a fine up to S$150,000, or imprisonment up to 3
years, or both; or
b) If the person is not an individual to a fine not exceeding S$300,000.

Sections 57 TIPPING-OFF
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 purposes of the CDSA; and
b) discloses to any other person information or any other matter which is likely to
prejudice that investigation or proposed investigation,
shall be guilty of an offence.

Any person who —

a) knows or has reasonable grounds to suspect that a disclosure has been or is being
made to an authorised officer under the CDSA (referred to in this section as the
disclosure); and
b) discloses to any other person information or any other matter which is likely to
prejudice any investigation which might be conducted following the disclosure,
shall be guilty of an offence.

Section 57 PENALTY FOR BREACH OF SECTION 57

a) Fine up to S$250,000; or
b) Imprisonment up to 3 years; or
c) Both.

Section 56 PROOF AND KNOWLEDGE, ETC., OF PREDICATE OFFENCE

To prove an offence under sections 50 to 55 of the CDSA, it is not necessary for the
prosecution to prove the particulars of any offence constituted by the drug dealing or
criminal conduct, or that the person knows or has reasonable grounds to believe that the
whole or part of the property constitutes, or directly or indirectly represents, the benefits
of a particular offence. It would suffice to prove that the person knows or has reasonable
grounds to believe that the whole or part of the property constitutes, or directly or
indirectly represents, the benefits of an offence generally.
To prove under sections 50 to 55 of the CDSA whether any act in a foreign country
constitutes drug dealing or criminal conduct –

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Offences Description
(a) where the prosecution adduces, to the satisfaction of the court, some evidence that
doing or being concerned in the act satisfies every element of a foreign drug dealing
offence or foreign serious offence, it is presumed, until the contrary is proved, that the
act constitutes that foreign drug dealing offence or foreign serious offence, and
(b) the court may take judicial notice of any Act passed by the legislature of that foreign
country.

Sections 36, PRODUCTION ORDERS AND AUTHORITY TO SEARCH

39 and 40
For the purpose of an investigation into drug dealing or criminal conduct, as the case may
be, an authorised officer may apply to a court for an order under Section 36 (Production
Order) or apply to a court for warrant in relation to specified premises under Section 40
(Search Warrant).
Any person who contravenes the order under Section 36 without reasonable excuse or
hinders or obstructs an authorised officer in the execution of a warrant issued under
Section 40 shall be guilty of an offence.

Sections 40 PENALTY FOR BREACH OF SECTION 40

A person who commits an offence under section 40 shall be liable on conviction to:
a) Fine up to S$10,00 or
b) Imprisonment up to 2 years; or
c) Both.

Section 39(1) FAILURE TO COMPLY WITH PRODUCTION ORDER where a person is required by a
and (2 production order to produce any material or make any material available to an
authorised officer for inspection, the person shall be guilty of an offence under this
section if the person -
a) contravenes the order without reasonable excuse or,
b) in purported compliance with the order produces or makes available any material
known to the person to be false or misleading in a material particular without-
ii) indicating to the authorised officer to whom the material is produced or
made available that the material is false or misleading and the respect in
which the material is false or misleading; and
iii) providing correct information to the authorised officer if the person is in
possession of, or can reasonably acquire, the correct information

A person guilty of an offence under the above section shall be liable to a fine up to
$10,000 or to an imprisonment for a term up to 2 years or both.

Section 45 PENALTY FOR FAILURE TO REPORT SUSPICIOUS TRANSACTIONS

Any person who contravenes section 45 shall be guilty of an offence and shall be liable
on conviction –
a) If the person is an individual, to a fine up to S$250,000 or imprisonment up to 3 years
or to both.

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Offences Description
b) If the person is not an individual, to a fine up to S$500,000.

Section 46 STATUTORY PROTECTION IN REPORTING

Sections 46 provide statutory protection to an institution and its employees or officer in
making STRs under the CDSA, specifically: -
Section 37
(4) A financial institution which complies with an order made under subsection (2) is not
to be treated as being in breach of any restriction upon the disclosure of information or
material imposed by law, contract or rules of professional conduct
(5) No action shall lie against a financial institution which in good faith produces
materials or gives access materials relating to the account of its customer by reason of
that financial having produced or given access to the materials in compliance with an
order made against it under subsection (2) or any act done or omitted to be done in
relation to any funds or investment or property in the account if that customer in
consequence of the production of or access to those materials.
(6) In subsection (5) each reference to a customer of a financial institution is, if the
financial institution is a VCC, a reference to its member.
(7) The proceedings for an application for a production order under this section are to be
heard in private.
(8) The Public Prosecutor or the person duly authorized by the Public Prosecutor may
exercise the powers conferred on the Public Prosecutor or the person (as the case may
be) by this section to the production of, or the giving of an access to, any particular
material or material of a particular description

Section 43 RETENTION OF RECORDS

Section 43 provides for the statutory duty of financial institutions to keep records.
Financial institutions are required to retain Financial Transaction Documents (FTDs) for a
minimum period.
a) FTDs are defined in Section 42(1) to refer to any document that relates to financial
transactions carried out by the institution in its capacity as a financial institution and
includes but is not limited to documents that relate to:
- Opening/closing of an account;
- Operation of an account;
- Opening or use of deposit box;
- Telegraphic or electronic fund transfer;
- Transmission of funds between Singapore and a foreign country or between
foreign countries;
- Loan application forms; or
- Customer identification records.
b) Minimum period of retention is:

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Offences Description
i) if the document relates to the opening of an account with the institution, the
period of 5 years after the day on which the account is closed;

ii) if the document relates to the opening by a person of a deposit box held by the
institution, the period of 5 years after the day on which the deposit box ceases
to be used by the person; or

iii) in any other case, the period of 5 years after the day on which the transaction
takes place.

Section 43(3) PENALTY FOR FAILURE TO RETAIN FTDs

A financial institution which fails to retain FTDs (such as those set out in section 43) shall
be guilty of an offence and shall be liable on conviction to a fine up to S$10,000.

Section 44(1) KEEPING REGISTER OF ORIGINAL FTDs RELEASED

and (2)
A financial institution may be required by law to release an original of an FTD before the
end of the minimum retention period applicable to that FTD. In such instances, the
financial institution must retain a complete copy of the original FTD released until the
end of the minimum period of retention or until the original FTD is returned, whichever
occurs first. It must also maintain a register of all FTDs so released.

Section 44(3) PENALTY FOR FAILURE TO RETAIN COPY OR MAINTAIN REGISTER OF FTDs RELEASED
Failure to retain copy and maintain register of FTDS released is an offence punishable on
conviction with a fine up to S$10,000.

Section 37(1) PRODUCTION ORDER

and (2)
All financial institutions must comply with a Production Order issued under Section 36 of
the CDSA by the High Court within a reasonable period, but not less than 7 days, as the
Order may specify.

Section 39(2) PENALTY

Failure to comply with a Production Order is an offence punishable with:
- Fine up to S$10,000; or
- Imprisonment up to 2 years; or
- Both.

Section 40(6) SEARCH WARRANT

A person must not hinder or obstruct an authorised officer conducting a search under a
search warrant issued by the court under the CDSA.

Section 40(6) PENALTY

Hindering or obstructing an Authorised Officer in the execution of a warrant issued under
section 40 of the CDSA is an offence publishable on conviction with:
- Fine up to S$10,000; or
- Imprisonment up to 2 years; or
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Offences Description
- Both.

Sections 6, RESTRAINT ORDER, CHARGING ORDER AND CONFISCATION ORDER

7,18, 19 and
Besides a Production Order and a search warrant, all institutions must also comply with a
20
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.

In addition to the above penalties which are not exhaustive, it is also important to note that failure to comply
may lead to:
i. Regulatory sanctions;
ii. Reputation Risks; or
iii. Loss of business and thus face financial risks.

7.3.3 The Mutual Assistance in Criminal Matters Act 2000 (MACMA)

The MACMA 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 MACMA. This is
because ML or TF crimes usually also involve cross-border transactions. As it is difficult to only investigate one
side of the transactions, it is easier and more effective if both sides of the transactions are investigated and
analyzed. This is especially so where high value ticket items or overseas investments are involved.

7.3.4 Terrorism (Suppression of Financing) Act 2002 (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 UN Security Council Resolution 1373.

The TSOFA criminalizes TL 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 TF to the Police. A failure
to do so is a criminal offence.

Specifically, the following acts are prohibited under the TSOFA193:

i. The provision or collection of property for terrorist acts;

ii. The provision of property and services for terrorist purposes194;

iii. The use or possession of property for terrorist purposes; and

iv. The dealing with property of terrorists.

193 Sections 3 to 6 of the TSOFA.

194 This includes the financing of travel of an individual to any place other than the state of which the individual is a citizen or in which
the individual resides, in order for the individual to provide or receive any training in facilitating or carrying out any terrorist act.
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A person who does any of the acts listed in (i) to i(v) above will be guilty of an offence under the TSOFA and
shall be liable on conviction195:

a) In the case of an individual, to a fine up to S$500,000 or to imprisonment for a term up

to 10 years or to both; or

b) In the case of a person who is not an individual, to a fine not exceeding the higher of (i)
S$1 million; or (ii) twice the value or the property (including funds derived or generated
from the property), financial services or other related services, or fina ncial transaction
(as the case may be) in respect of which the offence was committed.

7.4 MAS Notices and Regulations on Prevention of Money Laundering

and Countering the Financing of Terrorism

7.4.1 MAS Notice on Prevention of Money Laundering and Countering the Financing of
Terrorism (SFA 04-N02)

The Notice sets out the obligations for a CMI to take measures to help mitigate the risk of Singapore’s capital
markets being used for money laundering or terrorist financing. All CMIs are required to comply with the
Notice and the Guidelines to the Notice (Guidelines).

The Notice sets out the principles guiding the conduct of CMIs in preventing the system from being used for
criminal purposes and the due diligence required to be performed with proper controls to be implemented.

The Guidelines provide guidance on some of the requirements set out in the Notice and should be read
together with the Notice. The degree of observance with these Guidelines by a CMI may have an impact on
MAS' overall risk management of the CMI, including the quality of its board and senior management oversight,
governance, internal controls and risk management.

7.4.2 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;

195 Section 6A of the TSOFA.

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• Protecting against the use of correspondent banking relationships196 and front companies to shield illicit
activities and be alert generally to the impact of dealing with sanctioned countries; and
• Freezing assets and reporting suspicion of ML and TF activities when alerted, and to prevent release of
assets without approval from the regulator.

MAS has also set additional guidance197 for CMIs to consider incorporating in their processes to better detect
and manage sanction-related risks. Specifically, CMIs should:
• ensure that there is strong Board and Senior Management oversight of sanctions-related risk; and
• continue to strengthen their sanction-risk detection capabilities.

7.5 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 regulations (MAS Regulations) issued under the Financial Services and
Markets Act 2022 (FSMA) 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

• 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.

Pursuant to section 16(4)(a) and 16(4)(b) of the FSMA, a financial institution that fails to comply with an
issued direction or contravenes any regulations made that MAS considers necessary for the prevention of
money laundering or the financing of terrorism shall be guilty of an offence and shall be liable on conviction
to a fine up to S$1 million and, in the case of a continuing offence, to a further fine of $100,000 for every day
or part of a day during which the offence continues after conviction.
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.

196 Correspondent banking relationships include the provision of correspondent account services, which means the provision of
services under a cross-border relationship between a CMI and a respondent financial institution, in relation to any activity for
which the CMI is regulated under the SFA, whether for that respondent financial institution as principal or for that respondent
financial institution's customers.
197
MAS circular No: AMLD 11/2023 dated 31 August 2023 Circular on ensuring effective detection of sanctions-related risks.
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CMIs should refer to the lists of targeted financial sanction regulations198 and lists of designated individuals
and entities199 for detailed information on their respective obligations under the UN or MAS Regulations.

7.6 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 1947 and the offence of tax evasion and improperly obtaining refund of tax under the Goods and
Services Tax (GST) Act 1993 have been designated as ML predicate offences.

7.6.1 What are the Tax Offences?

Singapore has designated tax offences under Sections 37M(3), 37M(4), 96 and 96A, of the Income Tax Act and
Sections 62 and 63 of the GST Act as ML predicates for direct tax and indirect tax offences respectively.

7.6.2 Direct Tax Offences under Sections 37M(3), 37M(4), 96 and 96A of the Income Tax Act

7.6.2.1 Section 37M(3) – Giving False Information to Comptroller of Income Tax, etc., to Obtain, or to
Assist Another Person to Obtain, Cash Pay-out or Productivity and Innovation Credit (PIC) Bonus
(or both), etc.

Any person who wilfully with intent to obtain or to assist any other person to obtain a cash payout or PIC
bonus (or both) or a higher amount of cash pay-out or PIC bonus (or both) which he or that other person is
not entitled to:
i. Gives to the Comptroller any information when submitting an irrevocable written election for a cash
payout that is false in any material particular or omits any material particular from any information or
document given when submitting an irrevocable written election for a cash payout; or
ii. Gives any false answer, whether verbally or in writing, to any question or request for information asked
or made by the Comptroller,

shall be guilty of an offence.

7.6.2.2 Section 37M(4) – Falsifying Records or using Contrivances, etc., to Obtain, or Assist Another Person
to Obtain, Cash Pay-out or PIC Bonus (or both), etc.
Any person who wilfully with intent to obtain or to assist any other person to obtain a cash payout or PIC
bonus (or both) or a higher amount of cash pay-out or PIC bonus (or both) which he or that other person is
not entitled to:
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 accounts or records; or

198 For the current list of targeted financial sanctions regulations, please refer to the MAS website at:
https://www.mas.gov.sg/regulation/anti-money-laundering/targeted-financial-sanctions/lists-of-designated-individuals-and-
entities
199 For the current list of designated individuals and entities, please refer to the MAS website at:
https://www.mas.gov.sg/regulation/anti-money-laundering/targeted-financial-sanctions/lists-of-designated-individuals-and-
entities
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ii. Makes use of any fraud, art or contrivance or authorises the use of such fraud, art or contrivance,

shall be guilty of an offence.

7.6.2.3 Section 96 - Tax Evasion and Wilful Action to obtain PIC Bonus
Any person who willfully with intent to evade or to assist any other person to evade tax:
i. Omits from a return made under the Income Tax Act any income which should be included;
ii. Makes any false statement or entry in any return made under the Income Tax 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 the Income Tax Act; or
iv. Fails to comply with Section 76(8),

shall be guilty of an offence.

7.6.2.4 Section 96A - Serious Fraudulent Tax Evasion

Any person who willfully with intent to evade or to assist any other person to evade tax:
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;

shall be guilty of an offence.

7.6.3 Indirect Tax Offences Covered by Sections 62 and Sections 63 of the GST Act

7.6.3.1 Section 62 - Tax Evasion

Any person who willfully with intent to evade or to assist any other person to evade tax:
i. Omits or understates any output tax or overstates any input tax in any return made under the GST Act;
ii. Makes any false statement or entry in any return, claim or application made under the GST 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 the GST 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,

shall be guilty of an offence.

7.6.3.2 Section 63 - Improperly Obtaining Refund

Any person who knowingly:

i. Causes;

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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 the GST 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, shall be guilty of an offence.

Implications
What does this mean for the industry?
Financial institutions must apply the full suite of AML/CFT 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 act to appropriately manage and mitigate those risks. These requirements
will apply to both new and existing accounts.

7.7 The Three Lines of Defence

The board of directors and senior management of a CMI are ultimately responsible and accountable for
ensuring compliance with AML/CFT laws, regulations and notices. The board of directors and senior
management are responsible for ensuring strong governance and a sound AML/CFT risk management and
controls at the CMI. While certain responsibilities can be delegated to senior AML/CFT employees, final
accountability rests with the CMI's board of directors and senior management.

CMIs 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. CMIs should ensure a strong compliance culture
throughout their organizations, where the board of directors and senior management set the right tone, set a
clear risk appetite and develop a compliance culture throughout their organizations.

7.7.1 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.

The CMI's policies, procedures and controls on AML/CFT should be clearly specified in writing, and
communicated to all relevant employees, officers and representatives in the business units. Employees and
representatives in business units should be adequately trained to be aware of their obligations and provide
clear guidance and instructions on how to ensure the CMI's compliance with prevailing AML/CFT rules,
regulations and notices.

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7.7.2 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 the fulfilment of all AML/CFT obligations of the
CMIs. This implies sample testing and the review of exception reports. The AML/CFT compliance function
should alert the senior management and the board of directors of the CMI of any potential breaches or ML/TF
risks and concerns, including where it believes that the employees, representatives or officers in the line
departments are failing or have failed to adequately address ML/TF risks and concerns. Other support
functions such as operations, human resource or technology also play a role to help mitigate the ML/TF risks
that the CMI faces. 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.

The board and senior management should ensure that AML/CFT compliance functions are adequately
resourced and effectively by:
i. Empowering compliance functions to drive the monitoring and review of risks and controls;
ii. Providing sufficient clarity on compliance function's AML/CFT mandate in the policies and procedures
(particularly for compliance functions which have multiple responsibilities and reporting lines); and
iii. Equipping compliance functions with adequate AML/CFT resources as well as capabilities through
appropriate training200.

7.7.3 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 CMIs and reports to the audit committee of CMIs which is typically formed by the board of directors, or a
similar oversight body. This independent evaluation is achieved through the internal audit or equivalent
function's periodic evaluations of the effectiveness of the CMIs’ compliance with prevailing AML/CFT policies,
procedures and controls.

The CMI should establish policies for periodic AML/CFT internal audits covering areas such as:
i. The adequacy of the CMI's AML/CFT policies, procedures and controls in identifying ML/TF risks,
addressing the identified risks and complying with laws, regulations and notices;
ii. The effectiveness of the CMI's employees, officers and representatives in implementing the CMI's policies,
procedures and controls;
iii. The effectiveness of the compliance oversight and quality control including parameters and criteria for
transaction alerts; and
iv. The effectiveness of the CMI's training of relevant employees, officers and representatives.

Such internal audit function must be independently and adequately resourced, and the board and senior
management must actively oversee the remediation of audit findings. Policies and procedures for periodic
AML/CFT audits, reporting of strengths and gaps, as well as monitoring and closure of follow-up actions should
also be established and implemented.

200 For examples, please refer to Case Studies G and H of the MAS Guidance to CMIs on Enhancing AML/CFT Frameworks and Controls
dated Jan 2019.
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The board and senior management need to institute appropriate reporting structures, so that they are kept
updated regularly on audit issues and are able to assess whether the control gaps and recommended
enhancements raised by auditors have been appropriately addressed in accordance with agreed timelines201.

7.8 Governance

Given the inherent ML/TF risks in CMIs’ businesses, the board and senior management should put in place a
robust AML/CFT risk management framework as an organizational priority, and emphasize the importance of
detecting, disrupting and deterring ML/TF attempts. The board and senior management need to ensure that
the ML/TF risks arising from a CMI’s business are properly assessed and mitigated in line with the
organizational risk appetite.

The board and senior management should also take steps to foster strong AML/CFT practices and behaviors
that permeate the firm. These steps may include, for instance, factoring effectiveness of AML/CFT compliance
in staff performance appraisal at all levels and taking stern actions against individuals who perpetuate
improper AML/CFT conduct202.

The board of directors and senior management of the CMI should also ensure that the CMI's processes are
robust and there are adequate risk mitigating measures in place. The successful implementation and effective
operation of a risk-based approach to AML/CFT depends on the CMI's employees, officers and representatives
having a good understanding of the ML/TF risks inherent in the CMI's business.

Further, the board of directors and senior management should understand the ML/TF risks the CMI is exposed
to and how the CMI's AML/CFT control framework operates to mitigate those risks. This should involve the
board and senior management:
i. Receiving sufficient, frequent and objective information to form an accurate picture of the ML/TF risks
including emerging or new ML/TF risks, which the CMI is exposed to through its activities and individual
business relations;
ii. Receiving sufficient and objective information to assess whether the CMI's AML/CFT controls are adequate
and effective;
iii. Receiving information on legal and regulatory developments and the impact these have on the CMI's
AML/CFT framework; and
iv. Ensuring that processes are in place to escalate important decisions that directly impact the ability of the
CMI to address and control ML/TF risks, especially where AML/CFT controls are assessed to be inadequate
or ineffective.

The board and senior management must also have adequate oversight that AML/CFT controls are effectively
implemented, including effective reporting and escalation mechanisms that would enable the board and
senior management to be promptly apprised of AML/CFT issues. At the same time, the board and senior
management has to devote sufficient management bandwidth to oversee the implementation of AML/CFT
systems and controls, including the adequacy of training and progress of remediation efforts. Where there

201 For examples, please refer to Case Studies I, J and K of the MAS Guidance to CMIs on Enhancing AML/CFT Frameworks and Controls
dated Jan 2019.
202 For examples, please refer to Case Studies A and B of the MAS Guidance to CMIs on Enhancing AML/CFT Frameworks and Controls
dated Jan 2019.

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are implementation issues, the board and senior management is expected to make timely interventions to
address those issues, and to ensure the continuing effectiveness of the CMI’s AML/CFT frameworks and
controls203.

7.9 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. CMIs must ensure that they do not open any anonymous accounts or
accounts with 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.

7.9.1 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 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 legal person or legal arrangement (i.e. non-individual) 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, and the legal form, constitution and
powers that regulate and bind the legal person or legal arrangement to determine the standing of the
legal person or the legal arrangement and the risk score and profile of the legal person or legal
arrangement for money laundering assessment purposes. It is also important to identify the connected
parties of the customer, by obtaining at least the full name and the unique identification number of the
connected party204.

203 For examples, please refer to Case Studies E and F of the MAS Guidance to CMIs on Enhancing AML/CFT Frameworks and Controls
dated Jan 2019.
204 A "connected party": (i) in relation to a legal person (other than a partnership), means any director or any natural person having
executive authority in the legal person; (ii) In relation to a legal person that is a partnership (in the case of a limited liability
partnership or a limited partnership, and includes foreign partnerships), means any partner or manager; and (iii) in relation to a legal
arrangement, means any natural person having executive authority in the legal arrangement.

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• 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 client is a non-individual or where the client appoints one or more natural persons to act on his
behalf in establishing business relations with a CMI, any persons with authority to act on behalf of their
client must also be identified, by obtaining at least the full name, including any aliases, the unique
identification number, residential address, date of birth and nationality of the natural person, and verify
the due authority of each natural person appointed to act on behalf of the client by obtaining at least the
appropriate documentary evidence authorising the appointment of such natural person by the client to
act on his behalf, and the specimen signature of such natural person appointed.

7.9.2 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; and
• Establish objective for the account.

7.9.2.1 Where to get information about client?

• Internet;
• Newspapers and other news sources;
• Company reports;
• Official subscribed databases such as Factiva and Complinet;
• Intermediary introduction certificates and disclosures; and
• Others – e.g. grapevine.

7.9.2.2 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, although they are expensive. Original documents issued
by regulatory bodies are accepted because they are issued by regulatory bodies.

Other sources like newspapers, internet and grapevine must not be taken as accurate but can be used to make
further checks. Information which is not authenticated cannot be relied upon absolutely.

Intermediaries’ disclosures should only be relied upon if you have assessed the intermediary’s reputation
and reliability. Otherwise, it is best to carry out due diligence directly.

7.9.3 Documentation and Verification of Client Information

The identity of the client should be verified using reliable, independent source data, documents, or
information. Where the client is a legal person or legal arrangement, the legal form, proof of existence,

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constitution and powers that regulate and bind the client should be verified, using reliable independent source
data, documents, or information.
Documentation which can be used to verify client information includes:
• Individuals – ID/passports, address proof.
• Corporates – business constitution documents, board resolutions, ID documents of ultimate BOs,
signatories.
• Offshore companies – as above, plus certificate of incumbency and 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 BOs.
In exceptional circumstances where CMIs are unable to verify the client’s identity or obtain the original
document, the CMI should ensure documents obtained are clear and legible and in accordance with the
measures indicated under the Notice.

In exceptional circumstances where the CMI is unable to retain a copy of the documentation used to verify
the customer's identity, the CMI should record the following:
i. Information that the original documentation had served to verify;
ii. Title and description of the original documentation produced to the CMI's employee, representative or
officer for verification, including any particular or unique features or condition of that documentation (e.g.
whether it is worn out, or damaged);
iii. Reasons why a copy of that documentation could not be made; and
iv. Name of the CMI's employee, representative or officer who carried out the verification, a statement by
that employee, representative or officer certifying verification of the information against the
documentation and the date of the verification.

Where the customer is unable to produce an original document, the CMI may consider accepting a copy of the
document:
a. That is certified to be a true copy by a suitably qualified person (e.g. a notary public, a lawyer or a
certified public of professional accountant); or
b. If a CMI's staff independent of the customer relationship has confirmed that he has sighted the original
document.

The CMI should ensure that documents obtained for performing any measures required under the Notice are
clear and legible, and where a document is in a foreign language, translate such documents to allow the CMI
to be reasonably satisfied that the document does in fact provide evidence of the customer's identity.

7.9.4 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 or ThomsonReuters.com.
• Origin of wealth.
• Reputation risk.
• Whether it is a listed company.
• All other relevant information deemed fit and then assess accordingly.
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• Sensitivity criteria.

If the CMI 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 TL, even before a CMI establishes business
relations or undertakes any transaction without opening an account, the CMI shall:
i. Not establish business relations with, or undertake a transaction for the client; and
ii. File a Suspicious Transaction Report (STR) 205 and extend a copy to MAS for information.

7.9.5 Questions to Ask during Client Onboarding

7.9.5.1 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?
• Do the company’s trading records 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 contracts that do not make financial sense?

7.9.5.2 Shareholders and Beneficial Owners

Beneficial owners (BOs) of a customer who is a legal person are:

i. Natural persons who ultimately own the legal person (i.e. owning more than 25% of the legal person);
ii. To the extent that there is doubt to sub-paragraph (i) as to whether the natural persons who ultimately
own the legal person are the beneficial owners or where no natural persons ultimately own the legal
person, the natural persons who ultimately control the legal person or have ultimate effective control of
the legal person; and
iii. Where no natural persons are identified under sub-paragraphs (i) or (ii), the natural persons having
executive authority in the legal person, or in equivalent or similar positions.
BOs of a client who is a legal arrangement (e.g. trusts) are the settlor, trustee, protector, beneficiaries
(including every beneficiary that falls within a designated characteristic or class)206, and any person exercising
ultimate ownership, ultimate control or ultimate effective control over the trust, or persons in equivalent or
similar positions.
CMIs must take reasonable measures to identify the identities of the ultimate BOs. If the client is not a natural
person, reasonable steps must be taken to understand the nature of the client’s business and the client’s
ownership and control structure.
Questions or important issues to consider include:

205 Please note in particular section 48 of the CDSA on tipping-off. Please see Table 11.3.2 above for more information in this regard.
206 In relation to a beneficiary of a trust designated by characteristics or by class, the CMI shall obtain sufficient information about the
beneficiary to satisfy itself that it will be able to establish the identity of the beneficiary (a) before making a distribution to that
beneficiary, or (b) when that beneficiary intends to exercise vested rights.
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• Is the client or any of its shareholders, directors, BOs, authorised signatories and members of management
a politically exposed person (PEP) such as a member of government or the armed forces, or a diplomat
who might have derived unusual wealth from illicit activities?
• Does the client’s 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 client’s profile?
• What is the client’s sources of wealth?
Unless there are doubts about the veracity of the customer due diligence information, or other reasons to
suspect money laundering or terrorism financing, CMIs are not required to inquire if there exists any BO in
relation to a client that is:
i. 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 BOs (imposed through
stock exchange rules, law or other enforceable means);
ii. Certain financial institutions supervised by MAS207;
iii. 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
iv. An investment vehicle where the managers are (a) certain financial institutions supervised by MAS208; or
(b) incorporated or established outside Singapore but are subject to and supervised for compliance with
AML/CFT requirements consistent with standards set by the FATF.
For the purposes of (iii) and (iv) (b) above, the CMI shall document the basis for its determination that the
requirements in those paragraphs have been duly met.

7.9.5.3 Source of Funds

CMIs should assess and validate the plausibility and reasonableness of the client’s net worth against their
understanding of the client’s background by obtaining supporting documentation and/or using public sources
of information as reference points. Examples of independent corroboration measures include citing reliable
publicly available information sources such as corporate registration websites, company websites and news,
as well as obtaining documentary evidence such as companies' financial statements or management accounts,
bank statements, independent third-party professionals' (e.g. tax advisors) confirmations. CMIs are also
reminded to ascertain the legitimacy and credibility of the documents furnished by the customers in this
regard209.

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?

207 Please see Appendices 1 and 2 of the MAS Notice on the Prevention of Money Laundering and Countering the Financing of Terrorism

– Capital Markets Intermediaries (SFA04-N02) for the list of financial institutions supervised by MAS to which this clause applies.
208 Please see Appendices 1 and 2 of the MAS Notice on the Prevention of Money Laundering and Countering the Financing of Terrorism

– Capital Markets Intermediaries (SFA04-N02) for the list of financial institutions supervised by MAS to which this clause applies.
209 For examples, please refer to Case Study P of the MAS Guidance to CMIs on Enhancing AML/CFT Frameworks and Controls dated
Jan 2019.
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• Are the transactions consistent with the client’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 client is in?
• Are the payments to and/or from jurisdictions with inadequate AML/CFT laws?

7.9.6 Risk Based Approach to Client Onboarding

CMIs 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, CMIs are allowed to accord higher or lower risk scores to different clients, and these risk scores
determine how frequently the clients’ accounts should be reviewed.

Generally financial institutions use most of the following risk rating criteria depending on each institution’s
internal policies:
i. PEP (refer to Section 7.9.17);
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 CMIs 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 CMI might use is shown in Figure 7.9.6(1):

Figure 7.9.6(1) – Example of a Risk Evaluation Matrix

Source: FATF Guidance on National Money Laundering and Terrorist Financing Risk Assessment (February 2013)

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CMIs 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.

7.9.6.1 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 and Rankings210, some
countries which are considered low risk or high risk include:
• Low risk countries – Finland, New Zealand, Sweden, Denmark
• High risk countries – Haiti, Myanmar, Nicaragua

CMIs should also take into consideration factors that contribute to country risks, such as those arising from
corruption levels and tax regimes, in addition to referring to the FATF list of jurisdictions with serious AML/CFT
deficiencies. CMIs also need to ensure that they do not omit assessments of ML/TF risks arising from their
customers, products, geographies, transactions, services, and delivery channels211.

7.9.6.2 Business Risk Rating

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 and diamond related businesses; and
• Cash-intensive businesses (e.g. 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 Myanmar. He trades with a

counterpart in Haiti who is in the precious stones industry. Mr A 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 and Rankings 2023, Myanmar is a high-risk country, as is Haiti.

What would you consider this account’s risk score to be?

Myanmar - High
Hati - High
Panama - High

His business activity of 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 Customer Due Diligence and even after proper
validation and acceptance, he should be put on the annual review cycle.

210 The complete list of scores and rankings can be found in the Basel AML Index 2023 Report 12th edition in September 2023
(https://baselgovernance.org/publications/basel-aml-index-2023).
211 For examples, please refer to Case Study C of the MAS Guidance to CMIs on Enhancing AML/CFT Frameworks and Controls dated

Jan 2019.
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The complexity of a client’s ownership or control structure, as well as those of his downstream
asset/investment holding structures should be one of the key indicators in a CMI's risk assessment measure.
Considerations that CMIs can use for assessing the risks posed by the complexity of a customer's structure
include:
i. The number of layers involved in the structure;
ii. The extent to which the layers increases the structure's opacity and impedes the CMI's ability to effectively
monitor for suspicious behaviours and transactions;
iii. Whether the CMI is able to satisfactorily understand and explain the rationale for the layers; and the
structure is consistent with the nature of the client’s profile and his intended purpose for setting up the
account;
iv. Whether the CMI is impeded in understand the corporate entities due to the control structure and nature
of business of the corporate entities, e.g. operating companies held as trust assets controlled by settlors
and the licensed trust company does not have adequate sight over the operating companies, through for
example, obtaining their annual financial statements.

Additional due diligence measures that CMIs can consider adopting to mitigate the risk(s) include:
i. reviewing the financial statements and/or management accounts of all entities within the structure on a
regular basis;
ii. reviewing the entities’ transaction activities regularly to detect unusual or suspicious patterns and
behaviours;
iii. obtaining independent legal or other expert advice (e.g. tax advice) to help the CMI make informed risk
assessments of such structures;
iv. performing the following due diligence measures before accepting operating companies (OpCos) as
injections into their client’s accounts e.g. trust accounts, bespoke investment funds:
a. Understand the profile and operations of the OpCos via meetings with customers and publicly
available sources of information;
b. Obtain the OpCos’ constitutional documents and audited financial statements to ascertain the
legitimacy of the OpCos’ business;
c. Perform site visits to the OpCos’ business premises to detect shell operations; conduct screenings
and/or internet searches for adverse ML/TF news on directors and shareholders of the OpCos;
v. reviewing periodically (at least annually) the activities of the corporate entities/OpCos using financial
statements and bank statements to ascertain whether the transactions are in line with the CMI’s
knowledge of the client’s profile and business, or whenever there is any change in the customer’s structure
or OpCo’s business, whichever is earlier212.

7.9.6.3 Other Business Activities Exposed to Risk

Accountants, Lawyers, Notaries, Trustees, Offshore Trustees – As these professions set up accounts for third
parties, there is a risk that they may become conduits for ML (whereby the beneficiary of the account makes
use of the credibility attached to the accountant, lawyer, notary or trustee’s name as a front).

212 For examples, please refer to Case Study R of the MAS Guidance to CMIs on Enhancing AML/CFT Frameworks and Controls dated
Jan 2019.
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Import/ Export of Retail items, Shipping Companies - These business activities can be used for trade-based
ML 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 (despite there being no funds upon presentation for clearing). 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 cheques. 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. It is only then that 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 to be done on the client. This can happen to CMIs too when payments are
made by cheques for securities purchases. They should have policies in place not to allow release of
securities until the cheques have been cleared.

It is important therefore to look at the country’s risk, the business activity of the client, whether it came
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 onboarding or monitoring the
account.

7.9.7 Non-Face-to-Face Business Relations or Clients

CMIs should develop and implement policies and procedures to address specific risks related with business
relationships or transactions where there is no face-to-face verification. Such policies and procedures should
be implemented when establishing business relations with a client and when conducting ongoing due
diligence.

One reliable and independent source for the purposes of verifying the client’s name, unique identification
number, date of birth, nationality and residential address is MyInfo, which MAS has stated is a verified source
of identification information. MAS will not require CMIs to obtain additional identification documents to
identify a client’s identity and will also not expect CMIs to separately obtain a photograph of the client where
MyInfo is used.213

CMIs 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, CMIs 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 unauthorized access, absence of physical documents, and so on.

The policies and procedures for establishing new client 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

213 MAS Circular on the Use of MyInfo and CDD Measures for Non-Face-to-Face Business Relations (Circular No.: AMLD 01/2018).
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stringent as those that would be performed if there was face-to-face contact. CMIs should also perform
additional checks if there is no face-to-face contact with the business or the client, such as robust anti-fraud
checks, such as through telephone contact with the client at a residential or business number that can be
verified independently, or confirmation of the customer's salary details by requiring the presentation of recent
bank statements from a bank. Where identity is obtained through non-face-to-face means, CMIs should also
apply additional checks to mitigate the risk of impersonation, such as by holding real-time video conference,
verifying the identity of a client with a secure digital signature, or new technology solutions such as biometric
technologies214

CMIs which rely on new technology solutions to perform such checks should ensure that these solutions
continue to facilitate customer due diligence measures that are at least as robust as those performed with
face-to-face contact. This should include a once-off independent assessment215 from a suitably qualified
professional to certify, at the first-year mark after implementation, the effectiveness of the new technology
solution in managing impersonation risk.

7.9.8 Verification of Client

CMIs must complete verification of the identity of a client, natural persons appointed to act on behalf of the
client and BOs of the client:
i. before the CMI establishes business relations with the client; or
ii. before the CMI undertakes any transaction of a value exceeding S$20,000 for the client, where the client
has not otherwise established business relations with the CMI.

However, there are some circumstances where CMIs may establish business relations with a client 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 and provided
the risks of ML/TF can be effectively managed by the CMIs.

A technique which CMIs 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 client
(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. CMIs 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, the
CMI should suspend business relations with the client 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
CMI should terminate business relations with the client; and

214
MAS Circular on the Use of MyInfo and CDD Measures for Non-Face-to-Face Business Relations (Circular No.: AMLD 01/2018).
215 This independent assessment should be retained by the financial institution for as long as that technology solution is in use, and for
a minimum period of 5 years after it ceases to be in use. MAS may request to review the independent assessment as part of MAS'
supervisory process.
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(e) these time limitations are factored into the CMI’s policies, procedures and controls.

Where the CMI is unable to complete the verification (i.e. where the CMI has obtained, screened and verified
all necessary CDD information and received satisfactory responses to all inquiries in relation to such necessary
CDD information), it shall not commence or continue business relations with any client, or undertake any
transaction for the client. In addition, the CMI shall consider if the circumstances are suspicious as to warrant
the filing of a STR.

7.9.9 Screening of Clients

CMIs must conduct screening of their clients, natural persons appointed to act on their behalf, and their
connected parties and BOs before establishing business relationships, irrespective of the clients’ 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, to comply with applicable laws and regulations in
Singapore. Such assets should be reported promptly to the relevant authorities and a STR should be filed (refer
to Section 7.9.20 for details).

Screening is normally conducted as an automated process against available databases, so CMIs 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).

Screening must be performed by the CMI:

i. when, or as soon as reasonably practicable after, the CMI establishes business relations with a client;

ii. when the CMI undertakes any transaction of a value exceeding S$20,000 for any client who has not
otherwise established business relations with the CMI;

iii. on a periodic basis after the CMI establishes business relations with the client; and

iv. where there are any changes or updates to:

a. the lists and information provided by MAS or other relevant authorities in Singapore to the CMI; or

b. the natural persons appointed to act on behalf of a client, connected parties of a client or BOs of a
client.

The results of screening and assessment by the CMI shall be documented.

Periodic screening should also be conducted to monitor any changes in clients’ status or risks, or to assess
whether to impose additional ML/TF risk mitigation measures (e.g. enhanced CDD measures). CMIs should
also ensure that there are adequate arrangements to perform screening of their client database when there
are changes to the lists of sanctioned individuals and entities. CMIs should implement “four-eye checks” or
quality assurance checks on alerts from sanctions reviews before closing an alert.

7.9.10 Simplified Customer Due Diligence (CDD)

As CMIs are allowed to do risk based CDD, simplified CDD can be considered if the ML risks are low, or if the
client is a specified type of financial institution under MAS’ supervision. The following could be considered as
‘’low-risk’’:
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a) For companies listed on the stock exchange and subject to regulatory disclosure requirements (relating to
adequate transparency in respect of BOs (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 client is a specified financial institution under MAS supervision216; and
d) The client is a Singapore government entity. In this regard, the CMI shall only be required to obtain such
information as may be required to confirm that the client is a Singapore government entity as asserted.
The assessment of low risks shall be supported by an adequate analysis of risks by the CMI, and the simplified
CDD measures shall be commensurate with the level of risk, based on the risk factors identified by the CMI.

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 (a) if the CMI suspects that money laundering or terrorist financing is involved, (b) where a
customer or any beneficial owner of the client is from or in a country or jurisdiction in relation to which the
FATF has called for countermeasures, or (c) where a client or any BO of the client is from or in a country or
jurisdiction known to have inadequate AML/CFT measures, as determined by the CMI for itself or notified to
the CMI generally by MAS, or other foreign regulatory authorities.

Where a CMI performs simplified CDD measures, it shall document the details of its risk assessment and the
nature of the simplified CDD measures.

Where a CMI applies simplified CDD measures, it is still required to perform ongoing monitoring of business
relations under the Notice.

Reliance on Third Parties - There is a separate provision permitting a CMI to rely on a third party to perform
the CDD measures (namely, specific types of financial institutions), subject to certain conditions217. However,
CMIs should satisfy themselves that the third party's CDD standards meet regulatory requirements as well as
their own internal policies. CMIs should also assess that the third parties used are licensed and supervised for
compliance with AML/CFT requirements that are consistent with FATF standards and have adequate measures
to comply with those requirements (i) before placing reliance on third parties for CDD and (ii) on a periodic
basis218. Reliance on such a third party does not diminish the responsibility of the CMI in fulfilling its obligations
to the regulations and regulator. In instances where CMI or financial institutions rely on intermediaries to
perform CDD, the CMI or financial institutions would need to immediately obtain the CDD information from
the intermediaries. If this is not done, the CMI should carry out its own due diligence.

A CMI may not rely on a third party to conduct ongoing monitoring of business relations with clients.

216Please see Appendix 2 of the MAS Notice on the Prevention of Money Laundering and Countering the Financing of Terrorism –
Capital Markets Intermediaries (SFA04-N02) for the list of financial institutions supervised by MAS to which this clause applies.
217 Please see Paragraph 9 of the MAS Notice on the Prevention of Money Laundering and Countering the Financing of Terrorism –
Capital Markets Intermediaries (SFA04-N02) for the list of third parties to which a CMI can rely on to perform the CDD measures,
and the criteria for relying on such third party, and Paragraph 9 of the Guidelines to SFA04-N02.
218 For examples, please refer to Case Study O of the MAS Guidance to CMIs on Enhancing AML/CFT Frameworks and Controls dated

Jan 2019.
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The “Reliance on Third Parties” scenario is different from an outsourcing arrangement or agreement. In an
outsourcing scenario, the outsourced service provider performs the CDD measures on behalf of the CMI, in
accordance with the CMI’s AML/CFT policies, procedures and standards, and is subject to the CMI’s control
measures to effectively implement the CMI’s AML/CFT procedures. A CMI may also outsource a part of the
ongoing monitoring processes. For example, the first-level review of alerts from the transaction monitoring
systems, or sanctions reviews, to another party. However, the CMI remains responsible for complying with
ongoing monitoring requirements.219

7.9.11 CDD Measures for Joint Account Holder and Related Transactions

In the case of a joint account, a CMI shall perform CDD measures on all the joint account holders as if each of
them was individually clients of the CMI.

Where a CMI suspects that two or more transactions are or may be related, linked or the result of a deliberate
restructuring of an otherwise single transaction into smaller transactions to evade the CDD measures (i.e. to
ensure that each transaction does not exceed S$20,000), the CMI shall treat the transactions as a single
transaction and aggregate their values for the purpose of AML/CFT and CDD.

7.9.12 CDD Measures for Existing Clients

A CMI shall also perform the CDD measures in relation to its existing clients, based on its own assessment of
materiality and risk, considering any previous measures applied, the time when the measures were last applied
to such existing customers and the adequacy of date, documents or information obtained.

7.9.13 CDD Measures for Non-Account Holders

Where the CMI undertakes any transaction of a value exceeding S$20,000 for any client who does not
otherwise have business relations with the CMI, the CMI shall:

(i) Perform CDD measures as if the client had applied to the CMI to establish business relations; and

(ii) Record adequate details of the transaction to permit the reconstruction of the transaction, including the
nature and date of the transaction, the type and amount of currency involved, the value date, and the
details of the payee or beneficiary.

7.9.14 Enhanced Due Diligence (EDD)

When the Risk Score is high, a CMI must carry out EDD. EDD is conducted on potentially high-risk clients,
geographic 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 CMI 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;

219 Guidelines to Notice SFA04-N02 on Prevention of Money Laundering and Countering the Financing of Terrorism.
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• 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 CMI and the client);
• are companies that have nominee shareholders or shares in bearer form;
• are cash intensive businesses; or
• are from or in, or where any BO of the client is from or in a country or jurisdiction in relation to which the
FATF has called for countermeasures, or known to have inadequate AML/CFT measures, as determined
by the CMI for itself or notified to the CMI generally by MAS or other foreign regulatory authorities.

Examples of higher geographic risk include countries or jurisdictions which have been identified by the FATF
or other credible international bodies such as Transparency International as having significant levels of
corruption, TL, 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.
• when processing the application to establish business relations, the CMI shall understand and as
appropriate, obtain from the customer information as to the purpose and intended nature of business
relations.

For higher risk clients, CMIs should take reasonable means to establish and corroborate their source of wealth
and source of funds. Where it is not possible to obtain reliable supporting documents from the clients (e.g.
audited financial statements, salary slips, documentary evidence of sale of property), CMIs should, at
minimum, validate clients’ representations against independent sources of information (e.g. salary
benchmarking reports from Human Resource consultancy firms, publicly available financial performance data
for businesses of similar scale and nature), and document their assessment of the plausibility of the clients’
wealth. Where necessary, CMIs should consider obtaining more stringent independent verification options
such as obtaining clients’ tax returns filed with the relevant tax authorities or commissioning external
intelligence reports.

7.9.15 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; or
• Non-transparent ownership.

7.9.16 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 match the size of the account
relationship and conduct of the account.
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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 the client for AML/CFT reasons. The decision and reason to close the
account must be recorded and filed.

7.9.17 Politically Exposed Person

7.9.17.1 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; or
• Close associate of such a person.

“Prominent public functions” includes the roles held by heads of state, heads of government, government
ministers, senior civil servants, senior judicial or military officials, senior executives of state-owned
corporations, senior political party officials, members of the legislature and senior management of
international organizations. The MAS has clarified that the definition of PEPs also include Singapore PEPs.

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 CMI should also put in place proper policies and
procedures for EDD including but not limited to the following:
i. Implementing appropriate internal risk management systems, policies, procedures and controls to
identify and determine if a client, any natural person appointed to act on behalf of the client, any
connected party of the client or BO of the client is a PEP, i.e. a PEP policy;
ii. Obtaining the approval from the CMI’s senior management to establish or continue business relations
where the client or BO of the client is a PEP or subsequently a PEP;
iii. Establishing the source of wealth and source of funds of any client or BO by appropriate and reasonable
means; and
iv. Conducting, during the course of business relations with the client, enhanced monitoring of business
relations with the client. In particular, the CMI shall increase the degree and nature of monitoring of the
business relations with and transactions for the client, to determine whether they appear unusual or
suspicious.

7.9.18 Personal Data Protection Act

The PDPA governs the collection, use, disclosure and care of personal data. Therefore, PDPA has implications
for CMIs. It is important for CMIs not to share information without consent or release information to third
parties. Any unauthorised release of information may result in legal action taken against it. It is important that

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CMIs incorporate disclosure clauses related to PDPA in the terms and conditions for account opening to
provide for such situations. In the absence of such provisions, the CMI may breach the PDPA which serves to
maintain the confidentiality of clients’ information. It should be noted that express consent from client is
needed and should be obtained. CMIs should add disclosure clauses or update their Terms and Conditions in
account opening documents and check the “Do Not Call Registry” (DNC) if marketing calls are intended.

However, for the purposes of complying with the Notice, a CMI may, whether directly or through a third party,
collect, use and disclose personal data of an individual220 client, an individual beneficiary of a life insurance
policy, an individual appointed to act on behalf of a client, an individual connected party of a client or an
individual BO of a client, without the respective individual's consent.

CMIs may only under limited circumstances221 provide an individual client, an individual beneficiary of a life
insurance policy, an individual appointed to act on behalf of a client, an individual connected party of a client
or an individual BO of a client with:

i. any access to personal data about the individual that is in the possession or under the control of the CMI,

ii. any information about the ways in which the personal data of the individual under subparagraph (i) has
been or may have been used or disclosed by the CMI, or

iii. any right to correct an error or omission of the personal data about the individual that is in the possession
or under the control of the CMI.

7.9.19 Record Keeping

All documents of checks and transactions with the client (which are required to be obtained or produced to
meet the requirements under the Notice) have 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.

Data, documents and information may be retained as originals or copies, in paper or electronic form or on
microfilm, provided they are admissible as evidence in a Singapore court of law.

Records of data, documents and information on all business relations with or transactions for a client
pertaining to a matter which in under investigation or which has been the subject of a STR should be retained,
in accordance with any request or order from Suspicious Transaction Reporting Office (STRO) or other relevant
authorities in Singapore.

7.9.20 Reporting Suspicious Transactions

CMIs shall keep in mind the provisions in the CDSA222 and in the TSOFA that provide for the reporting to the
authorities of transactions suspected of being connected with money laundering or terrorism financing. CMIs
shall report any suspicious transactions to STRO, Commercial Affairs Department (CAD) of the Singapore Police
Force, as well as extend a copy of the report to MAS for information. Such reports on suspicious transactions

220
For the purposes of this section 7.9.15, "individual" means a natural person, whether living or deceased.
221
Please see Paragraph 12.3 of the MAS Notice on the Prevention of Money Laundering and Countering the Financing of Terrorism –
Capital Markets Intermediaries (SFA04-N02) for the circumstances under which the CMI may do so.
222 Please note in particular section 57 of the CDSA on tipping-off.

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(including attempted transactions) should be submitted regardless of the amount of the transaction. When a
suspicion arises, an investigation should be conducted by Compliance and management, and a STR should be
filed as soon as is reasonably practicable but no later than 15 business days after the case is referred by the
relevant employee, officer or representative, unless the circumstances are exceptional or extraordinary.

As long as there are reasonable grounds for suspicion that funds are/were connected to criminal conduct or
TL, CMIs have an obligation to lodge a STR with STRO and extend a copy to MAS. The CMI does not have to
prove beyond doubt that a client was involved in criminal activity before a STR is filed.

Examples of suspicious transactions or circumstances that may warrant the filing of a STR to the relevant
authorities include the client:
• being unable to complete CDD measures;
• being reluctant, unable, or unwilling to provide any information requested by the CMI; or
• deciding 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 MAS Notice on Reporting of Suspicious Activities and
Incidents of Fraud (CMG-N01). A CMI 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 CMI223. Examples of suspicious transactions are set out in Appendix B of the Guidelines. This
can also be found in Appendix C of this Study Guide.

STRs should be filed to the STRO, as required under the CDSA and the Notice. For incidents of fraud, the CMI
should lodge a police report and submit to the MAS a copy of the report. Where the CMI has not lodged a
police report, it should notify the MAS of the reasons for its decision224.

CMIs should also implement appropriate internal policies, procedures, and controls for meeting their
obligations under the law, including the following:
(i) Establish a single reference point within the organisation to whom all employees, officers and
representatives are instructed to promptly refer all transactions suspected of being connected with ML or
TF, for possible referral to STRO via STRs, and
(ii) Keep records of all transactions referred to STRO, together with all internal findings and analysis done in
relation to them.

7.9.21 Policies and Procedures for Ongoing Monitoring

CMIs must establish appropriate policies and procedures to combat financial crimes and appoint a central
contact point or liaison for regulators. The CMI shall put in place and implement adequate systems and
processes, commensurate with the size and complexity of the CMI.

During the course of business relations, CMIs and representatives should observe the conduct of the client’s
account and transactions undertaken to ensure that the client’s behavior is consistent with their knowledge
of the client, its business and risk profile and where appropriate, the source of funds. Complex or unusually

223 The report shall be in Form F1 – Suspicious Activities and Incidents of Fraud Report of the MAS Notice on Reporting of Suspicious
Activities and Incidents of Fraud (CMG-N01) and shall be lodged not later than 5 working days after the discovery of the activity or
incident by the CMI.
224 MAS Notice on Reporting of Suspicious Activities and Incidents of Fraud (CMG N01).

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large transactions or unusual patterns of transactions that have no apparent or visible economic or lawful
purpose should be given further scrutiny and attention.

CMIs need to ensure that their ongoing monitoring is conducted meaningfully based on patterns of
transactions and aggregated positions (e.g. for client with multiple accounts, and accounts of related client)
to: (a) better understand the risks associated with their client; (b) identify potential ML/TF risks; and (c) report
suspicious transactions225.

CMIs and representatives should make further inquiries into the background and purpose of any unusual
transactions and document their findings with a view to making this information available to the relevant
authorities should the need arise.

Periodic review of client identification and beneficial ownership information should be conducted to ensure
the information is kept up to date, particularly for higher-risk categories of clients. The frequency of CDD
review may vary depending on each client’s risk profile. Higher-risk clients should be subject to more frequent
periodic reviews.

Where there are reasonable grounds for suspicion that existing business relations with a client are connected
with ML or TF, and where the CMI considers it appropriate to retain the client: (a) the CMI shall substantiate
and document the reasons for retaining the client; and (b) the client’s business relations with the CMI shall be
subject to commensurate risk mitigation measures, including enhanced ongoing monitoring. Where the CMI
assesses the client or the business relations with the client to be of higher risk, the CMI shall perform enhanced
CDD measures, which shall include obtaining the approval of the CMI's senior management to retain the client.

For higher-risk categories of clients, a CMI should obtain CDD information as part of its periodic CDD review,
or upon the occurrence of a trigger event as deemed necessary by the CMI, whichever is earlier, and for all
other risk categories of clients, obtain updated CDD information upon the occurrence of a trigger event.
Trigger events include:

(i) when a significant transaction takes place,

(ii) a material change occurs in the way a client’s account is operated,

(iii) the CMI’s policies, procedures or standards relating to the documentation of CDD information change
substantially, and

(iv) the CMI becomes aware that it lacks sufficient information about the client concerned.

7.9.21.1 Tax-Related ML risk

CMIs should exercise vigilance and avoid having a complacent mindset when assessing tax-related ML risks of
their clients. In this regard, a CMI could consider in its assessment of tax-related ML risks, factors such as the
relevant countries’226 compliance with the Exchange of Information on Request standard as well as
commitment to adopt Common Reporting Standard (CRS)/Automatic Exchange of Information, level of
AML/CFT compliance in relation to CDD, and the client’s participation in a tax amnesty programme.

225 For examples, please refer to Case Study Q of the MAS Guidance to CMIs on Enhancing AML/CFT Frameworks and Controls dated
Jan 2019.
226 These could include the customers’ countries of incorporation/origin as well as countries where the customers’ sources of funds

originate from.
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Tax arbitrage opportunities remain despite Foreign Account Tax Compliance Act (FATCA) and CRS
implementation, as not all countries have signed agreements to automatically exchange information with one
another. For instance, a client may choose to change his tax residency to a country without an arrangement
with Singapore to exchange information. Although he may have good reasons for the change in tax residency,
the CMI should enquire further into this change and request for corroborative evidence of the tax legitimacy
of his funds, where relevant. CMIs should be alert to the possibility that the client may be trying to circumvent
CRS requirements to countries where he is a tax resident.

Likewise, tax-related ML risk remains a relevant AML/CFT consideration for client in spite of their participation
in tax amnesty programme. CMIs should not assume that the tax affairs of these clients are fully regularized
and should continue to monitor for tax-related red flags227.

7.9.22 Summary of a “Know Your Client” (KYC) Framework

A KYC framework can be summarized 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 should be reported to the police/
relevant authorities;
• Avoid tipping off.

A flowchart of the KYC process is shown in Figure 7.9.22.

227 For examples, please refer to Case Study N of the MAS Guidance to CMIs on Enhancing AML/CFT Frameworks and Controls dated
Jan 2019.
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Figure 7.9.22: Workflow of the KYC Process

KYC, Client Onboarding and

Customer Due Diligence

• CMI / Representative gathers

information about client
(E.g. age, investment
experience, source of funds).
• Ask questions, perform
identification and verification
checks for red flags and
simulate risk.

7.10 Enterprise-Wide Risk Assessment

In addition to assessing the ML/TF risks presented by an individual client, a CMI 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.

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In conducting an enterprise-wide risk assessment, the broad ML/TF risk factors that the CMI should consider
include target customer markets and segments (i.e. its clients, and the countries or jurisdictions its clients are
from or in); countries or jurisdictions the CMI is exposed to, especially countries or jurisdictions with relatively
higher levels of corruption, organised crimes 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 CMI (i.e. the
products, services, transactions and delivery channels of the CMI).

CMIs should analyse and get a proper understanding of the risk factors that they have included in their
enterprise-wide risk assessment methodologies and ensure that the calibration of the risk scores is aligned
with the degree of ML/TF risks228.

The scale and scope of the enterprise-wide ML/TF risk assessment should be commensurate with the nature
and complexity of the CMI’s business. As far as possible, a CMI’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 CMI’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 CMI shall consider 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 CMI 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 client segments or delivery channels, or the launch of new products and services by the
CMI. The results of these reviews should be documented and approved by the senior management even if
there are no significant changes to the CMI’s enterprise-wide risk assessment.

Risk Mitigation

A CMI shall also develop and implement policies, procedures and controls, which are approved by senior
management, to enable the CMI to effectively manage and mitigate the risks that have been identified by the
CMI or notified to it by MAS or other relevant authorities in Singapore. In addition, the CMI should also monitor
the implementation of those policies, procedures and controls and enhance them if necessary.

Further, the CMI should perform enhanced measures where higher risks are identified, to effectively manage
and mitigate those higher risks, and ensure that the performance of measures or enhanced measures to
effectively manage and mitigate the identified risks address the risk assessment and guidance from MAS or
other relevant authorities in Singapore.

7.11 Risk Controls for New Products, Practices and Technologies

A CMI shall identify and assess the money laundering and terrorism financing risk that may arise in relation to
the development of new products and new business practices, including new delivery mechanisms, and the
use of new or developing technologies for both new and pre-existing products. This assessment of ML/TF risks
in relation to new products, practices and technologies is separate from, and in addition to, the CMI's
assessment of other risks such as credit risks, operational risks or market risks, and should be approved by
senior management and heads of business, risk and compliance.

228For examples, please refer to Case Study D of the MAS Guidance to CMIs on Enhancing AML/CFT Frameworks and Controls dated
Jan 2019.

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A CMI shall undertake the risk assessments, prior to the launch or use of such products, practices and
technologies, and shall take appropriate measures to manage and mitigate the risks. The CMI shall pay special
attention to any new product, new business practice (including new delivery mechanisms) or new or
developing technologies that favors anonymity.

7.12 Operational Risk Controls to Prevent Financial Crimes

7.12.1 Prevention and Operational Control - “A Risk Management Framework”

In the Technology Risk Management Guidelines issued in January 2021229, 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 and controlled areas
• Access control over systems and control of data integrity.

Breaches of security will impact:

• Banking Secrecy provisions in the Banking Act;
• PDPA;
• Civil action;
• Fines;
• Imprisonment terms; and
• Reputation.

7.12.2 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 and 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 and Fraud; and
• Audit.

7.12.3 FRAUD – Prevention and Detection in Summary

• F – Follow Policies and Procedures. If you do not know what these are, ask Compliance where to find
them.

229 MAS Guidelines on Risk Management Practices – Technology Risk (January 2021).
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• R – Report any suspicious transactions or inconsistencies to Compliance and Management through a

whistle blowing process.
• A – Act if you have any suspicion and investigate.
• U – Unite with Management, Compliance and Enforcement Agencies to bring perpetrators to justice.
• D – Disciplinary action to be taken and criminal charges imposed.

7.13 Reporting and Filing Requirements

A CMI shall have policies and procedures in place for the reporting of any suspicious transaction230 or client as
well as an appropriate escalation process. It should have a single reference point to whom all staff are
instructed to promptly refer all transactions which are suspected of ML or used for terrorist activities. This is
to enable quick investigations to take place so that a decision can be taken to file a STR.

Once a decision is made to file an STR, such filing must be done as soon as is reasonably practicable but no
later than 15 business days after the case is referred by the relevant employee, officer or representative,
unless the circumstances are exceptional or extraordinary. Such reports are to be filed with the CAD, 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 CMI 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 STRs filed and the
supporting documents must similarly be maintained and retained for the minimum period.

(For examples of suspicious transactions, please refer to Appendix B of the Guidelines231 which can also be
found in Appendix F of this Study Guide.)

7.14 Penalties and 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-off offences carry with it both fines and imprisonment
terms.

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,

230 Guidelines to MAS Notice SFA 04-N02 on Prevention of Money Laundering and Countering the Financing of Terrorism, Appendix B
– Examples of Suspicious Transactions.
231
Guidelines to MAS Notice SFA 04-N02 on Prevention of Money Laundering and Countering the Financing of Terrorism, Appendix B
– Examples of Suspicious Transactions.
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shall be guilty of an offence.

7.15 Internal Policies, Compliance, Audit and Training

7.15.1 Group Policy

A CMI 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.

A CMI incorporated in Singapore shall develop a group policy on AML/CFT to meet all requirements of the
Notice and extend this to all its branches and subsidiaries in its financial groups. Such group policy should
include procedures for sharing information between its branches and subsidiaries required for the purposes
of CDD and for ML/TF risk management, and for the provision of client, account, and transaction information
from its branches and subsidiaries to the CMI's group-level compliance, audit and AML/CFT functions, when
necessary, for ML/TF risk management purposes.

Where the AML/CFT requirements in the host country or jurisdiction differ from those in Singapore, the CMI
shall require that the overseas branch or subsidiary apply the higher of the two standards, to the extent that
the law of the host country or jurisdictions so permits. In cases of conflict between the law of the host country
and Singapore law such that the overseas branch or subsidiary is unable to fully observe the higher standard,
the CMI shall apply additional appropriate measures to manage the ML and TF risks, report this to MAS and
comply with such further directions as may be given by MAS.

7.15.2 Compliance

Compliance control programmes should include key performance indicators as well as control tests and
procedures to check on PEPs and ensure that 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. At the minimum, an AML/CFT compliance officer at the management level must be appointed,
and all compliance staff must be suitably qualified and has adequate resources and timely access to all client
records and other relevant information which they require to discharge their functions.

7.15.3 Audit

A CMI 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.

7.15.4 Training

A training programme should be in place to ensure that staff are regularly and appropriately trained on
AML/CFT, fraud and other financial crimes prevention. It is important that such training be refreshed at least
once every two years. Training can be in the form of e-learning, face-to-face training (whether internal or
externally provided training, etc.) and such training received should be recorded for audit purposes and
monitored for effectiveness.

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To ensure that staff can fulfil their respective AML/CFT responsibilities, tailored training should be provided
for staff performing different AML/CFT functions. CMI should also consider expounding learning points from
specific real-life case studies, e.g. sharing with front office and other relevant staff suspicious transactions and
client behaviours which could lead or led to filing of STRs that have been encountered by other staff of the
CMI232.

7.15.5 Employee and Representative Hiring233

In addition, there must be proper policies and procedures in place for the proper selection of employees,
appointing officers and representatives and their screening when hiring. The screening procedures applied
should include:

(a) Background checks with past employers,

(b) Screening against ML/TF information sources, and

(c) Bankruptcy searches.

In addition, credit history checks, on a risk-based approach, should be conducted, when hiring employees, and
appointing officers and representatives.

7.16 Effectiveness of AML/CFT Framework

Following a series of AML/CFT inspections by MAS that examined the effectiveness of the AML/CFT
frameworks and controls of CMIs, MAS has published a guidance paper setting out MAS' supervisory
expectations of sound practices for CMIs (Guidance).

In determining whether a CMI's AML/CFT framework and control is effective, MAS applies the following three-
pillar framework in its AML/CFT inspections:

(a) Governance: The board and senior management of a CMI plays an important role to maintain sound
governance frameworks for active management of ML/TF risks. Setting a firm tone from the top with
adequate oversight for effective AML/CFT controls should be a priority. There should be clear lines of
responsibility and active involvement in the deliberation and resolution of AML/CFT issues.

(b) Risk awareness: Strong risk awareness across the CMI is needed to enhance the assessment of the nature
and level of ML/TF risks faced by the firm and strengthen the CMI's ability to properly identify and escalate
risk issues as well as determine appropriate risk mitigation measures. There should be a clear
understanding of individual ownership and accountability for managing ML/TF risks.

(c) Execution: Effective execution of controls within the organization is necessary to achieve desired
outcomes of detecting, preventing and deterring ML/TF risks. There should be proper implementation of
policies, procedures and controls that comply with the requirements in the Notice, effective risk

232 For examples, please refer to Case Studies L and M of the MAS Guidance to CMIs on Enhancing AML/CFT Frameworks and
Controls dated Jan 2019.
233 Guidelines to MAS Notice SFA04-N02 on Prevention of Money Laundering and Countering the Financing of Terrorism, paragraph

14-5.
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assessment and mitigation measures, timely escalation and resolution of red flags, and timely and
effective resolution of past issues.

7.16.1 Governance

To build a robust AML/CFT governance framework, the board and senior management should have adequate
oversight of the effectiveness of AML/CFT systems, processes and controls, and put in place competent and
adequately resourced compliance and independent audit arrangements. There should also be adequate and
timely reporting to the board and senior management on key ML/TF risks issues and concerns. CMIs should
also:

i. Put in place a review process to periodically assess the adequacy and effectiveness of the firm's
AML/CFT compliance frameworks, systems and processes. The enterprise-wide risk assessment
framework should be one of the key areas prioritized for the initial review.

ii. Clearly define the roles and responsibilities of compliance and independent audit functions, and
periodically review their effectiveness in acting as the second and third lines of defence respectively.

iii. Review and enhance AML/CFT reporting processes to ensure that (a) the board and senior management
receives enough and timely updates on key ML/TF risks and challenges so that ML/TF concerns are
actively monitored, decisions on mitigation measures are taken and guidance for effective execution
are provided where necessary; and (b) the remediation of audit findings is timely, effective and
sustainable.

7.16.2 Risk Awareness

To strengthen risk awareness of the board and senior management and staff, CMIs should:

i. Formalize individual ownership and accountability over AML/CFT controls, so that the board and senior
management and staff are aware of and understand their respective AML/CFT responsibilities.

ii. Develop and communicate clear guidance tailored for the various AML/CFT functions. Guidance should
include the nature of ML/TF risks that arises from the firm's business, red flags based on customer
behaviours and account activities, and appropriate escalation and risk mitigation measures.

iii. Review periodically and enhance training programmes and curriculum (e.g. by including new relevant
typologies as and when they arise) to ensure that specialized training is provided for the various
AML/CFT functions and a framework for continuous learning is developed within the CMI. To help staff
obtain a better understanding of the AML/CFT issues they might encounter in their daily work, case
studies and/or role plays should be incorporated, where appropriate, in AML/CFT trainings.

7.16.3 Execution

To support effective execution of AML/CFT frameworks, systems and controls, CMIs should:

i. Periodically review and enhance policies and procedures to ensure that they are aligned with regulatory
requirements and supervisory expectations, as well as any audit recommendations. In this regard, the
corroboration of source of wealth and source of funds of higher risk client and timeliness of periodic
review assessments should be amongst the key focus areas.
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ii. Implement an ongoing risk-based monitoring framework which ensures that enhanced CDD measures
are adequately applied on clients that pose higher ML/TF risks.

iii. Put in place systems and processes for the identification, assessment, and escalation of ML/TF red flags,
as well as the implementation of risk mitigation measures, including filing of STRs, where required.

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Appendix A:
Guidelines on Fit and Proper
Criteria234

1. The criteria for considering whether a relevant person is fit and proper include but are not limited to the
following
(a) Honesty, integrity and reputation;
(b) Competence and capability;
(c) Financial soundness.
2. The failure by a relevant person to meet any one of the criteria set out above may not lead to an automatic
refusal of an application; refusal to enter his name or any additional regulated activity or financial advisory
services in the public register of representatives; revocation of an authorisation; revocation of the status
of an appointed, provisional or temporary representative; or withdrawal of an exemption or other
regulatory action by MAS. The significance and relevance of a relevant person failing to satisfy MAS that
it or he meets a specific criterion depends on:
(a) The seriousness of, and surrounding circumstances resulting in, the relevant person not meeting the
specific criteria;
(b) The relevance of the failure by the relevant person to meet the specific criteria to the duties that
are, or are to be, performed and the responsibilities that are, or are to be, assumed by the relevant
person; and
(c) The passage of time since the failure by the relevant person to meet the specific criteria.
3. In the case where the relevant person is an institution, to establish that it is fit and proper, an institution
should satisfy MAS that:
(a) All of its substantial shareholders meet the fit and proper criteria of these Guidelines;
(b) Each of its directors and chief executive officer, or equivalent persons, meet the fit and proper
criteria of these Guidelines; and
(c) It has in place appropriate recruitment policies, adequate internal control systems and procedures
that would reasonably ensure that the persons that it employs, authorises or appoints to act on its
behalf, in relation to its conduct of the activity regulated under the relevant legislation, meet the fit
and proper criteria of these Guidelines.

234 MAS FSG-G01 Guidelines on Fit and Proper Criteria.

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4. In the case where the relevant person is an exempt financial institution, to establish that it is fit and
proper, the exempt financial institution should have in place appropriate recruitment policies, adequate
internal control systems and procedures that would reasonably ensure that the persons that it employs,
authorises or appoints to act on its behalf, in relation to its conduct of the activity regulated under the
relevant legislation, meet the fit and proper criteria of these Guidelines.

5. In the case where the relevant person is an exempt entity, or a fund management company registered
under paragraph 5(1)(i) of the Second Schedule to the SFR(LCB), to establish that it is fit and proper, an
exempt entity or a registered fund management company should satisfy MAS that:
(a) All of its substantial shareholders or equivalent persons and persons who:
(i) control, directly or indirectly, not less than 20% of the voting power or such equivalent decision-
making power in the exempt entity; or
(ii) acquire or hold, directly or indirectly, not less than 20% of the issued shares or such equivalent
share of ownership of the exempt entity;
(iii) meet the fit and proper criteria of these Guidelines;
(b) Each of its key officers meet the fit and proper criteria of these Guidelines; and
(c) It has in place appropriate recruitment policies, adequate internal control systems and procedures
that would reasonably ensure that the persons that it employs, authorises or appoints to act on its
behalf, in relation to its conduct of the activity regulated under the relevant legislation, meet the
relevant fit and proper criteria of these Guidelines.

Honesty, Integrity and Reputation

6. The factors set out in the following paragraphs are relevant to the assessment of the honesty, integrity
and reputation of a relevant person. The factors include but are not limited to whether the relevant
person:
(a) Has been refused the right or restricted in its or his right to carry on any trade, business or profession
for which a specific license, registration or other authorisation is required by law in any jurisdiction;
(b) Has been issued a prohibition order under any Act administered by MAS or has been prohibited from
operating in any jurisdiction by any financial services regulatory authority;
(c) Has been censured, disciplined, suspended or refused membership or registration by MAS, any other
regulatory authority, an operator of a market, trade repository or clearing facility, any professional
body or government agency, whether in Singapore or elsewhere;
(d) Has been the subject of any complaint made reasonably and in good faith, relating to activities that
are regulated by MAS or under any law in any jurisdiction;
(e) Has been the subject of any proceedings of a disciplinary or criminal nature or has been notified of
any potential proceedings or of any investigation which might lead to those proceedings, under any
law in any jurisdiction;
(f) 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;
(g) Has had any judgment (in particular, that associated with a finding of fraud, misrepresentation or
dishonesty) entered against the relevant person in any civil proceedings or is a party to any pending
proceedings which may lead to such a judgment, under any law in any jurisdiction;
(h) Has accepted civil liability for fraud or misrepresentation under any law in any jurisdiction;
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(i) Has had any civil penalty enforcement action taken against it or him by MAS or any other regulatory
authority under any law in any jurisdiction;
(j) Has contravened or abetted another person in breach of any laws or regulations, business rules or
codes of conduct, whether in Singapore or elsewhere;
(k) Has been the subject of any investigations or disciplinary proceedings or been issued a warning or
reprimand by MAS, any other regulatory authority, an operator of a market, trade repository or
clearing facility, any professional body or government agency, whether in Singapore or elsewhere;
(l) Has been refused a fidelity or surety bond, whether in Singapore or elsewhere;
(m) Has demonstrated an unwillingness to comply with any regulatory requirement or to uphold any
professional and ethical standards, whether in Singapore or elsewhere;
(n) Has been untruthful or provided false or misleading information to MAS or been uncooperative in
any dealings with MAS or any other regulatory authority in any jurisdiction;
(o) In addition to sub-paragraphs (a) to (n), where the relevant person is an individual:
(i) 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;
(ii) 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, trade repository or clearing facility, any
professional body or government agency, whether in Singapore or elsewhere;
(iii) 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 relevant person was a director, partner, substantial
shareholder or concerned in the management of the business, whether in Singapore or
elsewhere;
(iv) Has been dismissed or asked to resign from —
(A) Office;

(B) Employment;

(C) A position of trust; or;

(D) A fiduciary appointment or similar position,

whether in Singapore or elsewhere;
(v) Is or has been subject to disciplinary proceedings by his current or former employer(s), whether
in Singapore or elsewhere;
(vi) Has been disqualified from acting as a director or disqualified from acting in any managerial
capacity, whether in Singapore or elsewhere; and
(vii) Has been an officer found liable for an offence committed by a body corporate as a result of the
offence having proved to have been committed with the consent or connivance of, or neglect
attributable to, the officer, whether in Singapore or elsewhere;
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(p) In addition to sub-paragraphs (a) to (o), where the relevant person is carrying on business in, or is
acting as a representative in respect of, providing credit rating services, is or has been in observance
of the Code of Conduct for Credit Rating Agencies.

Competence and Capability

7. The factors set out in the following paragraphs are relevant to the assessment of the competence and
capability of a relevant person. The factors include but are not limited to:
(a) Whether the relevant person has satisfactory past performance or expertise, having regard to the
nature of the relevant person’s business or duties, as the case may be, whether in Singapore or
elsewhere;
(b) Where the relevant person is an individual who is assuming concurrent responsibilities, whether such
responsibilities 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 under the relevant legislation;
(c) In relation to a relevant person whose activity is regulated by MAS under the FAA, the IA, the Payment
Services Act, SFA or the Trust Companies Act and where the relevant person is an institution, exempt
financial institution or exempt entity, whether its directors or equivalent persons, chief executive
officer or equivalent person, the persons that it employs, authorises or appoints to act on its behalf,
in relation to its conduct of the activity regulated under the relevant legislation, where applicable,
have satisfactory educational qualification or experience, whether in Singapore or elsewhere;
(d) In relation to a relevant person whose activity is regulated by MAS under the FAA or the SFA, whether
the representative of the relevant person has:
(i) Satisfactory educational qualification or experience, relevant skills and knowledge, whether in
Singapore or elsewhere, having regard to the nature of the duties they are required to perform;
and
(ii) Satisfied the requirements stipulated in the Notice on Competency Requirements for
Representatives of Holders of CMS Licence and Exempt Financial Institutions [SFA 04-N22] or
Notice on Competency Requirements for Representatives of Licensed Financial Advisers and
Exempt Financial Advisers [FAA-N26], as the case may be and as may be applicable to the
representative;
(e) In relation to a relevant person whose activity is regulated by MAS under the IA, whether the broking
staff of the relevant person has:
(i) Satisfactory qualification or experience, whether in Singapore or elsewhere, having regard to the
nature of the duties he is to perform; and
(ii) Satisfied the requirements stipulated in the Notice on Minimum Standards and Continuing
Professional Development Requirements for Insurance Brokers and their Broking Staff [Notice
No. MAS 502], as may be applicable to the broking staff;
(f) In relation to an Appointed Actuary or a Certifying Actuary:
(i) whether the actuary has satisfactory past performance or expertise indicating knowledge of the
local life or general insurance market;
(ii) whether an Appointed Actuary is a Fellow of Singapore Actuarial Society (SAS);
(iii) Whether a Certifying Actuary is a member of the SAS and is a Fellow of an association
recognised by the International Actuarial Association.
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Financial Soundness

8. The factors set out in the following paragraphs are relevant to the assessment of the financial soundness
of a relevant person. The factors include but are not limited to, whether the relevant person:
(a) Is or has been unable to fulfil any of its or his financial obligations, whether in Singapore or elsewhere;
(b) Has entered into a compromise or scheme of arrangement with its or his creditors or made an
assignment for the benefit of its or his creditors, being a compromise or scheme of arrangement or
assignment that is still in operation, whether in Singapore or elsewhere;
(c) Is subject to a judgment debt which is unsatisfied, either in whole or in part, whether in Singapore or
elsewhere;
(d) In addition to sub-paragraphs (a) to (c), in the case where the relevant person is an individual:
(i) Is or has been the subject of a bankruptcy petition, whether in Singapore or elsewhere;
(ii) Has been adjudicated a bankrupt and the bankruptcy is undischarged, whether in Singapore or
elsewhere; or
(iii) Is or has been subject to any other process outside Singapore that is similar to those referred to
in sub-paragraph (i) and (ii); and
(e) In addition to sub-paragraphs (a) to (c), in the case where the relevant person is a corporation:
(i) Is or has been the subject of a winding up petition, whether in Singapore or elsewhere;
(ii) Is in the course of being wound-up or otherwise dissolved, whether in Singapore or elsewhere;
(iii) Is or has been a corporation where a receiver, receiver and manager, judicial manager, or such
other person having the powers and duties of a receiver, receiver and manager, or judicial
manager, has been appointed, in relation to, or in respect of any property of, the corporation,
whether in Singapore or elsewhere; or
(iv) Is or has been subject to any other process outside Singapore that is similar to those referred to
in sub-paragraphs (i) to (iii).

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179 | Appendix B – Criteria for the Assessment of a Customer Account Review

Appendix B:
Criteria for the Assessment of a
Customer Account Review235

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 listed 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; Association of Chartered Certified Accountants
(ACCA) Qualifications; Associate Wealth Planner or Certified Financial Planner by the Certified
Financial Planners Board of Standards, USA; Certified Financial Risk Manager Programme by the
Global Association of Risk Professionals, USA; Chartered Alternative Investment Analyst
Examination conducted by the Chartered Alternative Investment Analyst Association, USA; or
Chartered Financial Consultant by the American College, USA);
(c) The customer has transacted in a Listed Specified Investment Products (i.e. a Specified Investment
Product which is approved in-principle for listing and quotation on, or listed for quotation and
quoted on, an organised 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 Listed Specified Investment
Products.

235 SFA04-N12 Notice on the Sale of Investment Products.

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Appendix C:
Criteria for the Satisfaction of the
Customer Knowledge
Assessment236
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; Association of Chartered Certified Accountants (ACCA)
Qualifications; Associate Wealth Planner or Certified Financial Planner by the Certified Financial Planners
Board of Standards, USA; Certified Financial Risk Manager Programme by the Global Association of Risk
Professionals, USA; Chartered Alternative Investment Analyst Examination conducted by the Chartered
Alternative Investment Analyst Association, USA; or Chartered Financial Consultant by the American
College, USA);
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 unlisted specified investment products (other than CIS and ILPs), the customer has
transacted in any unlisted specified investment products (other than CIS and ILPs) at least 6 times in
the preceding 3 years; or
iv. 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 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 to understand an unlisted

specified investment product, but subsequently demonstrates sufficient understanding of the features

236 SFA04-N12 Notice on the Sale of Investment Products.

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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.

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Appendix D:
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
approved in-principle for listing and quotation only on or listed for quotation or only quoted on one or more
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.

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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 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 must
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
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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 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: ______________________

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185 | Appendix E – Excluded Investment Products

Appendix E:
Excluded Investment Products237
Unless otherwise provided here, the terms used or referred to in this Appendix shall have the same meanings
assigned to them in section 2 of the Act or section 2 of the Financial Advisers Act 2001, 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 all of the matters below apply:
(a) the CIS documents of the collective investment scheme require that the manager of the scheme must
not engage in any securities lending transaction or securities repurchase transaction in relation to the
scheme, except where —
(i) the securities lending transaction or securities repurchase transaction (as the case may be) is
carried out for the sole purpose of efficient portfolio management; and
(ii) the total value of securities subject to all the securities lending transactions and securities
repurchase transactions entered into by the manager does not exceed 50% of the net asset
value of the scheme at any time,
and the manager complies with the requirement;
(b) the CIS documents of the collective investment scheme require the manager of the scheme —

237 Class of capital markets products listed in the Schedule to the Securities and Futures (Capital Markets Products) Regulations 2018.

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(i) to invest the property of the scheme only in one or more of the following:
(A) deposits as defined in section 4B (4) of the Banking Act 1970;
(B) gold certificates, gold savings accounts or physical gold;
(C) any capital markets products belonging to a class of excluded investment products;
(D) any product, instrument, contract or arrangement if the investment is solely for the
purpose of hedging or efficient portfolio management; or
(ii) to invest the property of the scheme as follows:
(A) except where sub‑paragraph (B) applies, the manager must invest only in one or more
products, instruments, contracts or arrangements mentioned in sub‑paragraph (i);
(B) the manager may invest in some other product, instrument, contract or arrangement
if:
(BA) there is any change in any written law, regulation, direction, rule or
non‑statutory instrument of the jurisdiction where the scheme is constituted,
operating or investing; and

(BB) following such change, the manager is restricted or prohibited from investing
in any of the products, instruments, contracts or arrangements mentioned in
sub-paragraph (i),

and, in the case of either sub‑paragraph (i) or (ii), the manager invests the property of the scheme
only in one or more of the products, instruments, contracts or arrangements mentioned in
sub‑paragraph (i).

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;
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 in this Appendix 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).

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Appendix F:
Examples of Suspicious
Transactions238
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 flags239.

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 deposited240, 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

238 Guidelines to MAS Notice SFA04-N02 on Prevention of Money Laundering and Countering the Financing of Terrorism, Appendix B.
239The website address for a list of red flag indicators: https://www.police.gov.sg/~/media/Spf/Files/cad/stro/2015-may/industry-
layout/capital-markets-intermediaries/capital-markets-intermediaries---red-flag-indicators.
240 For CMIs, this could mean depositing of funds into trust accounts, margin accounts, as collaterals or for fund management purposes.

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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.

(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.

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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.

(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.

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(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.

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.

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(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.

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Appendix G:
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.

The correct answer for each question is in bold.

Chapter 2 – Licensing and Business Operations

1. Under the SFA, a CMS licence holder must inform MAS if there is change in its records relating to:

a. The name of the CMS licence under which the business is carried on.
b. The back-office settlement infrastructure used by the CMS licence holder.
c. The address of the principal place of business in respect of the licensed activity.
d. The contact numbers of the CMS licence holder’s client pool.

▪ (a) and (c).

▪ (b) and (c).
▪ (a) and (d).
▪ (a) and (b).

2. To satisfy fit and proper criteria eligibility for registration as a Representative, an individual must:
a. Not be dismissed from a fiduciary appointment in Singapore.
b. Not be on prolonged medical leave arising in Singapore.
c. Be of minimally satisfactory tertiary educational qualification in Singapore.
d. Be unable to fulfil any of his or her financial obligations in Singapore.

3. What document must a CMS licence holder obtain from a retail investor, before accepting any
transactions in overseas-listed investment products?
a. A signed acknowledgement that the investor has received verbal explanations about the key risks of
trading in overseas-listed investment products.
b. A signed acknowledgement that the investor has received a Risk Warning Statement that had been
mailed to his home.

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c. A signed acknowledgement of the Risk Warning Statement which highlights the key risks of trading
in overseas-listed investment products.
d. A signed acknowledgement that the investor has been given a verbal explanation of the product key
features and potential returns.

4. A CMS licence holder is required to send monthly statements of accounts to customers unless:

a. The customer has verbally requested not to receive such monthly statements.
b. There is no change to the customer’s account within the month.
c. The information contained in the statement has already been sent to customers by CDP.
d. The customer is an expert investor who consented to using real-time electronic statements.

▪ (a), (b) and (d).

▪ (b), (c) and (d).
▪ (b) and (c).
▪ (c) and (d).

5. Under which circumstances may a CMS licence holder advance its own moneys to a customer’s trust
account?
a. To facilitate positions and transacting in capital market products traded through the customer’s trust
account.
b. To prevent the customer’s trust account from being under-funded.
c. For designation of the customer’s trust account maintained with specified financial institutions.
d. When the moneys are received in the course of business conducted by the CMS licence holder.

Chapter 3 – Market Conduct

6. Jeremy, a representative, traded in some Singapore-listed securities on the Stock Exchange of Thailand
(SET) with material non-public information. He placed large buy orders through a foreign broker on SET.
Would Jeremy’s action be in breach of market conduct rules under the SFA?

a. As the transaction was executed outside Singapore, Jeremy was not in breach of SFA market conduct
rules.
b. As the SFA rules have extra-territorial reach, Jeremy was in breach of the insider trading rules.
c. As the trade was executed by a foreign broker, the trade was not subjected to Singapore market
conduct rules.
d. As payment for the trade was in a foreign currency, Jeremy was in breach of employment of deceptive
devices.

7. Which of the following are typical techniques used in the circulation of false or misleading statements and
information?

a. Using electronic means or media to spread rumours about a security.

b. Passing around ‘hot tips’ by word of mouth.
c. Circulating the audited accounts of a company.
d. Passing out unverified information about a particular security.

▪ (a), (b) and (d).

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▪ (b), (c) and (d).

▪ (b) and (c).
▪ (c) and (d).

8. What would be a concern when a transaction involves connected persons?

a. There will be effective change in beneficial ownership.

b. There is knowledge of generally unavailable information with material effect on security prices.
c. There is a need for approval to be sought for such transactions.
d. The market will react to the change in ownership of the affected securities.

9. Which of the following conditions would a CMS licence holder be subject to when borrowing and lending
securities?

a. The capacities in which the CMS license holder is acting as, whether agent or principal.
b. The specified procedures for the return of specified products lent and borrowed.
c. The debt priorities in which the CMS licence holder enters into, as preferential or subordinate.
d. The value of collateral throughout the arrangement must be 100% of the securities’ market value.

▪ (a), (b) and (d).

▪ (b), (c) and (d).
▪ (b) and (c).
▪ (c) and (d).

10. A CMS licence holder or its Representative, who is guilty of market misconduct under the SFA, may face:

a. civil penalties.
b. civil sanctions.
c. criminal penalties.
d. restraint sanctions.

▪ (a), (b) and (c).

▪ (b), (c) and (d).
▪ (b) and (c).
▪ (c) and (d).

Chapter 4 – Ethics, Codes and Standards of Professional Conduct for Securities Dealing

11. Which of the following best describes an external factor that could affect one’s judgement in ethical
decisions?

a. Authority figures.
b. Moral values.
c. Overconfidence.
d. Rationalisation.

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12. Gaston, an appointed representative, manages large cap equity portfolios for his clients. However,
recently due to the economic recession, the performance of large cap equity markets is lacklustre.
Considering the situation, Gaston reduces the equity exposure of his clients and invests in low-risk fixed
income investments without consulting his clients. By doing so, he averts a fall in his commission fees for
the month.

Which is the most likely ethical threat leading to Gaston’s action?

a. Need for self-actualisation.

b. Need for self-review.
c. Need for self-interest.
d. Need for peer recognition.

13. During a conversation with a prospective client, a remisier stated “I can guarantee that you will make a
20% return on equity investments this year by applying my financial investment models and methods. My
investment methodologies are extremely popular among my clients and I have a solid track record for the
past 15 years. Each year, I develop flexible trading models using business network information, financial
news, economic forecasts and public reports.”

By making such statements, what standard of professional conduct has the remisier violated?

a. Misconduct.
b. Confidentiality.
c. Suitability.
d. Misrepresentation.

14. Which of the following circumstances may result in a breach of the professional standards relating to
conflicts of interest?

a. After receiving a large sell order from a client, a broker executes a personal sell order to avert potential
losses from plummeting market prices caused by the client’s large sell order.
b. An analyst, using a research report prepared under his former employment, submits the report as his
own research at his new employment.
c. An equity analyst fails to disclose her additional compensation agreement with a firm that she is
conducting research on.
d. A full-time portfolio manager at an investment bank offers Mathematics tuitions at his home regularly,
without informing the investment bank.

▪ (a) and (c).

▪ (b) and (c).
▪ (a) and (d).
▪ (a) and (b).

15. When applying the ethical framework to resolve ethical dilemmas, which of the following are factors to
be taken into consideration?

a. Ensuring that your judgement hold personal bias.

b. Executing the best course of action and tracking its progress.
c. Considering the ethical issues involved.
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d. Identifying the enemies who are likely to create a drift.

▪ (a) and (c).

▪ (b) and (c).
▪ (a) and (d).
▪ (a) and (b).

Chapter 5 – Securities Dealing Practice and Skills

16. What is the recommended internal control practice to enhance objectiveness during client risk profiling?

a. Clean-desk principle.
b. Continuity principle.
c. 4-eyes principle.
d. 6-steps principle.

17. A designated market maker, as prescribed by MAS, with net assets of S$50 million and whose entire share
capital is owned by 3 corporations, is classified as a/an

a. Expert Investor.
b. Institutional Investor.
c. Corporate Investor.
d. Accredited Investor.

18. Which of the following statements on product recommendations during the client on-boarding process
are TRUE?

a. There is no need to formally include the client’s investment objective in the account opening
documents prior to trade execution.
b. The onus is on the client to ensure the suitability of the product.
c. The client is legally bound to retain all investment account opening documents.
d. The need to obtain relevant client information at the time of establishing the relationship.

▪ (a) and (c).

▪ (b) and (c).
▪ (b) and (d).
▪ (a) and (b).

19. What constitute best execution practices by a securities dealer?

a. The establishment of sound customer due diligence policies and procedures.

b. The execution of client orders with speed to mitigate possible price volatility.
c. The disclosure to clients must be in written form with the client's consent.
d. The responsibility to adhere to the specific considerations of different order types.

▪ (a), (b) and (d).

▪ (b), (c) and (d).
▪ (b) and (c).
▪ (c) and (d).

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20. Which of the following aretypically undertaken by appointed representatives to develop a strong client-
representative relationship?

a. Ensuring that all risk disclosures are communicated to the clients for them to make informed decisions.
b. Ensuring the priority of execution for client’s orders
c. Ensuring a clear distinction of the roles and capacities in managing and executing trades for their
clients.
d. Ensuring the continual professional development of the appointed representatives on product
knowledge and processes.

▪ (a), (b) and (d).

▪ (b), (c) and (d).
▪ (b) and (c).
▪ (c) and (d).

Chapter 6 – Central Provident Fund Investment Scheme (CPFIS)

21. Out of the CPFIS-Ordinary Account savings, only 35% of the savings can be invested in which products?

a. Fixed deposits.
b. Singapore Government bonds.
c. Corporate bonds.
d. Endowment insurance policies.

22. Which of the following banks is an agent bank included under CPFIS?

a. OCBC Bank.
b. Maybank.
c. HSBC Bank.
d. ICICI Bank.

23. Athena is 45 years old with balances of S$18,000 and S$20,000 in her CPF-Ordinary Account and CPF-
Special Account accounts respectively. She is currently a homemaker with no liabilities. Is Athena eligible
to invest her CPF savings?

a. Yes, as she is not declared an undischarged bankrupt.

b. No, as her CPF balances did not meet the stipulated requirement.
c. No, as she is unemployed.
d. Yes, as she is above 18 years of age.

24. For Exchange-Traded Funds to be included under the CPFIS Scheme, they must:

a. Be traded in Singapore dollars.

b. Not be placed on an SGX-ST watch-list.
c. Be listed on SGX-ST.
d. Comply with CPF Investment Guidelines.

▪ (a) and (c).

▪ (b) and (c).
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▪ (b) and (d).

▪ (c) and (d).

25. Which document must be produced in order to entitle a claim of any residual CPFIS investments from the
agent bank or product provider, upon the death of a CPFIS member?

a. Option to Administer.
b. Letter of Entitlement.
c. Entitlement of Nominee.
d. Grant of Probate.

Chapter 7 – Prevention of Financial Crimes

26. Zenia buys luxury goods and resells them to unrelated clients. She then deposits the sales proceeds into
multiple bank accounts. Which stage of money laundering does this relate to?

a. Initiation.
b. Integration.
c. Layering.
d. Placement.

27. Which of the following statutes governs money laundering in Singapore?

a. Banking Act.
b. Securities and Futures Act.
c. Suppression of Financing of Terrorism Act.
d. Corruption, Drug Trafficking and Other Serious Crimes (Confiscation of Benefits) Act.

28. The document retention policy under the MAS Notice on Prevention of Money Laundering and Countering
the Financing of Terrorism requires documents to be retained for a period of at least ________.
a. 1 year.
b. 3 years.
c. 5 years.
d. 7 years.

29. Harrison is a business development officer of Cosmos Brokerages. He is currently applying Know Your
Customer (KYC) procedures for the opening of a new brokerage account. Which of the following would be
considered critical steps to undertake?

a. Properly identifying and verifying the client’s identity.

b. Identifying the client’s source of funds.
c. Determining the marital status of the client opening the account.
d. Determining the types of business activity of the client.

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▪ (a), (b) and (d).

▪ (b), (c) and (d).
▪ (b) and (c).
▪ (c) and (d).

30. Upon learning that a client is on a money laundering sanctions list, what action must a trading
representative take?

a. Immediately freeze the account and report this to the authorities.

b. Immediately freeze the account and delete all relevant records and particulars.
c. Continue to closely monitor transactions on the affected account.
d. Transfer the client’s account to another trading representative or trading firm.

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Appendix H:
Essential Readings

1. Securities and Futures Act

Available online on Attorney-General’s Chambers website - Singapore Statutes Online
(https://sso.agc.gov.sg)

2. Securities and Futures (Licensing and Conduct of Business) Regulations

Available online on Attorney-General’s Chambers website – Singapore Statutes Online
(https://sso.agc.gov.sg)

3. Securities and Futures (Financial and Margin Requirements for Holders of Capital Markets Services
Licences) Regulations
Available online on Attorney-General’s Chambers website – Singapore Statutes Online
(https://sso.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 (https://www.mas.gov.sg/)

5. Guidelines on Fit and Proper Criteria

(Guideline No. FSG-01)
Available online on Monetary Authority of Singapore website (https://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 https://www.mas.gov.sg/)

7. Notice on Competency Requirements for Representatives of Holders of CMS Licence and Exempt
Financial Institutions
(Notice No. 04-N22)
Available online on Monetary Authority of Singapore website https://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 https://www.mas.gov.sg/)

9. Notice on Sale of Investment Products

(Notice No. SFA 04-N12)

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Available online on Monetary Authority of Singapore website https://www.mas.gov.sg/)

10. Banking Secrecy Act

Available online on Attorney-General’s Chambers website – Singapore Statutes Online
(https://sso.agc.gov.sg)

11. Personal Data Protection Act

Available online on Attorney-General’s Chambers website – Singapore Statutes Online
(https://sso.agc.gov.sg)

12. Central Provident Fund Investment Scheme

Available online on Central Provident Fund website (https://www.cpf.gov.sg)

13. Corruption, Drug Trafficking and Other Serious Crime (Confiscation of Benefits) Act
Available online on Attorney-General’s Chambers website – Singapore Statutes Online
(https://statutes.agc.gov.sg/)

14. Mutual Assistance in Criminal Matters Act

Available online on Attorney-General’s Chambers website – Singapore Statutes Online
(https://sso.agc.gov.sg)

15. Terrorism (Suppression of Financing) Act

Available online on Attorney-General’s Chambers website – Singapore Statutes Online
(https://sso.agc.gov.sg)

16. 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 (https://www.mas.gov.sg)

17. 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 (https://www.mas.gov.sg)

18. MAS Notice on Prevention of Money Laundering and Countering the Financing of Terrorism – Banks
(Notice No. 626)
Available online on Monetary Authority of Singapore website (https://www.mas.gov.sg)

19. Income Tax Act

Available online on Attorney-General’s Chambers website – Singapore Statutes Online
(https://sso.agc.gov.sg)

20. Goods and Services Tax (GST) Act

Available online on Attorney-General’s Chambers website – Singapore Statutes Online
(https://sso.agc.gov.sg) (

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The Institute of Banking & Finance IBF Assessment Centre
10 Shenton Way 20 Anson Road
MAS Building #13-07/08 Twenty Anson #05-01
Singapore 079117 Singapore 079912
www.ibf.org.sg
CAPITAL MARKETS AND FINANCIAL ADVISORY SERVICES
(CMFAS) EXAMINATIONS

STUDY GUIDE

RES 2B RULES, ETHICS AND SKILLS FOR

DERIVATIVES DEALERS OF NON-EXCHANGE
MEMBERS
i|

© ALL RIGHTS RESERVED

The Institute of Banking and Finance

February 2024 (Version 1.0)

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 and 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 that are correct, current or applicable as of 30 September 2023. For the
latest set of rules and regulations, the reader or user is advised to refer to the latest set of rules and regulations
issued by the relevant regulatory authorities.

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.

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Acknowledgements | ii

Acknowledgements
IBF would like to express its gratitude to all members of the CMFAS Examinations Board and Industry Expert
Panel – Derivatives for their contributions and support in the development of the CMFAS Study Guides and
Examinations.

Study Guide Writers

IBF would like to thank the following study guide writers* for reviewing and updating the Study Guide text:

Mr Jeth Lee, Vice President & Lead Counsel, Singapore Exchange Limited
Mr Leng Hoe Lon, Portfolio Manager, Tudor Investment Corporation

[* Information accurate as at date of appointment.]

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iii | Preface

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

The objective of the CMFAS RES 2B – Rules, Ethics and Skills for Derivatives Dealers of Non-Exchange Members
(RES 2B) Examination 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
derivatives dealing; ethical codes, considerations, and standards of professional conduct relating to derivatives
dealing; and fundamental skills relating to derivatives 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 appointed representatives are lodged with the
Monetary Authority of Singapore (MAS) on the Public Register via the Representative Notification Framework
(RNF), before they can commence any regulated activities. For details, please refer to the MAS Notice on
Competency Requirements for Representatives of Holders of Capital Markets Services Licence and Exempt
Financial Institutions under the Securities and Futures Act 2001 (SFA 04-N22).

The Study Guide contains regulatory requirements for Capital Markets Services licence holders and their
representatives conducting regulated activities of dealing in capital markets products under the Securities and
Futures Act. Candidates should take note that some of the regulatory requirements, in particular, the business
conduct requirements, are also applicable to exempt financial institutions (EFIs), such as banks and their
representatives, who conduct the same type of regulated activities. For example, Regulation 54 of the
Securities and Futures (Licensing and Conduct of Business) Regulations applies certain provisions of the
Securities and Futures Act 2001 to EFIs and their representatives.

Candidates who have passed the CMFAS Examinations are encouraged to continue their learning journey by
attending IBF accredited programmes. For more information, please visit www.ibf.org.sg.

Organisation of the Study Guide

The Study Guide consists of 7 Chapters, starting with rules and regulations governing derivatives dealing,
followed by the ethical codes and conduct and elementary skills relating to derivatives dealings in Singapore.

The emphasis in each Chapter is to ensure that candidates have a good understanding of the rules and
regulations, ethical principles and skill relevant to perform their roles effectively. 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 the topics discussed.

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A summary of each Chapter is provided below:

Chapter 1: The Capital Markets Industry in Singapore and 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 licensing requirements, procedures and regulations governing the business
operations of Capital Markets Services licence holders and representatives in derivatives
dealing.

Chapter 3: Market Conduct

Highlights the rules and regulations prohibiting market misconduct in relation to derivatives
dealing.

Chapter 4 Over-the-Counter Derivatives

Describes the main features of Over-the-Counter (OTC) derivatives contracts and general
practices in dealing OTC derivatives.

Chapter 5 Ethics, Codes and Standards of Professional Conduct for Derivatives Dealing

Defines ethics and ethical behaviour in the context of derivatives dealing. Discusses ethical
issues or dilemmas faced by derivatives dealing representatives, and the applicable ethical
codes and professional standards of conduct that derivatives dealers should uphold in their
professional capacities.

Chapter 6 Derivatives Dealing Practices and Skills

Describes the key aspects of trading strategy formulation, implementation, monitoring, and
execution. Discusses how important risks relating to derivatives dealing are managed.

Chapter 7 Prevention of Financial Crimes

Discusses the regulatory requirements for the prevention of financial crimes, including anti-
money laundering and countering the financing of terrorism.

To assist candidates in their preparation of the examination, we have included a set of Review Questions with
the answers highlighted in bold.

A list of essential readings is also provided in Appendix G. Candidates should ensure that they complete the
essential readings before attempting the examination.

The Appendices are provided for candidates’ reference and to enhance their understanding of the important
concepts covered in this Study Guide.

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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 Updates to the Study Guides Page on the IBF website for the latest updates.

Important Notes about the Examination

The RES 2B examination is conducted at the IBF Assessment Centre.

The examination includes questions that test candidates’ knowledge, understanding, and application of the
relevant rules, ethics and skills for derivatives dealing.

The examination comprises 60 questions multiple-choice questions and multiple-response questions, with a
duration of 1 hour and 30 minutes. The passing mark is 75%.

Candidates should note that they will NOT be tested on the amount of penalties applicable under the laws
and regulations, associated codes, notices and guidelines governing dealing in capital markets products.

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

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Table of Contents
Acknowledgements .............................................................................................................................................. ii
Preface ................................................................................................................................................................. iii
RES 2B – Rules, Ethics and Skills for Derivatives Dealers of Non-Exchange Members.................................... iii
Organisation of the Study Guide ..................................................................................................................... iii
Study Guide Updates ........................................................................................................................................ v
Important Notes about the Examination ......................................................................................................... v
Table of Contents ................................................................................................................................................ vi
Chapter 1: The Capital Markets Industry in Singapore and Participants in the Capital Markets ....................... 1
1.1 Introduction ......................................................................................................................................... 2
1.2 Institutional Participants in the Capital Markets ................................................................................. 3
1.3 The Regulatory Framework and Regulatory Bodies............................................................................. 5
Chapter 2: Licensing and Business Operations ................................................................................................. 13
2.1 Introduction ....................................................................................................................................... 13
2.2 Grant of Capital Markets Services Licence ......................................................................................... 14
2.3 Registration of Representatives with MAS ........................................................................................ 20
2.4 Regulatory Requirements for Advertising.......................................................................................... 24
2.5 Confidentiality of Customer Information........................................................................................... 25
2.6 Opening and Management of Customer Trading Account ................................................................ 27
2.7 Keeping of Books and Audit Trails ..................................................................................................... 30
2.8 Customers’ Moneys and Assets ......................................................................................................... 33
2.9 Register of Interests in Listed Specified Products .............................................................................. 42
Chapter 3: Market Conduct .............................................................................................................................. 43
3.1 Introduction ....................................................................................................................................... 43
3.2 Market Misconduct under the SFA .................................................................................................... 44
3.3 False Trading and Market Rigging Transactions ................................................................................ 45
3.4 Manipulation of Prices of Derivatives Contracts and Cornering........................................................ 46
3.5 Market Manipulation in relation to Securities and Securities-based Derivatives Contracts ............. 46
3.6 False or Misleading Statements and Information.............................................................................. 47
3.7 Bucketing............................................................................................................................................ 48
3.8 Fraudulently Inducing Persons to Deal in Capital Markets Products ................................................. 48
3.9 Employment of Manipulative and Deceptive Devices ....................................................................... 49

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3.10 Insider Trading ................................................................................................................................... 50

3.11 Dissemination of Information about Illegal Transactions .................................................................. 52
3.12 Non-Disclosure of Orders ................................................................................................................... 53
3.13 Withdrawal and Withholding of Orders............................................................................................. 53
3.14 Trading against Customer Orders ...................................................................................................... 53
3.15 Front Running and Priority of Customer Orders ................................................................................ 53
3.16 Cross Trades ....................................................................................................................................... 54
3.17 Churning ............................................................................................................................................. 55
3.18 Overtrading ........................................................................................................................................ 55
3.19 Pre-arranged Trades .......................................................................................................................... 56
3.20 Penalties for Misconduct under the SFA............................................................................................ 56
Chapter 4: Over-the-Counter Derivatives......................................................................................................... 58
4.1 Overview on Over-the-Counter Derivatives ...................................................................................... 58
4.2 Regulatory Regime for Dealing in Over-the-Counter Derivatives ...................................................... 60
4.3 SGX-DC Clearing Rules for Over-the-Counter Derivatives ................................................................. 61
4.4 Risk Disclosure.................................................................................................................................... 62
4.5 General Over-the-Counter Derivatives Dealing Practices .................................................................. 62
Chapter 5: Ethics, Codes and Standards of Professional Conduct for Derivatives Dealing .............................. 64
5.1 Introduction ....................................................................................................................................... 65
5.2 The Ethical Framework ...................................................................................................................... 66
5.3 Ethical Dilemmas ................................................................................................................................ 69
5.4 Professional Ethics, Codes and Standards of Professional Conduct for Derivatives Trading ............ 70
5.5 Best Execution Practices for Dealing in Derivatives Contracts .......................................................... 89
5.6 Applying the Ethical Framework to Resolve Ethical Dilemmas.......................................................... 92
Chapter 6: Derivatives Dealing Practices and Skills .......................................................................................... 95
6.1 Introduction ....................................................................................................................................... 95
6.2 Analysis of Market Information ......................................................................................................... 96
6.3 Trading Strategy Formulation ............................................................................................................ 97
6.4 Trading Strategy Implementation & Monitoring ............................................................................. 100
6.5 Customer Account and Know-Your-Customer Requirements ......................................................... 104
6.6 Specified Investment Products Trading Account ............................................................................. 105
6.7 Risk Management ............................................................................................................................ 109
Chapter 7: Prevention of Financial Crimes ..................................................................................................... 117
7.1 Introduction ..................................................................................................................................... 118
7.2 Anti-Money Laundering and Counter-Terrorism Financing Regime in Singapore ........................... 124
7.3 The Regulatory Framework of Financial Crimes – Rules and Regulations ....................................... 125

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7.4 MAS Notices & Regulations on Prevention of Money Laundering and Countering the Financing of
Terrosism ......................................................................................................................................... 132
7.5 Targeted Financial Sanctions related to Anti – Money Laundering and Terrorism Financing ......... 133
7.6 Designation of Tax Crimes as Money Laundering Predicate Offences in Singapore ....................... 134
7.7 The Three Lines of Defence.............................................................................................................. 137
7.8 Governance ...................................................................................................................................... 139
7.9 Client Onboarding ............................................................................................................................ 140
7.10 Enterprise-Wide Risk Assessment .................................................................................................... 160
7.11 Risk Controls for New Products, Practices and Technologies .......................................................... 161
7.12 Operational Risk Controls to Prevent Financial Crimes ................................................................... 161
7.13 Reporting and Filing Requirements ................................................................................................. 162
7.14 Penalties and Risks for Non- Compliance ........................................................................................ 163
7.15 Internal Policies, Compliance, Audit and Training ........................................................................... 163
7.16 Effectiveness of AML/CFT Framework ............................................................................................. 165
Appendix A: Criteria for the Assessment of a Customer Account Review ..................................................... 167
Appendix B: Criteria for the Satisfaction of the Customer Knowledge Assessment ...................................... 168
Appendix C: Risk Warning Statement for Overseas-Listed Investment Products .......................................... 170
Appendix D: Excluded Investment Products .................................................................................................. 173
Appendix E: Examples of Suspicious Transactions ......................................................................................... 174
Appendix F: Review Questions ....................................................................................................................... 179
Appendix G: Essential Readings ...................................................................................................................... 184

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Chapter 1:
The Capital Markets Industry in
Singapore and Participants in the
Capital Markets
Learning Objectives
The candidate should be able to understand:
✓ 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 and self-regulating organization in the regulation of the derivatives
industry:
• Monetary Authority of Singapore (MAS);
• Singapore Exchange Limited (SGX);
• Singapore Exchange Regulation Pte Ltd (SGX RegCo);
• Singapore Exchange Securities Trading Ltd (SGX-ST);
• The Central Depository (Pte) Limited (CDP);
• Singapore Exchange Derivatives Trading Limited (SGX-DT);
• Singapore Exchange Derivatives Clearing Limited (SGX-DC);
• Intercontinental Exchange Futures Singapore Pte Ltd (IFSG);
• Intercontinental Exchange Clear Singapore Pte Ltd (ICE Clear Singapore);
• Asia Pacific Exchange Pte Ltd (APEX); and
• Asia Pacific Clear Pte Ltd (APEX Clear).
✓ Origin of the relevant rules and requirements governing the trading and clearing of derivatives
including:
• Securities and Futures Act (SFA);
• Securities and Futures Regulations (SFR);
• SGX-ST Mainboard and Catalist Rules;
• SGX-ST Trading Rules;
• CDP Clearing Rules;
• CDP Delivery versus Payment (DVP) Rules;
• CDP Depository Rules;
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• SGX-DT Futures Trading Rules;

• SGX-DC Clearing Rules;
• IFSG Trading Rules and Procedures;
• ICE Clear Singapore Clearing Rules and Procedures;
• APEX Trading Rules and Procedures; and
• APEX Clear Clearing Rules and Procedures.

1.1 Introduction

1.1.1 The Capital Markets in Singapore

1.1.1.1 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.

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.

1.1.1.2 The Secondary Market

Trading activity that takes place outside of the initial capital-raising activities (i.e. in the primary market) takes
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, issuer or company
warrants and leverage certificates.

Exchanges in Singapore, namely SGX, APEX and IFSG, provide capital-raising and risk management
opportunities to the global market through their product offerings. SGX’s product suite includes securities
such as shares, bonds, company and issuer warrants, as well as derivatives such as futures and options. APEX
and IFSG provides market participants with a variety of trading and hedging instruments in the financial and
commodities markets.

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1.1.2 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 capital markets product.

An exchange provides a centralized market where buyers and sellers can congregate. This allows for the
efficient discovery of the prices and quantities at which each participant is interested to buy or sell capital
markets products. 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.

1.1.3 Financial Intermediaries

There are many 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 already 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 who matches selling interest and buying interest, or route sell or buy orders to an exchange for
matching.

1.2 Institutional Participants in the Capital Markets

1.2.1 Banks

There are different types of banks licensed under the Banking Act 1970 which may provide capital markets
services, e.g. dealing in capital markets products1.

The types of banking licences include:

• Qualifying Full Banks/ Full Banks;
• Wholesale Banks; and
• Merchant Banks.

1 SFA Second Schedule, Part II – Interpretation -“Dealing in capital markets products” means (whether as principal or agent) making
or offering to make with any person, or inducing or attempting to induce any person to enter into or to offer to enter into any
agreement for or with a view to acquiring, disposing of, entering into, effecting, arranging, subscribing for, or underwriting any
capital markets products.
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1.2.1.1 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
also provide capital markets products, custodial business, underwriting, corporate finance activities and some
even offer insurance policies as distributors for insurance companies. As 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, accredited and institutional
clients.

1.2.1.2 Wholesale Banks

Wholesale Banks provide the full range of banking business but are restricted in their deposit taking activities.
Wholesale Banks are allowed to take foreign currency deposits in any amount but are restricted to take
deposits in Singapore dollars. They can accept Singapore dollar fixed deposits of at least S$250,000. While they
may operate Singapore dollar savings or current accounts, such Singapore dollar savings or current account
should not be interest-bearing when such account is opened for a Singapore resident who is a natural person,
except with prior approval of MAS.

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 investment.

1.2.1.3 Merchant Banks

Merchant Banks are licensed under section 55S of the Banking Act since 1 July 2021. They are not allowed to
accept Singapore dollar deposits or borrow Singapore dollars from the public in any form except from banks,
finance companies, their shareholders and companies controlled by their shareholders. Merchant banks are
not found in the retail space, but can undertake banking business or deposit taking business in accordance
with the Banking Act and Banking (Merchant Banks) Regulations 2021.

1.2.2 Capital Markets Services (CMS) Licence Holders

CMS licence holders which deal in derivatives such as futures contracts include (amongst others):
• Broker/dealer companies; and
• Fund management companies.

1.2.2.1 Broker/Dealer Companies

Apart from banks, broker/dealer companies are another class of financial intermediaries. Unlike banks, these
companies do not engage in deposit-taking activities, but instead specialize 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 services to their customers, allowing the customers to trade on
the exchange2.

2 Refer to Sections 1.3.1.3 – 1.3.1.11 for details about the Trading and Clearing Members of the various Approved Exchanges of the
securities and futures markets in Singapore.
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1.2.2.2 Fund Management Companies

These companies hold a CMS licence to carry out fund management activities. Since 2012, MAS requires all
fund management companies to be registered or licensed in order to regulate all the players in the market
that provide fund management services.

Fund management companies manage investments on behalf of investors, which include both institutions and
individuals. Examples of institutions that engage the professional investment management services provided
by fund management companies include corporations, insurance companies, pension funds and sovereign
wealth funds. The investments can be in the form of segregated mandates or collective investment schemes,
including unit trusts. Individuals can invest in the unit trusts managed and offered by fund management
companies through distributors such as retail banks, private banks and financial advisers.

Fund management companies invest in different asset classes including bonds and equities, forming different
portfolios to meet the investment objectives of the investors.

1.2.2.3 Others (Non-CMS Licence Holders) – Remote Trading and Clearing Members

Overseas-based remote trading and clearing members of a Singapore exchange, recognised market operator
or clearing house are exempted from holding a CMS licence3. This is provided that the remote member:

i. is incorporated outside of Singapore;

ii. is a member of an approved exchange or clearing house or recognised market operator or clearing house
under the SFA, as the case may be, on which the relevant securities or derivatives are traded or cleared;

iii. does not serve any customer resident in Singapore;

iv. is not a regulated financial institution in Singapore;

v. carries on business in a jurisdiction where the relevant regulator has an arrangement with the MAS for
information exchange and co-operation in respect of derivatives supervision; and

vi. is regulated in respect of such activities by the relevant regulator in its home jurisdiction.

In addition, a SGX remote clearing member cannot have FI affiliate regulated by MAS. This criterion does not
apply to a remote trading member.

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:

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

3 Securities and Futures (Exemption from Requirement to Hold CMSL) Regulations, Regulation 4.
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ii. Maintaining a safe and efficient financial market infrastructure;

iii. Ensuring fair, orderly and transparent organized markets; and

iv. Keeping customers well-informed and empowered.

To achieve these objectives, the securities and derivatives markets, in particular, are regulated by regulatory
bodies including:
• MAS;
• SGX
• SGX RegCo;
• SGX-ST;
• CDP;
• SGX-DT;
• SGX-DC;
• IFSG;
• ICE Clear Singapore;
• APEX; and
• APEX Clear.

These regulatory bodies are responsible for originating and issuing the relevant rules and requirements
governing the trading and clearing of securities and derivatives trading, which include the:
• SFA and SFR;
• SGX-ST Mainboard and Catalist Rules;
• SGX-ST Trading Rules;
• CDP Clearing Rules;
• CDP DVP Rules;
• CDP Depository Rules;
• SGX-DT Futures Trading Rules;
• SGX-DC Clearing Rules;
• IFSG Rules and Trading Procedures;
• ICE Clear Singapore Clearing Rules and Procedures;
• APEX Rules and Trading Procedures; and
• APEX Clear Rules and Procedures.

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1.3.1 Roles of the Regulatory Bodies and Self-Regulatory Organisations

1.3.1.1 Monetary Authority of Singapore

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:

i. 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;

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

iii. Manage the official foreign reserves of Singapore; and

iv. Develop Singapore as an international financial centre.

MAS is responsible for, amongst others, the administration of the following legislations which are relevant to
the capital markets industry, including:
• SFA, the main legislation governing the capital markets industry in Singapore;
• Securities and Futures (Licensing and Conduct of Business) Regulations (SFR(LCB));
• Securities and Futures (Organised Markets) Regulations;
• Securities and Futures (Clearing Facilities) Regulations;
• Securities and Futures (Financial and Margin Requirements for Holders of Capital Markets Services
Licence) Regulations (SFR(FMR));
• Securities and Futures (Corporate Governance of Approved Exchanges, Approved Clearing Houses and
Approved Holding Companies) Regulations; and
• Financial Services and Markets Act 2022.

The SFA gives MAS a wide range of powers to enable the sound development of the capital markets. These
include (but are not limited to) the power to:
a. Approved exchanges and clearing houses;
b. Review any amendments to rules and regulations of the exchanges and clearing houses;
c. 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;
d. Inspect the books of an exchange, a person operating an exempt market, a clearing house, a person
operating an exempt clearing facility, a holder of a CMS licence, an exempt person or a representative;
and
e. Conduct investigation into alleged or suspected contravention of any provision of the SFA or written
direction issued under the SFA.

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1.3.1.2 Singapore Exchange Limited

SGX is Asia’s leading and trusted market infrastructure, operating equity, fixed income and derivatives markets
to the highest regulatory standards. As Asia’s most international, multi-asset exchange, SGX provides listing,
trading, clearing, settlement, depository and data services, with a large proportion of listed companies and
bonds originating outside of Singapore.

SGX is the world’s most liquid offshore market for the benchmark equity indices of China, India, Japan and
ASEAN and offers commodities and currency derivatives products. Headquartered in AAA-rated Singapore,
SGX is globally recognised for its risk management and clearing capabilities.

SGX offers a fully integrated value chain from trading and clearing, to settlement and depository services.

In conducting its regulation of the markets, SGX has adopted six guiding principles:

i. 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.

ii. 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.

iii. Guiding Principle Three: Risk-Based Targeting of Regulatory Activities - SGX adopts a pragmatic risk-
based approach. Supervisory activities focused on Guiding 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.

iv. 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.

v. 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.

vi. 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) of the Singapore Police Force and the Accounting and Corporate
Regulatory Authority (ACRA) on matters such as regulatory policies, risk management, regulatory oversight,
and enforcement actions.

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1.3.1.3 Singapore Exchange Derivatives Trading Limited

SGX-DT, established in 1978, is a wholly owned subsidiary of SGX. It carries on the business of establishing,
conducting and regulating a futures market with underlying assets such as 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 the United States. These are contained in the Futures Trading Rules, which govern
SGX-DT Trading Members.

1.3.1.4 Singapore Exchange Derivatives Clearing Limited

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

i. Products listed and traded on SGX-DT; and

ii. OTC commodity and financial derivatives trades registered for clearing via the SGX Titan OTC platform.

SGX-DC is now a Qualifying Central Counterparty (CCP). Bank members and participants of a banking group
(which are SGX-DC members) are subject to lower capital requirement for their trade and default fund
exposures under the Basel III framework introduced by the Basel Committee on Banking Supervision (Basel
III). This means that as an SGX-DC bank member or participant, one will benefit from lower capital costs.

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

1.3.1.5 Singapore Exchange Securities Trading Limited

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 the SGX-ST Trading 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 who wish to raise capital and 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 Catalist. The Mainboard caters to the needs of
more established companies, with higher entry and listing requirements such as minimum profit and market
capitalisation levels. Catalist 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 IPO. For these companies to be
listed on Catalist, there is no quantitative entry criteria required by SGX. Instead, sponsors will decide if the
listing applicant is suitable to be listed.

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The listing requirements applicable to all companies that wish to be listed on the SGX-ST platforms are
contained in the SGX-ST Listing Manual4, which contains the rules and regulations for, amongst others:
• Listing requirements;
• Acquisitions;
• Realizations;
• Takeovers; and
• Timely disclosure of corporate information.

1.3.1.6 The Central Depository (Pte) Limited

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

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+25. 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. SGX has introduced, in 2021, an Intra-day Settlement Run, to facilitate earlier
settlement of securities, thereby reducing counterparty risks in the securities clearing system.

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 participants and ensures that
payment is made against the transfer of securities. For transactions settled on a FOP basis, participants make
their money settlement without involving CDP. The CDP DVP rules govern the settlement of trades on a
delivery-versus-payment basis through CDP.

4 The SGX-ST Listing Manual contains the Mainboard Listing Rules and the Catalist Listing Rules. Refer to the SGX website for further
details Rulebooks | Rulebook (sgx.com).
5 SGX-ST Rule 9.2 – Settlement Basis and Eligibility for Clearing by CDP. T+2 refers to 2 exchange business days, which is 2 exchange
business days after the trade day.
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Clearing Members of CDP must adhere to the following CDP Rules, where applicable:
• CDP Clearing Rules;
• CDP Depository Rules; and
• CDP Settlement Rules.

1.3.1.7 Singapore Exchange Regulation Pte Ltd

In 2017, SGX established SGX RegCo as an independent regulatory subsidiary of SGX to enhance the
governance of SGX as a self-regulatory organisation and explicitly segregate the exchange’s regulatory
functions from its commercial and operating activities. SGX RegCo undertakes all the front-line regulatory
functions and has a separate board of directors from SGX.

1.3.1.8 Intercontinental Exchange Futures Singapore Pte. Ltd.

IFSG is a subsidiary of Intercontinental Exchange (ICE), which is a global network of exchanges and clearing
houses for financial and commodity markets based in United States. ICE has 23 regulated exchanges under
them, such as ICE Futures exchanges in the US, Canada, Europe, LIFFE futures exchanges in the US and Europe
and New York Stock Exchange.

Since 2000, ICE has already had a presence in Singapore, serving clients in the global energy markets. In
February 2014, ICE acquired the Singapore Mercantile Exchange for US$150 million. With that, ICE managed
to establish a revamped version of the derivatives market into IFSG. The establishment of both IFSG and ICE
Clear Singapore (a clearing house), aims to support an expanding customer base in Asia, further developing
the global derivatives market.

IFSG is an approved exchange under the SFA, and it lays down rules and regulations for trading, in order to
uphold high standards of fair dealing in accordance with the MAS requirements. These rules and regulations
are contained in the IFSG Rules, which govern its members.

1.3.1.9 Intercontinental Exchange Clear Singapore Pte. Ltd

ICE Clear Singapore acts as the central counterparty for trades that are executed on IFSG, and operates under
the supervision of MAS as an approved clearing house. Currently, ICE Clear Singapore provides clearing for
futures products from IFSG.

Clearing Members of ICE Clear are governed by the ICE Clear Singapore Rules.

1.3.1.10 Asia Pacific Exchange Pte Ltd

APEX is the third approved exchange under the SFA. As an international derivatives exchange, APEX aims to
establish itself as a leading commodity and financial derivatives trading center covering the Asia Pacific region,
providing Asian pricing benchmarks for commodities and a new Asian financial derivatives risk management
platform.

APEX’s business scope includes futures and options contracts that covers both commodity and financial
derivative products. APEX aims to build a comprehensive range of derivative products covering various asset
classes, such as agriculture, energy, metals, and RMB-related products.

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1.3.1.11 Asia Pacific Clear Pte Ltd

APEX Clear operates as an approved clearing house under the supervision of MAS, and provides clearing
services for the products listed on APEX. As a central counterparty, APEX Clear’s objective is to ensure the
transparency and efficiency of the market.

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Chapter 2:
Licensing and Business
Operations
Learning Objectives
The candidate should be able to:
✓ Understand the regulatory requirements for the grant of a Capital Markets Services (CMS) licence.
✓ Understand the requirements for registration and the obligations of CMS licence holders and their
representatives.
✓ Understand the requirements for notification of as appointed representatives under MAS’
Representative Notification Framework.
✓ Conform to the rules relating to client identification through the account opening process,
information and documentation required and maintaining customer confidentiality.
✓ Manage customer accounts properly with regards to receiving customer instructions, execution and
record of customer orders and documentation requirements.
✓ Report positions and keep records as required.
✓ Adhere to rules on customers’ asset protection.

2.1 Introduction

This Chapter focuses on the regulatory requirements governing the business operations of CMS licence
holders and individual representatives.

CMS licence holders and their representatives who are members of the approved exchanges must comply
with both the regulatory requirements under the SFA and the rules of the relevant exchanges.

Confidence and stability are core to an efficient and well-functioning capital markets. Therefore, in addition
to requiring CMS licence holders to be licensed, MAS requires them to conduct business professionally and
act responsibly by having adequate resources, tools, systems, processes and controls in place to provide

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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 Capital Markets Services Licence

CMS licence holders are licensed and regulated under the SFA. A corporation may make an application for
a CMS licence6 to carry on business in one or more of the regulated activities as specified in the SFA7. A
corporation that intends to deal in capital markets products, including derivatives contracts8, whether as
principal or agent, will have to obtain a CMS licence for dealing in capital markets products.

An existing CMS licence holder who wishes to vary its licence by adding a regulated activity or an additional
capital markets product is required to seek MAS’ approval for the new regulated activity or product to be
added to its existing licence.

Individuals who are employed by or acting for CMS licence holders to carry out the regulated activities are
required to be appointed representatives under the SFA. MAS supervises CMS licence holders and their
representatives under the SFA to ensure that they are well-managed and resilient against systemic risks.

A CMS licence will only be granted to a corporation. 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
Schedule9 to the SFA or is an exempt institution10.

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, are granted a CMS licence.

2.2.1 Base Capital Requirements

A CMS licence holder needs to satisfy the Base Capital Requirements (BCR)11 for its proposed regulated
activities. The BCR for CMS licence holders who deal in derivatives contracts are set out in Tables 2.2.1(a) to
2.2.1(d):

6 SFA Section 86 - Grant of Capital Markets Services Licence.

7 SFA Second Schedule – Regulated Activities.
8 Options on equity indices, such as the SGX Nifty Options contracts, are classified as “securities-based derivatives” under the SFA
and dealing in such contracts would require a similar Capital Markets Services Licence.
9 SFA Third Schedule - Specified Persons.
10 SFA Section 99 - Exemptions from requirement to hold Capital Markets Services Licence; SFR (LCB) - Second Schedule
(Exemptions from Sections 82(1) & 99B(1) of the Act; SFR (Exemption from Requirement to Hold CMS Licence).
11 SFR (Financial & Margin Requirements for Holders of Capital Markets Services Licences) First Schedule – Base capital
requirement; MAS Guidelines on Criteria for the Grant of a Capital Markets Services Licence other than for Fund Management
and Real Estate Investment Trust Management (SFA04-G01), Annex 1.
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Table 2.2.1(a): BCR for dealing in capital markets products that are exchange-traded derivatives contracts

Entity classification BCR (S$)

Clearing member12 5 million

Trading member13 1 million
14
Non-member 1 million
Introducing broker15 500,000
Others16 50,000

Table 2.2.1(b): BCR for dealing in capital markets products that are over-the-counter derivatives contracts

Entity classification BCR (S$)

Clearing member17 5 million

Non-clearing member with retail clients18 5 million
19
Non-clearing member with non-retail client 1 million
Others20 500,000

12 Refers to a corporation which is a member of an approved clearing house.

13 Refers to a corporation (not being an introducing broker or broker in the “others” category) which is a member of an approved
exchange.
14 Refers to a corporation (not being an introducing broker or broker in the “others” category) which is not a member of an
approved exchange.
15 Refers to a corporation which does not carry any customer’s positions in those capital markets products, 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 of
those capital markets products from any customer; 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 those capital markets products by that customer.
16 Refers to a corporation which (i) does not carry any customer’s positions in those capital markets products, margins or accounts
in its own books; (ii) deals in those capital markets products only with accredited investors, expert investors or institutional
investors; (iii) does not accept money or assets from any customer as settlement of, or as a margin for, or to guarantee or secure,
any contract for the purchase or sale of those capital markets products by that customer; and (iv) does not enter into any
transaction with any customer to deal in those capital markets products as principal.
17 Refers to a corporation which is a member of an approved clearing house.
18 Refers to a corporation (not being an introducing broker or broker in the “others” category) that is not a member of an approved
clearing house and carries out dealing in capital markets products that are over-the-counter derivatives contracts with any
customer who is not an accredited investor, an expert investor or an institutional investor.
19 Refers to a corporation (not being an introducing broker or broker in the “others” category) that is not a member of an approved
clearing house and carries out dealing in capital markets products that are over-the-counter derivatives contracts with only
customers who are accredited investors, expert investors or institutional investors.
20 Refers to a corporation that does not carry any customer’s positions, margins or accounts in over-the-counter derivatives
contracts in its own books, and either (i) carries on business only of soliciting or accepting orders for the purchase and sale of
over-the-counter derivatives contracts from any customer; 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 of sale of over-the-counter derivatives contracts by
that customer.
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Table 2.2.1(c): BCR for dealing in capital markets products that are specified commodity futures contracts
only

Entity classification BCR (S$)

Clearing member21 1 million

Non-clearing member22 500,000
Non-member23 500,000
Introducing broker24 250,000
Restricted broker25 250,000

Table 2.2.1(d): BCR for dealing in capital markets products that are spot foreign exchange (FX) contracts
for the purposes of leveraged FX trading

Entity classification BCR (S$)

Broker dealings with retail clients 5 million

Broker dealings with accredited investors, institutional
1 million
investors or expert investors

2.2.2 General Criteria for Capital Markets Services (CMS) Licence Holders26

The applicant should be primarily engaged in the business of conducting one or more of the regulated
activities specified in the Second Schedule to the SFA and be operating out of a physical office in Singapore.
The applicant must satisfy the MAS that it will discharge its duties efficiently, honestly, and fairly.

MAS would consider 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 should be subject to proper supervision by its
home regulatory authority, where applicable. 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).

21 Refers to a corporation which is a member of an approved clearing house, where the corporation’s membership is limited to
specified commodity futures contract. The applicant engaged in this regulated activity may be required to maintain and hold its
financial resources [as defined in the SF(Financial & Margin Requirements for holders of CMS Licences) Regulations] in such
manner in Singapore as may be specified by MAS.
22 Refers to a corporation (not being an introducing broker or restricted broker in relation to trading in commodity futures
contracts) which is a member of an approved exchange.
23 Refers to a corporation (not being an introducing broker or restricted broker in relation to trading in commodity futures
contracts) which is not a member of an approved exchange.
24 Refers to a corporation (not being a restricted broker) which does not carry customers’ positions in those capital markets
products, 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 those capital markets products 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 purchase or sale of those capital
markets products by that customer.
25 Refers to a corporation which (i) does not carry any customer’s positions in those capital markets products, margins or accounts
in its own books; (ii) deals in those capital markets products only with accredited investors, and (iii) does not accept money or
assets from any customer as settlement of, or as a margin for, or to guarantee or secure, any purchase or sale of those capital
markets products by that customer.
26 MAS Guidelines on Criteria for the Grant of a Capital Markets Services Licence other than for Fund Management and Real Estate
Investment Trust Management (SFA04-G01).
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2.2.3 Criteria in respect of the Board of Directors, Chief Executive Officer (CEO) and
Representatives of the Applicant27

The board of directors and senior management of the applicant should uphold good corporate governance
standards and practices in directing and managing the applicant’s business. The board of directors should
comprise a minimum of 2 members, at least one of whom is resident in Singapore. The CEO28 of the applicant
should also be a resident in Singapore.

The applicant must obtain MAS’ approval before appointing a person as:

i. its CEO;

ii. in the case of a locally incorporated company, its director;

iii. in the case of a foreign company, its director who resides in Singapore or is to reside in Singapore; or

iv. its director who is directly responsible for its business in Singapore.

The applicant must also obtain MAS’ approval to change the nature of the appointment of a person as a
director from one that is non-executive to one that is executive29. The applicant should also inform MAS of
any person ceasing to hold office as its CEO or director.

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 licensed 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 by CMS Licence Holders

A CMS licence holder is required to inform MAS within 14 days of any change in particulars30 if it ceases to
carry on business in the regulated activity it is licensed for, or if there is a change in the CMS licence holder’s
records31 as follows:

i. The CMS licence holder’s name;

ii. The address of the principal place of business in respect of the licensed activity;

iii. The regulated activity or activities, or where such activity concerns the type or types of capital markets
products, to which its licence relates;

iv. 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

v. Such other information as may be prescribed.

27 MAS Guidelines on Criteria for the Grant of a Capital Markets Services Licence other than for Fund Management and Real Estate
Investment Trust Management (SFA04-G01).
28 SFA Section 2(1) – Interpretation of “chief executive officer”.
29 SFR (LCB) Regulation 12 – Application for Appointment of Chief Executive Officer and Director.
30 SFA Section 93 - Notification of Change of Particulars.
31 SFA Section 94 - Records of Holders of Capital Markets Services Licence.
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These changes must 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 Holders

A CMS licence will lapse if the CMS licence holder is wound up or dissolved, whether in Singapore or
elsewhere or upon any occurrence that may be prescribed by MAS. MAS may also revoke or suspend a CMS
licence if, among other things, it has reasons to believe that the CMS licence holder or its representatives or
officers had failed to discharge its or his duties efficiently, honestly and fairly, or had not acted in the best
interest of its or his customers, thereby breaching the conditions imposed on their licences32.

Heavy financial penalties are imposed if a CMS licence holder continues to carry on business after its licence
had lapsed or been suspended or revoked. This is to ensure that investors or other market participants are
not misled into dealing with errant CMS licence holders which may result in financial losses or credit issues
for the unknowing participants.

2.2.6 Approval of CEO 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 CEO
or director33. 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
entered into a compromise or scheme of arrangement with creditors or have unsatisfied judgement debts.

This expectation of CMS licence holders to meet the “Fit and Proper Criteria” requirements continues even
after a CMS licence has been granted and is monitored on a continuing basis. MAS has the power of authority
to direct the CMS licence holder to remove its CEO or directors if they fail to meet the “fit and proper”
criteria, e.g. if they had been convicted of an offence involving fraud or dishonesty, is an undischarged
bankrupt, or had failed to discharge their duties of office in ensuring the CMS licence holder’s compliance
with its duties set out in Regulation 13A of the Securities and Futures (Licensing and Conduct of Business)
Regulations (SFR(LCB)) (refer to section 2.2.7).

2.2.7 Duties of CMS Licence Holders

CMS licence holders must 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 must
institute adequate internal controls commensurate with the nature, scale and complexity of their business34.
These include:

i. Implementing effective written policies on all operational areas, including financial policies, accounting
and internal controls, and internal audit and complying with these policies;

32 SFA Section 95 - Lapsing, revocation and suspension of Capital Markets Services Licence.
33 SFA Section 96 - Approval of Chief Executive Officer or Director of Holder of Capital Markets Services Licence; SFR(LCB)
Regulation 12 - Application for Appointment of Chief Executive Officer & Director.
34 SFR (LCB) Regulation 13 - Duties of Holder of CMS Licence.
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ii. Putting in place compliance function and arrangements, including specifying the roles and
responsibilities of officers and employees in helping to ensure compliance with all applicable laws,
codes of conduct and standards of good practice 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;

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

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

v. Ensuring that internal audits of the CMS licence holder or its holding company (if any) include inquiring
into the CMS licence holder’s compliance with all relevant laws and all relevant business rules of any
approved exchange and approved clearing house;

vi. 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);

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

viii. 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

ix. 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 CMFAS examinations or are
exempted from the examinations before notifying 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
examinations.

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 misconduct35.
CMS licence holders who fail to comply with their prescribed duties will be guilty of an offence which is
punishable with a fine.

35 MAS Notice on Reporting of Misconduct of Representatives by Holders of Capital Markets Services Licence and Exempt Financial
Institutions (SFA 04-N11).
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2.3 Registration of Representatives with MAS

Individuals intending to conduct any regulated activity under the SFA have to be an appointed
representative, temporary representative 36 or provisional representative 37 in respect of that type of
regulated activity they intend to carry out38. They can only commence the regulated activities after they
have satisfied the competency requirements for that type of regulated activity under the SFA (refer to
Section 2.3.2) and their names have been entered into the Public Register of Representatives on MAS’
website, where applicable (refer to Section 2.3.5).

CMS licence holders should ensure that they do not permit any individuals to conduct any regulated activity
under the SFA if they are not notified as appointed, temporary or provisional representatives under the SFA
or are otherwise exempted39.

Any person who carries out regulated activities without being registered with MAS, will be guilty of an
offence and will be liable on conviction to a fine and/or imprisonment term.

2.3.1 Acting for One Principal

A representative of a CMS licence holder can act for only one principal unless he has the approval of MAS
to act for more than one principal, or if the principals are related corporations 40 . 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.

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

i. To provide clarity to investors on the status of the representatives, the principals they represent, and
more importantly, where responsibility rests for complaints and redress; and

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

36 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
educational 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 the Frequently Asked Questions on Licensing and Business Conduct
(Other than for Fund Management Companies) under the SFA.
37 Provisional representatives are given a grace period of 3 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 the Frequently Asked Questions on Licensing and Business Conduct (Other than for Fund Management
Companies) under the SFA.
38 SFA 99B(1) - Acting as Representative.
39 SFA Section 99B(3) - Acting as Representative.
40 SFA Section 99J - Representative to Act for Only One Principal.
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2.3.2 Competency Requirements

All appointed representatives who represent CMS licence holders must meet minimum competency
requirements prescribed by MAS41. To be eligible for registration as a representative, an individual must
fulfil all the following conditions:

i. Be at least 21 years old;

ii. Has a minimum education level 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 individuals who sat for the O-Levels in or before 1980);

iii. Has satisfied the CMFAS examination requirements for those regulated activities he will deal in; and

iv. Be a fit and proper person, which includes42:

• Possessing qualities of honesty, integrity and sound reputation;

• Competence and capability; and
• Financial soundness, e.g. not an undischarged bankrupt, whether in or out of Singapore.

The MAS Guidelines on Fit and Proper Criteria sets out further guidance on the factors to be considered in
assessing fitness and propriety.

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 representatives43:

i. 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 verifying his
identity. If the proposed representative is a foreigner, CMS licence holders are expected to verify that
he has the relevant employment pass or has approval from the relevant authorities to work in
Singapore.

ii. 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 employers. CMS licence
holders are also expected to check the Public Register of Representatives (refer to Section 2.3.5.1) on

41 MAS Notice on Competency Requirements for Representatives of Holders of Capital Markets Services Licence and Exempt
Financial Institutions (SFA 04-N22).
42 MAS Guidelines on Fit and Proper Criteria (FSG-G01).
43 MAS Circular on Due Diligence Checks and Documentation in Respect of the Appointment of Appointed, Provisional and
Temporary Representatives (CMI 01/2011).
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the 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
bodies or associations, 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.

iii. 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 Central Provident Fund (CPF) Board to verify that he is not in arrears of his contributions to the CPF
Board as required under the CPF Act 1953. 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) Pte Ltd.

2.3.4 Revocation and Refusal of Registration of Representative44

MAS has broad powers to decide whether to register or revoke a representative’s registration. The decision
whether to register a representative or to revoke a registration of a representative depends on the
following:

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

ii. 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; and

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

Representatives are required to fulfil the “Fit and Proper” criteria as long as they continue to engage in the
respective regulated activity(s).

2.3.5 Representative Notification Framework (RNF)

CMS licence holders can register representatives as appointed 45 , provisional 46 or temporary 47

representatives with MAS through the RNF. The RNF allows CMS licence holders to lodge notifications with
MAS electronically via the online system for their representatives who intend to conduct regulated activities.
As part of the notification, CMS licence holders 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 Public Register of Representatives on MAS website.

44
SFA Section 99M – Power of Authority to Refuse Entry or Revoke or Suspend Status of Appointed, Provisional or Temporary
Representative.
45 SFA Section 99D - Appointed Representative.
46 SFA Section 99E - Provisional Representative.
47 SFA Section 99F - Temporary Representative.
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2.3.5.1 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 3 years and any
formal regulatory action taken by MAS against the representative, would be displayed on the Public Register
of Representatives.

2.3.5.2 Importance of RNF Number

All representatives are assigned a unique representative number, which will stay with them even if they
change principals. Members of the public may verify the representatives whom they are dealing with against
the Public Register of Representatives either with the RNF number or the name of the representatives,
thereby reducing their risk of dealing with unregulated individuals. CMS licence holders are encouraged to
make the unique representative numbers of their representatives readily available for consumers to verify
the representative’s regulatory status. It is thus important for representatives to know and maintain records
of their own RNF number.

2.3.5.3 Cessation of Status of Representatives

The status of an appointed 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; or

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 temporary and provisional representatives, with necessary modifications and
adaptations. In addition, 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.

2.3.6 Change of Particulars of Representatives

An appointed, provisional or temporary representative is required to inform his principal company of any
change in his identification or other relevant 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 manner48.

48 SFA Section 99H (5) - Lodgement of Documents; SFR(LCB) Regulation 5 – Change of Particulars and Additional Regulated
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2.3.7 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 conduct49. 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.

Training can be in the form of:

• Face to face training;
• E-learning; or
• Seminars and workshops and generally be via formal or documented learning.

The Continuing Professional Development (CPD) activities can be a combination of:

• Relevant ethics and market conduct requirements50;
• Relevant product knowledge;
• Relevant compliance-related matters; or
• Other relevant skills or competencies.

2.4 Regulatory Requirements for Advertising 51

To prevent the investing community from being misled, the SFA contains guidelines and rules governing the
behaviour of CMS licence holders with regard to advertising. CMS licence holders and representatives must
adhere to these guidelines and rules when publishing advertisements, market letters or similar information,
collectively called “advertisements” in this study guide.

Under the SFR (LCB), the advertisements must meet the following requirements:

i. the product advertisement is not false or misleading;

ii. the product advertisement provides a fair and balanced view of the capital markets products to which
it relates;

iii. the product advertisement presents information in a clear manner, regardless of whether such
information is in text or otherwise;

49 MAS Notice on Competency Requirements for Representatives of Holders of CMS Licence and Exempt Financial Institutions (SFA
04-N22).
50 SFA04-N22 states that an appointed representative must complete a minimum of 6 Core CPD Hours in ethics or rules and
regulations or both, which are relevant to the regulated activity which the representative carries out and accredited by IBF. In
addition, an appointed representative must complete a minimum of 3 Supplementary CPD hours in relevant training.
51 SFR (LCB) Regulation 46 - Advertisement; SFR(LCB) Regulation 46A – Certain Representations Prohibited.
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iv. where the product advertisement appears in any medium of communication in visual form, the product
advertisement is clearly legible;

v. where the product advertisement appears in any electronic mail or website, the product advertisement
adheres to the font size requirements in Regulation 46(2)(e) of the SFR (LCB);

vi. the product advertisement contains the following statement: "This advertisement has not been
reviewed by the Monetary Authority of Singapore."; and

vii. the product advertisement has been approved by a person specified in Regulation 46AA of the SFR(LCB)
in the manner set out in that regulation prior to its dissemination or publication. This may include the
senior management, an agent or a committee of the CMS licence holder. In each case, the relevant
person(s) must be satisfied that the advertisement complies with the requirements, records his reasons
for satisfaction in writing, and gives his written approval.

Non-product advertisements have to comply with the following requirements52:

i. the non-product advertisement is not false or misleading;

ii. the non-product advertisement does not contain any statement to the effect that any report, analysis
or other service will be furnished free or without charge, unless such report, analysis or service is in
fact or will in fact be furnished in its entirety without any condition or obligation; and

iii. the non-product advertisement does not contain any exaggerated statement which is calculated to
exploit an individual’s lack of experience and knowledge.

Under Regulation 46AD of the SFR (LCB), a non-product advertisement refers to an advertisement, other
than a product advertisement, that is in respect of the provision of any product or service that is regulated
by the SFA.

2.5 Confidentiality of Customer Information

2.5.1 Confidentiality of Customer Information

CMS licence holders and their representatives must keep and protect the confidentiality of customers’
information. All intermediaries are required under common law as well as the Personal Data Protection Act
2012 (PDPA) to keep confidential customers’ information in their possession.

In addition, under Regulation 47(2) of the SFR (LCB), CMS licence holders and their representatives must not
divulge information relating to a customer’s order held by it unless the disclosure is:

i. necessary for the effective execution of the order;

ii. permitted under the rules of the relevant approved exchange, recognised market operator, approved
clearing house or recognised clearing house; or

52 SFR (LCB), Regulation 46AD – Advertisement other than Product Advertisement.

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iii. required by the MAS under the SFA or SFR(LCB).

2.5.2 Banking Secrecy53

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. Please refer to the Third Schedule
of the Banking Act for a full list of circumstances. Some examples of permitted circumstances include:

i. Where the bank has the prior written consent of the customer, and the disclosure is in accordance with
the terms of the consent;

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

iii. 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).

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

If any disclosure is made, a bank still has the duty to inform and remind the person to whom the information
is released to, that they also have an obligation to safeguard confidentiality and bear the consequences of
a breach. Any person who discloses information in contravention of Section 47 of the Banking Act, the PDPA
and the applicable requirements on customer information confidentiality under the SFA may face penalties
and litigation risks.

2.5.3 Personal Data Protection Act (PDPA)

The PDPA governs the protection of personal data. Data protection is an aspect of privacy protection that
deals with control over the collection, storage, accuracy, use and dissemination 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 also aims to prevent the processing of
incorrect or inaccurate personal data about a specific individual.

2.5.4 The Impact of the PDPA on Business Operations

As confidentiality obligations are already in force for CMS licence holders and their representatives, the
PDPA would impact the CMS licence holders’ operations especially when disclosures are requested. It also
affects CMS licence holders and their representatives when making marketing calls.

CMS licence holders should establish clear policies and procedures to comply with the provisions of the
PDPA and other confidentiality obligations such as requiring their representatives to:

53 Banking Act Section 47 – Privacy of Customer Information.

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i. Check the Do Not Call (DNC) registry before making marketing calls to a Singapore telephone number;
and

ii. Seek clear and unambiguous consent through written forms and such other means as may satisfy the
PDPA.

Violations of DNC provisions of the PDPA may lead to civil and/or criminal liabilities.

2.6 Opening 54 and Management of Customer Trading Account

2.6.1 Risk Disclosure Statement55

A Risk Disclosure Statement highlights the risks associated with trading in leveraged capital markets
products, including futures and options. The MAS prescribes Form 13 for use as the Risk Disclosure
Statement.

CMS licence holders intending to deal in derivatives contracts shall not open a trading account for a
customer, unless it:

i. Furnishes the customer with a separate written risk disclosure document in Form 13; and

ii. Receives from the customer an acknowledgment signed and dated by the customer that he has
received and understood the nature and contents of the risk disclosure document in Form 13.

2.6.2 Provision of Statements to Customers56

2.6.2.1 Monthly Statement

CMS licence holders shall send monthly statements to customers, containing information on the following
(where applicable):

i. Outstanding positions of the customer in derivatives contracts and spot FX contracts, the prices at
which the positions were established, and the net unrealised profits or losses in all positions of the
customer marked to the market;

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 specified products 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

54 Refer to Chapter 7, Section 7.9 on Client Onboarding for AML obligations in relation to account opening.
55 SFR (LCB) Regulation 47E – Risk Disclosure by Certain Persons.
56 SFR (LCB) Regulation 40 - Provision of Statement of Account to Customers.
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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.

CMS licence holders do not need to send a monthly statement to a customer if:57

i. The information that is to be contained in the statement has already been sent to the customer by a
clearing house, which the holder is a member of;

ii. There has been no change to the customer’s account in the month; or

iii. The customer is an accredited investor, an expert investor, or an institutional investor, or a corporation
related to the holder, 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.

2.6.2.2 Quarterly Statement58Error! Reference source not found.

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 required information.

Example – Monthly and Quarterly Statements

Scenario 1
If a monthly statement was sent for January, but no statements were sent for February and March, the
CMS licence holder will have to send a quarterly statement at the end of March.
Scenario 2
If a monthly statement was sent for January and March, there is no need for the CMS licence holder to
send a quarterly statement at the end of March.

As outlined above, CMS licence holders are required to observe the rules under the SFR (LCB) relating to a
customer’s statement of accounts and contract notes.

2.6.4 Contract Notes59

CMS licence holders are also required to provide their customers a contract note following a transaction.
Contract notes shall be issued no later than the next business day following the transaction. If any detail
about the transaction which needs to be included in the contract note is only available later, the contract
note shall be issued by the next business day after the details is available.

57 SFR (LCB) Regulations 40(1A), (4), (5) & (6).

58 SFR (LCB) Regulation 40(3) – Provision of Statement of Account to Customers.
59 SFR(LCB) Regulation 42 – Contract Notes.
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Example – Contract Notes

A transaction was done on Monday 23 April. There are no market holidays till 1 May. In this case, the
contract note should be sent by 24 April. However, if the transaction needed to refer to the fixing price
of 25 April, the contract note would then need to be sent by 26 April.

The contract note should contain the following information:

i. The name under which the CMS licence holder carries on its business of dealing in capital markets
products, and the address of the principal place of business;

ii. A statement informing the customer that the CMS licence holder is dealing in capital markets products
as a principal (other than for futures contracts) or is dealing against its customer (for futures contracts),
if the CMS licence holder is doing so.

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

iv. The date on which the transaction is entered into;

v. The quantity and type of the derivatives contract or the amount of a transaction connected with spot
FX contracts for the purposes of leveraged FX trading that is transacted;

vi. The price per unit of the transaction;

vii. The amount of the consideration for the transaction;

viii. Any amount that is to be added or deducted from the settlement amount for the transaction;

ix. The rate and amount of commission (if any) charged for the transaction by the CMS licence holder; and

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

In the case of transactions done on an overseas exchange, the contents of the contract note can follow the
requirements of the overseas exchange.

For a transaction of sales or purchase of Over-the-Counter (OTC) derivatives contracts, the CMS licence
holder is not required to provide the contract note if the holder gives to the other party to the transaction
a confirmation in respect of the transaction that states:

i. the name of the holder;

ii. the name of the party to whom the confirmation is given;

iii. where the holder is dealing in OTC derivatives contracts as a principal, a statement that is so acting;

iv. the date on which the transaction is entered into; and

v. the type and notional value of the OTC derivatives contracts.

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2.7 Keeping of Books and Audit Trails

2.7.1 Record Keeping Requirements60

Under the SFA, CMS licence holders are required to ensure that their books are:

i. kept in such a manner that enables them to be conveniently and properly audited; and

ii. kept for at least 5 years.

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.

2.7.2 Content of Records to be Kept61

CMS licence holders must keep all books and records in English. All information to be kept must sufficiently
explain the transactions and financial position of its business and enable true and fair profit and loss
accounts and balance-sheets to be prepared62.

Such information includes:

2.7.2.1 Customer Details

i. Particulars of every customer, and their guarantor;

ii. Particulars of authorized traders;

iii. Particulars of each customer asset, including:

a. The amount, description of each asset deposited with and held in trust for the customer;

b. Its beneficial owner;

c. Whether the asset is held for safe custody, mortgaged, charged, or pledged;

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

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

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

g. Whether the customer shares the same trust or custody account with other customers; and

60 SFA Section 102 – Keeping of Books and Furnishing of returns.

61 SFR(LCB) Regulation 39 - Books of Holder of CMS Licence.
62 SFA Section 102 - Keeping of Books and Furnishing of Returns.
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h. The name of custodians with whom the CMS licence holder deposits customer monies and assets.

2.7.2.2 Customer Correspondence and other documents

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

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

iii. Every disclosure made to a customer under Regulations 18A or 27A of the SFR(LCB);

iv. Every acknowledgment of a customer received under Regulation 47DA(1)(b) of the SFR(LCB);
v. Every document relating to the opening of a customer trading account for the purpose of entering into
OTC derivatives contract transactions;
vi. Every acknowledgment of a customer received under Regulation 47E(1)(b) of the SFR(LCB), which shall
be in Form 13;
vii. Every acknowledgment of a customer received under Regulation 47E (2) of the SFR(LCB), which shall be
in Form 14;

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

ix. Every order prepared or received in the course of the business of the CMS licence holder;

x. 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;

xi. 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;
xii. Written confirmation of every transaction to purchase or sell any capital markets products and every
purchase and sale contract note and statement of account in respect of such transaction, being a
transaction to which any of the following is a party: (i) the holder; (ii) except where the holder is one
referred to in sub-paragraph (iii), an executive director of the holder, if the transaction is a personal
transaction of such executive director; and (iii) where the holder is a branch or subsidiary of a foreign
company with its head office located outside Singapore, an executive director of the holder who is
directly involved in its operations and business, if the transaction is a personal transaction of such
executive director;
xiii. Written confirmation of every transaction carried out on behalf of customers prepared by the holder,
and every purchase and sale contract note and statement of account in respect of such transaction
prepared by the holder, or received from any other party; and

xiv. In respect of every underwriting and placement transaction entered into by the holder, documentation
stating the basis of allotment to each subscriber or placee.

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

i. The description and quantity of the assets;

ii. The price and fee arising from the transaction;

iii. The transaction date and settlement or delivery date;

iv. The name of the counterparty to the transaction; and

v. The realised or unrealised gain or loss.

2.7.2.4 Particulars of all income and expenses of the CMS licence holder, including:

i. Particulars of all liabilities (including contingent liabilities) of the CMS licence holder;

ii. 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; and

iii. Particulars of every over-the-counter derivatives transaction carried out on behalf of or with customers.

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

2.7.3 Audit

CMS licence holders must appoint an auditor to audit its accounts63 and prepare a true and fair profit and
loss account and a balance sheet for each financial year64. 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.

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.

2.7.4 Report 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 money or assets of any customer of the CMS licence holder.

63 SFA Section 106 - Appointment of Auditors.

64 SFA Section 107 - Lodgement of Annual Accounts, etc.
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A copy of the report should be sent to the approved exchange if the CMS licence holder concerned is a
member of an approved 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.

2.7.5 Offence to Destroy, Conceal, Alter Books65

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 and/or to imprisonment 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 the CMS licence holder.

2.8 Customers’ Moneys and Assets

2.8.1 Definitions of Moneys and Assets66

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

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

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

iii. 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 “moneys received on account of customers” of CMS licence holders includes:

i. Moneys received from, or on account of, the customer in respect of a sale or purchase of any capital
markets products;

ii. Moneys received from, or on account of, the customer for holding of any capital markets products, or
the maintenance of a trading account for any capital markets products by the customer;

iii. Moneys received from, or on account of, the customer, where the CMS licence holder provides product
financing to the customer;

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

65
SFA Section 111 - Offence to Destroy, Conceal, Alter, etc., Books.
66 SFR(LCB) Regulation 15 - Definitions of this Part.
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v. Moneys received from, or on account of, the customer in the course of the business of the CMS licence
holder,

but does not include moneys which are:

i. used to reduce the amount owed by the customer to the CMS licence holder;

ii. to be paid to the customer or in accordance with the customer’s written direction;

iii. used to defray the CMS licence holder’s brokerage and other proper charges;

iv. to be paid to any other person entitled to the moneys; and

v. moneys received from or on account of a customer who is an institutional investor in connection with
any OTC derivatives contract entered into by the CMS licence holder with the customer, is not cleared
or settled by a clearing facility and is booked in Singapore.

“Customer assets” refers to securities and assets, including Government securities and certificates of
deposits, that are beneficially owned by customers of the CMS licence holder, but does not include securities
and assets received from or on account of a customer who is an institutional investor in connection with
any OTC derivatives contract which is:
i. entered into by the holder with the customer;
ii. not cleared or settled by a clearing facility; and
iii. booked in Singapore.

2.8.2 Segregation of Customers’ Moneys and Assets and Fiduciary Obligations67

In the interest of customer protection, a key principle is to keep a CMS licence holder’s moneys and assets
separate from customer moneys and assets. To this end, CMS licence holders are prohibited from depositing
or commingling their own moneys and assets with their customers’ moneys and assets.

Customer moneys and assets are only to be used for the purpose agreed with the customer. A CMS licence
holder must not use customer moneys and assets for its own needs.

Where its customer is a retail customer, the CMS licence holder shall deposit all money received on account
of that customer:

i. for over-the-counter derivatives (OTC) contracts, in a trust account; and

ii. in any other case, in a trust account maintained in accordance with Regulation 17 of the SFR (LCB) or
any other account directed by the customer,

to which the customer has legal and beneficial title and which is maintained with a financial institution
specified under the SFR(LCB) (refer to Section 2.8.3).

67 SFA Section 104 - Handling of Customer Assets; SFA Section 104A - Non-availability of Customer Moneys and Other Assets for
Payment of Debt; SFR(LCB) Regulation 15 – Definitions of this Part; SFR (LCB) Regulation 16 - Money Received on Account of
Customer; SFR (LCB) Regulation 26 - Duties of Holder on Receipt of Customer’s Assets; SFR (LCB) Regulation 27 - Maintenance
of Custody Account with Specified Custodians.
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Where its customer is not a retail customer, the moneys must be deposited in a trust account in accordance
with Regulation 17 of the SFR(LCB) or in any other account directed by the customer.

Moneys and assets received from customers must be deposited no later than the next business day68 after
receipt. The customer’s moneys and assets 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.

Other than for OTC derivatives contracts, the CMS licence holder may commingle moneys from different
customers into the same trust account. Where the CMS licence holder offers the customer an option of
having a segregated account from other customers for moneys deposited or paid for in relation to OTC
derivatives contracts, it shall disclose to the customer the additional costs and differences in protection that
such arrangement attracts.

2.8.3 Maintenance of Trust and Custody Accounts69

2.8.3.1 Maintenance of Accounts

Trust and custody accounts must be maintained with:

i. A bank or a merchant bank licensed under the Banking Act;

ii. A finance company licensed under the Finance Companies Act 1967;

iii. A depository agent within the meaning of Section 81SF of the SFA for the custody of securities listed
for quotation or quoted on SGX-ST or deposited with CDP;

iv. An approved trustee for a collective investment scheme within the meaning of Section 289 of the SFA;
or

v. Any person licensed under the SFA to provide custodial services.

The CMS licence holder may maintain a custody account itself where it is licensed under the SFA to provide
custodial services.

Other than moneys received from a retail customer in respect of over-the-counter (OTC) derivatives
contracts 70 , the CMS licence holder may maintain a trust, custody account with a custodian outside
Singapore for the purpose of depositing customers' moneys or assets denominated in foreign currencies.
The custodian must be licensed, registered or authorised to conduct banking business in the country or
territory where the account is maintained, subject to customer’s prior written consent.

The CMS licence holder must, before depositing retail customer’s moneys in the trust account, disclose to
the retail customer71:

68 “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.
69 SFR (LCB) Regulation 17 - Maintenance of Trust Account with Specified Financial Institutions; SFR (LCB) Regulation 27 –
Maintenance of Custody Account with Specified Custodians.
70 SFR (LCB) Regulation 19 – Customer’s Moneys Deposited with Approved Clearing House, etc.
71 SFR (LCB) Regulation 18A – Disclosure to Customers in relation to Moneys Received on Account of Customers.
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i. That the moneys are held by a specified financial institution on behalf of the CMS licence holder;
ii. That the CMS licence holder may withdraw the retail customer’s moneys from the trust account and
deposit the moneys with a clearing facility or a member of a clearing facility or organised market;
iii. Whether the moneys are deposited in the same trust account, and commingled with the monies, of
other customers;
iv. Where the moneys are deposited in the same trust account, and commingled with the moneys, of other
customers, the risk of such commingling;
v. The consequences for the retail customer’s moneys if the financial institution or custodian with which
the trust account is maintained becomes insolvent, if applicable; and
vi. Where the moneys are placed with a custodian outside Singapore, if applicable, that the laws and
practices of the jurisdiction under which the custodian is based may be different from those in
Singapore and that such differences may affect the ability of the customer to recover the deposited
funds.

For trust accounts, all interest earned from the maintenance of the moneys received on account of the
customer and all returns from the investment of moneys received on account of the customer (in
accordance with Section 2.8.4), shall accrue to the customer72.

2.8.4 Investment of Moneys Received on Account of Customers73

A CMS licence holder may invest customer moneys in:

i. any government securities;

ii. any debt instrument of the government of the country of an organised market on which the CMS
licence holder normally transacts its business; or

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

Full details of the investments must be kept by the CMS licence holder.

The profits earned on the investments are to be returned to the customers proportionately. If a CMS licence
holder had deposited its own moneys into the trust account, for the purpose of maintaining the account,
the CMS licence holder is allowed to retain his proportionate share of the profits.

72 SFR (LCB) Regulation 22 - Interest Arising from Trust Account, etc.; SFR (LCB) Regulation 27 – Maintenance of Custody Account
with Specified Custodians.
73 SFR(LCB) Regulation 20 - Investment of Moneys Received on Account of Customers.
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2.8.5 Placement of Capital Markets Services Licence Holders’ Own Moneys in Trust
Accounts74

A CMS licence holder may advance sufficient money to a customer’s trust account from its own funds in
order to:

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

ii. ensure the continued maintenance of that account in a case where it is maintained with a financial
institution or custodian as specified in Section 2.8.4.

The CMS licence holder may retain any interest earned and returns arising on the moneys which it has
advanced to the account. With the exceptions mentioned in Section 2.8.10, any moneys belonging to the
CMS licence holder that is deposited into a customer’s trust account may be used for the purpose of
payment to the customer.

2.8.6 Suitability of Financial Institution or Custodian75

Before opening a trust account, a CMS licence holder shall conduct initial and periodic due diligence on the
suitability of the specified financial institution for its customers. It must document the procedures for the
conduct of such due diligence, including the frequency of periodic reviews and the approval of its senior
management for such procedures. Records of the grounds on which it has satisfied itself of the financial
institution’s suitability must also be maintained.

2.8.7 Customer Agreement76

Before providing custodial services to its customers, a CMS licence holder must notify the customer of the
terms and conditions that would apply to the safe custody of the customers’ assets, including:

i. Arrangements for giving and receiving customer instructions with regards to custodial services,
including any arrangements where authority is given to another person besides the customer;

ii. Any lien over or security interest in the assets by the CMS licence holder or a third party;

iii. Any circumstances under which the CMS licence 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 CMS licence holder, the
liability of the holder in the event of default by the custodian;

v. Where the CMS licence 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

74 SFR(LCB) Regulation 23 - Placement of Licensee’s Own Moneys in Trust Account.

75 SFR (LCB) Regulation 17 – Maintenance of Trust Account with Specified Financial Institutions; SFR(LCB) Regulation 29 - Suitability
of Custodian.
76 SFR(LCB) Regulation 31 - Customer Agreement.
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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. Arrangement relating to claim and receipt of 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. Arrangements for the provision of information relating to the custody of the assets to the customer;
and

ix. All applicable fees and costs for the custody of the assets.

2.8.8 Custody Agreement77

Before placing its customer's assets in a custody account with a custodian, a CMS licence holder shall agree
with the custodian, in writing, 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 CMS licence 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 CMS licence 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 CMS licence holder in order that the
holder may comply with its record-keeping obligations under the SFA, SFR(LCB) 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 CMS licence 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

77 SFR(LCB) Regulation 32 - Custody Agreement.

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ix. The applicable fees and costs for the custody of the assets.

The CMS licence holder shall, before depositing its customer's assets in a custody account, disclose to the
customer the terms and conditions agreed with the custodian.

2.8.9 Instructions to Trustees and Custodians78

Before depositing customers' moneys or assets in the trust or custody account, a CMS licence holder shall
give written notice to the financial institution and obtain an acknowledgment from the financial institution
that:

i. All moneys and assets deposited in the trust or custody account are held on trust by the CMS licence
holder for its customer and the financial institution cannot use those moneys and assets to offset any
debt owed by the holder to the financial institution; and

ii. The account is designated as a trust or custody 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 moneys and assets.

If a trust or custody account is opened with a custodian outside of Singapore, the CMS licence holder shall,
before depositing customer’s assets in such account, give written notice to the custodian and obtain a
similar acknowledgement as described above.

2.8.10 Withdrawal of Moneys or Assets from Trust or Custody Account79

A CMS licence holder shall not withdraw any moneys from a customer's trust account except for the purpose
of:

i. Making a payment to any person entitled thereto;

ii. Making a payment for the customer to meet the customer's obligation that arises from any transaction;

iii. Defraying its brokerage and other proper charges;

iv. Making a payment to any other person or account in accordance with the written direction of the
customer (except that a withdrawal must not be made from a retail customer’s trust account to meet
any obligation of the CMS licence holder in relation to any transaction for the benefit of the holder);

v. Reimbursing the CMS licence holder any moneys that it has advanced to the account, as long as the
withdrawal does not result in the account becoming under-margined or under-funded;

vi. Making a deposit for the customer with a clearing house or a member of a clearing house or exchange;

vii. Making an investment in accordance with Section 2.8.4; or

78 SFR(LCB) Regulation 18 - Notification and Acknowledgment from Specified Financial Institutions; SFR (LCB) Regulation 28 -
Notification and Acknowledgment from Specified Custodians.
79 SFR(LCB) Regulation 21 - Withdrawal of Moneys from Trust Account; SFR (LCB) Regulation 35 - Withdrawal of Customer’s Assets.
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viii. Making a payment or withdrawal that is authorised by law.

For assets, the following purposes are also permissible for withdrawal:

ix. Specified products lending in accordance with Regulation 33 of the SFR (LCB); or

x. Mortgaging, charging, pledging or hypothecating the assets in accordance with Regulation 34 of the
SFR (LCB).

2.8.11 Customer's Moneys or Assets Held with a Clearing House, etc.80

A CMS licence holder which deals in capital markets products may deposit customer’s moneys (other than
moneys received on account of a retail customer in respect of OTC derivatives contracts) and customer’s
assets with:

i. an approved or recognised clearing house; or

ii. a member of a recognised market or of a clearing house,

for the purpose of facilitating positions and transactions in capital markets products traded, entered, settled
or cleared on such entities or for any other purpose specified under the business rules and practices of the
clearing house or exchange, as the case may be.

2.8.12 Mortgage of Customer's Assets81

Where the customer owes a CMS licence holder moneys, the holder may mortgage, charge, pledge or
hypothecate its customer's assets for a sum not exceeding the amount the customer owes the holder.

This, however, does not apply if there is an excess arising on any day through the reduction of the amount
owed by the customer on that day, but only if the CMS licence holder pays or transfers to the mortgagee,
chargee or pledgee concerned any moneys or assets of an amount sufficient to reduce such excess as quickly
as possible after the excess occurs and, in any event, no later than the next business day.

A CMS licence holder may mortgage, charge, pledge or hypothecate its customer’s assets under the
following circumstances:
i. Subject to an agreement between the holder and its customer, where the holder is owed moneys by
the customer, the 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 must, before mortgaging, charging, pledging or hypothecating a retail customer’s assets,
inform the retail customer that it would do so only for a sum not exceeding the amount owed by the
customer to the holder, explain the risks involved to the retail customer and obtain the retail
customer’s written consent; and
iii. The holder 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

80 SFR (LCB) Regulation 19 - Customer’s Moneys Held with a Clearing House, etc.; SFR (LCB) Regulation 30 - Customer’s Assets Held
with Clearing House, etc.
81 SFR (LCB) Regulation 34 - Mortgage of Customer’s Assets.
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pays or transfers to the mortgagee, chargee or pledgee concerned moneys 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.

A CMS licence holder may mortgage, charge, pledge or hypothecate the customers’ assets together if and
only if:
i. The sum of the claims to which such customers’ assets are subject as a result of such actions does not
exceed the aggregate amounts owed by the customers to the holder; and
ii. The claim to which each customer’s assets are subject as a result of such actions does not exceed the
amount owed by the customer to the holder.

2.8.13 Computation for Trust Accounts and Custody Accounts82

At least once a day, a CMS licence holder who carries on business in any regulated activity shall compute:

i. The total amount of moneys and assets deposited in its customers' trust accounts and custody
accounts;

ii. The total amount of its customers' moneys and its customers' assets (required under Part V of the SFA
and SFR (LCB)) to be deposited in trust accounts and custody accounts; and

iii. The amounts of the holder’s own residual interest in the trust accounts,

as at the end of the previous business day.

A CMS licence holder shall complete the above computation before noon of every business day. Such
computation with all supporting data shall be kept by CMS licence holders for at least 5 years.

2.8.14 Moneys Received from Retail Customers83

A CMS licence holder shall not enter into any arrangement for the transfer of title relating to retail customer
moneys, unless the arrangement is in connection with the lending of the customer’s specified products and
it is in compliance with regulation 45 of the SFR(LCB).

82 SFR (LCB) Regulation 37 - Computation for Trust Accounts and Custody Accounts.
83 SFR (LCB) Regulation 20A – Moneys Received from Retail Customer.
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2.9 Register of Interests in Listed Specified Products 84

CMS licence holders and their representatives dealing in capital markets products that are listed specified
products85 are required to maintain a register of interests in such products. They must:

i. enter into the register, particulars of the listed specified products, within 7 days after the date that
it/he acquires any interest;

ii. retain that entry in an easily accessible form for at least 5 years after the date on which such entry was
first made; and

iii. ensure that a copy of the register is kept in Singapore.

A relevant person shall keep the register of interests in listed specified products (in the case of an individual)
at his principal place of business, or (in the case of a corporation) at any of its places of business. MAS may
request that copies or extracts of the register be provided to it.

84 SFR (LCB) Regulation 4 - Register of Interests in Listed Specified Products; Regulation 4A – Place at which Register is Kept.
85 SFR (LCB) Regulation 4(5) – Register of Interests in Listed Specified Products. “Listed specified products” means specified
products that are listed for quotation, or quoted on an organised market that is operated by an approved exchange or a
recognised market operator.
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Chapter 3:
Market Conduct
Learning Objectives
The candidate should be able to understand:

✓ What constitutes market conduct and prohibited conduct.

✓ Prohibited conduct in the capital markets, particularly in relation to derivatives trading.

✓ The various types of market conduct requirements and trading misconduct under the Securities and
Futures Act (SFA) and Securities and Futures (Licensing and Conduct of Business) Regulations
(SFR(LCB)).

3.1 Introduction

The aim of the Monetary Authority of Singapore (MAS), as the regulator of financial institutions in Singapore,
is to have a sound and progressive financial services sector. These objectives are sought through the financial
supervision and development of the banking and insurance industries as well as the capital markets. In
addition to supervising the individual institutions to ensure that they are financially sound and reputable with
good operational controls, one of MAS’ objectives is also to ensure fair, efficient and transparent markets.

In order to achieve fair, efficient and transparent markets, the rules and regulations governing the markets
need to be clear and made known to all participants in the market. This would ensure that the playing field is
level and the risks are recognised, mitigated and controlled. In addition, MAS lays down rules that are risk-
focused, places responsibilities on the board of directors, senior management and qualified representatives
to provide services to achieve a fair, efficient and transparent market that can operate efficiently with little
fear of systemic failure.

All participants play a part in ensuring a fair, orderly and transparent market and any manipulation or market
misconduct will be dealt with severely by MAS and the approved exchanges (such as Singapore Exchange
Derivatives Trading Ltd (SGX-DT), Asia Pacific Exchange Pte Ltd (APEX) and Intercontinental Exchange Futures
Singapore Pte Ltd (IFSG)). The regulators take a serious view of market misconduct and have heavy penalties
in place if market participants are found guilty of such practices. A representative is expected to conduct
himself in a professional manner, employing strict standards of honesty and integrity, and placing his
customer’s interest first at all times.

Penalties have been stipulated by the SFA for misconduct in the markets and employment of unprofessional
trading practices.

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3.2 Market Misconduct under the SFA 86

A high standard of ethical conduct is expected from all participants of organised markets. This is covered in
the market conduct rules under the SFA and SFR(LCB). The rules apply to acts occurring in Singapore with
respect to any derivatives contracts, whether listed or quoted in or outside Singapore87.

Similarly, the rules apply to acts occurring outside Singapore with respect to derivatives contracts listed or
quoted on an organised market in Singapore. That is, the rules have extraterritorial reach.

Example – Market Misconduct

If a person sitting in Japan carries out transactions intending to manipulate prices of a counter listed or
quoted on an approved exchange in Singapore, then that act of price manipulation will be regarded as
having taken place in Singapore for purpose of market misconduct offences. Any persons found guilty will
face the penalties of a fine or an imprisonment term or both.

Practices that give an unfair advantage to certain customers over the general public are strictly prohibited as
it goes against the grain of fair competition. Therefore, all customers, intermediaries and their representatives
must abide by the regulations that guide market conduct. The severity of the fines and imprisonment term
reflects the serious intention of MAS to deter market misconduct and ensure personal liability for any persons
breaching the laws on market conduct.

The SFA spells out the following as prohibited market conduct when dealing in derivatives contracts88:
• False trading and market rigging transactions;
• Manipulation of price of derivatives contracts and cornering;
• Market manipulation in relation to securities and securities-based derivatives contracts;
• False and misleading statements, etc;
• Bucketing;
• Fraudulently inducing persons to trade in capital markets products;
• Employment of fraudulent or deceptive devices;
• Insider trading; and
• Dissemination of information about illegal transactions.

In addition to the above obligations, persons who deal in securities-based derivatives contracts must also be
aware of trading-related and market misconduct offences provided specifically for such securities-based
products in the SFA, including but not limited to section 198 on market manipulation in relation to securities
and securities-based derivatives contracts.

86
MAS-SGX Trade Surveillance Practice Guide. https://www.mas.gov.sg/-/media/MAS/News-and-Publications/Monographs-and-
Information-Papers/MAS-SGX-Trade-Surveillance-Practice-Guide.pdf. Further information could also be found from
(i) https://api2.sgx.com/sites/default/files/2018-05/Trade%20Surveillance%20Hand%20Book.pdf; and
(ii) https://api2.sgx.com/sites/default/files/2018-05/20180523%20SGX_Trade%20Surveilance%20Handbook_S2.pdf.
87 SFA Section 196 - Application of this Division.
88 SFA Part 12 Division 1 – Market Conduct – Prohibited Conduct – Capital Markets Products.
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Securities-based derivatives contracts89 are any derivatives of which the underlying thing90 is a security or a
securities index. This includes futures and options on equity indices (e.g., SGX MSCI Taiwan futures, SGX Nifty
Options contracts listed on SGX-DT) and other contracts based on securities price movements (e.g. daily
leverage certificates and structured warrants listed on SGX-ST).

3.3 False Trading and Market Rigging Transactions 91

False trading is any form of transaction that is not driven by a genuine investment objective in the market, but
rather is designed to create the impression of greater market activity or to push prices away from their current
levels. The intention is to delude others into sending orders into the market, which the perpetrators will
attempt to profit from.

False trading and market rigging transactions include:

i. Creating or intending to create an appearance of active trading on any capital markets product;

ii. Buying and selling without a change in beneficial ownership in capital markets products in order to
maintain, change or cause fluctuation in the market price of such products in the market;

iii. 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 capital markets products if the person is reckless as to whether
doing that act would so create or be so likely to create such a false or misleading appearance; or

iv. Creating transactions that is intended to give a false and misleading appearance with respect to the price
or market of any capital markets products.

Example – No change in beneficial ownership

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 go 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.

As such, Person A had not in effect sold the shares but continued to have ownership throughout, creating a
false impression that ownership had changed hands and thus misleading the investing public.

The most common false trading practices are:

1. Hunting for stops: This occurs when a trader deliberately places subsequently higher (or lower) bids (or
offers) into the market, effectively pushing the market up (or down). This is done in the hope that
eventually the market price will be moved to a point where stop loss orders are triggered. The trader will
either already be long and take profit as the buying momentum from the triggered stop loss orders kick
in, or will go short after the buying momentum kicks in, expecting the market to fall back off thereafter.

89 SFA Section 2 – Interpretation.

90 SFA Section 2 – Interpretation.
91 SFA Section 197 – False Trading and Market Rigging Transactions.
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2. Wash Trades: This occurs when a trader enters into transactions, either with another collaborator or
using different accounts that he controls. There is no real economic value to the trade. Such trades are
done merely to create the impression of volume. The trader, at the same time, accepts buy and sell orders
which have the same price, from a customer for the same contract month of the same futures contract.
In the case of option contracts, this would happen on a put or call with the same underlying instrument,
strike price and expiration month.

3.4 Manipulation of Prices of Derivatives Contracts and Cornering 92

The prices of derivatives contracts should not be manipulated away from their fair value. An example of such
manipulation might be where a trader deliberately enters orders into a contract to cause a new “day high”
price to be recorded, which then allows him to trigger stops for other instruments which use that contract as
a reference price.

The SFA provides that no person shall, directly or indirectly:

i. Manipulate or attempt to manipulate the price of a derivatives contract traded on an organised market,
or of any underlying thing which is the subject of such derivatives contract; or

ii. Corner, or attempt to corner, any underlying thing which is the subject of a derivatives contract.

“Cornering” is another form of manipulation. Cornering is achieved by purchasing an underlying thing in such
volumes that the manipulator gains a monopoly over it. By doing so, control over its price is achieved and
short sellers are left having to pay an inflated price to cover their positions.

3.5 Market Manipulation in relation to Securities and Securities -based

Derivatives Contracts 93

In broad terms, market manipulation involves intentional interference with the free forces of supply and
demand to deceive or defraud investors, or for other ulterior purposes. To prevent market manipulation, the
SFA has provisions which disallow any person from directly or indirectly effecting two or more transactions in
securities or securities-based derivatives of a corporation if the transactions have the effect of raising,
lowering, maintaining or stabilising the price of securities or securities-based derivatives contracts of the
corporation or of a related corporation.

Example - 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. This has the effect of either
artificially maintaining or increasing the price of the security.

92 SFA Section 201B – Manipulation of Price of Derivatives Contracts and Cornering.

93 SFA Section 198 – Market Manipulation in relation to securities and securities-based derivatives contracts.
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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.

3.6 False or Misleading Statements and Information 94

The dissemination of information or statements that are false or misleading in a material particular that is
likely to:

i. induce the subscription of securities, securities-based derivatives contracts or units in a CIS by other
persons,

ii. induce the sale or purchase of securities, securities-based derivatives contracts or units in a CIS by other
persons; or

iii. raise, lower, maintain or stabilise the market price of securities, securities-based derivatives contracts or
units in a CIS,

is strictly prohibited, if the person disseminating the information or statement:

a. does not care whether the information or statements is true or false, or

b. knew or should have known that the information or statements are false or misleading in a material
particular.

Such dissemination can be in the form of:

• newsletters;
• research papers;
• electronic means;
• the media; or
• word of mouth.

CMS licence holders or their representatives should not knowingly with intent make or publish any statements,
forecasts or promises that are false or misleading to induce others to deal in securities, securities-based
derivatives contracts or units in a CIS. If a CMS licence holder or its representative recklessly does so through
wilfully concealing material facts which are recklessly published, stored or recorded, they will be contravening
the SFA.

94 SFA Section 199 - False and Misleading Statements, etc.

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3.7 Bucketing 95

Bucketing occurs when a broker, directly or indirectly, takes the opposite side of a customer’s order, with the
aim of attempting to profit from the customer’s order. Bucketing is prohibited under the SFA, which states
that no person shall knowingly execute, or hold himself out as executed, an order for the purchase or sale of
a derivatives contract, without having effected a bona fide purchase or sale of that derivatives contract in
accordance with the business rules and practices of an organised market.

When bucketing is practised, customer’s orders are not exposed to competitive bids or asks on the respective
approved exchanges. By preventing the customer’s order from being executed competitively, such practices
fail to provide the customer with the best price.

Example – Bucketing

A broker receives an order to buy 1 contract of December gold futures at $1,400. The market for December
gold futures is $1,395 bid / $1,405 offer.

Instead of placing the customer’s order into the market, the broker withholds the order. When the market
falls to $1,398 offer, the broker then tells the customer his order is filled at $1,400. At the same time, the
broker buys the contract in the market at $1,398, and pockets the difference of $2.

If the market had not fallen but risen instead, the broker would have informed the customer that the order
could not be executed, when in truth it was never placed for execution. This practice is very unfavourable
for the customer.

Furthermore, CMS licence holders are required to get the customer’s prior consent should they wish to take
the opposite side of a customer’s trade (i.e. trading against the customer). Bucketing also violates the SFR(LCB)
provisions on withholding of orders.

Withholding of customers’ orders and trading against the customer will be further elaborated in Sections 3.14
and 3.15 respectively.

3.8 Fraudulently Inducing Persons to Deal in Capital Markets Products 96

Another common form of market misconduct is the circulation of false information to fraudulently induce
dealing in capital markets products. This could be done by:

i. knowingly making or publishing any statement, promise or forecast that he knows or should have known
to be false, misleading or deceptive;

ii. deliberately concealing material facts;

95 SFA Section 201A Bucketing.

96 SFA Section 200 – Fraudulently Inducing Persons to Deal in Capital Markets Products.
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iii. the reckless making or publishing of any statement, promise or forecast that is misleading, false or
deceptive; or

iv. recording or storing in, or by means of, any mechanical, electronic or other device information that he
knows to be false or misleading in a material particular.

Example - Fraudulently Inducing Persons to Deal in Capital Markets Products

A broker issues a research report that falsely states that a disease has destroyed major coffee plantations
around the world, and that this will result in a shortage of coffee beans, thereby causing coffee prices to
rise. This causes his readers to purchase coffee futures.

3.9 Employment of Manipulative and Deceptive Devices 97

It is an offence for any person to, directly or indirectly, in connection with any transaction involving the
subscription, purchase or sale of any capital markets product:

i. employ any device, scheme or artifice to defraud;

ii. engage in any act, practice or course of business which operates or is likely to operate as a fraud or
deception, or is likely to operate as a fraud or deception, upon any person;

iii. make any statement he knows to be false in a material particular; or

iv. 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.

An example of fraudulent practice would be the Madoff investment scandal that occurred in late 2008, which
was perpetuated by securities broker and former NASDAQ chairman Bernard Madoff. Madoff operated a large
Ponzi scheme involving securities fraud that resulted in alleged losses of at least US$17 billion when the
scheme collapsed.

It is not possible to define all the possible devices that perpetrators may employ to manipulate the market or
defraud their victims. To this end, the SFA provides for a general catch-all provision with regard to such
devices.

97 SFA Section 201 - Employment of Manipulative and Deceptive Devices.

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3.10 Insider Trading 98

Insider trading refers to trading that takes place when persons who have privileged or confidential information
about important events, such as earnings information from a company, use the special advantage of that
knowledge to reap profits or avoid losses on the securities or securities-based derivatives market.

Persons with such confidential information must not enter into transactions in instruments that will be
impacted by the information. They should also not communicate such information to other parties. Insider
trading occurs in derivatives as well as securities markets, and such actions are detrimental to the source of
the information and also to other parties who do not possess the advantage of such “insider” information.

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, securities-based derivatives contracts or units in a CIS. A
reasonable person would be taken to expect information to have a material effect if the information is likely
to influence persons or a class of persons who commonly invest in securities, securities-based derivatives
contracts or units in a CIS in deciding whether or not to buy, subscribe for or sell such capital markets
products99.

Information is considered to be “generally available” if100:

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, securities-based derivative contracts or units in a CIS 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.

“Persons who commonly invest”, in relation to investment in any kind of securities, securities-based
derivatives contracts or CIS units, means a section of the public that is accustomed, or would be likely, to deal
in capital markets products of that kind. The MAS has issued guidelines on the interpretation of this concept101.

Example – Insider Trading

In early 2014, Mr Tan, a former staff of Company A was fined S$2.9 million by the MAS under the SFA for
insider trading and employing deceptive devices in share trading. From 2007 to 2008, Mr Tan was an
assistant to the then Chief Executive of Company A, which was listed on Catalist.

98 SFA Sections 218 - Prohibited Conduct by Connected Person in Possession of Inside Information; SFA Section 219 – Prohibited
Conduct by Other Persons in Possession of Insider Information; SFA Section 220 - Not Necessary to Prove Intention to Use.
99 SFA Section 216 – Material Effect on Price or Value of Securities, Securities-based Derivatives Contracts or CIS Units.
100 SFA Section 215 – Information Generally Available.
101 Guidelines on the Interpretation of “Persons Who Commonly Invest” in Division 3 of Part 12 of the SFA (SFA 12-G01).
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While in possession of non-public and materially price-sensitive information regarding a proposed takeover
of Company A, Mr Tan used securities trading accounts belonging to a Mr Yap on three occasions to buy a
total of 2.65 million shares of Company A for his own benefit. Mr Tan made a profit of more than S$50,000
from these trades. Subsequently, the proposed takeover was withdrawn and the price of Company A shares
tumbled by 70%.

Again, while in possession of non-public and materially price-sensitive information regarding the withdrawal
of the offer, Mr Tan used Mr Yap’s accounts to sell about 7.1 million shares in Company A, and avoided a
loss of about S$1.1 million.

For these offences of insider trading, a civil penalty fine of S$2,865,415 was imposed on Mr Tan. It was also
ruled that Mr Tan’s actions had deceived Mr Yap’s broker into believing that the transactions were for the
benefit of Mr Yap, which was not the case. This action constituted using manipulative and deceptive devices
in connection with the purchase and sale of securities, which is an offence under the SFA.

For this offence, Mr Tan was fined S$100,000. Separately, Mr Yap admitted to contravening the SFA by
allowing Mr Tan to use his accounts, and paid a fine of S$50,000 to MAS.

3.10.1 Exceptions and Defences102

There are specific situations where individuals who have privileged information can execute transactions in
the impacted instruments, and would not be considered guilty of insider trading.

3.10.1.1 Exceptions

The following cases will not be considered as insider trading:

i. The redemption of units by trustees or managers in respect of a collective investment scheme, subject to
certain conditions (Section 222 of the SFA);

ii. Persons acting as underwriters and pursuant to the performance of their roles (Section 223 of the SFA);

iii. The purchase or sale of securities, securities-based derivatives contracts or units in a collective
investment scheme pursuant to legal requirements, such as requirements imposed by written law or
court order (Section 224 of the SFA);

iv. Price-sensitive information communicated pursuant to legal requirements, such as requirements

imposed by written law or court order (Section 225 of the SFA);

v. Knowledge by virtue of a natural person’s own transactions (Section 228 of the SFA); and

vi. Knowledge of a corporation’s own transactions (Section 229 of the SFA).

102 SFA Sections 222 to 229 and 231.

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3.10.1.2 Defences

The following will be considered effective defences against charges of insider trading (Section 231 of the SFA):

i. The information had been made known in a manner that would, or would be likely to, bring it to the
attention of persons who commonly invest in the products affected by the information.

ii. The counterparty to the transaction knew, or ought reasonably to have known of the information, before
entering into the transaction.

The nuances of insider trading are complex. If you are not sure if you are in possession of insider information,
it is best to check with your compliance department. Most financial institutions have instituted internal
practices that require employees to seek approval from their managers before they transact in instruments
that might be affected by insider information.

3.11 Dissemination of Information about Illegal Transactions 103

Since the manipulative devices discussed above each have the effect of creating artificial market conditions,
the dissemination of information that such illegal transactions are taking place or are going to take place can
have an equally deleterious effect. This is because persons who are aware of such transactions can then seek
to take advantage of the expected market movements without themselves being involved in the carrying out
the fraud.

Their entry into the market can then either exacerbate the artificial market conditions being created, or
themselves create the desired artificial market conditions. As such an effect can assist market manipulators,
this method can be used either in conjunction with the illegal transactions to boost the desired effect, or to
create the desired effect without actually engaging in the illegal transactions.

Accordingly, it is an offence to be involved, whether directly or indirectly, in the circulation and/or

dissemination of any information about illegal transactions.

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 informed 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.

It is an offence to be involved, whether directly or indirectly, in the circulation and/or dissemination of any
information about illegal transactions if such transactions have an impact on the price of such securities and
such person either effected the transaction or expected to derive a benefit from disseminating such
information.

103 SFA Section 202 - Dissemination of Information about Illegal Transactions.

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3.12 Non-Disclosure of Orders 104

Under the SFR(LCB), CMS licence holders and their representatives have an obligation to keep information
regarding their customers’ orders confidential. Specifically, Regulation 47(2) of the SFR(LCB) states that any
such person shall not divulge information relating to a customer’s order held by it, unless the disclosure is:

i. necessary for the effective execution of the order;

ii. permitted under the rules of the relevant approved exchange, recognised market operator, approved
clearing house or recognised clearing house, as the case may be; or

iii. required by the MAS under the SFA or SFR (LCB).

3.13 Withdrawal and Withholding of Orders 105

CMS licence holders and their representatives trading in capital markets products shall not withhold or
withdraw from an organised market any order, or any part of an order of a customer for their own benefit, or
to benefit any other person.

3.14 Trading against Customer Orders 106

CMS licence holders shall not knowingly enter into a transaction to buy from or sell to its customer any futures
contract for:

iv. the CMS licence holder’s own account;

ii. an account of a person associated with or connected to it; or

v. an account in which the CMS licence holder has an interest,

except with the customer’s prior consent and in accordance with the business rules and practices of an
approved exchange or recognised market operator.

3.15 Front Running and Priority of Customer Orders 107

Front running occurs when trading representatives make favourable trades for themselves based on the
advance knowledge they have of their client’s orders. As client’s order information is non-public and known

104 SFR(LCB) Regulation 47(2) – Trading Standards.

105 SFR(LCB) Regulation 47(1) – Trading Standards.
106 SFR(LCB) Regulation 47C(1) – Trading Against Customer.
107 SFR(LCB) 44 – Priority of Customers’ Orders.
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only to the respective traders acting on behalf of their clients, such practices are a form of trading on insider
information. As such, the SFR(LCB) has provisions to ensure priority of customers’ orders.

CMS licence holders and their representatives shall not enter into a transaction for the purchase or sale of
capital markets products that are permitted to be traded on an approved exchange or a recognised market
operator, if a customer of that holder or representative, who is not associated with or connected to that
person, has instructed that person to purchase or sell, respectively, capital markets products of the same class
and the holder or representative has not complied with the instruction.

3.16 Cross Trades 108

A cross trade means the simultaneous matching of buy and sell orders executed for different account owners.

CMS licence holders dealing in capital markets products shall not knowingly fill or execute a customer’s order
for the purchase or sale of a futures contract on an organised market by off-setting against the order, or orders
of any other person, without effecting such a purchase or sale either:

i. electronic futures trading system; or

ii. in accordance with the business rules and practices of an approved exchange or recognised market
operator.

Example 1 – Cross Trades

The contract is the NK225 Futures with a tick size of 5 points.

Existing Bid 11710

Existing Offer 11740
Last traded price 11740

The Approved Trader receives buy and sell orders at the same time and at price of 11715. The Approved
Trader can expose either the buy or the sell order first.

Reason: Both the price of buy and sell orders are better than the prevailing 11710 bid and 11740 offer
respectively.

Example 2 – Cross Trades

Existing Bid 11710

Existing Offer 11740
Last traded price 11740

The Approved Trader receives buy and sell orders at the same time and price at 11740. The Approved Trader
shall expose the buy order first.

108 SFR(LCB) 47D – Cross-Trading.

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Reason: The buy order is a more attractive order than the sell order because there was an existing 11740
offer waiting to be “lifted”.

Example 3 – Cross Trades

Existing Bid None

Existing Offer None
Last traded price 11740

The Approved Trader receives buy and sell orders at the same time and price at 11715. The Approved Trader
shall expose the sell order first.

Reason: The sell order has a more attractive price because the opposite trader who “lifts” the offer will be
buying at a price lower than the last traded price of 11740. On the contrary, the buy order has a less
attractive price because the opposite trader who “hits” the bid will be selling at a price lower than the last
traded price of 11740.

3.17 Churning

The practice of “churning” involves executing as many trades as possible for a customer, even when there are
no sound opportunities in the market. This is done by the CMS licence holder or representative with the sole
purpose of increasing the volume of trades executed for a customer, allowing them to bill the customer for
more commissions.

3.18 Overtrading

CMS licence holders and their representatives are prohibited from executing trades or maintaining any
derivatives positions which would cause them to breach limits imposed by their sponsoring members, the
approved exchanges, clearing houses or regulatory authorities, and are also responsible for maintaining their
customers' positions within the prescribed limits. In the event of any breach of limits or incidences of
overtrading, approved exchanges or clearing houses may notify their members of the breach and appropriate
steps must be taken to reduce the positions which are in excess of the limits.

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3.19 Pre-arranged Trades

Pre-arranged trading is defined as the act of buying or selling any derivatives products that occurs between
traders, dealers or brokers at an agreed or predetermined price. Pre-arranged trading is considered to be a
form of market misconduct because it violates the principle of fair and transparent markets, and allows
selected market participants to benefit from their own premeditated prices and trades.

3.20 Penalties for Misconduct under the SFA

As mentioned above, Trading Members or CMS licence holders and their representatives are bound to
immediately report any suspicion of attempted market manipulation, false trading or insider trading to MAS
and the respective approved exchanges. Any contravention of the provisions of the market conduct rules will
result in:
• Criminal Penalties;
• Civil Penalties;
• Civil liabilities, Financial and Reputation Loss; and
• Suspension, loss of licence or de-registration from public registers.

3.20.1 Criminal and Civil Penalties109

Any market misconduct offences are criminal and carry heavy penalties, which include fines or imprisonment
or both.

In addition to criminal penalties, the CMS Licence Holder or its Representative may also face civil action
brought by the MAS in court.

3.20.2 Civil Liabilities, Financial and Reputation Loss110

In addition to potential criminal and civil penalties, an offending CMS Licence Holder or its Representative may
also be liable to compensate any person who:

i. had entered into similar trades at the time of the offence; and

ii. had suffered market losses due to the effects of the offence.

This is in addition to the possibility of facing further lawsuits (apart from those contemplated under the SFA)
from market players for losses incurred. Such actions may require damages to be paid resulting in financial
loss.

109 SFA Sections 204, 221 - Penalties under this Division; SFA Section 232 - Civil Penalty; SFA Section 233 - Action under SFA 232 Not
to Commence etc., in Certain Situations.
110 SFA Section 234 - Civil liability; SFA Section 235 - Action under section 234 Not to Commence, etc., in Certain Situations; SFA
Section 236 - Civil Liability in event of Conviction, etc.
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Reputational loss (including the loss of customers’ confidence) is also a likely knock-on effect. Further, a CMS
licence holder or representative may have its licence or his registration suspended or revoked depending on
the severity of the offence.

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Chapter 4:
Over-the-Counter Derivatives
Learning Objectives

The candidate should be able to:

✓ Understand what over-the-counter (OTC) derivatives are.
✓ Describe the regulatory regime for dealing in OTC derivatives.
✓ Understand general practices for dealing in OTC derivatives.

4.1 Overview on Over-the-Counter Derivatives

Over-the-Counter (OTC) derivatives are typically traded via a decentralised network, such as a dealer, as
opposed to being traded on a central exchange such as Singapore Exchange Derivatives Trading Ltd (SGX-DT),
Intercontinental Exchange Futures Singapore Pte Ltd (IFSG) or Asia Pacific Exchange Pte Ltd (APEX). Unlike on
a regulated exchange, the price of the OTC derivatives is not necessarily publicly published for an OTC trade.

The risks relating to OTC derivatives are generally viewed as being opaquer than contracts traded on an
exchange. This is because of bilateral counterparty risks that exist within these trades, where a counterparty
may default prior to the expiration of the contract and not make the required payments.

In order to mitigate these counterparty risks, OTC derivatives can be sent to clearing houses for clearing and
settlement. The clearing houses would then act as central counterparties (CCP) to the trade (that is, the
clearing house interposes itself as being the buyer to the seller, and the seller to the buyer). In the event of a
default, the buyer or seller of the trade faces the clearing house’s credit risk, which is backed by safe amounts
of margin and a mutualised default fund.

Singapore Exchange Derivatives Clearing Ltd (SGX-DC) provides CCP services for OTC commodities and OTC
financial derivatives trades for a global participant base.

4.1.1 Common Over-the-Counter Derivatives Contracts

OTC derivatives include instruments like Interest Rate Swaps (IRS), Non-Deliverable Interest Rate Swaps
(NDIRS), Cross-Currency Swaps (CCS), Forward Rate Agreements (FRA) and Commodity Swaps.

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Table 4.1.1 below highlights some common OTC derivatives:

Table 4.1.1: Common OTC Derivatives

Instrument Description

Interest Rate Swaps An agreement between two counterparties in which a stream of future interest
(IRS) payments is swapped for another, based on a specified principal amount.
Non-Deliverable A currency swap between major and minor currencies that is not convertible. In
Interest Rate Swaps a NDIRS, there is no physical exchange of currency flows, unlike an ordinary
(NDIRS) currency swap.
Cross-Currency Swaps An agreement between two counterparties to swap interest payments and
(CCS) principle on loans denominated in two different currencies.

Forward Rate An OTC contract between two counterparties that determines the rate of
Agreement interest, or currency exchange rate, to be paid or received on an obligation
(FRA) beginning at a future start date.

An agreement between two counterparties to exchange cash flows, which is

Commodity Swaps dependent on the price of an underlying commodity. This is commonly used as a
hedge against swings in commodity prices.

Some examples of the various types of OTC products cleared by SGX-DC are:
• IRS – SGD.
• NDIRS – THB, MYR.
• Commodity swaps – Iron ore, rubber, freight forward agreements, coking coal, petrochemicals, oil,
gas.
In 2013, MAS implemented regulatory regimes for OTC derivatives clearing facilities and trade repositories.
DTCC Data Repository (Singapore) Pte Ltd established the first local trade repository and was approved by
MAS as a licensed trade repository. It enables reporting of OTC derivatives trades and is an important market
infrastructure in improving regulatory oversight and transparency of the OTC derivatives market in
Singapore111.

There are several differences between the traditional securities market traded on an exchange and the OTC
derivatives market, including the roles in which intermediaries play in the markets. Some of the differences
include:

i. Clientele – Unlike the securities market, the OTC derivatives market are populated with more
sophisticated and institutional players, with little participation from retail traders.

ii. Relationship with clients – In a purchase of a share or futures contract, the obligations between an
intermediary and a client are largely discharged after the trade is completed and positions are closed out.
Whereas for OTC derivatives, the intermediary‘s obligations with its counterparty may last for several
years, depending on the length of the OTC derivatives contract.

111 DTCC Data Repository Website at http://www.dtcc.com/repository-otc-data.

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iii. Standardisation – The securities markets are largely standardised with regulations and procedures in place
that support trading, which also comes with clearing facilities. In contrast, the OTC derivatives market are
not centrally cleared and are mostly privately negotiated transactions between two counterparties. The
contract terms between the two parties may not always be documented properly and wholly.

iv. Brokering – A broker on a traditional exchange earns its commissions by bringing together buyers and
sellers, where they have a licence to trade within the exchange. On the other hand, inter-dealer brokers
facilitate trades between major dealers buying and selling OTC derivatives products.

Figure 4.1.1 provides a simplified OTC derivatives trading flowchart.

Figure 4.1.1: Simplified OTC Derivatives Trading Flowchart

4.2 Regulatory Regime for Dealing in Over-the-Counter Derivatives

In the wake of the Global Financial Crisis in 2008, MAS improved the regulation of the OTC derivatives market,
in order to meet the objectives set by G20 and the Financial Stability Board. The SFA has seen several changes
in regard to the regulation of OTC derivatives. These include:

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i. Introducing a new regulatory regime for trade repositories;

ii. Extension of regulatory regimes for market operators, clearing facilities and capital markets intermediaries
to the OTC derivatives markets; and

iii. Mandating the central clearing and reporting of certain OTC derivatives contracts. Intermediaries dealing
in OTC derivatives contracts are required to hold a CMS licence to deal in capital markets products.

The SFA and the Securities and Futures (Reporting of Derivatives Contracts) Regulations (SFR(RDC)) provides
for a reporting regime for specified derivatives contracts. As stated in Part 6A of the SFA on Reporting of
Derivatives Contracts, a “specified person” who is a party to a specified derivatives contract must report
certain prescribed information to either a licensed local trade repository or a licensed foreign trade repository.
Specified persons include banks, bank subsidiaries, merchant banks, finance companies, insurers, and CMS
licence holders.

The following derivatives contracts, provided that they are traded or booked in Singapore are prescribed under
Regulation 5 of the SFR(RDC) as being specified derivatives contracts for the purpose of the reporting regime:

• Interest rate derivatives contracts;

• Credit derivatives contracts;
• Foreign exchange derivatives contracts;
• Commodity derivatives contracts; and
• Equity derivatives contracts.

4.2.1 Clearing of Over-the-Counter Derivatives Contracts112

Section 129C of the SFA states that every specified person who is a party to a specified derivatives contract
must clear such contracts with an approved or recognised clearing house.

Specified derivatives contract means any derivatives contract that is, or that belongs to a class of derivatives
contracts that is, prescribed by MAS under the Securities and Futures (Clearing of Derivatives Contracts)
Regulations.

4.2.2 Reporting of Information

The information which needs to be reported as stated in the First Schedule to the SFR (RDC), includes
information pertaining to the contract, counterparty, clearing and other transactional data.

4.3 SGX-DC Clearing Rules for Over-the-Counter Derivatives 113

The main type of OTC derivatives that SGX-DC clears are OTC commodity derivatives (e.g. iron ore swaps,
rubber swaps).

112 SFA Part 6B – Clearing of Derivatives Contracts.

113 SGX-DC Rules 7.02A.1 – Eligible OTC Transactions; 7.02A.2 – Registration of OTC Transaction.
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OTC commodity derivatives are covered under the definition of “Non-Relevant Market Contracts” under the
SGX-DC Clearing Rules.

4.3.1 General Requirements

OTC commodity contracts are registered through the Titan OTC system. Clearing members are required to
post margin on contracts at rates prescribed by SGX-DC. Clearing members are required to procure initial
margin from their customers and ensure that their customers comply with maintenance margin requirements.
Further, variation margin may need to be paid to SGX-DC to account for mark-to-market differences in the
contracts. The same requirements would need to be adhered to for the clearing members’ proprietary trades.

Members may at their discretion set higher margin rates/requirements than required by the rules set by the
Clearing House. Members shall review their internal rates/requirements on a continual basis to ensure
compliance with the rules.

4.4 Risk Disclosure

CMS licence holders dealing in futures contracts, OTC derivatives contracts with currency or currency index as
underlying or leveraged FX contracts are required to furnish a risk disclosure document to their clients before
the setting up of their accounts114. Furthermore, CMS licence holders are also required to furnish a risk warning
statement to clients and obtain their acknowledgement prior to executing trades in overseas-listed investment
products115.

It is essential that investors and counterparties fully understand the risks associated with the investment
product that they are dealing with. Where MAS does not intend to prescribe the form of the risk disclosure
for all OTC derivative contracts, CMS licensees may rely on established industry standards for risk disclosure.

For instance, the International Swaps and Derivatives Association (ISDA) Dodd-Frank Disclosure documents
can be used if the CMS licence holder has assessed that such documents meet the MAS risk disclosure
requirements. Examples of MAS risk disclosure statements would be Form 13 and Form 14.

4.5 General Over-the-Counter Derivatives Dealing Practices 116

There is no standardized procedure for dealers and brokers to conduct their trades in the OTC derivatives
market. However, the Singapore FX Market Committee has provided guidance as to the conduct of dealing in
OTC derivatives.

114 Regulation 47E of SFR(LCB) - Risk Disclosure by Certain Persons.

115 MAS Notice on Sale of Investment Products (SFA 04-N12).
116 Chapter IX OTC Derivatives Dealing Practices, The Singapore Guide to Conduct and Market Practices for the Wholesale Financial
Markets (also known as “The Blue Book”), Singapore FX Market Committee.
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4.5.1 Dealing Procedures

When transacting in OTC derivatives, dealers and brokers should ensure that all material terms on the trade
are stated clearly, and that there is no ambiguity over those terms. Unless otherwise provided by any
applicable broker agreement, the principals should specify to the broker where a transaction involves less than
the minimum dealing amount. The information must be given early to the broker in the event a principal is
unable to deal with another principal on the grounds of an insufficient credit limit.

It is highly recommended that the principals, brokers and other relevant parties follow an established
confirmation format and terminology when handling OTC derivatives, in order to reduce any
misunderstanding that may follow.

One such format available for use would be the Master Agreement published by ISDA (or other similar
template agreements developed by industry bodies such as the Futures Industry Association). The ISDA Master
Agreement outlines standard terms to be applied to a derivatives transaction between two parties. Among
other things, these standard terms include provisions relating to governing law, conditions precedent, netting,
undertakings, events of default, and termination. However, the Master Agreement is open for negotiation
between the relevant parties. The Master Agreement’s terms can also be customised to suit the parties’
circumstances.

In addition, the Master Agreement can be supplemented with credit support documents, which deals with the
treatment of collateral provided between the parties. This may be appropriate where transactions involve
parties with very different credit ratings as there may be significant counterparty risk, or where collateral is
provided to cover potential exposure. The relevant parties should pay attention to the terms of the credit
support documents, particularly to the governing law employed (e.g. English, New York or Japanese law), as
the manner in which collateral is transferred may differ significantly.

4.5.2 Settlement of Differences

When a broker is unable to substantiate his quotation and a difference is payable to the principal, the broker
should close the OTC derivatives product at the next available price and settle the difference with the principal,
such as issuing a cheque for that amount.

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Chapter 5:
Ethics, Codes and Standards of
Professional Conduct for
Derivatives Dealing
Learning Objectives
The candidate should be able to:
✓ Define ethical behaviour in the context of capital markets transactions, namely derivatives trading.
✓ Explain the importance of ethical behaviour.
✓ Recognize and interpret ethical issues arising from ethical dilemmas in the capital markets environment.
✓ Apply the ethical framework to resolve ethical dilemmas.
✓ Define and describe professional ethics and ethical expectations for representatives engaged in
derivatives trading.
✓ Recognize and use the codes of ethics and standards of professional conduct as guidelines to best
practices in derivatives trading.
✓ Recognize and use the professional codes of conduct relevant to derivatives trading:
• Singapore Foreign Exchange Market Committee - Singapore Guide to Conduct and Market Practices
for the Wholesale Financial Markets; and
• Bank for International Settlements – Foreign Exchange Global Code.
✓ Demonstrate professional ethical standards that are expected of derivatives trading representatives.
✓ Recognize and demonstrate recommended procedures for compliance in the context of derivatives
trading.
✓ Recognize and apply best execution practices in the context of derivatives trading.

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5.1 Introduction

This Chapter aims to provide guidance to professionals to understand ethical principles and issues when faced
with dilemmas in their capacity as derivatives traders. Representatives must know the relevant professional
codes and standards applicable to derivatives trading activities, and be aware of the professional and ethical
behaviour expected of them in dealings with clients and other market participants.

Representatives must appreciate the importance of doing business ethically because their professional and
personal conduct can have wider repercussions on the financial markets and the business ecosystem. By
applying the relevant ethical frameworks, derivatives traders can evaluate potential ethical conflicts and seek
practical solutions to deal with them. Ethical frameworks can help instil awareness and vigilance so that the
practitioners are able to make decisions and execute transactions with integrity and professionalism.

5.1.1 Definition of Ethics for the Derivatives Trading Industry

A general definition of unethical behaviour is performing an act which falls outside the boundaries of what is
considered to be morally right for the individual, professional community or industry. The Chartered Financial
Analyst (CFA) Institute defines Ethics in its Code of Ethics and Standards of Professional Conduct117 as:

“…… a set of moral principles or rules of conduct that provide guidance for one’s behaviour when it affects
others”.

The dictionary defines ethics as:

i. A system of moral principles; or
ii. A complex framework of moral precepts held or rules of conduct followed by an individual.

Everyone’s moral fabric differs and is influenced by education, culture, and spiritual or religious beliefs. It goes
beyond regulations and the law, and can be simply described as “doing the right thing even when no one is
looking to prevent hurting others.”

5.1.2 The Importance of Ethics

Unethical behaviour by individuals not only affects their own lives and careers but can also damage investors’
confidence, erode the public’s trust and in severe cases, lead to market contagion. Unethical practices such as
creating a false market or cornering a specific stock, the Ponzi schemes, mis-selling of sub-prime bonds,
accounting fraud, market manipulations and other insider trading schemes, have led to the destabilization of
markets. Such destabilizations are not always contained within domestic markets but can spread globally.
Financial markets have become more interconnected with cross border investment flows and international
distribution of financial products, which are developed in a particular domestic market and sold to investors
in other regions.

By having well-functioning financial markets, capital can flow efficiently to places with the most attractive
investment prospects and financial returns. Efficient capital markets enable the matching of borrowers/
issuers of securities, who are looking for capital to grow their business, with investors, who are seeking to

117
Code of Ethics and Standards of Professional Conduct, 12th Edition and Standards of Practice Handbook, 12th Edition..
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grow their wealth by directing funds into assets which generate positive returns. For the needs of both parties
to be served, fair and transparent market mechanisms must be in place to facilitate such transactions.

The financial markets depend on a solid ethical foundation to guide the behaviours and actions of market
participants. Therefore, it is important to instil the right ethical values so that financial markets professionals
are aware of their responsibility to protect the integrity of the financial ecosystem, putting the wider interests
of society and markets before their own. In light of the numerous acts of misconduct and scandals in recent
years, governments and financial regulators have introduced numerous regulatory reforms to help combat
unethical and destabilising behaviour in their financial markets.

5.2 The Ethical Framework

Significant codes and standards of professional conduct would be embedded within rules and regulations as
discussed in Chapters 2 to 4. Most codes of ethics and standards of professional conduct generally serve as
just guidance for best ethical or industry practice behaviours. When the codes are violated and the relevant
laws and regulations are not enforced, acts of misconduct can result in penalties being imposed on the
individual representatives and their firms. They may also be subject to civil and criminal liabilities.

The key to resolving ethical dilemmas relies on the sound individual judgement of the representatives, to do
the right thing when they find themselves in grey areas or in positions where they face temptations seemingly
too good to resist. An ethical framework can serve as a good foundation, which representatives can rely upon
for guidance and direction, when they need to make the right decisions. Furthermore, organisations can also
adopt such a framework to help create a positive and supportive workplace culture which promotes ethical
behaviour. Figure 5.2 shows the four components of the ethical framework.

Figure 5.2: The Ethical Framework for the Capital Markets Professional

Products /
Services

Understand Analyse
Risks
Objective /
Suitability / Adviser Careful /
Honesty
Independent
Serves Execute
Customers Solutions

Quickly / Fairly
/ Transparently

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The main objective is always to serve the best interests of the client with integrity. This means understanding
the specific products thoroughly, analysing all the risks involved, and executing solutions efficiently to fulfil
the client’s wishes.

1. Understanding & Comprehension – Representatives should have a full comprehension of the investment
product that they are handling with. This includes understanding the risks involved and whether it is
suited for recommendation to the client. The client’s investment profile and risk tolerance should also be
taken into consideration in assessing the suitability of the recommended investment product for the
client.

2. Analyse Risks - The risks associated with the investment product must be covered in detail and
highlighted to the client who wishes to invest in the product. Representatives should ensure that these
risks are aligned within the risk tolerance of the client’s portfolio.

3. Execute Solutions - Upon formulating and executing solutions for the client, representatives should
ensure that the transaction and execution process is smooth and efficient. Most importantly, the process
must be transparent and carried out in a fair manner.

4. Serve Clients - Representatives should always do their utmost to ensure that they serve their clients with
integrity and act in their best interest within the framework of rules and regulations. Representatives
should never place their own self-interest over that of the client.

5. Safeguarding Reputation - In accessing the feasibility and executing a transaction, representatives

should carry out their work objectively and professionally recognizing that the reputation of their
employer and the integrity of the industry could be undermined by unethical behaviour.

5.2.1 Why People Engage in Unethical Behaviour

External factors can influence an individual’s actions which could result in unethical conduct. An example
would be when the client puts pressure on the representative to act in a way that violates the ethical rules of
the firm, industry code of conduct or worse, circumvents prescribed rules and regulations. The representative
may feel pressured because if he does not do as the client asks, it could result in the loss of the current deal
or diminish future business opportunities with the client.

Internal factors can also contribute to unethical behaviour. Some examples are:

• An individual may commit unethical acts due to the lack of understanding and experience, proficiency, or
misinterpretation of rules that he would be expected to follow when carrying out a task. This could be
due to the person’s inadequate skills or knowledge, the lack of proper supervision, or a combination of
both.

• A representative performs deliberate acts driven purely by the desire to make financial gains, or to seek
a non-financial benefit, such as gain recognition or attain a position of personal or professional advantage.
Seeking the desired outcome overrides any ethical and moral considerations, justifying the use of any
means to achieve the end result.

• Pressure from one or more colleagues within an organisation. It could happen in a work environment
where there is an intense push to trade and generate commissions, even when it may not be in the client’s
best interests. The representative may succumb to influence from peers or seniors to conform, especially

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if he is a junior staff member. It is a scenario that should not be discounted especially if the organisation
has a weak ethical and workplace culture.

5.2.2 Preparing to Understand the Ethical Role

To reinforce ethical thinking and action, it is important for the representatives to be familiar with ethical
frameworks which can help them recognise and deal with ethical dilemmas. There are six main steps to
consider and follow:
i. Putting clients’ interests first
• Ensuring that the client’s needs and interest are given priority over self.
• Balancing between personal growth and the benefit of the capital markets and financial system.
ii. Emphasizing integrity, competence, diligence and respect
• Ensuring that there is no conflict of interest and abstaining from acting for the client when conflicted.
• Observing applicable laws and regulations and comply with gifts and entertainment policies of the
employer.
• Attending training courses when new products are introduced into the markets or when new
rules/regulations are introduced.
• Ensuring that the charges, commissions, and expenses incurred are fair, transparent and
communicated clearly to clients.
iii. Exercising care and independent professional judgement
• Ensuring proper understanding of products and their risks before making recommendations.
• Ensuring proper understanding of clients' needs, financial goals and risk appetite before making
recommendations.

• Providing factual information and explaining different scenarios to clients.

• Observing best execution rules and priority of clients’ orders above self-interests.
iv. Building trust with clients and ensuring respect of market conduct rules to prevent abuse of the market
• Observing secrecy and confidentiality of client’s data and information.
• Proper handling of clients’ funds and assets.
• Communicating with clients transparently and providing information throughout the life of the
product.
• Observing internal controls of the employer.
• Building a strong trusting client/professional relationship.
• Observing proper complaints handling procedures.
• Observing channels for whistle blowing.
v. Disassociating oneself from the deal or transaction when it is the ethical thing to do
• Exercising objectivity upon facilitating the transaction and refrain from taking sides.
• Demonstrating professionalism when executing the transaction.
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• Advising the client to reconsider the client’s strategy if his transaction has an impact on the market.
vi. Seek guidance from compliance and legal departments whenever in doubt
• Engaging in frequent communication with supervisors on the applicable codes of ethics and
standards of professional conduct.
• Approaching the relevant parties for assistance when facing ethical dilemmas.
• Ensuring that any transactions undertaken are always within the compliance and legal rules set out
by the relevant authorities.

5.3 Ethical Dilemmas

5.3.1 What are Ethical Dilemmas?

Ethical dilemmas are situations where an individual has to decide whether to carry out an action which runs
contrary to his own ethical standards, rules and regulations, or the provisions of a professional code of
conduct. Ethical dilemmas can come in various forms, such as conflicts of interest, confidentiality issues or
even committing something that is fraudulent and illegal.

If you think something might be unethical, you need to consider the relevant factual evidence, the ethical
issues involved and assess if any violations have been committed. When identifying potential ethical
dilemmas, it is always important to refer to the core code of ethics and standards, as listed in Section 5.4.

Example – An Ethical Dilemma

John, a trading representative, is under heavy pressure from his superiors to meet his commission target.
John is currently working with a client, who he believes can land him a huge transaction and the
commissions earned would more than meet his target.

In order to increase the success of closing the transaction, he can recommend investment products to his
client which he knows is unsuitable for his client in terms of risk.

John knows that this is unethical; however, if he does not close the deal, he will not meet his target and may
be subsequently fired by his firm. This is an example of an obvious ethical dilemma.

We will understand how John can apply the Ethical Framework in order to resolve his ethical dilemma in
Section 5.6.

5.3.2 Identifying Potential Ethical Dilemmas

It is important to be vigilant and alert to situations where compliance with the organisation’s and individual’s
core ethical values is threatened. Any identified threat should be evaluated and managed swiftly so as to
reduce or eliminate the potential ethical conflicts. The threats faced typically arise due to:

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• Self-Interest: A personal interest (e.g. monetary benefits) which could negatively affect the behaviour or
judgement of the representative.
• Self-Review: Lack of objectivity in analysing the recommendations made to clients or professional actions
being carried out. This could be due to an inherent bias which results in the favouring and approving work
done by oneself. A more holistic review and feedback process involving others is needed to ensure checks
and balances.
• Influence: Being influenced by individuals or groups (e.g. clients, superiors or departments). This will have
a bearing on one’s judgement, quality of decisions, and ultimately, one’s behaviour.

Representatives must be aware and attentive in order to identify any ethical issues or dilemmas that they may
encounter during the course of their work.

With greater awareness, representatives should be able assess the underlying root causes of their own ethical
dilemmas and work to resolve them in a decisive manner. Further examples of potential ethical dilemmas are
discussed in Section 5.6 for illustration (and are not exhaustive).

5.4 Professional Ethics, Codes and Standards of Professional Conduct for

Derivatives Trading

Professional ethics is a set of behaviour and conduct expected of the representatives in a particular industry.
Representatives of the capital markets industry should be guided by the spirit of a code of ethics 118 as
guidelines to best practices in derivatives trading as follows:

i. Act with integrity, competence, diligence, and respect and in an ethical manner with the public, clients,
prospective clients, employers, employees, colleagues in the investment profession, and other
participants in the global capital markets.
ii. Place the integrity of the investment profession and the interest of clients above their own personal
interests.
iii. Use reasonable care and exercise independent professional judgement when conducting investment
analysis, making investment recommendations, taking investment actions, and engaging in other
professional activities.
iv. Practice and encourage others to practise in a professional and ethical manner that will reflect credit on
themselves and the profession.
v. Promote the integrity and viability of the global capital markets for the ultimate benefit of society.
vi. Maintain and improve their professional competence and strive to maintain and improve the competence
of other investment professionals.

All professionals in the capital markets eco-system are expected to comply with these basic principles as well
as the ethics and codes covered in their respective sub-industry.

For representatives dealing in derivatives contracts, the following codes of conduct are relevant to their
professional conduct and can be used as a reference when adopting ethical practices:

118 Code of Ethics and Standards of Professional Conduct, 12th Edition and Standards of Practice Handbook, 12th Edition.
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• The Singapore Guide to Conduct and Market Practices for Wholesale Financial Markets (“The Blue Book”)
119;
; and
• The FX Global Code120.

5.4.1 Standards of Professional Conduct

5.4.1.1 Professionalism

(i) Knowledge of the Law

Representatives must understand and comply with all applicable laws, rules and regulations of any
government, regulatory organization, licensing agency, or professional association governing their
professional activities. In the event of conflict, representatives must comply with the stricter law, rule or
regulation. Representatives must not knowingly participate or assist in and must dissociate from any violation
of such laws, rules, or regulations.

This includes the SFA, applicable obligations under the Financial Advisers Act (FAA) and the rules and
regulations of any applicable regulatory organization, licensing agency or professional association regulating
derivatives trading activities.

(ii) Independence and Objectivity

Representatives must use reasonable care and judgement to achieve and maintain independence and
objectivity in their professional activities. Representatives must not offer, solicit or accept gifts, benefits,
compensation, or considerations that could reasonably be expected to compromise their own or another’s
independence and objectivity.

Representatives should also comply with internal guidelines issued in relation to gifts and entertainment
within their respective employment and observe industry codes and practices on the same. Representatives
should resist internal pressure from their firms when making investment recommendations to prevent conflict
of interest. This is especially crucial during order execution where client’s interest is priority to that of their
firms or their own.

Example – Independence and Objectivity

Jonathan, a derivatives trader working for an investment firm, is facing pressure to hit his target
commissions. In order to make a quick buck, he manages to convince his client about a trade idea that he
thinks may be a winner. However, in his haste to close the deal, he failed to conduct further research to
support this recommendation.

Jonathan must ensure that he exercises independence and objectivity in carrying out his duties and separate
them from his personal issues. Even though he is under pressure to meet his targets, any recommendations
made to his client must ultimately be based on thorough analysis of the facts in order to maintain
independence and objectivity.

119 Produced and compiled by the Singapore Foreign Exchange Market Committee (SFEMC) (www.sfemc.org).
120 The FX Global Code is written and complied by the Bank of International Settlements (BIS) (https://www.sfemc.org/).
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(iii) Misrepresentation

Representatives must not knowingly make any misrepresentations relating to investment analysis,
recommendations, actions, or other professional activities.

This includes not intentionally making any misrepresentations relating to any financial services, including
investment analysis, recommendation or any other professional activity. Care and due diligence should also
be exercised when incorporating third party information into the client’s investment analysis and
recommendations.

Example – Misrepresentation

Timothy, a professional trader at a reputable company, has created a personal blog about his research
reports. His personal blog gives the impression that he is acting as an independent analyst.

On his blog, Timothy has several recommendations for which the companies’ stock prices are expected to
increase. However, he does not disclose his contractual relationships with the companies that he has
covered on his personal blog.

Timothy’s personal blog can be misleading to potential investors. Even though the recommendations
Timothy has made may reflect his true personal opinions, his non-disclosure of his relationship with the
companies he is recommending is tantamount to misrepresentation. There is a conflict of interest that
Timothy has failed to highlight to his blog visitors.

(iv) Misconduct

Representatives must not engage in any professional conduct involving dishonesty, fraud, or deceit. They also
must not commit any act that reflects adversely on their professional reputation, integrity, or competence.

This includes any offence that will tarnish the representative’s professional reputation, competence and
integrity, such as practices that distort the securities or derivatives prices or artificially increase the trading
volume in an attempt to mislead market participants with false information. Any representative that has
observed professional misconduct in any circumstance should take necessary steps to report to the relevant
authorities.

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Example – Reporting Misconduct

Jane works as a portfolio manager at a reputable hedge fund company and is very knowledgeable about the
hedge fund’s trading strategies and performance. During a period of time, Jane noticed that many of the
securities that the hedge fund had invested in had declined in value. However, the overall performance of
the hedge fund did not reflect this decline.

In her experience, the occurrence of such a scenario is very unlikely. Jane suspects that something is amiss
and expresses her concern to her superiors but was asked not to probe too much or it could affect her
standing in the firm.

In this case, Jane has clearly come across suspicious activity conducted by the hedge fund company. Such
activities may potentially be market misconduct. As such, Jane should pursue the issue by gathering proof
to verify her doubts and make reports to the appropriate authority.

(v) Competence

Representatives should continuously maintain or improve the competence required by their professional
responsibilities. Over time, representatives’ role may expand, requiring new or different knowledge, skills and
abilities. They should therefore develop and refine their skills and abilities throughout their professional
careers.

5.4.1.2 Integrity of Capital Markets

(i) Material Non-public Information

Representatives who possess material non-public information that could affect the value of an investment
must not act or cause others to act on the information.

Information is “material” and “non-public” only if its disclosure has the potential to impact the price of a
security and has not yet been disseminated to the general marketplace. Material information can include
information that representatives have knowledge of which are non-public information. Representatives must
not act or induce any other party to take action on such material non-public information.

Any investment or trading decisions made based on material non-public information would result in an unfair
advantage gained by the investor and can potentially harm the integrity of the capital markets. This would also
constitute insider trading, which is a violation of SFA Section 216 on the material effect on prices or value of
securities, securities-based derivatives contracts or units in a collective investment scheme (CIS units).

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Example – Material Non-public Information

David holds a senior position in a start-up company called Pay2Win. Recently, David found out that Pay2Win
has accepted an acquisition offer made by a major global technology company. Knowing that the share price
of Pay2Win will skyrocket once the information is made public, he divulges the confidential information to
his good friend Kenneth. Kenneth then immediately purchases a huge quantity of Pay2Win’s shares.

The information regarding Pay2Win’s acquisition is material non-public information. As such, both David
and Kenneth have committed the serious offence of insider trading. David had disclosed the inside
information to Kenneth, who had then violated the standard for fair trading by purchasing shares based on
this material non-public information.

(ii) Market Manipulation

Representatives must not engage in practices that will distort prices or artificially inflate trading volumes with
the intent to mislead market participants.

There are two types of market manipulation:

a) Informational-based manipulation involves spreading misleading information to influence trading

and prices; and
b) Transactional-based manipulation involves making transactions that would influence the price of a
capital markets product.

Example – Market Manipulation

Michael is a trader who has a large position on ABC company, a small-cap company with limited trading
volume. He wants to significantly reduce his position due to the poor performance of the company and
suspects that the price will continue to fall. However, if Michael unloads his position, the price will plummet
even further.

In order to avoid the above scenario, Michael comes up with a plan to split his position into multiple
brokerage accounts. At the same time, he creates a rumour on news media to promote positive news about
the company.

Michael then begins to gradually offload his position every time the price increases, conducting his trades
through the multiple brokerage accounts. By doing so, he is able to reduce his position over time without
negatively affecting the price of the security.

Through his rumours, Michael has fraudulently created a false impression that there is great interest in the
stock. This is backed up by the surge in trading volume, which is also a false impression that Michael has
created by making trades from multiple brokerage accounts.

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5.4.1.3 Duties to Clients

(i) Loyalty, Prudence & Care

Representatives have a duty of loyalty to their clients. As such, they must act with reasonable care and exercise
prudent judgement. They are to act for the benefit of their clients and place their clients’ interest before their
employer’s or their own interest.

Representatives have a duty to place their client’s interests first and have a duty of loyalty to manage their
client’s investments to the best of their abilities according to what they believe is in their clients’ best interest.
All known facts and information must be provided to the client for the client to make informed decisions and
due care, skills and diligence has been applied in the relationship. Representatives should not take advantage
of their clients and must always carry out clients’ investment transactions prior to their own. Most importantly,
representatives must take into consideration the client’s needs and objectives when making any investment
recommendation or action.

Example – Loyalty, Prudence & Care

Leonard works for investment firm, SmartInvest. After providing a performance report on a client’s account
to the external-facing departments before its release to the client, Leonard noticed that the performance
report has omitted a particular trade that had recorded a large loss. Additionally, if the omission is rectified
and included in the report, it would severely affect the performance on the report.

Leonard is aware that the client has previously placed SmartInvest on a watch-list for termination if his
investments continued to perform badly. Nevertheless, Leonard proceeds to correct the error before the
report is released to the client.

Even though Leonard’s actions may lead to the potential termination of SmartInvest’s services by the client,
withholding information on purpose would not be in the client’s best interests. Leonard has recognised this
and has demonstrated loyalty, prudence and care towards the client.

a. Act in the Best Interest of Clients

Representatives should always act in the best interest of their clients and should never engage in deceitful
or manipulative conduct that will give their clients misleading impressions about market conditions. Any
professional activity undertaken should always be in the client’s best interests.

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Example – Acting in the Best Interest of Clients

DigiFund, a renowned global hedge fund, has several high net worth individuals as its clients. The
trading business that DigiFund conducts has high commissions involved.

DigiFund uses the brokerage services of several firms, but most of their transactions with the bulk of
commissions are handled through a large brokerage company, Johnson Inc., because the senior
executives of the two firms share a close relationship. This is despite Johnson Inc. charging higher
commission rates that other brokerage firms.

In exchange for directing business to Johnson Inc., the brokerage then absorbs some overhead
expenses that is due to DigiFund.

Through its use of brokerage services that do not provide the best prices and execution, DigiFund has
disregarded its fiduciary duties to its clients. The senior executives of both firms have not acted in the
best interest of the clients. Instead, they have colluded to act in their own favour by generating more
business among themselves.

b. Client Complaints

It is the representative’s duty to ensure that any complaints received from clients are dealt with in a
professional, prompt and independent manner. The financial institution should always have formal
procedures on how to respond and deal with client complaints. Both the institution and the
representatives should set a reasonable time period to review and resolve client complaints, and provide
appropriate interims if the complaints cannot be resolved within the stated time period. Adequate
resources must be set aside to address the complaints efficiently, promptly and independently. Proper
records, which include documents reviewed and interviews conducted, should also be kept.

In addition, CMS licence holders and representatives who provide financial advice on derivatives
contracts to clients under the FAA are required to comply with the Financial Advisers (Complaint Handling
and Resolution) Regulations 2021.

(ii) Fair Dealing

Representatives must deal fairly and objectively with all clients when providing investment analysis, making
investment recommendations, taking investment action, or providing any other professional activities.

When conducting investment transactions or trading activities for clients, representatives should exercise
fairness and objectivity. In the event that a representative is unsure whether a certain issue will cloud his
objectivity, he must highlight his concern to his superiors and adequate disclosure must be made to clients.
Representatives should also ensure that investments actions and decisions fall within the portfolio’s
objectives, mandate and guidelines in place.

Representatives should also have a policy in place about corporate governance in the companies they invest
in. It is highly recommended that representatives formalise the process on selecting companies to invest in
with adequate corporate governance. Representatives of the licence holder should advise and disclose the
holder’s policies and procedures with regards to the investment services to their clients from the beginning of
the investment relationship. Investment decisions executed must be informed to the client immediately and
any change must be informed to the client with justifications. Communications have to be up to date and
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media of information dissemination has to be made known i.e. whether through phone, fax or only through
official correspondences, including how performance reports are to be sent and its frequency.

CMS licence holders and representatives who provide financial advice on derivatives contracts to clients under
the FAA are expected to observe the fair dealing outcomes set out in the Guidelines on Fair Dealing – Board
and Senior Management Responsibilities for Delivering Fair Dealing Outcomes to Customers (FAA-G11).

(iii) Suitability

1. When representatives are in an advisory relationship with a client, they must ensure that they have a
reasonable basis for making an investment recommendation to the client121:

a. Make reasonable inquiries into a client’s or prospective client’s investment objectives, financial
situation and particular needs prior to making any investment recommendation or taking investment
action and must reassess and update this information regularly;

b. Determine that an investment or trade recommendation is suitable to the client’s risk appetite,
financial situation and is consistent with the client’s written financial objectives, mandates and
constraints before making a recommendation or taking investment action; and

c. Judge the suitability of investments/trades in the context of the client’s total portfolio.

2. When representatives are responsible for managing a portfolio to a specific mandate, strategy, or style,
they should only make investment recommendations or investment actions that are consistent with the
stated objectives and constraints of the portfolio.

Representatives should have a full understanding of the needs and objectives of their clients, as well as any
legal and regulatory requirements in facilitating the client relationship and servicing of the account122.

Representatives should provide clients with the appropriate information about their firm. This includes the
business address, relevant conditions or restrictions under which the firm’s business is conducted, and the
identity and status of persons acting on the firm’s behalf with whom the clients may have contact with.

Where a representative has an investment management agreement with an individual client, he should
establish:
i. The client’s full identity, including the identities of his beneficiaries;
ii. The client’s financial situation and the source of funds used for investments; and
iii. The client’s investment experience and objectives.

121 FAA Section 36; FAA Notice on Recommendation on Investment Products (FAA-N16).
122 On 7 October 2023, MAS, in conjunction with the Association of Banks in Singapore (ABS), Association of Financial Advisers
(Singapore) (AFAS) and Life Insurance Association (LIA), launched a Basic Financial Planning Guide to help Singaporeans take steps
to enhance their financial well-being. The Guide outlines a few rules of thumb, for individuals to start taking proactive steps to
address their savings, insurance, and investment needs (Go.gov.sg).
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Example – Suitability

Lauren is an investment adviser for her client Thomas. Thomas is new to investing and is unsure on which
investment products to invest in. Thomas has stated to Lauren that all he needs is a passive and stable
income with minimal risk, as his purpose for investing is to save for his children’s education expenses.

However, Lauren suggested to Thomas that he can afford to take on more risks as his full-time job is paying
well. As such, she advised that he should take advantage of the booming markets by investing in products
with higher returns (and therefore higher risks).

Even though Thomas has a steady stream of high income, Lauren did not consider the suitability of her
recommendations to both Thomas’ financial needs and risk appetite. Despite the fact that there are indeed
opportunities in a booming market, Lauren should prioritize Thomas’ financial objectives instead of looking
at investments as opportunities that should not be missed out on.

Documentation of Client Relationship - There should exist documentation between the representative and
the client. An example would be an investment management agreement. Representative should enter into a
written investment contract with the client before any advice or service is provided, or before any trade is
executed on behalf of the client.

An investment management agreement should contain, but not limited to, the following:
• Nature of investment services;
• Commencement of the investment management agreement;
• Investment objectives and restrictions;
• The amount to be paid by client;
• Fee arrangements and soft dollar commissions;
• Delegation of functions including appointment of sub-advisor(s);
• Risk disclosure statements for investments in derivatives; and
• Termination period and arrangements.

(iv) Performance Presentation

When communicating investment performance information, representatives must make reasonable efforts to
ensure that the information is fair, accurate, and complete.

This will enhance comparability with other similar investment services or products. The performance
information should also outline the variables that the performance is being measured against (e.g. time
periods).

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Example – Performance Presentation (if any)

Goodman Investments, an equity investment group, has hired Saul as a vice president and a managing
partner. Goodman Investments recruited Saul because of his stellar 5-year performance at Pollos Financial.

When developing the marketing materials for Goodman Investments, Saul prepares an advertisement
which also includes the equity investment performance which he had achieved at Pollos Financial. However,
the advertisement failed to state that the equity performance was actually earned during his employment
at Pollos Financial instead of Goodman Investments. The advertisements are distributed to both existing
and prospective clients.

By doing so, Saul has distributed advertisements containing material misrepresentations about the past
performance of Goodman Investments. He has failed to ensure that the performance information is entirely
accurate and reflective of Goodman Investments. If Saul had wanted to mention his past performance at
Pollos Financial, he should have made a full disclosure of the source of that performance.

(v) Preservation of Confidentiality

Representatives must keep information about current, former, and prospective clients confidential unless the:
i. information concerns illegal activities on the part of the client or prospective client;
ii. disclosure is required by law; or
iii. client or prospective client permits disclosure of the information.

Representatives must do their utmost best to preserve the confidentiality in all matters including information
on customers and dealing counterparties in the performance of their duties. Representatives are responsible
for protecting the integrity of the market through the proper maintenance of confidentiality. Client
information must never be disclosed, unless required by law.

Example – Preservation of Confidentiality

Ross works as a market maker in a trading desk at QRS Bank. Chandler, a C-level executive at a major firm
called Central Perk Corporation (CPC), is in the process of selling the bulk of his personal shares in CPC
through QRS Bank, where Ross is the one to execute the trade. However, this trade information has not
been made public yet.

Rachel, another client of Ross, also has interests in CPC. Because Rachel enjoys a close-knit relationship with
Ross, Ross lets her in on the trade made by Chandler. Anticipating that the share price of CPC will fall, Rachel
immediately contacts her broker to sell her CPC shares.

Ross should have exercised his professionalism by not disclosing material information about his clients to
third parties. By doing so, Ross has damaged the integrity of the financial markets.

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a. Handling of Confidential Information

Where a representative routinely shares sensitive information as part of his profession, such as client
information with other branches / subsidiaries within its group, this information should only be shared in
accordance with applicable laws or regulations and established procedures.

Representatives should be well equipped with the necessary knowledge to deal with sensitive
information, as such information requires anonymity and discretion. The knowledge gained from the
information should not be used for any personal gain.

b. Confidentiality in Dealing Practices

Representatives shall not compromise the confidentiality of their clients and shall not reveal the
identity of their principals, unless when appropriate under the accepted terms of disclosing names or
when expressly authorized to do so by the principals.

Representatives shall not divulge the names of principals or counterparties prematurely. Names should
be revealed only when the broker is satisfied that both sides have a genuine motive to conduct the
transaction.

Representatives should never induce or pressure another person in order to gain advantages. This
includes stakeholders such as clients, representatives or trading members (of an exchange or brokerage
firm).

Representatives should reject any request to divulge confidential information on their counterparts and
should report any such incidents to their management.

Example – Dealers vs. Brokers

Dealer A (the principal) pressured Broker B (who takes orders from the principal) for material
information by inducement, threats, or promises.

In this case, “pressure” could be construed as implying that a failure to cooperate would lead to a
reduction in the business given by Dealer A or other dealers to Broker B. Dealers and brokers should
not be visiting each other’s dealing rooms as this would be a serious breach in conflict of interests.

c. Handling of Market Information

It is the duty of representatives to ensure that the market information they receive and pass on to clients
are true and up to date. Client communication should be fair and not contain any false or misleading
information. Representatives should also exercise care when handling unsubstantiated information and
should not disseminate such information to clients without proper verification. In addition,
representatives must not spread false rumours or information to deceive the clients.

In addition, representatives must exercise caution and due diligence when handling materials containing
price-sensitive information. They should not be trading from their own or their institution’s account, nor
should they induce another party to enter a trade based on such information.

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5.4.1.4 Duties to Employers

(i) Loyalty

In matters related to their employment, representatives must act for the benefit of the employer and not
deprive their employer of the advantage of their skills and abilities, divulge confidential information, or
otherwise cause harm to their employer.

Representatives should not withhold any material information from their employer that may affect their
decisions; neither should the representatives disclose any confidential information pertaining to the employer.

a. Misuse of Confidential Information

From time to time, representatives will have access to confidential information provided by the
employer. It is the duty of the representative to protect the integrity of the information and ensure
that the information remains confidential at all times. The representative should never use the
confidential information for personal gain, such as insider trading or releasing the information to
unauthorised parties like his clients or peers.

b. Solicitation of Employers’ Clients

In the event whereby a representative decides to leave his employer’s firm, he should not solicit the
employer’s clients. If the representative wants to bring the employer’s clients with him, permission
should be granted by the employer first.

Example – Soliciting Former Clients

Jacob is a dealer for XYZ Brokerage, but has become disillusioned with his career prospects in the
firm. He has been offered a job at ABC Brokerage.

Before leaving XYZ Brokerage, Jacob calls up several of his most important clients and asks them
to open accounts with ABC Brokerage. He also persuades some prospective clients of XYZ
Brokerage to switch to ABC Brokerage instead.

By doing so, Jacob has failed to observe his duty to act for his employer’s (XYZ Brokerage) benefit.
Instead, he was acting out for his own personal gain and his solicitation of XYZ Brokerage’s clients
was unethical.

c. Misappropriation of Client List

Misappropriation of an employer’s client list includes obtaining and using the personal information
of the clients which rightfully belongs to the employers. Representatives should not be collecting this
information without the employer’s knowledge. Employers usually require representatives to sign a
non-compete agreement. In doing so, the representative’s actions would be governed by the terms
in the non-compete agreement.

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Example – Misappropriation of Client List

Jason has been with EFG Investment Group for 10 years and currently holds the position of senior
portfolio manager. He has decided to leave EFG Investment Group to start his own investment
firm.

Jason is planning to take with him the documents that he has compiled while working for EFG
Investment Group, such as the client list with details such as personal information, account
statements, sample marketing presentations and algorithms for his trade selection process.

Additionally, Jason has knowledge about the client’s portfolio allocations in certain asset classes
from the client list. He uses this knowledge to his own advantage when formulating the trading
strategy for his own investment firm.

Even though Jason has not solicited any of EFG Investment Group’s clients, Jason should not be
taking materials such as books, records and reports, which still rightfully belongs to his employer
(EFG Investment Group). Doing so may provide an unfair advantage for Jason and this is akin to
stealing from his employer (EFG Investment Group).

d. Self-dealing

Self-dealing is the act of serving one’s own interest before that of the party he is responsible towards.
In the context of employer relations, self-dealing may include the act of appropriating a property,
business opportunity or information that belongs to the employer. Some of these includes client
information, or information about company reports or prospective clients. Self-dealing violates the
standards of professional conduct and is unethical.

(ii) Additional Compensation Agreements

Representatives must not accept gifts, benefits, compensations or considerations that competes with or might
reasonably be expected to create a conflict of interest with their employer’s interest unless they obtain written
consent and permission from all parties involved.

(iii) Responsibilities of Supervisors

Staff and representatives must make reasonable efforts to ensure that anyone subject to their supervision or
authority complies with applicable laws, rules, regulations, and the codes and standards of professional
conduct.

It is the staff and representatives’ responsibility that subordinates under their supervision comply with the
code of conduct and rules and regulations as set out by the government or regulatory authorities.

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Example – Exception: Whistleblowing

While a representative has a duty to his employer, protecting the integrity of the capital markets should be
placed above the interest of his employer.

Circumstances may arise where representatives need to act against their employer’s interests, such as
whistleblowing or reporting an employer for false trading practices. Such actions should be allowed if the
intention is to protect the capital markets rather than for personal gain. Remaining silent may be construed
as being in collusion.

5.4.1.5 Investment Analysis, Recommendations and Actions

(i) Diligence and Reasonable Basis

Representatives must:
i. Exercise diligence, independence, and thoroughness in analysing investments, making investment
recommendations, and taking investment actions; and
ii. Have a reasonable and adequate basis that is supported by appropriate research and investigation for
any investment analysis, recommendation, or action.

Example – Diligence and Reasonable Basis

Joseph is a relationship manager at a bank who advises and recommends derivatives products to his clients
on their investments. When advising and recommending a client to invest in a derivative product, Joseph
did not fully disclose to the client the risk of investing in the derivative product. He also did not conduct a
detailed fact-find and needs analysis (FNA) on the client including the client’s risk profile to ensure that the
recommended product is suitable to the client.

Derivative products are complex products that are of higher risk. Clients investing in such products are
exposed to higher level of risks. By not conducting a full FNA and risk profile on the client before making
product recommendation, Joseph has failed to exercise diligence in the sales process to ensure there is a
reasonable basis for his recommendation to the client.

(ii) Communication with Clients and Prospective Clients

When communicating with clients or prospective clients, it is important that representatives ensure that they:
i. Disclose to clients and prospective clients the basic format and general principles of the investment
processes they use to analyse investments, select securities, and construct portfolios and must promptly
disclose any changes that may materially affect those processes.
ii. Disclose to clients and prospective clients the significant limitations and risks associated with the
investment process.
iii. Use reasonable judgement in identifying which factors are important to their investment analyses,
recommendations, or actions and include those factors in communications with clients and prospective
clients.

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iv. Distinguish between fact and opinion in the presentation of investment analysis and recommendations.
v. Disclose the nature of services provided and information about the costs associated with those services
to the clients and prospective clients.

(iii) Record Retention

Representatives must develop and maintain appropriate records to support their investment analyses,
recommendations, actions, and other investment - related communications with clients and prospective
clients.

All records of communication with clients are to be kept for audit trial purpose. This includes personal notes
from meeting, call reports, press releases, official reports, risk analysis reports and other computer printouts
given to clients and the bases of recommendations. A file on the clients should be maintained.

5.4.1.6 Conflicts of Interest

(i) Avoidance or Disclosure of Conflicts

Representatives must avoid or make full and fair disclosure of all matters that could reasonably be expected
to impair their independence and objectivity and interfere with their duties to clients, prospective clients, and
employers. Representatives must ensure that such disclosures are prominent, delivered in plain language, and
communicated effectively.

Representatives should always be extremely cautious as to whether any transaction may result in a conflict
with the client’s best interest. This includes violating any of the Best Execution Practices (as outlined in Section
5.5). Any conflict of interest with the client should be highlighted immediately before the transaction takes
place.

Even if the client consents to the transaction despite being aware of the conflict, it is still the duty of the
representatives to actively seek alternative solutions in order to avoid the conflict of interest. Any market
orders made by the client should be executed in the best interest of the client.

Example – Disclosure of Conflicts

John, a derivatives trader who is working for the McClane Banking Corporation, has a macroeconomic view
that oil prices are going to fall sharply. As such, he short sells oil futures contracts through his proprietary
trading account.

Mr Gruber, John’s client, thinks otherwise and bets that oil prices will rise. Mr Gruber then decides to go
long on oil futures contracts with John acting as the market maker.

John has a fiduciary responsibility to disclose his short position on oil futures contracts to Mr Gruber, as his
interest to short oil futures contracts is directly in conflict with Mr Gruber’s long position on oil futures
contracts. Mr Gruber would then have to decide whether to trade through John despite this conflict of
interest.

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(ii) Priority of Transactions

Investment transactions for clients and employers must have priority over investment transactions in which a
representative is the beneficial owner.

Example – Priority of Transactions

Louis owns 100,000 shares of a company called Versalife, which is a substantial number of shares for that
company. Brittany, who is Louis’ broker, received a market order from Louis to sell all of his 100,000 shares
in Versalife.

Brittany also holds stocks in Versalife and knows that if she executes the sell order for Louis, Versalife’s
share prices will plummet. To avoid heavy capital losses, Brittany decides to sell her shares first before
putting Louis’ sell order through.

By doing so, Brittany has prioritised her personal transactions over that of her client’s due to a conflict of
interest. Brittany has a fiduciary responsibility to Louis, but she has placed her own interests before that of
her client. This is an example of self-dealing, and Brittany has failed to uphold her duty of loyalty and care
towards her client.

(iii) Referral Fees

Representatives must disclose to their employer, clients, and prospective clients, as appropriate, any
compensation, consideration, or benefit received from or paid to others for the recommendation of products
or services.

The representatives should also ensure that there are appropriate records kept of benefits received and
offered to clients or other parties. This also includes gifts and entertainment received and offered.

5.4.2 Recommended Procedures for Compliance

5.4.2.1 Segregation of Sales/ Dealing and Research Staff

Representatives may come under pressure from their own firms. For example, they may be pressured to issue
favourable research reports or recommendations for certain companies with potential or continuing business
relationships with the firm.

Such situations may be aggravated if an executive of the company sits on the bank or investment firm’s board
and attempts to interfere in investment decision making. Representatives acting in a sales or marketing
capacity must be especially mindful of their objectivity when promoting appropriate investments for their
clients.

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Example – Segregation of Sales / Dealing and Research Staff

Lannister Asset Management (Lannister) has been underperforming in most of its derivatives investment
portfolios. As a result, it is under pressure to keep business relations with its clients and avoid potential
terminations.

The senior executives of Lannister then try to influence the product and research reports written by its
analysts by revising some of their ‘hold’ recommendations to ‘buy’, in order to induce their clients to invest
more money with Lannister.

By doing so, the senior executives have attempted to interfere with the research reports written by their
in-house analysts. This will harm the integrity of the firm by distorting the independence and objectivity of
the firm’s investment decision making. The firm’s compliance unit should closely monitor the behaviour of
its employees and representatives in such situations to ensure that they follow proper market conduct.

5.4.2.2 Resist Undue Influence from Sponsoring Company

Credit rating agencies provide a service by grading the fixed-income products offered by companies. Analysts
face challenges related to incentives and compensation schemes that may be tied to the final rating and
successful placement of the product.

Representatives employed at rating agencies should ensure that procedures and processes at the agencies are
able to prevent undue influences from a sponsoring company during the analysis.

5.4.2.3 Protect the Integrity of Opinions

Representatives and their firms should establish policies stating that every research report concerning the
securities of a corporate client should reflect the unbiased opinion of the analyst. Firms should also design
compensation systems that can allow the analyst to maintain his independence and objectivity. This is to
protect the integrity of the investment decision process.

Example – Protecting the Integrity of Opinions

Justin, a vice president at Queen Banking Corporation (Queen), has thoroughly analysed and concluded that
the current trading price of mortgage-backed securities (MBS) are overvalued.

However, he is concerned that a negative report may jeopardize his close relationship with his superiors at
Queen, as most of them are long on the housing markets. Justin thinks that this may potentially result in
management retaliation, such as being cut off from conference meetings or side-lined from new business
opportunities.

In spite of his concerns, Justin’s analysis should still be independent and objective. Any pressure that comes
from Queen is inappropriate. Justin should seek to protect and reinforce the integrity of his opinions by
ensuring that his investment research reports are based on a fair analysis of the asset fundamentals and
relative valuation.

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5.4.2.4 Review Procedures

Representatives should encourage their firms to establish effective supervisory procedures to ensure that
both portfolio managers and analysts will comply with the relevant rules and regulations relating to their
investment activities.

5.4.2.5 Limit Gifts and Benefits

Representatives should limit the acceptance of gifts and benefits. Firms should consider implementing a value
limit for acceptable gifts. The limit could be in terms of each gift or an aggregate annual value.

5.4.2.6 Appointment of an Officer

Firms should appoint an officer to oversee compliance of the firms’ code of ethics and all regulations
concerning their business. The firms should also ensure that every employee and representative know the
procedures for reporting a violation of regulations, unethical behaviour or any other activity that will tarnish
the firms’ reputation.

5.4.2.7 Training and Update of Skills

Regular ethics and compliance training, in conjunction with the adoption of a code of ethics, is critical to
investment firms seeking to establish a strong culture of integrity and to provide an environment in which
employees routinely engage in ethical conduct in compliance with the law. Training and education can assist
representatives to recognize areas that are prone to ethical and legal pitfalls, and identify circumstances and
influences that can impair ethical judgement.

It is essential for representatives to constantly update their knowledge and skills on investment products and
financial markets in order to provide the best advice for their clients.

More importantly, representatives must always keep abreast of new regulations and compliance rules put
forth by the relevant regulatory authorities. This is to ensure that market participants continue to comply with
the rules and regulations that protect the integrity of the capital markets.

5.4.3 The Singapore Guide to Conduct and Market Practices for the Wholesale Financial
Markets (“The Blue Book”) (Singapore Foreign Exchange Market Committee)

The Singapore Foreign Exchange Market Committee (SFEMC) is a committee which aims to foster the continual
growth of the Singapore financial market as a leading international centre for transactions in foreign exchange,
money markets, fixed income and derivatives instruments. SFEMC regularly reviews market conduct and
practices to ensure that they conform to international best practices and safeguards the integrity of the
system.

The Blue Book produced by the SFEMC sets out the principles governing the conduct of participants in the
financial markets. The purpose of the Blue Book is meant to provide a benchmark for high standards of
business conduct and good market practices with the relevant financial products. This helps to facilitate
market efficiency and seeks to minimize disputes between counterparties. Its specific objectives are:
• To foster the growth and development of the wholesale financial markets in Singapore;
• To enhance the stature and reputation of the Singapore markets by promoting high standards of
professional conduct and competencies;
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• To discuss technical issues and recommend appropriate standards and codes of conduct for use in the
market. In this capacity, the Committee is responsible for the Blue Book;
• To serve as a channel of communication amongst market participants and the MAS; and
• To mediate disputes among market participants where the parties involved agree to such mediation.

The Blue Book covers several codes of conduct and standards, such as:

1. General Dealing Principles and Market Conduct;

2. Ethics & Behavioural Standards;

3. Governance, Risk Management and Compliance Principles;

4. Back Office Practices; and

5. Dealing Practices of Different Instruments (FX, Debt Securities, Swaps, OTC Derivatives etc.)

Recommended market conduct practices for wholesale dealings in OTC markets is also encapsulated in the
Blue Book.

5.4.4 The Foreign Exchange Global Code (Bank for International Settlements)

Established on 17 May 1930, the Bank for International Settlements (BIS) is the world's oldest international
financial organisation, comprising 63 member central banks. The mission of the BIS is to serve central banks
in their pursuit of monetary and financial stability, to foster international cooperation in those areas and to
act as a bank for central banks. BIS is headquartered in Basel, Switzerland and has four departments –
monetary and economic, banking, innovation, and general internal support.

The objectives of the BIS are to:

i. Foster discussion and facilitating collaboration among central banks;
ii. Support dialogue with other authorities that are responsible for promoting financial stability;
iii. Carry out research and policy analysis on issues of relevance for monetary and financial stability;
iv. Act as a prime counterparty for central banks in their financial transactions; and
v. Serve as an agent or trustee in connection with international financial operations.

BIS has produced a Foreign Exchange (FX) Global Code, which constitutes some of the global principles of good
practices for the wholesale FX market. The guidelines provided by the Code aims to promote the integrity and
effective functioning of the wholesale FX market by ensuring that it is fair, robust, liquid and open. The Code
is intended to serve as a supplement to local rules and regulations in place by highlighting good practices and
processes.

The FX Global Code is organised around 6 leading principles:

i. Ethics;
ii. Governance;
iii. Information Sharing;
iv. Execution;

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v. Risk Management and Compliance; and

vi. Confirmation and Settlement Processes.

5.5 Best Execution Practices for Dealing in Derivatives Contracts

This section seeks to give guidance on the elements of best execution practices, where CMS licence holders
and their representatives should also be aware of and incorporate such guidelines into providing the best
trade execution services for their clients.

Best execution refers to the responsibility of the derivatives dealing representatives of CMS licence holders
in taking reasonable steps to obtain the most advantageous trade result for their clients. This includes
considering the price, costs, speed, likelihood of execution and settlement, size, execution quality or any other
factor that is relevant to the order execution. It is also essential that representatives ensure that their clients
fully understand the nature and potential risks of the products offered to them, before the transactions are
executed123

The Guidelines on Standards of Conduct for Financial Advisers and Representatives (FAA-G04) 124 issued
pursuant to section 64 of the FAA sets out that a financial adviser should take all reasonable steps to execute
client orders promptly, in accordance with the instructions of clients and on the best available terms. The
financial adviser should also provide its clients with prompt written confirmation or documentation that the
clients’ orders have been executed. CMS licence holders and their representatives should similarly familiarise
themselves with applicable obligations under the FAA in executing transactions on behalf of clients.

In addition to FAA-G04, MAS has issued a Notice on Execution of Customers’ Orders (SFA 04-N16), together
with accompanying guidance (SFA 04-G10)125. A CMS licence holder which places and/or executes customers’
orders for capital markets products must, in a manner that is commensurate with the nature, scale and
complexity of its business, implement written policies and procedures to deal with:

i. customers’ orders on the best available terms; and

ii. comparable customers’ orders in accordance with the time of receipt of such orders.

To achieve the best available terms for customers’ orders, the CMS licence holder should consider different
factors holistically, including but not limited to price, costs, speed and likelihood of execution. The relative
importance of the factors should consider the circumstances of the order and type of capital markets product.

A CMS licence holder should also not receive Payment for Order Flow (PFOF) in placing and/or executing
customers’ orders. PFOF refers to commission or other form of payment which a CMS licence holder receives
from another broker/counterparty in return for routing customers’ order to that broker/counterparty. The
receipt of PFOF introduces conflicts of interest as the CMS licence holder may be incentivized to route

123
The Singapore Guide to Conduct & Market Practices for the Wholesale Financial Markets, April 2018 - Chapter III, General Dealing
Principles and Market Conduct Section 3.2.
124 Guidelines on Standards of Conduct for Financial Advisers and Representatives [FAA-G04] Sections 5.2 and 5.3 – Prompt and Best
Execution.
125 MAS Notice on Execution of Customers’ Orders (SFA 04-N16), and MAS Guidelines to MAS Notice SFA 04-N16. The Notice and
Guidelines took effect on 3 March 2022.
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customers’ order to another broker/counterparty in pursue of commission or other form of payment from
that broker/counterparty.

The CMS licence holder should monitor the effectiveness of its best execution policies and procedures. It
should also provide adequate disclosure to customers on such policies in a clear and easily understood
manner.

5.5.1 Elements of Best Execution Practices

5.5.1.1 Speed and Likelihood of the Execution

Levels of volatility affects both price and volume. Thus, CMS licence holders and representatives should seek
to execute client orders as fast as reasonably possible. When prices are volatile, a client placing orders with
large volumes can create order imbalances and backlogs, affecting the speed and likelihood of the execution.

5.5.1.2 Price Improvement and Overall Consideration of Costs

Price improvement refers to the opportunity, but not the guarantee, for an order to be executed at a better
price than what is quoted publicly. Orders in OTC and listed derivatives products are routed to market makers
and/or market centres if there are opportunities for price improvement. The criteria to be used by other
market-makers and/or market centres include:
• Automatically filling pending limit orders with incoming market and limit orders; and
• Crossing transactions where price improvement is offered to one or both sides of the trade.

5.5.1.3 Size Improvement

CMS licence holders should always seek markets which provide the greatest liquidity and the possibility for
execution of large orders. They should always be on the lookout for opportunities for client orders to benefit
from order-size guarantees offered by exchanges and other market participants.

5.5.1.4 Overall Execution Quality

When determining how and where to route or execute an order, CMS licence holders should draw on the
professional knowledge and experience with various markets and market makers, focusing on an accurate and
efficient execution.

5.5.1.5 Client-Specific Instructions

Whenever there is a specific instruction from the client on how to execute the order, CMS licence holders
should always execute client orders according to the instructions given. Consequently, if a client requires an
order to be executed in a particular manner that is not in accordance with the best execution principles, the
client should clearly state the desired method of execution when he places the order.

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Example – Client using Direct Market Access

The client may choose to execute an order via a CMS licence holder’s Direct Market Access (DMA) system,
with the client selecting certain parameters of the trade. In these cases, the CMS licence holder will be
deemed to have satisfied its duty of best execution, in respect of those parameters specified by the client.

However, if the CMS licence holder had not respected the parameters specified by the client, it should justify
its actions or it may be deemed to have not met the duty of best execution for its client.

In the event that a client’s instruction is unclear, the CMS licence holder and its representatives will determine
any non-specified components of the execution in accordance with these best execution principles.

The responsibility of the CMS licence holder and its representatives to provide best execution not only relates
to price but also involves the consideration of various factors, including cost, speed and likelihood of execution
and settlement. Even if a trade has not been executed at the best possible price, this does not necessarily
constitute a violation of best execution practices.

Naturally, price would be of high priority in obtaining the best result possible for clients. However, in certain
circumstances, the CMS licence holder may prioritize the speed and likelihood of execution over immediate
price and cost factors, if they are critical in delivering the optimal result. This happens when there are large
client orders with illiquid shares or when a stop-loss has been triggered.

5.5.2 Principles for Best Execution Practices126

5.5.2.1 Roles and Capacities of a Representative

Representatives should clearly distinguish their roles and capacities in managing and executing trades for their
clients (or principals). They may have an agreement with the client as to their roles in regard to executing
trades, or they may manage their relationship by determining their roles before executing each trade. The
representative receiving a client order may either act as an agent or principal. A representative acting as an
agent executes an order on behalf of the client which is strictly governed by the investment mandate.
However, a representative acting as principal can take on more risks with that order and he acts on his own
behalf. There is no obligation to execute the order until both parties have struck an agreement.

5.5.2.2 Fairness and Transparency

Representatives should handle clients’ orders with fairness and transparency. When communicating with the
clients about the execution of their trades, representatives should always be truthful in their statements and
use clear, unambiguous language. They should also establish procedures to analyse and advise on the trades
made by the clients. Lastly, the clients’ trades before and after the execution should be recorded.

5.5.2.3 Cross Trades

CMS licence holders should have a policy in place to regulate cross trading and only facilitate the purchase and
sale transactions between client accounts when it is in the best interest of both clients. This must be
appropriate and relevant to the investment objectives of both clients, and must also adhere to the guidelines
and restrictions provided.

126 BIS FX Global Code July 2021 – Execution.

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Cross trading between staff personal accounts and client accounts should be prohibited. Cross-trading using a
house account, which can be controlled by both the representative and client, should also be prohibited.

5.5.2.4 Risks

It is important that the representative ensure that clients are aware of the risks associated with the trades
they want to execute. The clients should clearly communicate to representatives their expectations in
executing the orders.

5.6 Applying the Ethical Framework to Resolve Ethical Dilemmas

In order to apply the ethical framework effectively, representatives should diligently go through a fact-finding
process so as to identify and resolve the ethical issues. Some key factors to consider and appropriate questions
to ask are:
i. Gather relevant facts and identify existing problem
• Have I acquired all the necessary information to properly assess the situation at hand?
• What assumptions am I making? What facts can be used to replace the assumptions made?
• What is the source of the ethical dilemma? What factors are causing the problem?

ii. Consider the ethical issues involved

• What are the ethical issues being involved? Which professional and personal codes of ethics apply
here?
• What are the threats to complying with these fundamental ethical issues? Are there any obvious
ethical conflicts?
• Would these issues compromise the integrity of the investment and trading profession?
• Would these issues affect the interest of the public?
• Would these issues affect the capital markets at large?
• Would these issues affect the client’s interests?
• What are my personal interests in this issue? Is my judgement clouded by my personal biases?
iii. Identify the affected parties
• Who are the key stakeholders that are involved in this issue?
• Is it at an individual, departmental or an organisational level?
• What are the conflicts between the different stakeholders?
• Who are my allies? Do I have any colleagues or superiors that I can trust with this information?
• Would my decision and action cause ripples in the market and create market instability?

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iv. Refer to the firm’s internal reporting procedures

• What are my firm’s policies and procedures in reporting issues of ethical conflicts?
• Does my firm have an internal whistleblowing mechanism in place?
• When should I start seeking help from external sources if things do not go as planned?

v. Evaluate alternatives to resolve the issue

• Are there any better alternatives to resolve the issue?
• Will alternative actions result in better outcomes for others?
• Which course of action would best benefit the financial industry and society?

vi. Implement the best course of action and monitor its progress
• Monitor the results of the action you have taken.
• Document your thought processes and decision making upon implementing the action. Written
records can prove useful in capturing the ethical issues encountered and justifying your actions.

Example 1 – An Ethical Dilemma

John is facing pressure to hit his commission targets, and is worried that he may potentially lose his job if
he does not close the deal. This pressure may affect John’s objectivity in recommending suitable choices for
his client.

If John carefully analyses his situation in accordance with the Ethical Framework, he should come to the
conclusion that his best alternative would be to alert his superiors about his plight.

What John can do is to request for his superiors to monitor his recommendations and dealings with his
clients until his case closes.

Example 2 – Application of the Ethical Framework

Jordan works as an investment adviser at Oakmont Investments and has accumulated several years of
experience in advising clients about their investment decisions. Being very familiar with the client
onboarding process, Jordan always ensures that he follows a framework that allows him to cover all the
necessary details whenever he is providing advice to a client.

Jordan has a new client, Jared, who is coming close to retirement. Jared wants to earn more money through
investing before he retires. However, Jared is not sure whether he should engage in an aggressive investing
strategy or a conservative strategy.

Firstly, Jordan conducts a full fact finding about Jared’s financial goals and objectives, investment profile
and risk tolerance. Jordan notes that Jared is close to retirement and currently has a stable income from his
full-time job. Jordan also realises that some of Jared’s debts have not been fully paid. The bulk of Jared’s
debts come from his mortgage and car loans.

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Even though Jared has told Jordan that he would prefer to invest aggressively as he has a high risk tolerance,
Jordan convinces Jared that his main objective should be to secure funds for his retirement. This also
includes paying off his remaining debts. In order to work towards that objective, Jordan highly recommends
that Jared’s portfolio should be conservative instead of aggressive.

Jordan suggests a portfolio mix whereby 70% of the portfolio should be invested in fixed income securities,
15% in cash and equivalents, and the remaining 15% in equities. Jared eventually concurs with Jordan’s
assessment and agrees to go ahead with Jordan’s recommended portfolio mix.

After the execution of Jared’s investments into the different asset classes, Jordan carefully monitors Jared’s
portfolio and updates him every month on the performance of his portfolio.

From this example, Jordan has demonstrated the importance of having an in-depth knowledge about his
client’s investment profile, investment objectives, and the characteristics of the investment products.

Although Jordan is aware that recommending an aggressive strategy could have generated more
commissions for him, he has prioritized the client’s interest and recommended a conservative portfolio mix
given the client’s financial status. As such, Jordan has demonstrated care and loyalty towards his client.

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Chapter 6:
Derivatives Dealing Practices and
Skills
Learning Objectives
The candidate should be able to understand the:
✓ Framework of the trading strategy process and its principles:
• Trading Strategy Formulation; and
• Trading Strategy Implementation.
✓ Client servicing practices which are highly recommended by industry standards.
✓ Processes involved in carrying out:
• Customer Account Review (CAR);
• Customer Knowledge Assessment (CKA); and
• Specified Investment Products (SIP) Trading Account opening.
✓ Different types of risk associated at both institutional and individual level, and the appropriate risk
management actions.

6.1 Introduction

A CMS licence holder and its representatives who recommend any products127 to a prospective client are
generally required128 to have a reasonable basis for any recommendations made to the client.

There are some exceptions to the standards where a CMS licence holder and its representatives merely carry
out a client’s instructions without making any recommendation, or where a CMS licence holder or its
representatives are exempt from such standards in relation to a recommendation of a listed excluded
investment product (subject to certain conditions129, including providing a rationale for the execution-related

127 MAS Guidelines for Conduct of Business for Execution-Related Advice (FAA-G08), Paragraph 4 – Definitions states that capital
markets product means any capital markets product that is a specified product other than a listed prescribed capital markets
product or a futures contract. “specified product” has the same meaning as in section 2(1) of the SFA.
128 Financial Advisers Act (FAA) – Part 3 Conduct of Business, Section 36 - Recommendations by licensed financial advisers; MAS
Notice on Guidelines on Conduct of Business for Execution-Related Advice (FAA-G08) – Paragraph 5.
129 Regulation 33A of the Financial Advisers Regulations.
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advice given, and a notice to the client that the advice does not take into account the client’s objectives or
needs and the client needs to assess the suitability of the investment).

This Chapter focuses on understanding the general overview of the investment advisory process. It is
important for CMS licence holder and its representatives to know how the investment advisory process works
and how it leads up to an overall investment strategy constructed for the client. The overall investment
strategy will also ultimately affect how the client’s trades are being executed.

6.2 Analysis of Market Information

At a macro level, the analysis of financial markets involves monitoring the relative performance of financial
instruments in different asset classes, such as equities, bonds, commodities, futures, options and swaps. In
the modern world, there are several different methods of financial analysis that aid in understanding the
underlying market trends of the various asset classes. They can be generically classified as follows:

• Fundamental Analysis - Studies the financials of an industry or a company using financial ratios and
valuation models to ascertain the intrinsic value of that particular industry or company. Fundamental
analysis is usually applied to study equities.

• Technical Analysis - Uses historical price movements displayed on a chart as guidance to gauge and
make future investment decisions.

• Global Macro Analysis - Interprets and predicts large-scale events in relation to macroeconomics,
history and international relations. The analysis typically employs forecasts and analysis of interest
rate trends, government policies, political changes and other systemic factors.

These different financial analysis methods can be suited for different types of asset classes and different
investment strategies. For example, when a client wishes to invest in equities and has a long-term investment
horizon, fundamental analysis would be most suitable for developing his strategy, as it takes into account the
profitability of a company over a longer period of time. In contrast, technical analysis may be better suited for
investment strategies with short-term horizons, as market fluctuations are more significant in the short term.

With the advent of the internet age and media, there has been a massive influx of intelligence gathering from
the markets. This is a broad subject and can include obtaining information about a certain capital markets
products or sector through different sources (e.g. from financial news media, broker subscription or third party
research). However, the CMS licence holder and its representatives must still conduct due diligence on a
regular basis to ensure that information obtained is objective and with reasonable basis.

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Example – Market Intelligence Gathering

Jonathan is a senior derivatives analyst working for a hedge fund called Kappa Capital (Kappa). He is given
the task of conducting market research about a certain company, Theta Corporation (Theta). Kappa is
interested in purchasing Theta’s shares as Jonathan’s primary research has shown that Theta’s
fundamentals are strong. However, Jonathan has also come across a conflicting report written by Alpha
Research Company (Alpha) highlighting questionable practices about Theta’s accounting systems. The
conflicting report affects Jonathan’s decision to pitch the trade to his superiors about going long on (i.e.
buying) Theta’s shares.

Jonathan has decided to conduct further research on the background of Alpha and the writer of the research
report. It turns out that the writer was an ex-employee of Theta that was recently fired. Furthermore, Alpha
has only been around for 6 months. After careful consideration, Jonathan decides to disregard the negative
report.

What Jonathan has done was to further conduct research on the credibility of the report. Apart from
analysing the data from the report, he manages to investigate the experience of the research company
Alpha, as well as the motivation behind the publication of the report. Jonathan suspects that the research
report may be biased because of the writer’s background.

6.3 Trading Strategy Formulation

6.3.1 Analysis of Overall Investment Objective

After ascertaining the client investment profile and conducting the relevant market research, the CMS licence
holder and its representatives have to reassess the client’s overall investment objective. This includes clearly
stating the purpose for trading, such as the primary purpose for engaging in this trading strategy - Is it to
capture excess returns from the market or to hedge against market risks?

Example – Trading Strategy Formulation

Daniel has two clients, Tom and Harry. Both clients have roughly around the same annual income and have
a healthy financial status. However, Tom has a much higher risk tolerance than Harry. Tom’s trading strategy
is to seek excess returns (alpha), hence he is willing to invest aggressively. However, Harry is looking for a
steady rate of return with low volatility, which he aims to achieve by hedging against market risks.

In this case, Daniel should recommend a portfolio to Tom where he can invest in higher-yield but risker
securities, such as small-cap equity stocks or equity derivatives, and a large portion of Tom’s portfolio can
be dedicated to these higher-yield securities. However, as for Harry, Daniel should recommend a portfolio
with more allocation to fixed income instruments, as there is less volatility and a steadier rate of return as
compared to small-cap stocks or equity derivatives.

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6.3.2 Return and Risk Objectives

The CMS licence holders and their representatives should highlight details of the overall investment strategy
to clients. This includes details about the return and risk objectives of the investment strategy used for the
clients’ investments or portfolios.

6.3.2.1 Performance Target

The CMS licence holders and their representatives should consider what returns are needed in order to satisfy
the overall objectives of their clients. There should be careful specifications on how the performance target
that is set is able to meet the main investment objective of the client.

The CMS licence holder and its representatives should also consider all possible asset classes which may be
invested in the portfolio, as different asset classes may have different returns. Both the client and the CMS
licence holder and its representatives can use risk-adjustment techniques to compare the performance of their
returns against benchmarks like stock market indices.

6.3.2.2 Spending Costs/Assumptions

What are the likely costs that will be incurred when investing into certain asset classes? This includes fees,
taxes, inflation and anticipated spending, which is useful as a guide to make realistic assumptions.

6.3.2.3 Portfolio Asset Allocation

The CMS licence holder and its representatives should designate target allocations for each asset class in the
portfolio, including setting an allowable range within each asset class. They are responsible for delineating the
asset allocation strategy to the client, as well as maintaining the client’s portfolio.

6.3.2.4 Risk Tolerance

Does the trading strategy take into account temporary negative returns and losses that may occur over time?
CMS licence holders and their representatives should ensure that investors are aware of the relevant risks,
such as business, liquidity, geo-political, and regulatory risks, among others.

Even after the client’ risk tolerance has been outlined in the initial Client Investment Profiling, it must be
continually monitored. Gauging clients’ risk tolerance is subjective and may be a challenge, especially for
individual clients. The CMS licence holders and their representatives need to continually conduct
reassessments of the client’s risk tolerance.

6.3.3 Constraints of Trading Strategies

The CMS licence holders and their representatives must address the possible constraints that may affect a
client’s investment strategy and portfolio. Most of these constraints are closely tied to the risks associated
with the client’s investment portfolio.

6.3.3.1 Trading Strategy and Time Horizon

When formulating a trading strategy for the client, the CMS licence holder and its representatives would do
well to highlight the time period the position is going to be held for. It could be for as short as a few days or

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weeks, and can extend to months and years. This would ultimately depend on the client’s intention on
executing the trade, whether it is to capture quick profits from potential spikes in prices, or to hold the position
in order to accumulate cash flow.

6.3.3.2 Liquidity Maintenance

In some cases, clients may have a need to withdraw cash in order to fulfil their short-term needs. The CMS
licence holder and its representatives should discuss these specifications with the client and prepare for
situations with possible liquidity constraints.

6.3.3.3 Legal Constraints

The CMS licence holder and its representatives should conduct due diligence to find out and comply with any
possible legal regulations and restrictions that may affect the client’s investment portfolio or trades.

6.3.3.4 Restrictions on Foreign Investment

The CMS licence holder and its representatives must take note of the client’s portfolio exposure in foreign
investments and trades. Clients may choose to limit these exposures to investments in foreign countries
because of investment, economic or political reasons. Administrative costs may also be a cause for concern
when investing in foreign assets.

6.3.4 Risk Management of Trading Strategy

When formulating trading strategies for clients, the CMS licence holder and its representatives must also
incorporate the proper steps to avert or reduce risk if necessary.

6.3.4.1 Risk Measurement and Evaluation

The CMS licence holder and its representatives should use consistent metrics to assess and evaluate the risk
profile of the proposed trading strategy. This is important in order for meaningful comparison to be made in
gauging the performance of the portfolio. The CMS licence holder and its representatives must avoid the
inappropriate use of metrics in an attempt to disguise any risks involved.

6.3.4.2 Outline Process for Rebalancing Investment Portfolio and Trade Positions

The CMS licence holder and its representatives should plan out a rebalancing system with the client in the
event of the portfolio’s exposure to volatility and risk. A rebalancing system would aid in changing the
exposure of certain positions in order to reduce risk that may potentially arise from a certain event.

For example, if the CMS licence holder and its representatives suspect that oil prices are going to spike due to
macroeconomic events, they may want to reduce the weightage in oil futures or equities in the energy sector.
In portfolio management, this is also known as tactical asset allocation, which is an active management
strategy that shifts the weightages of certain assets to take advantage of market mispricing or strong sectors.

6.3.4.3 Risk Management Framework

An example of a simple risk management framework can involve:

i. Risk Identification – Identifying possible risks to the trading strategy.

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ii. Risk Assessment – Making initial qualitative assessments of the possible risks involved, as well as
estimating the probability and the impact of the risks if they occur.

iii. Risk Evaluation – Making thorough quantitative assessments and measurements to better estimate the
probability and impact of the risks.

iv. Risk Response – Planning the response to each of the risks addressed. This should also include taking into
account any relationship between individual risks.

v. Risk Reporting – Reporting on the outcome of the policy execution and evaluating whether the response
has mitigated or significantly reduced the risks. Regularly evaluating the entire risk management
framework and process to make the appropriate feedback and amendments.

Figure 6.3.4.3 provides an example of a summarized risk management framework.

Figure 6.3.4.3 – Example of a Summarized Risk Management Framework

Risk
Identification

Risk Risk
Reporting Assessment

Risk Risk
Response Evaluation

6.4 Trading Strategy Implementation & Monitoring

6.4.1 Recommendations on Capital Markets Products130

The CMS licence holder131 and its representatives are expected to have sufficient knowledge of their client’s
investment objectives, financial situation and needs before they advise on sales or purchases of capital

130 MAS Notice on Guidelines on Conduct of Business for Execution-Related Advice (FAA-G08), Paragraphs 7 to 10.
131 Under the FAR Regulation 33A(8) regulations, a CMS licence holder falls under the definition of “dealer” which means a person
exempt from holding a financial adviser’s licence under section 23(1)(a), (b) or (d) of the Act and who carries on a business of
providing execution-related advice. As discussed in Section 6.1, dealers or their representatives are exempted from such
requirements if they merely carry out a client’s instructions without making any recommendation, or where they recommend a
listed excluded investment product (subject to fulfilling conditions under FAR Regulation 33A).
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markets products suitable for the client. Thus, it is not normally possible for the CMS licence holder and its
representatives to offer such advice to a new client before the relevant information is obtained.

Obtaining relevant information about the client is usually done at the time when the relationship is first
established. If execution-related advice 132 is provided on an on-going basis, a CMS licence holder and its
representatives should update the client’s profile and conduct a needs analysis at least once a year. This is
also consistent with good business practice of reviewing clients’ profiles and needs on a regular basis.
Additionally, where products are traded on a margin basis, the CMS licence holder and its representatives
should highlight the risk of such products to the clients.

When a client does not wish to accept any of the product recommendation given by the CMS licence holder
and its representatives, the CMS licence holder and its representatives can proceed with the client’s request.
This should be followed by a documentation of the client’s decision and a warning to the client that any
recommendation made, or advice given would not take into account his investment objectives, financial
situation and risk tolerance. Ultimately, it is the client’s responsibility to ensure the suitability of the product
recommendations.

6.4.2 Documentation and Record Keeping133

It is the duty of the CMS licence holder and its representatives to maintain the client’s profile and to record
the recommendation or warning made to the client. The recording can be in the form of file notes or tapes of
a conversion. This will assist both the client and the CMS licence holder and its representatives in resolving
any disputes regarding the advice provided, based on the client’s investment profile.

As best practice, MAS recommends that the CMS licence holder and its representatives maintain their records
for at least 5 years. The nature of the records to be kept can be determined by the CMS licence holder and its
representatives, taking into consideration factors such as the nature of the client’s business and the likelihood
of the client disputing that the advice was given without due consideration of the client’s investment profile
and financial needs.

6.4.3 Disclosure of Conflicts of Interest134

The CMS licence holder and its representatives should disclose any potential conflict of interest to their clients,
either in writing or orally. However, once disclosed, the CMS licence holder and its representatives are not
required to make such a disclosure every time they make a recommendation or provide execution-related
advice to a client, provided that:
i. The previous disclosure remains up-to-date, accurate and comprehensive; and
ii. The client can be reasonably expected to be aware of the previous disclosure.

The CMS licence holder and its representatives should also take note whether there is a long lapse between
the current recommendation and the previous disclosure. The CMS licence holder and its representatives
should also consider whether the client is likely to assume that the current recommendation given by the CMS
licence holder and its representatives no longer applies to the previous disclosure. If ever in doubt, the CMS

132
Under the FAR Regulation 33A(8), “execution-related advice” means advice provided on any listed excluded investment product
which is solely incidental to the execution activities of a dealer with no discrete fee charged by the dealer for the advice rendered.
133 MAS Notice on Guidelines on Conduct of Business for Execution-Related Advice (FAA-G08), Paragraphs 11 and 12.
134
MAS Notice on Guidelines on Conduct of Business for Execution-Related Advice (FAA-G08), Paragraphs 13 and 14.
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licence holder and its representatives should not hesitate to disclose to the client about any conflicts of
interest that could potentially occur.

6.4.4 Disclaimers135

The CMS licence holder and its representatives can choose to include formal disclaimers in their documents
to their clients that they are in the business of only executing trades for their clients. If these disclaimers are
made, the CMS licence holder and its representatives should ensure that they set up procedures and systems
to ensure that they do not provide any advice to clients.

All CMS licence holder and its representatives will still be subject to the same rules and regulations by the
authorities. Such disclaimers stating that it is the responsibility of the client to ensure the validity of the
recommendation will not remove the CMS licence holder and its representatives of their liabilities imposed
under the SFA or the FAA. MAS will enforce the provisions under the SFA and FAA to ensure that clients enjoy
the protection accorded to them.

6.4.5 Execution

After profiling the client and formulating the trading strategy, the CMS licence holder and its representatives
and the management team would have to create the portfolio. Depending on how actively involved the client
chooses to be, the portfolio will be structured with the CMS licence holder and its representatives and most
likely a portfolio management team.

There are certain questions to be considered when executing the entire trading strategy:
• What is the size of the client’s investments/ trades?
• What is the frequency and speed of the investments/ trades being made?
• What are the trading costs (e.g. commissions, bid ask spread, price impact) involved?
• Are derivatives used to reduce or enhance the risks taken?

A good trading strategy takes into consideration the following three factors:

i. Small, liquidity-oriented trades can be packaged and executed via direct market access and algorithmic
trading. Direct market access refers to platforms that permit buy-side representatives to directly access
equities, fixed income, futures, and foreign exchange markets via access sponsored by the broker;
ii. Larger trades can receive custom handling. Large, information-laden trades also demand immediate
skilled attention and experienced representatives are needed to manage the tradeoff between impact
and delay costs by releasing the minimum amount of information into the market that is required to get
the trade done; and
iii. In addition to best execution, the representatives must be cognizant of client trading restrictions, cash
balances, and brokerage allocations, if any.

135 MAS Notice on Guidelines on Conduct of Business for Execution-Related Advice (FAA-G08), Paragraphs 15 and 16.
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6.4.6 Risk Management Skills in Dealing

Risk Management can be simply defined as the practice of setting and maintaining acceptable loss levels given
a person’s capital, trading strategy and personal risk tolerance. Effective risk management should be
conducted on every trade and is ideally monitored over long-term periods. The difference between a
professional representative from the rest would be the ability to adhere to the strict guidelines regarding risk.

6.4.6.1 Stop Loss

A stop loss is not only the most basic risk management tool for a professional representative, but is also the
most important. A stop-loss is a price which the representative has decided that a loss is too large and he has
to exit the trade. Once the price of the asset hits the stop-loss level, the position is automatically liquidated,
and the loss will be accepted. This prevents a representative from holding on to losing positions that have
already exceeded his risks limits.

6.4.6.2 Daily Loss Limit

A daily loss limit sets a maximum loss for a representative for any given day. When this limit is reached, the
representative must either liquidate all positions, or else be prevented from entering into new positions. This
helps to protect a representative from making further impulsive trades and taking excessive risks in order to
recoup his losses.

6.4.6.3 Value at Risk (VaR)

VaR is a statistical technique used to quantify the level of risk within a portfolio within a specific time frame.
Representatives often use this technique to determine the extent of possible losses in their portfolios or
positions. VaR can be applied to specific positions, portfolios or even as a measure of firm-wide risk exposure.

6.4.7 Performance Monitoring Evaluation

The implementation process also refers to monitoring the progress of the trading strategy, and how to best
execute changes to the trading strategy in light of changing market conditions and investment returns. The
CMS licence holder and its representatives should ensure that there is regular communication with the client
when any changes are made.

CMS licence holders and representatives should also keep watch if the portfolio is actively handled by a
discretionary portfolio manager:
• What kind of risks is the portfolio manager taking?
• What kind of returns is the portfolio manager making?
• Is the portfolio manager outperforming or underperforming?

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Figure 6.4.7 provides an example of a summarized performance monitoring system.

Figure 6.4.7 – Example of a Summarized Performance Monitoring System

Establish
Performance
Management
Plan

Monitor
Improve
Performance
and Refine
Under Market
Portfolio Conditions

Record,
Create Report
Analyse and
on Action for
Improvement
Explain
Variances

6.5 Customer Account and Know-Your-Customer Requirements 136

Where the customer is a retail customer and wishes to trade in Specified Investment Products (SIPs), the CMS
licence holder and its representatives shall formally assess the customer’s knowledge and experience before
allowing him to trade in such products. Such an assessment is termed a Customer Account Review (CAR) or
Customer Knowledge Assessment (CKA).

A CMS licence holder and its representatives shall conduct a CAR before opening an account for a customer
to transact any Listed SIPs. For the purpose of the CAR, a CMS licence holder and its representatives shall take
into consideration the information on a customer’s educational qualifications, investment experience and
work experience. When a customer does not provide adequate information, the CMS licence holder and its
representatives shall deem the customer not to possess knowledge or experience in derivatives.

136 MAS Notice on Sales of Investment Products (SFA 04-N12).

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6.6 Specified Investment Products Trading Account 137

SIPs are complex products, which commonly are derivatives or structured products. 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 notes (e.g. equity-linked structured
• Structured warrants notes, credit linked structured notes)
• Futures • Certain collective investment schemes (CIS)
• Certificates • Certain investment-linked life insurance policies
(ILPs)

6.6.1 Customer Account Review and Customer Knowledge Assessment

CMS licence holders and their representatives are required to conduct CAR or CKA assessments for any
customers who wish to trade in listed or unlisted SIPs, as not all customers have the knowledge or experience
to be able to assess a SIP’s complex features and risks.

When conducting the CAR or CKA, a retail customer would be deemed to have sufficient knowledge if he:

i 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 Has professional finance-related qualifications, such as Chartered Financial Analyst (CFA) or the
Association of Chartered Certified Accountants (ACCA);

iii For CAR: Has transacted in SIPs which are listed or quoted on an exchange at least 6 times in the
preceding 3 years;

iv For CKA: Has invested or transacted in unlisted CIS or ILPs at least 6 times in the preceding 3 years; or
in unlisted SIPs (excluding CIS and ILPs) at least 6 times in the preceding 3 years; or

v 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.

Where a customer is assessed to not possess knowledge or experience in SIPs, but subsequently demonstrates
sufficient understanding of the features and risks of listed SIPs through a learning module provided by SGX

137 MAS Notice on Sale of Investment Products (SFA 04-N12).

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(the SGX Online Education Programme on SIPs) or passing of the CMFAS modules CM-SIP, 8A or 9A138, the
customer may be deemed to possess the knowledge to transact in listed SIPs139.

Where a customer is assessed to not possess knowledge or experience in an unlisted SIP, but subsequently
demonstrates sufficient understanding of the features and risks of such a product through a learning module
in respect of that unlisted SIP provided by The Association of Banks in Singapore and the Securities Association
of Singapore (the relevant ABS-SAS learning module) or passing the CMFAS modules CM-SIP, M8A or M9A, the
customer may be deemed to possess the knowledge to transact in that unlisted SIP. In this regard, a CMS
licence holder and its representatives are required to obtain and consider140:

i. the customer’s acknowledgement that he has personally undergone and passed the assessment or
examination;
ii. the customer’s previous score(s) of every assessment or examination taken; and
iii. the information relating to the number of times the customer has not been allowed to transact in that
unlisted SIP by another CMS licence holder.

Please refer to Appendices A and B for the criteria for the assessment of CAR and for satisfaction of the CKA.

6.6.2 Approval to Open Specified Investment Product Trading Accounts

A CMS licence holder and its representatives must not open a SIP trading account for a customer unless the
senior management of the CMS licence holder, who is not involved in that particular account opening process
and is not a connected person of that customer, is satisfied based on the outcome of the CAR or CKA that the
customer has knowledge or experience in listed SIPs (for CAR) or in unlisted SIPs (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 and its representatives 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 CMS licence holder and its representatives shall provide advice to the customer concerned.

Even if there is a positive outcome of the CKA, the CMS licence holder and its representatives should offer to
provide advice concerning the unlisted SIP to the customer. If the customer does not wish to receive advice,
the CMS licence holder and its representatives 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. The
CMS licence holder and its representatives 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. A
CMS licence holder who provides advice to the customers must also be an exempt financial adviser.

138
CM-SIP: Capital Markets – Specified Investment Products – Derivatives and Collective Investment Schemes (SIP); M8A: Collective
Investment Schemes II; M9A – Life Insurance and Investment-linked Policies II.
139
Practice Note on Sales of Investment Product (SFA PN-01).
140
Practice Note on Recommendations on Investment Products (FAA PN-02).
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6.6.3 Requirements for Customers who are Assessed Not to Possess Knowledge or Experience
in Unlisted SIPs

The CMS licence holder and its representatives 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 listed SIP trading account, the CMS licence holder and its representatives 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
listed 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 listed SIP trading account.

The CMS licence holder and its representatives shall inform the customer of the outcome of the CKA if he
is assessed not to possess knowledge or experience in derivatives following the CKA. If the customer
intends to proceed to transact in an unlisted SIP, the CMS licence holder and its representatives shall:

i 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 the CMS licence holder is also an exempt financial
adviser; and
ii where the CMS licence holder is also an exempt financial adviser, it and its representatives shall
provide financial advisory services to the customer in accordance with the standards set out in MAS
Notice on Recommendations on Investment Products (FAA-N16)141 issued under the Financial Advisers
Act (FAA).

6.6.4 Validity of the Outcome of CAR142

A CMS licence holder and its representatives must not allow a customer to transact in a listed SIP through the
Listed 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 and its representatives have checked and are 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 and its representatives have conducted a new CAR for the customer.

141 MAS Notice on Recommendations on Investment Products (FAA-N16).

142 MAS Notice on Sale of Investment Products (SFA 04-N12) – Paragraph 16 Validity of the Outcome of CAR.
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6.6.5 Validity of the Outcome of Customer Knowledge Assessment143

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

6.6.6 Documentation and Record Keeping144

A CMS licence holder and its representatives 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 or designated person to open the customer’s SIP trading account,
where applicable.

Where a CMS licence holder and its representatives transact 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 and its
representatives 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.

6.6.7 Requirements on Capital Markets Services Licence Holders Dealing in Overseas-Listed

Investment Products145

Overseas-listed investment products carry a different set of risks and levels of protection for investors. As
such, CMS licence holders and their representatives 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 Annex 4 of the MAS Notice on Sales of Investment Products (Appendix C) to the
customer and obtain the customer’s acknowledgement of the risk warning statement, in written form or
otherwise, before allowing the customer to transact146 in any overseas-listed investment product for the first
time.

143 MAS Notice on Sale of Investment Products (SFA 04-N12) – Paragraph 26 Validity of the Outcome of CKA.
144 MAS Notice on Sale of Investment Products (SFA 04-N12) – Paragraph 27-29 Documentation & Record Keeping.
145 MAS Notice on Sale of Investment Products (SFA 04-N12) – Paragraphs 29D-29K Requirements on Licenced Persons and Exempt
Financial Institutions Dealing in Overseas-Listed Investment Products.
146 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.
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6.6.8 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 the:

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

These and other risks may affect the value of the investment and customer needs to understand them before
he trades in foreign-listed investment products.

CMS licence holders and their representatives must maintain records of the customer’s acknowledgement for
a period of not less than 5 years147.

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

Where a CMS licence holder does not implement a system to identify and determine that an overseas-listed
investment product is to be classified as an EIP, the overseas-listed investment product shall be classified as a
SIP, and the requirements to conduct the CAR shall apply to a CMS licence holder and its representatives
dealing in the overseas-listed investment product for a customer.

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

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

6.7 Risk Management

This section aims to delineate the different types of risks and risk management that can be associated with
CMS licence holders. In order to implement effective risk management and sound internal controls, the
responsibility lies largely on the firm at a macro level. This includes the board of the firm in its oversight on
risk management, as well as the responsibility of the senior management to ensure that these practices are
sound, effective and robust. Lastly, the onus also lies on the individuals to carry out their professional duties
in risk management, compliance and audit functions.

147 SFA Section 102(3) - Keeping of Book and Furnishing of Returns.

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All stakeholders of the financial industry should be aware of the different types of risks that can affect them.
This is especially relevant for CMS licence holders where the importance of risk management lies in ensuring
that a framework is in place, should there ever be an unexpected event that would impact the CMS licence
holders internally.

6.7.1 Operational Risk148

Operational risk refers to a risk of loss that a company faces due to internal processes, such as breakdown of
internal processes, systems and people. Operational risk is independent of other types of risks, such as
financial, systematic or market-wide risk.

Operational risk management has become increasingly important over the years, especially as CMS licence
holders have been modifying their internal process and their products. As processes and products are
developing at a rapid pace, operational risks also increased. Consequently, regulators have been more
stringent about CMS licence holders taking on too much excessive risks that may affect them, both financially
and operationally.

Example – Collapse of Barings Bank

Barings Bank, a British bank based in London, suffered massive losses and collapsed in 1995. This was the
result from a rogue trader who dabbled in unauthorized trading, in which his speculative trades in futures
suffered massive losses.

The rogue trader was not only the floor manager for Barings Bank on the trading exchange, but he was also
the unit’s head of settlement operations, which effectively allowed him to settle his own trades. By doing
so, Barings Bank had compromised its accounting and internal controls, which led to its downfall.

It is important for CMS licence holders to have an effective and robust business continuity framework in
minimising the impact of operational disruptions. CMS licence holders should establish the following measures
to minimize operational risk:
i. Operational risk management policies and strategies to identify, monitor and control operational risk.
The risk management practices adopted should be consistent with the CMS licence holder’s capital and
risk profile, and take into account the current market conditions;
ii. Reporting mechanisms to notify the MAS of significant operational problems and breakdowns;
iii. Management processes with a focus on effective recovery and resumption of critical business functions
following an operational disruption; and
iv. Procedures to ensure that all critical processes are properly documented and that staff are adequately
trained in adhering to the policies and procedures. There should also be controls in place to detect any
deviation from policies as these could indicate a potential gap in the function being performed.

148
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6.7.2 Market Risk149

Market risk refers to the risk of a CMS licence holder suffering losses resulting from the movement of market
prices. Such movements include changes in FX rates, interest rates, credit spreads, equity and commodity
prices. When trading a derivatives product, representatives will make decisions and take on positions based
on their own investment analysis, whether fundamental or technical. For any investment made, there is always
a possibility that the investment will provide negative returns. One way to mitigate market risk would be to
diversify and invest in different kinds of asset classes.

Market risk is also highly related to other forms of risks such as credit or market liquidity risks. For example, a
credit rating downgrade of a listed company would lead to a drop in the price of the company’s shares. CMS
licence holders should be aware of the market risk that may affect their investments and should implement a
robust risk management strategy. An CMS licence holder should always consider the following factors:
i. Macroeconomic, market and liquidity conditions that can contribute to market risk;
ii. The CMS licence holder’s investment portfolio and how it would be affected if market risk increased; and
iii. Whether the CMS licence holder has a framework in place in order to identify, measure, evaluate,
monitor, report and control market risk.

6.7.2.1 Correlation Risk

Correlation risk refers to the correlation between different derivatives instruments, which may affect a
representative’s derivatives trades. For example, if a representative speculated on Gold Futures, he would
have to be aware of other financial instruments that can potentially affect the trade, such as the US Dollar. To
manage correlation risk, the representative must reduce on positions that are correlated with the derivatives
product that he is trading.

6.7.2.2 Political/ Legal Risk

Political or legal risks are risks to investments and trades resulting from political or regulatory changes in a
country. Such risks exist in every country around the world and varies in magnitude. These political or legal
risks may arise from changes in government policies, such as controls imposed on exchange rates and interest
rates, or even government interventions on prices, outputs and activities. Events outside of government
control, such as revolts or terrorism may contribute to a political risk within a country, and subsequently affect
prices of financial instruments associated with that country.

6.7.2.3 Gap Risk

Gap Risk is the risk that prices will change from one level to another with no trading in between. Gaps in prices
usually occur after an event, such as adverse news announcements, which can potentially cause the price of
a capital markets product to plummet. This is because representatives would buy or sell at extreme prices
after reacting to the new information. Representatives should take note of gap risks as gaps in prices can
sometimes fall below the stop-loss levels and positions must be liquidated possibly well below to stop-loss.

149
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6.7.3 Capital Risk

Capital Risk refers to the potential risk that a client’s account can lose part or all his principal invested. Capital
risk is generally inherent to all types of investments and trades; and there is a possibility that the client loses
his entire principal due to unforeseen circumstances if his positions have full exposure. In trading accounts
dealing with margins, the loss may even exceed the principal invested as the representative is relying on
borrowed capital to make the trades.

6.7.4 Technology Risk

With the rapid growth of information technology (IT), a variety of technological inventions in areas such as
system operations and mobile technology have helped CMS licence holders expand their service offerings to
clients. However, due to the increasing reliance on complex IT systems, CMS licence holders have also become
more susceptible to cyber-attacks and system shutdowns. CMS licence holders should continually improve on
their cyber security and technology risk management capabilities to prepare for any unexpected situations.

MAS has issued guidelines for CMS licence holders to comply with in terms of technology risk management150.
CMS licence holders would need to ensure that the maximum unscheduled downtime for their critical IT
systems do not exceed a total of more than 4 hours within any 12-month period. CMS licence holders also
must liaise closely with the MAS on their framework and processes for monitoring critical IT systems and their
system recovery testing. They are also required to notify MAS as soon as possible, but not later than 1 hour,
upon the discovery of a relevant incident relating to a system malfunction or IT security incident, which has a
severe and widespread impact on their operations or materially impacts their service to customers.

In addition, CMS licence holders are also required to comply with the cyber security requirements151 on:

i. securing administrative accounts;

ii. applying security patching;

iii. establishing baseline security standards;

iv. deploying network security devices; and

v. implementing anti-malware measures and strengthening user authentication.

6.7.5 Credit Risk152

Credit risk refers to the risk of loss that an obligor (e.g. client) will fail to meet its financial obligations in
accordance with agreed terms. Credit risk can arise from both on-balance and off-balance sheet transactions.
A CMS licence holder can also be exposed to credit risk from various financial instruments, such as FX, futures,
swaps, bonds, options and other derivatives or trade finance products.

The goal of credit risk management is to maximise a CMS licence holder’s risk-adjusted rate of return by
maintaining credit risk exposure within acceptable parameters. CMS licence holders need to manage the credit

150 MAS Notice on Technology Risk Management (Notice No. CMG-N02)

151 MAS Notice on Cyber Hygiene (Notice No. CMG-N03).
152
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risk inherent in the entire portfolio as well as the risk in individual credits or transactions. The effective
management of credit risk is a critical component of a comprehensive approach to risk management and
essential to the long-term success of any CMS licence holder.

Credit or counterparty risk happens when one of the parties involved in a derivatives contract, either the buyer
or seller, defaults on the contract. Derivatives may be traded over-the-counter (OTC), which are less regulated
than exchanges. The most direct way to reduce counterparty risk would be to reduce the credit exposure. The
aim is to minimize potential losses and the representative should always take into account risk limits when
trading derivatives.

6.7.6 Liquidity Risk153

Liquidity risk refers to the risk of a CMS licence holder being unable to meet its short-term financial obligations.
This may occur due to the inability of the CMS licence holder to convert financial assets into cash without
incurring unacceptable losses of capital. Liquidity risk often arise from other forms of risks such as credit risk.
For example, if the CMS licence holder was to suffer huge credit losses due to loan defaults, this could cause
major liquidity problems for the CMS licence holder, affecting its creditworthiness.

To effectively manage liquidity risk, CMS licence holders should establish and constantly review and monitor
their funding policies and strategy. The policy should also highlight how other forms of risks, such as credit or
operational risk, which can possibly affect the CMS licence holder’s funding strategy.

For representatives, liquidity risk may occur when they have entered a trade and plan to close out a position.
During times of low trading volume, the bid-ask spreads may be higher as the representative would need
higher compensation in handling the transaction. If the product is less frequently traded or less liquid, there
may be significant cost to the representative. In order to reduce liquidity risk, the representative can trade in
derivatives that are less volatile and have higher liquidity.

The CMS licence holder can also incorporate these measures:

i. Analysis of funding requirements over different scenarios;
ii. Maintenance of an unencumbered and highly liquid asset that can be used as a funding source in
uncertain situations;
iii. Diversification of funding sources and regular efforts to establish and maintain these relationships; and
iv. Regular review of the ability to liquefy assets.

6.7.7 Regulatory Risk

Regulatory risk refers to the risk that a change in laws and regulations in a country or a region can potentially
impact a company, industry sector, or market. Changes in laws and regulations enacted by the government
can increase the costs of operating a business or reduce the attractiveness of investment. An example of
regulatory risk would be increased stress test requirements imposed on CMS licence holders. CMS licence
holders must be more stringent in their capital preservation and ensure that they have enough capital and
liquidity.

153
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Example – The Dodd-Frank Act

The Dodd-Frank Wall Street Reform and Consumer Protection Act is a legislation passed by the United States
Government in 2010 as a response to the Global Financial Crisis that took place in 2008. The Dodd-Frank
Act is geared towards protecting consumers from predatory mortgage lending and ensuring the financial
stability of major firms that have considerable influence over the markets.

While these reforms can ensure more financial stability, it may also have the effect of restricting financial
institutions from conducting certain types of business. For example, the Volcker Rule (within the Dodd-Frank
Act) placed a ban on proprietary trading and restricted investment in hedge funds and private equity firms,
which may limit the flow of investments from both buy-side and sell-side firms.

Most importantly, CMS licence holders will have to comply with the regulations that are in place. A CMS licence
holder can minimize such regulatory risk by anticipating the outcomes of the regulatory impact and diversify
its business to other areas of the market.

6.7.8 Interconnected Risk

Interconnected risk refers to the risk arising from how institutions and systems are connected in such a way
that if one entity fails, the rest will fail along with it. On a larger scale, interconnected risk can also be referred
to as systemic risk, as one entity (e.g. an event at the company) could trigger instability or collapse of an entire
industry or economy.

For example, during the 2008 Global Financial Crisis, several bulge bracket banks had excess exposure to
mortgage-backed securities and housing-related assets. When America’s housing markets tanked, these
multinational banks suffered severe losses and triggered a worldwide financial crisis. Thus, representatives
have to be familiar with the interconnected risks that they are being exposed to when trading an asset class.

6.7.9 Provision of Support to Resolve Complex Risks

While it is essential that financial institutions including CMS licence holders have their own risk management
systems in place to resolve complex risks, regulatory authorities such as the MAS also provide regulatory
oversight to address such complex risks.

The MAS is the overall integrated supervisor of the financial service sector. One of MAS’ main roles is also to
keep track of the different types of risks associated with financial institutions including CMS licence holders
and to provide ample support in order to resolve such risks. To achieve this, MAS has created the
Comprehensive Risk Assessment Framework and Techniques (CRAFT)154. This risk-based supervision of the
financial sector by MAS seeks to reduce the impact of systemic risks that can greatly affect the capital markets.

Through the use of an Impact & Risk Model (Figure 6.7.9), MAS seeks to evaluate the potential risk that a
financial institution can bring. By doing so, MAS prioritizes their supervisory resources to firms that can
potentially have a huge impact on the financial markets. The risks assessed by the MAS would be the ones
mentioned in Section 6.7 but are not exhaustive.

154 MAS Framework for Impact and Risk Assessment of Financial Institutions.
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Figure 6.7.9 – Impact and Risk Model to Assess Risks of Different Financial Institutions155

After deriving the overall risk rating, the MAS then proceeds to develop a supervisory plan, which sets out
particular areas of coverage and selection of tools to address the risks and take corrective actions. Areas of
coverage would include identifying areas for supervisory attention, such as any significant activities, risk
management processes and governance issues.

The MAS has also diagnostic tools to identify problems at financial institutions at an early stage, whereas
remedial tools will involve collaborating with the financial institutions to achieve a specific outcome. In order
to mitigate the complex issues that will be involved with the firm, both types of tools have to complement
each other. Diagnostic work seeks to confirm whether the particular risk is relevant and material, while
remedial work sets clear plans to mitigate the risks. These plans are best achieved within a specific timeframe.

6.7.10 Management of Anti-Money Laundering and Countering the Financing of Terrorism

This section aims to highlight the sound management practices related to anti-money laundering (AML) and
countering the financing of terrorism (CFT), which stakeholders can follow on both institutional and individual
levels. The AML and CFT regime in Singapore, as well as the principles of due diligence and client onboarding
that financial institutions including CMS licence holders and individual representatives should adopt will be
further discussed in Chapter 7.

6.7.10.1 Comprehension and Assessment of AML/CFT Risks

Sound risk management of AML and CFT requires identifying, measuring and evaluating AML/CFT risks present
within the CMS licence holder and implementing policies which are commensurate with the identified risks. A
CMS licence holder should also develop a thorough understanding of the AML/CFT risks that are present within
its client base, products and services, delivery channels and areas in which clients conduct their businesses.

155 MAS Framework for Impact and Risk Assessment of Financial Institutions – Paragraph 3.1.
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6.7.10.2 Proper Governance

In order for AML/CFT risk management to be effective, there needs to be proper governance. The
responsibility is with the board of directors to oversee the risk management policies and compliance, ensuring
that all the different risks with regards to AML/CFT are accounted for. The board of directors should also have
a comprehensive understanding of AML/CFT risks. Any information that an employee receives should be
communicated to the board in a timely, accurate and complete manner, so that the board would be well-
equipped to make informed decisions.

6.7.10.3 Transaction Monitoring System

A CMS licence holder should have a monitoring system in place to track incoming and outgoing transactions.
This system should be commensurate with the CMS licence holder’s size, activities and any potential risks
associated with that CMS licence holder.

At any point of time, the monitoring system in place should allow the CMS licence holder to have access to a
centralised information library. With this, the CMS licence holder can risk-rate clients and monitor their
transactions with the relevant information at its disposal.

6.7.10.4 Customer Acceptance and Risk Profiling

Usually, the CMS licence holder will implement policies and procedures for client acceptance and risk profiling.
The policies and procedures aim to identify clients or prospective clients who are likely to pose a higher risk
of money laundering and terrorism financing threats. When assessing AML/CFT risk, the CMS licence holder
should thoroughly check through the client’s personal details, such as the client’s background, occupation,
source of funding and country of origin.

Such client acceptance and risk profiling policies require basic due diligence from the personnel who are
conducting the checks. However, the CMS licence holder must also ensure that the client acceptance and risk
profiling policies are not so restrictive that it hinders access to its services by the general public.

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Chapter 7:
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 (ML) / terrorism financing (TF);
• Sanctions & embargoes; and
• 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 capital markets
intermediaries and their representatives in the prevention and detection of financial crimes.
✓ The know-your-customer (KYC), 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; and
• Civil & Commercial risk.
✓ Reporting & filing requirements.
✓ Training requirements.

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7.1 Introduction

7.1.1 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 (ML);
ii. Terrorism Financing (TF);
iii. Embargoes and Sanctions; and
iv. Fraud.

Banks and financial institutions156 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 a concerted effort to combat financial
crimes. Regulators in international financial centres must 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.

Capital markets intermediaries (CMIs) 157 in Singapore are required to conduct their business activities and
operations based on the following principles outlined in the MAS Notice on Prevention of Money Laundering
and Countering the Financing of Terrorism – Capital Markets Intermediaries (SFA04-N02) (Notice):

a) exercise due diligence when dealing with customers, natural persons appointed to act on the person’s
behalf, connected parties of the customer and beneficial owners of the customer;

b) conduct its business in conformity with high ethical standards, and guard against establishing any
business relations or undertaking any transaction, including a digital token transaction, that is or may
be connected with, or facilitates or may facilitate ML or TF; and

c) assist and cooperate with the relevant law enforcement authorities in Singapore to prevent ML and
TF.

7.1.2 Definition of 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:

156
Financial institutions refer to banks, merchant banks and holders of Capital Markets Services (CMS) licence as defined in Appendix
2 of MAS Notice on Prevention of Money Laundering and Countering the Financing of Terrorism – Capital Markets Intermediaries
(SFA 04-N02).
157 A CMI refers to a person holding a capital markets services licence under the Securities and Futures Act, a fund management
company registered under paragraph 5(1)(i) of the Second Schedule to the Securities and Futures (Licensing and Conduct of
Business) Regulations (SFR(LCB) or a person exempted from the requirement to hold such a licence under paragraphs 3(1)(d) or
7(1)(b) of the Second Schedule to the SFR(LCB).
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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 Figure 7.1.2 for an illustration of
the stages of the money laundering process.

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Figure 7.1.2 - An Illustration of the Money Laundering Process

1. PLACEMENT STAGE

Cash deposited in
banks or finance
companies
Proceeds from
Criminal Activities

2. LAYERING STAGE 1st Layer

Purchase of luxury
Payments from or high value
Resells assets and high-end
customers by cheques goods from
supplies to unknowing
or wire transfers are genuine suppliers
customer
placed as “legitimate
funds” back in banks 2nd Layer

3. INTEGRATION STAGE

Sale of Investments and

return of sale proceeds
from Brokers in the form
of cheques or wire Shell Company
transfers to banks Issues Bearer Shares

Transfer of Investment
with Brokers

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

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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 CMIs which would
be affected by cash placements (for top-ups or answering to margin calls to accounts).

Unless proper action is taken, CMIs 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)158 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 ML 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.

CMIs must have adequate due diligence processes to identify the ultimate BOs 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 CMI often depends on other intermediaries who introduce business to them, it must conduct due
diligence to satisfy itself that the intermediaries are subject to and supervised for compliance with anti-money
laundering and countering terrorism financing (AML/CFT) requirements consistent with standards set by FATF.

Under the Notice, the Monetary Authority of Singapore (MAS) allows for a risk-based approach to be adopted
by CMIs. CMIs need not inquire if there exists any BO for certain types of customers which are further discussed
in Section 7.9.5.2.

Where the CMI has doubts about the veracity of the Customer Due Diligence (CDD) information or suspects
that the customer or business relation may be connected to ML, it should conduct full due diligence on the
client or transaction due to the increased risk. The responsibility on the CMI for preventing ML is not
diminished by relying on intermediary information.

7.1.3 Definition of 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 actions 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.

158 As defined the MAS Notice on Prevention of Money Laundering and Countering the Financing of Terrorism – Capital Markets
Intermediaries (SFA 04-N02), a beneficial owner (BO) is, in relation to a customer of a CMI, the natural person who ultimately owns
or controls the customer or the natural person on whose behalf a transaction is conducted or business relations are established
and includes any person who exercises ultimate effective control over a legal person or legal arrangement.
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Similar to ML activities, a CMI may inadvertently allow itself to be part of a TF scheme, for example when funds
or assets are transferred to a third party who is not a client of the CMI and due diligence has not been
conducted on the third party. CMIs should ensure that their payment policies and processes require further
checks for payments or transfers to third parties. CMIs should be vigilant as TF does not always involve large
sums of money and can be hard to detect.

7.1.4 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:
i. Embargoes affecting all relations with a particular country, e.g. North Korea;
ii. Embargoes affecting certain named individuals or entities, e.g. Specially Designated Names (SDN);
iii. Embargoes on certain sectors, e.g. armaments and weaponry; and
iv. 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 the United Nations (UN),
United States of America (US), European Union (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 CMI does not deal in goods, it could again unintentionally allow itself to enter into transactions
with an SDN listed party for securities transactions. It may have dealt with an offshore 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 imposed, which was intended to keep them out of the financial
markets.
In the Notice, CMIs are required where there are legal arrangements and structures, especially through
offshore vehicles, to trace to a natural person or persons exercising control or ownership (including through a
chain of control or ownership). This due diligence requirement is aimed at reducing the risk of dealing with
sanctioned parties that hide behind structures or a chain of vehicles.

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Implications
Why should CMIs 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 offshore companies making it difficult to
trace the ultimate BOs. CMIs 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”.

“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 – the policy in most institutions is to request
that clients register the shares. Even if they do accept dealings, it is only with clients they
know, and they require their client’s shares to be deposited with them. This is still a risk as
the shareholder can always get a replacement share certificate by claiming that they have
“lost” the original share certificates. Therefore, a good policy is not to accept “Bearer Share”
companies as clients at all because of the inability to know for certain the identity of the
ultimate BO.

In such situations, CMIs may unwittingly facilitate the transfer of funds in the sale and
purchase of securities by SDNs or embargoed country nationals. 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 a transfer to North Korea, it would have breached the
Financial Services and Markets (Sanctions and Freezing of Assets of Persons - Democratic
People’s Republic of Korea) Regulations 2023, which prohibits transactions with North
Korea159.

The embargo against Iran has been lifted. However, it does not mean there are no sanctions
against Iran. There are still sanctions on certain SDNs, trade, sectors and financial services
against Iran issued by the UN Security Council as well as the MAS. Financial institutions and
its representatives must be vigilant and exercise care when faced with issues concerning
Iran and are advised to consult their legal and compliance functions before entering into
transactions with Iran.
There is still an embargo against North Korea - a CMI and its representatives are not to
enter into transactions with North Korea.

A new Notice has been issued by MAS on 14 March 2022 prohibiting entering into financial
transaction or providing financial assistance or services, etc, in relation to the raising of new
funds for the Russian Government and the Central Bank of the Russian Federation. A CMI has
to exercise due diligence to prevent offering services to parties whose ultimately aim is to

159 Regulation 10 of the Financial Services and Markets (Sanctions and Freezing of Assets of Persons – Democratic People’s Republic
of Korea) Regulations 2023 - Prohibition against entering into financial transactions or providing financial assistance or services,
etc., in relation to trade.
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raise funds for the Russian Government through a layer of special purpose vehicles whose
BOs are not clear.

7.1.5 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, and the
risk increases where the operational risk is not properly managed.

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 the 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 checking systems, controls and audits must be robust in CMIs.

Example – External Fraud

External fraud could result 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 CMI to sell the
client’s holdings and pay the proceeds to his own account (which is different from the records in the books of
the CMI). This is possible because very often instructions are given through the telephone. The CMI must be
able to have controls in place to verify such instructions. If it fails to have such controls, then the fraudster -
after receiving the funds into his account - may withdraw the funds very quickly, disappear and evade capture.

Therefore, it is important for a CMI 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 an independent call back to the client to verify the instructions. If it is not an instruction given by the client,
then the bank should be alerted, and no transfer should be allowed.

7.2 Anti-Money Laundering and Counter-Terrorism Financing Regime in

Singapore

Singapore is a member and signatory to the 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 ML, TF 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
ML and TF, as well as the financing of proliferation of weapons of mass destruction.

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As a member of the FATF, Singapore is committed to the effective implementation and enforcement of the
FATF Recommendations.

Regulators have found that the most efficient way to stem the flow of funds to criminals or to starve them of
their funding for criminal activities is to stop institutions from facilitating such flows. This in turn is done by
making financial institutions (e.g. banks, brokerages, investment companies) and their employees or
representatives responsible for preventing the flow of funds to criminals.

7.3 The Regulatory Framework of Financial Crimes – Rules and

Regulations

7.3.1 The Singapore Penal Code 1871

The Penal Code of Singapore sets out general principles of criminal law in Singapore, as well as the elements
and penalties of criminal offences such as homicide, theft and cheating.

7.3.2 Corruption, Drug Trafficking and Other Serious Crimes (Confiscation of Benefits) Act,
1992 (CDSA)

The CDSA regulates money laundering activities and includes (among others) drug trafficking, prostitution,
gambling, TF and tax evasion offences. It was first introduced to criminalize ML and to allow for investigation
and confiscation of benefits from ML. At the time of the introduction of the CDSA, drug trafficking was the
primary source of funds for money laundering.

The CDSA has since been amended to include drug dealing and other criminal conduct including bribery,
criminal breach of trust, counterfeiting, theft extortion, robbery, cheating, etc. In 2013, tax evasion was added
as a listed crime in the CDSA.

Table 7.3.2(1) sets out a summary of the money laundering offences under the law.

Table 7.3.2(1): Summary of Key Provisions of the CDSA

Offences Description

Sections 53(1) ACQUIRING, POSSESSING, USING, CONCEALING OR TRANSFERRING BENEFITS FROM

and 54(1) DRUG DEALING OR FROM CRIMINAL CONDUCT
(1) Any person who:
a) Conceals or disguises any property which is, in whole or in part, directly or indirectly,
represents the person’s benefits of drug dealing or the person’s benefits from criminal
conduct; 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.

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Offences Description

Sections 53(3) ACQUIRING, POSSESSING, USING, CONCEALING OR TRANSFERRING BENEFITS OF DRUG

and 54(3) DEALING
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 benefits of drug
dealing or benefits from criminal conduct, acquires that property or has possession of or
uses such property, shall be guilty of an offence.

Sections 53(2) ACQUIRING, POSSESSING, USING, CONCEALING OR TRANSFERRING BENEFITS OF DRUG

and 54(2) DEALING
Any person who, knowing or having reasonable grounds to believe that any property is, or
in whole or in part, directly or indirectly, represents, another person’s benefits of drug
dealing 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.

Sections 50(1) ASSISTING ANOTHER TO RETAIN BENEFITS OF DRUG DEALING / FROM CRIMINAL
and 51(1) CONDUCT
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 (called in this section as that other
person) of that other person’s benefits of drug dealing or benefits from criminal
conduct is facilitated (whether by concealment, removal from jurisdiction, transfer to
nominees or otherwise); or
b) That other person’s benefits of drug dealing 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 that other person is a person
who carries on or has carried on drug dealing or has benefitted from drug dealing or who
engages in or has engaged in or has benefited from criminal conduct shall be guilty of an
offence.

Sections 50(5), PENALTY FOR MONEY LAUNDERING OFFENCES UNDER SECTIONS 50-51 AND SECTIONS
51(5), 53(5), 53-54
54(5)
Any person who commits any of the offences stated above shall be liable on conviction:
a) If the person is an individual, to a fine up to S$500,000 or imprisonment up to 10 years,
or both; or

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Offences Description
If the person is not an individual, to a fine up to S$1 million or twice the value of the
benefits of drug dealing or criminal conduct in respect of which the offence was
committed, whichever is higher.

Section 55 POSSESSING OR USING PROPERTY REASONABLY SUSPECTED TO BE BENEFITS FROM

DRUG DEALING, ETC.
Any person who possesses or uses any property that may be reasonably suspected of
being, or of in whole or in part, directly or indirectly, representing, any benefits of drug
dealing or benefits from criminal conduct shall, if the person fails to account satisfactorily
how the person came by the property, be guilty of an offence.

A person who commits an offence under this section shall be liable on conviction:
a) If the person is an individual, to a fine up to S$150,000, or imprisonment up to 3 years,
or both; or
b) If the person is not an individual to a fine not exceeding S$300,000.

Sections 57 TIPPING-OFF
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 purposes of the CDSA or any subsidiary legislation under
the CDSA; and
b) discloses to any other person information or any other matter which is likely to
prejudice that investigation or proposed investigation,
shall be guilty of an offence.

Any person who —

a) knows or has reasonable grounds to suspect that a disclosure has been or is being
made to an authorised officer under the CDSA (referred to in this section as the
disclosure); and
b) discloses to any other person information or any other matter which is likely to
prejudice any investigation which might be conducted following the disclosure,
shall be guilty of an offence.

Section 57 PENALTY FOR BREACH OF SECTION 57

a) Fine up to S$250,000; or
b) Imprisonment up to 3 years; or
c) Both.

Section 56 PROOF AND KNOWLEDGE, ETC., OF PREDICATE OFFENCE

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Offences Description
To prove an offence under sections 50 to 55 of the CDSA, it is not necessary for the
prosecution to prove the particulars of any offence constituted by the drug dealing or
criminal conduct, or that the person knows or has reasonable grounds to believe that the
whole or part of the property constitutes, or directly or indirectly represents, the benefits
of a particular offence. It would suffice to prove that the person knows or has reasonable
grounds to believe that the whole or part of the property constitutes, or directly or
indirectly represents, the benefits of an offence generally.
To prove under sections 50 to 55 of the CDSA whether any act in a foreign country
constitutes drug dealing or criminal conduct –
(a) where the prosecution adduces, to the satisfaction of the court, some evidence that
doing or being concerned in the act satisfies every element of a foreign drug dealing
offence or foreign serious offence, it is presumed, until the contrary is proved, that the act
constitutes that foreign drug dealing offence or foreign serious offence, and
(b) the court may take judicial notice of any Act passed by the legislature of that foreign
country.

Sections 36, PRODUCTION ORDERS AND AUTHORITY TO SEARCH

39 and 40
For the purpose of an investigation into drug dealing or criminal conduct, as the case may
be, an authorised officer may apply to a court for an order under Section 36 (Production
Order) or apply to a court for warrant in relation to specified premises under Section 40
(Search Warrant).
Any person who contravenes the order under Section 36 without reasonable excuse or
hinders or obstructs an authorised officer in the execution of a warrant issued under
Section 40 shall be guilty of an offence.

Sections 40 PENALTY FOR BREACH OF SECTION 40

A person who commits an offence under section 40 shall be liable on conviction to:
a) Fine up to S$10,00 or
b) Imprisonment up to 2 years; or
c) Both.

Section 39(1) FAILURE TO COMPLY WITH PRODUCTION ORDER where a person is required by a
& (2 production order to produce any material or make any material available to an authorised
officer for inspection, the person shall be guilty of an offence under this section if the
person -
a) contravenes the order without reasonable excuse or,
b) in purported compliance with the order produces or makes available any material
known to the person to be false or misleading in a material particular without:
i) indicating to the authorised officer to whom the material is produced or made
available that the material is false or misleading and the respect in which the
material is false or misleading; and
ii) providing correct information to the authorised officer if the person is in
possession of, or can reasonably acquire, the correct information.
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Offences Description

A person guilty of an offence under the above section shall be liable to a fine up to
$10,000 or to an imprisonment for a term up to 2 years or both.

Section 45 PENALTY FOR FAILURE TO REPORT SUSPICIOUS TRANSACTIONS

Any person who contravenes section 45 shall be guilty of an offence and shall be liable on
conviction –
a) If the person is an individual, to a fine up to S$250,000 or imprisonment up to 3 years
or to both.
b) If the person is not an individual, to a fine up to S$500,000.

Section 46 STATUTORY PROTECTION IN REPORTING

Section 46 provides statutory protection to an institution and its employees or officer in
making STRs under the CDSA, specifically:
Section 37
(4) A financial institution which complies with an order made under subsection (2) is not
to be treated as being in breach of any restriction upon the disclosure of information or
material imposed by law, contract or rules of professional conduct
(5) No action shall lie against a financial institution which in good faith produces materials
or gives access materials relating to the account of its customer by reason of that financial
having produced or given access to the materials in compliance with an order made against
it under subsection (2) or any act done or omitted to be done in relation to any funds or
investment or property in the account if that customer in consequence of the production
of or access to those materials.
(6) In subsection (5) each reference to a customer of a financial institution is, if the financial
institution is a VCC, a reference to its member.
(7) The proceedings for an application for a production order under this section are to be
heard in private.
(8) The Public Prosecutor or the person duly authorized by the Public Prosecutor may
exercise the powers conferred on the Public Prosecutor or the person (as the case may
be) by this section to the production of, or the giving of an access to, any particular
material or material of a particular description

Section 43 RETENTION OF RECORDS

Section 43 provides for the statutory duty of financial institutions to keep records.
Financial institutions are required to retain Financial Transaction Documents (FTDs) for a
minimum period.
a) FTDs are defined in Section 42(1) to refer to any document that relates to financial
transactions carried out by the institution in its capacity as a financial institution and
includes but is not limited to documents that relate to:
- Opening/closing of an account;

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Offences Description
- Operation of an account;
- Opening or use of deposit box;
- Telegraphic or electronic fund transfer;
- Transmission of funds between Singapore and a foreign country or between
foreign countries;
- Loan application forms; or
- Customer identification records.
b) Minimum period of retention is:
i) if the document relates to the opening of an account with the institution, the
period of 5 years after the day on which the account is closed;

ii) if the document relates to the opening by a person of a deposit box held by the
institution, the period of 5 years after the day on which the deposit box ceases to
be used by the person; or

iii) in any other case, the period of 5 years after the day on which the transaction
takes place.

Section 43(3) PENALTY FOR FAILURE TO RETAIN FTDs

A financial institution which fails to retain FTDs (such as those set out in section 43) shall
be guilty of an offence and shall be liable on conviction to a fine up to S$10,000.

Section 44(1) KEEPING REGISTER OF ORIGINAL FTDs RELEASED

& (2)
A financial institution may be required by law to release an original of an FTD before the
end of the minimum retention period applicable to that FTD. In such instances, the
financial institution must retain a complete copy of the original FTD released until the
end of the minimum period of retention or until the original FTD is returned, whichever
occurs first. It must also maintain a register of all FTDs so released.

Section 44(3) PENALTY FOR FAILURE TO RETAIN COPY OR MAINTAIN REGISTER OF FTDs RELEASED
Failure to retain copy and maintain register of FTDS released is an offence punishable on
conviction with a fine up to S$10,000.

Section 37(1) PRODUCTION ORDER

& (2)
All financial institutions must comply with a Production Order issued under Section 36 of
the CDSA by the High Court within a reasonable period, but not less than 7 days, as the
Order may specify.

Section 39(2) PENALTY

Failure to comply with a Production Order is an offence punishable with:
- Fine up to S$10,000; or
- Imprisonment up to 2 years; or

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Offences Description
- Both.

Section 40(6) SEARCH WARRANT

A person must not hinder or obstruct an authorised officer conducting a search under a
search warrant issued by the court under the CDSA.

Section 40(6) PENALTY

Hindering or obstructing an Authorised Officer in the execution of a warrant issued under
section 40 of the CDSA is an offence publishable on conviction with:
- Fine up to S$10,000; or
- Imprisonment up to 2 years; or
- Both.

Sections 6, RESTRAINT ORDER, CHARGING ORDER AND CONFISCATION ORDER

7,18, 19 & 20
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.

In addition to the above penalties which are not exhaustive, it is also important to note that failure to comply
may lead to:
i. Regulatory sanctions;
ii. Reputation Risks; or
iii. Loss of business and thus face financial risks.

7.3.3 The Mutual Assistance in Criminal Matters Act 2000 (MACMA)

The MACMA 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 MACMA. This is
because ML or TF crimes usually also involve cross-border transactions. As it is difficult to only investigate one
side of the transactions, it is easier and more effective if both sides of the transactions are investigated and
analyzed. This is especially so where high value ticket items or overseas investments are involved.

7.3.4 Terrorism (Suppression of Financing) Act 2002 (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 UN Security Council Resolution 1373.

The TSOFA criminalizes TL 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 TF to the Police. A failure
to do so is a criminal offence.

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Specifically, the following acts are prohibited under the TSOFA160:

i. The provision or collection of property for terrorist acts;

ii. The provision of property and services for terrorist purposes161;

iii. The use or possession of property for terrorist purposes; and

iv. The dealing with property of terrorists.

A person who does any of the acts listed in (i) to (iv) above will be guilty of an offence under the TSOFA and
shall be liable on conviction162:

a) In the case of an individual, to a fine up to S$500,000 or to imprisonment for a term up to 10 years or to

both; or

b) In the case of a person who is not an individual, to a fine not exceeding the higher of (i) S$1 million; or (ii)
twice the value or the property (including funds derived or generated from the property), financial
services or other related services, or financial transaction (as the case may be) in respect of which the
offence was committed.

7.4 MAS Notices & Regulations on Prevention of Money Laundering and

Countering the Financing of Terrosism

7.4.1 MAS Notice on Prevention of Money Laundering and Countering the Financing of
Terrorism (SFA 04-N02)

The Notice sets out the obligations for a CMI to take measures to help mitigate the risk of Singapore’s capital
markets being used for money laundering or terrorist financing. All CMIs are required to comply with the
Notice and the Guidelines to the Notice (Guidelines).

The Notice sets out the principles guiding the conduct of CMIs in preventing the system from being used for
criminal purposes and the due diligence required to be performed with proper controls to be implemented.

The Guidelines provide guidance on some of the requirements set out in the Notice and should be read
together with the Notice. The degree of observance with these Guidelines by a CMI may have an impact on
MAS' overall risk management of the CMI, including the quality of its board and senior management oversight,
governance, internal controls and risk management.

160 Sections 3 to 6 of the TSOFA.

161 This includes the financing of travel of an individual to any place other than the state of which the individual is a citizen or in which
the individual resides, in order for the individual to provide or receive any training in facilitating or carrying out any terrorist act.
162 Section 6A of the TSOFA.
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7.4.2 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 relationships163 and front companies to shield illicit
activities and be alert generally to the impact of dealing with sanctioned countries; and
• Freezing assets and reporting suspicion of ML and TF activities when alerted, and to prevent release of
assets without approval from the regulator.

MAS also sets out additional guidance164 for CMIs to consider incorporating in their processes to better detect
and manage sanction-related risks. Specifically, CMIs should:
• ensure that there is strong Board and Senior Management oversight of sanctions-related risks; and
• continue to strengthen their sanction-related risk detection capabilities.

7.5 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 regulations (MAS Regulations) issued under the Financial Services and
Markets Act 2022 (FSMA) 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;

163 Correspondent banking relationships include the provision of correspondent account services, which means the provision of
services under a cross-border relationship between a CMI and a respondent financial institution, in relation to any activity for which
the CMI is regulated under the SFA, whether for that respondent financial institution as principal or for that respondent financial
institution's customers.
164 MAS Circular No. AMLD 11/2023 dated 31 August 2023 - Circular on ensuring effective detection of sanctions-related risks.
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• 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

• 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.

Pursuant to section 16(4)(a) and 16(4)(b) of the FSMA, a financial institution that fails to comply with an issued
direction or contravenes any regulations made that MAS considers necessary for the prevention of money
laundering or the financing of terrorism shall be guilty of an offence and shall be liable on conviction to a fine
up to S$1 million and, in the case of a continuing offence, to a further fine of $100,000 for every day or part of
a day during which the offence continues after conviction.

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.

CMIs should refer to the lists of targeted financial sanction regulations165 and lists of designated individuals
and entities166 for detailed information on their respective obligations under the UN or MAS Regulations.

7.6 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 1947 and the offence of tax evasion and improperly obtaining refund of tax under the Goods and
Services Tax (GST) Act 1993 have been designated as ML predicate offences.

7.6.1 What are the Tax Offences?

Singapore has designated tax offences under Sections 37M(3), 37M(4), 96 and 96A, of the Income Tax Act and
Sections 62 and 63 of the GST Act as ML predicates for direct tax and indirect tax offences respectively.

165 For the current list of targeted financial sanctions regulations, please refer to the MAS website at:
https://www.mas.gov.sg/regulation/anti-money-laundering/targeted-financial-sanctions/lists-of-designated-individuals-and-
entities
166 For the current list of designated individuals and entities, please refer to the MAS website at:
https://www.mas.gov.sg/regulation/anti-money-laundering/targeted-financial-sanctions/lists-of-designated-individuals-and-
entities
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7.6.2 Direct Tax Offences under Sections 37M(3), 37M(4), 96 and 96A of the Income Tax Act

7.6.2.1 Section 37M(3) – Giving False Information to Comptroller of Income Tax, etc., to Obtain, or to Assist
Another Person to Obtain, Cash Pay-out or Productivity and Innovation Credit (PIC) Bonus (or
both), etc.

Any person who wilfully with intent to obtain or to assist any other person to obtain a cash payout or PIC
bonus (or both) or a higher amount of cash pay-out or PIC bonus (or both) which he or that other person is
not entitled to:

i. Gives to the Comptroller any information when submitting an irrevocable written election for a cash
payout that is false in any material particular or omits any material particular from any information or
document given when submitting an irrevocable written election for a cash payout; or
ii. Gives any false answer, whether verbally or in writing, to any question or request for information asked
or made by the Comptroller,

shall be guilty of an offence.

7.6.2.2 Section 37M(4) – Falsifying Records or using Contrivances, etc., to Obtain, or Assist Another Person
to Obtain, Cash Pay-out or PIC Bonus (or both), etc.

Any person who wilfully with intent to obtain or to assist any other person to obtain a cash payout or PIC
bonus (or both) or a higher amount of cash pay-out or PIC bonus (or both) which he or that other person is
not entitled to:

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 accounts or records; or
ii. Makes use of any fraud, art or contrivance or authorises the use of such fraud, art or contrivance,
shall be guilty of an offence.

7.6.2.3 Section 96 - Tax Evasion and Wilful Action to obtain PIC Bonus

Any person who willfully with intent to evade or to assist any other person to evade tax, or to obtain or to
assist any other person to obtain a PIC bonus or a higher amount of PIC bonus, or both -
i. Omits from a return made under the Income Tax Act any income which should be included;
ii. Makes any false statement or entry in any return made under the Income Tax 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 the Income Tax Act; or
iv. Fails to comply with Section 76(8),

shall be guilty of an offence.

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7.6.2.4 Section 96A - Serious Fraudulent Tax Evasion

Any person who willfully with intent to evade or to assist any other person to evade tax:
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;

shall be guilty of an offence.

7.6.3 Indirect Tax Offences Covered by Sections 62 & Sections 63 of the GST Act

7.6.3.1 Section 62 - Tax Evasion

Any person who willfully with intent to evade or to assist any other person to evade tax:
i. Omits or understates any output tax or overstates any input tax in any return made under the GST Act;
ii. Makes any false statement or entry in any return, claim or application made under the GST 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 the GST 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,

shall be guilty of an offence.

7.6.3.2 Section 63 - Improperly Obtaining Refund

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 the GST 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, shall be guilty of an offence.

Implications
What does this mean for the industry?

Financial institutions must apply the full suite of AML/CFT 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
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tax related risks and act to appropriately manage and mitigate those risks. These requirements
will apply to both new and existing accounts.

7.7 The Three Lines of Defence

The board of directors and senior management of a CMI are ultimately responsible and accountable for
ensuring compliance with AML/CFT laws, regulations and notices. The board of directors and senior
management are responsible for ensuring strong governance and a sound AML/CFT risk management and
controls at the CMI. While certain responsibilities can be delegated to senior AML/CFT employees, final
accountability rests with the CMI's board of directors and senior management.

CMIs 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. CMIs should ensure a strong compliance culture
throughout their organizations, where the board of directors and senior management set the right tone, set a
clear risk appetite and develop a compliance culture throughout their organizations.

7.7.1 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.

The CMI's policies, procedures and controls on AML/CFT should be clearly specified in writing, and
communicated to all relevant employees, officers and representatives in the business units. Employees and
representatives in business units should be adequately trained to be aware of their obligations and provide
clear guidance and instructions on how to ensure the CMI's compliance with prevailing AML/CFT rules,
regulations and notices.

7.7.2 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 the fulfilment of all AML/CFT obligations of the
CMIs. This implies sample testing and the review of exception reports. The AML/CFT compliance function
should alert the senior management and the board of directors of the CMI of any potential breaches or ML/TF
risks and concerns, including where it believes that the employees, representatives or officers in the line
departments are failing or have failed to adequately address ML/TF risks and concerns. Other support
functions such as operations, human resources or technology also play a role to help mitigate the ML/TF risks
that the CMI faces. 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.

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The board and senior management should ensure that AML/CFT compliance functions are adequately
resourced and effective by:
i. Empowering compliance functions to drive the monitoring and review of risks and controls;
ii. Providing sufficient clarity on compliance function's AML/CFT mandate in the policies and procedures
(particularly for compliance functions which have multiple responsibilities and reporting lines); and
iii. Equipping compliance functions with adequate AML/CFT resources as well as capabilities through
appropriate training167.

7.7.3 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 CMIs and reports to the audit committee of CMIs which is typically formed by the board of directors, or a
similar oversight body. This independent evaluation is achieved through the internal audit or equivalent
function's periodic evaluations of the effectiveness of the CMIs’ compliance with prevailing AML/CFT policies,
procedures and controls.

The CMI should establish policies for periodic AML/CFT internal audits covering areas such as:
i. The adequacy of the CMI's AML/CFT policies, procedures and controls in identifying ML/TF risks,
addressing the identified risks and complying with laws, regulations and notices;
ii. The effectiveness of the CMI's employees, officers and representatives in implementing the CMI's policies,
procedures and controls;
iii. The effectiveness of the compliance oversight and quality control including parameters and criteria for
transaction alerts; and
iv. The effectiveness of the CMI's training of relevant employees, officers and representatives.

Such internal audit function must be independently and adequately resourced, and the board and senior
management must actively oversee the remediation of audit findings. Policies and procedures for periodic
AML/CFT audits, reporting of strengths and gaps, as well as monitoring and closure of follow-up actions should
also be established and implemented.

The board and senior management need to institute appropriate reporting structures, so that they are kept
updated regularly on audit issues and are able to assess whether the control gaps and recommended
enhancements raised by auditors have been appropriately addressed in accordance with agreed timelines168.

167 For examples, please refer to Case Studies G and H of the MAS Guidance to CMIs on Enhancing AML/CFT Frameworks and Controls
dated Jan 2019.
168 For examples, please refer to Case Studies I, J and K of the MAS Guidance to CMIs on Enhancing AML/CFT Frameworks and Controls
dated Jan 2019.
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7.8 Governance

Given the inherent ML/TF risks in CMIs’ businesses, the board and senior management should put in place a
robust AML/CFT risk management framework as an organizational priority, and emphasize the importance of
detecting, disrupting and deterring ML/TF attempts. The board and senior management need to ensure that
the ML/TF risks arising from a CMI’s business are properly assessed and mitigated in line with the
organizational risk appetite.

The board and senior management should also take steps to foster strong AML/CFT practices and behaviors
that permeate the firm. These steps may include, for instance, factoring effectiveness of AML/CFT compliance
in staff performance appraisal at all levels and taking stern actions against individuals who perpetuate
improper AML/CFT conduct169.

The board of directors and senior management of the CMI should also ensure that the CMI's processes are
robust and there are adequate risk mitigating measures in place. The successful implementation and effective
operation of a risk-based approach to AML/CFT depends on the CMI's employees, officers and representatives
having a good understanding of the ML/TF risks inherent in the CMI's business.

Further, the board of directors and senior management should understand the ML/TF risks the CMI is exposed
to and how the CMI's AML/CFT control framework operates to mitigate those risks. This should involve the
board and senior management by:
i. Receiving sufficient, frequent and objective information to form an accurate picture of the ML/TF risks
including emerging or new ML/TF risks, which the CMI is exposed to through its activities and individual
business relations;
ii. Receiving sufficient and objective information to assess whether the CMI's AML/CFT controls are adequate
and effective;
iii. Receiving information on legal and regulatory developments and the impact these have on the CMI's
AML/CFT framework; and
iv. Ensuring that processes are in place to escalate important decisions that directly impact the ability of the
CMI to address and control ML/TF risks, especially where AML/CFT controls are assessed to be inadequate
or ineffective.
The board and senior management must also have adequate oversight that AML/CFT controls are effectively
implemented, including effective reporting and escalation mechanisms that would enable the board and
senior management to be promptly apprised of AML/CFT issues. At the same time, the board and senior
management have to devote sufficient management bandwidth to oversee the implementation of AML/CFT
systems and controls, including the adequacy of training and progress of remediation efforts. Where there are
implementation issues, the board and senior management are expected to make timely interventions to
address those issues, and to ensure the continuing effectiveness of the CMI’s AML/CFT frameworks and
controls170.

169 For examples, please refer to Case Studies A and B of the MAS Guidance to CMIs on Enhancing AML/CFT Frameworks and Controls
dated Jan 2019.
170 For examples, please refer to Case Studies E and F of the MAS Guidance to CMIs on Enhancing AML/CFT Frameworks and Controls
dated Jan 2019.
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7.9 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. CMIs 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.

7.9.1 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 is
commensurate with his income from employment and family background.
• If it is a legal person or legal arrangement (i.e. non-individual) 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, and the legal form, constitution and
powers that regulate and bind the legal person or legal arrangement to determine the standing of the
legal person or the legal arrangement and the risk score and profile of the legal person or legal
arrangement for money laundering assessment purposes. It is also important to identify the connected
parties of the customer, by obtaining at least the full name and the unique identification number of the
connected party171.
• 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 client is a non-individual or where the client appoints one or more natural persons to act on his
behalf in establishing business relations with a CMI, any persons with authority to act on behalf of their
client must also be identified, by obtaining at least the full name, including any aliases, the unique
identification number, residential address, date of birth and nationality of the natural person, and verify
the due authority of each natural person appointed to act on behalf of the client by obtaining at least the

171 A "connected party": (i) in relation to a legal person (other than a partnership), means any director or any natural person having
executive authority in the legal person; (ii) In relation to a legal person that is a partnership (in the case of a limited liability
partnership or a limited partnership, and includes foreign partnerships), means any partner or manager; and (iii) in relation to a
legal arrangement, means any natural person having executive authority in the legal arrangement.
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appropriate documentary evidence authorising the appointment of such natural person by the client to
act on his behalf, and the specimen signature of such natural person appointed.

7.9.2 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; and
• Establish objective for the account.

7.9.2.1 Where to get information about client?

• Internet;
• Newspapers and other news sources;
• Company reports;
• Official subscribed databases such as Factiva and Complinet;
• Intermediary introduction certificates and disclosures; and
• Others – e.g. grapevine.

7.9.2.2 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, although they are expensive. Original documents issued
by regulatory bodies are accepted because they are issued by the regulatory bodies.

Other sources like newspapers, internet and grapevine must not be taken as accurate but can be used to make
further checks. Information which is not authenticated cannot be relied upon absolutely.

Intermediaries’ disclosures should only be relied upon if you have assessed the intermediary’s reputation and
reliability. Otherwise, it is best to carry out due diligence directly.

7.9.3 Documentation and Verification of Client Information

The identity of the client should be verified using reliable, independent source data, documents, or
information. Where the client is a legal person or legal arrangement, the legal form, proof of existence,
constitution and powers that regulate and bind the client should be verified, using reliable independent source
data, documents, or information.
Documentation which can be used to verify client information includes:
• Individuals – ID/passports, address proof.
• Corporates – business constitution documents, board resolutions, ID documents of ultimate BOs,
signatories.

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• Offshore companies – as above, plus certificate of incumbency and 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 BOs.
In exceptional circumstances where CMIs are unable to verify the client’s identity or obtain the original
document, the CMI should ensure documents obtained are clear and legible and in accordance with the
measures indicated under the Notice.

In exceptional circumstances where the CMI is unable to retain a copy of the documentation used to verify
the customer's identity, the CMI should record the following:
i. Information that the original documentation had served to verify;
ii. Title and description of the original documentation produced to the CMI's employee, representative or
officer for verification, including any particular or unique features or condition of that documentation (e.g.
whether it is worn out, or damaged);
iii. Reasons why a copy of that documentation could not be made; and
iv. Name of the CMI's employee, representative or officer who carried out the verification, a statement by
that employee, representative or officer certifying verification of the information against the
documentation and the date of the verification.

Where the customer is unable to produce an original document, the CMI may consider accepting a copy of the
document:
a. That is certified to be a true copy by a suitably qualified person (e.g. a notary public, a lawyer or a
certified public of professional accountant); or
b. If a CMI's staff is independent of the customer relationship has confirmed that he has sighted the original
document.

The CMI should ensure that documents obtained for performing any measures required under the Notice are
clear and legible, and where a document is in a foreign language, translate such documents to allow the CMI
to be reasonably satisfied that the document does in fact provide evidence of the customer's identity.

7.9.4 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 or ThomsonReuters.com.
• Origin of wealth.
• Reputation risk.
• Whether it is a listed company.
• All other relevant information deemed fit and then assess accordingly.
• Sensitivity criteria.

If the CMI 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 TF, even before a CMI establishes business
relations or undertakes any transaction without opening an account, the CMI shall:
i. Not establish business relations with, or undertake a transaction for the client; and

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ii. File a Suspicious Transaction Report (STR) 172 and extend a copy to MAS for information.

7.9.5 Questions to Ask during Client Onboarding

7.9.5.1 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 records 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 contracts that do not make financial sense?

7.9.5.2 Shareholders & Beneficial Owners

Beneficial owners (BOs) of a customer who is a legal person are:

i. Natural persons who ultimately own the legal person (i.e owning more than 25% of the legal person);
ii. To the extent that there is doubt to sub-paragraph (i) as to whether the natural persons who ultimately
own the legal person are the beneficial owners or where no natural persons ultimately own the legal
person, the natural persons who ultimately control the legal person or have ultimate effective control of
the legal person; and
iii. Where no natural persons are identified under sub-paragraphs (i) or (ii), the natural persons having
executive authority in the legal person, or in equivalent or similar positions.
BOs of a client who is a legal arrangement (e.g. trusts) are the settlor, trustee, protector, beneficiaries
(including every beneficiary that falls within a designated characteristic or class)173, and any person exercising
ultimate ownership, ultimate control or ultimate effective control over the trust, or persons in equivalent or
similar positions.
CMIs must take reasonable measures to identify the identities of the ultimate BOs. If the client is not a natural
person, reasonable steps must be taken to understand the nature of the client’s business and the client’s
ownership and control structure.
Questions or important issues to consider include:
• Is the client or any of its shareholders, directors, BOs, authorised signatories and members of management
a politically exposed person (PEP) such as a member of government or the armed forces, or a diplomat
who might have derived unusual wealth from illicit activities?
• Does the client’s 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 client’s profile?

172 Please note in particular section 48 of the CDSA on tipping-off. Please see Table 7.3.2 above for more information in this regard.
173 In relation to a beneficiary of a trust designated by characteristics or by class, the CMI shall obtain sufficient information about the
beneficiary to satisfy itself that it will be able to establish the identity of the beneficiary (a) before making a distribution to that
beneficiary, or (b) when that beneficiary intends to exercise vested rights.
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• What is the client’s sources of wealth?

Unless there are doubts about the veracity of the customer due diligence information, or other reasons to
suspect money laundering or terrorism financing, CMIs are not required to inquire if there exists any BO in
relation to a client that is:
i. 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 BOs (imposed through
stock exchange rules, law or other enforceable means);
ii. Certain financial institutions supervised by MAS174;
iii. 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
iv. An investment vehicle where the managers are (a) certain financial institutions supervised by MAS175; or
(b) incorporated or established outside Singapore but are subject to and supervised for compliance with
AML/CFT requirements consistent with standards set by the FATF.
For the purposes of (iii) and (iv)(b) above, the CMI shall document the basis for its determination that the
requirements in those paragraphs have been duly met.

7.9.5.3 Source of Funds

CMIs should assess and validate the plausibility and reasonableness of the client’s net worth against their
understanding of the client’s background by obtaining supporting documentation and/or using public sources
of information as reference points. Examples of independent corroboration measures include citing reliable
publicly available information sources such as corporate registration websites, company websites and news,
as well as obtaining documentary evidence such as companies' financial statements or management accounts,
bank statements, independent third-party professionals' (e.g. tax advisors) confirmations. CMIs are also
reminded to ascertain the legitimacy and credibility of the documents furnished by the customers in this
regard176.

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 client’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 client is in?
• Are the payments to and/or from jurisdictions with inadequate AML/CFT laws?

174 Please see Appendices 1 and 2 of the MAS Notice on the Prevention of Money Laundering and Countering the Financing of
Terrorism – Capital Markets Intermediaries (SFA04-N02) for the list of financial institutions supervised by MAS to which this clause
applies.
175 Please see Appendices 1 and 2 of the MAS Notice on the Prevention of Money Laundering and Countering the Financing of
Terrorism – Capital Markets Intermediaries (SFA04-N02) for the list of financial institutions supervised by MAS to which this clause
applies.
176 For examples, please refer to Case Study P of the MAS Guidance to CMIs on Enhancing AML/CFT Frameworks and Controls dated
Jan 2019.
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7.9.6 Risk Based Approach to Client Onboarding

CMIs 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, CMIs are allowed to accord higher or lower risk scores to different clients, and these risk scores
determine how frequently the clients’ accounts should be reviewed.

Generally financial institutions use most of the following risk rating criteria depending on each institution’s
internal policies:
i. PEP (refer to Section 7.9.17);
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 CMIs 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 CMI might use is shown in Figure 7.9.6(1):

Figure 7.9.6(1) – Example of a Risk Evaluation Matrix

Source: FATF Guidance on National Money Laundering & Terrorist Financing Risk Assessment (February 2013)

CMIs 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.

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7.9.6.1 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 & Rankings177, some
countries which are considered low risk or high risk include:

• Low risk countries – Finland, New Zealand, Sweden, Denmark

• High risk countries – Haiti, Myanmar, Nicaragua
CMIs should also take into consideration factors that contribute to country risks, such as those arising from
corruption levels and tax regimes, in addition to referring to the FATF list of jurisdictions with serious AML/CFT
deficiencies. CMIs also need to ensure that they do not omit assessments of ML/TF risks arising from their
customers, products, geographies, transactions, services, and delivery channels178.

7.9.6.2 Business Risk Rating

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 and diamond related businesses; and
• Cash-intensive businesses (e.g. 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 Myanmar. He trades with a

counterpart in Haiti who is in the precious stones industry. Mr A 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 2022, Myanmar is a high-risk country, as is Haiti.

What would you consider this account’s risk score to be?

Myanmar - High
Haiti - High
Panama - High

His business activity of 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 Customer Due Diligence and even after proper
validation and acceptance, he should be put on the annual review cycle.

177 The complete list of scores and rankings can be found in the Basel AML Index 2023, 12th Public Edition.
(https://baselgovernance.org/publications/basel-aml-index-2023).
178 For examples, please refer to Case Study C of the MAS Guidance to CMIs on Enhancing AML/CFT Frameworks and Controls dated
Jan 2019.
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The complexity of a client’s ownership or control structure, as well as those of his downstream
asset/investment holding structures should be one of the key indicators in a CMI's risk assessment measure.
Considerations that CMIs can use for assessing the risks posed by the complexity of a customer's structure
include:
i. The number of layers involved in the structure;
ii. The extent to which the layers increases the structure's opacity and impedes the CMI's ability to effectively
monitor for suspicious behaviours and transactions;
iii. Whether the CMI is able to satisfactorily understand and explain the rationale for the layers; and the
structure is consistent with the nature of the client’s profile and his intended purpose for setting up the
account;
iv. Whether the CMI is impeded in understand the corporate entities due to the control structure and nature
of business of the corporate entities, e.g. operating companies held as trust assets controlled by settlors
and the licensed trust company does not have adequate sight over the operating companies, through for
example, obtaining their annual financial statements.

Additional due diligence measures that CMIs can consider adopting to mitigate the risk(s) include:
i. reviewing the financial statements and/or management accounts of all entities within the structure on a
regular basis;
ii. reviewing the entities’ transaction activities regularly to detect unusual or suspicious patterns and
behaviours;
iii. obtaining independent legal or other expert advice (e.g. tax advice) to help the CMI make informed risk
assessments of such structures;
iv. performing the following due diligence measures before accepting operating companies (OpCos) as
injections into their client’s accounts e.g. trust accounts, bespoke investment funds:
a. Understand the profile and operations of the OpCos via meetings with customers and publicly
available sources of information;
b. Obtain the OpCos’ constitutional documents and audited financial statements to ascertain the
legitimacy of the OpCos’ business;
c. Perform site visits to the OpCos’ business premises to detect shell operations; conduct screenings
and/or internet searches for adverse ML/TF news on directors and shareholders of the OpCos;
v. reviewing periodically (at least annually) the activities of the corporate entities/OpCos using financial
statements and bank statements to ascertain whether the transactions are in line with the CMI’s
knowledge of the client’s profile and business, or whenever there is any change in the customer’s structure
or OpCo’s business, whichever is earlier179.

7.9.6.3 Other Business Activities Exposed to Risk

Accountants, Lawyers, Notaries, Trustees, Offshore Trustees – As these professions set up accounts for third
parties, there is a risk that they may become conduits for ML (whereby the beneficiary of the account makes
use of the credibility attached to the accountant, lawyer, notary or trustee’s name as a front).

179 For examples, please refer to Case Study R of the MAS Guidance to CMIs on Enhancing AML/CFT Frameworks and Controls dated
Jan 2019.
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Import/ Export of Retail items, Shipping Companies - These business activities can be used for trade-based
ML 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 (despite there being no funds upon presentation for clearing). 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 cheques. 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. It is only then that 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 to be done on the client. This can happen to CMIs too when payments are made by
cheques for securities purchases. They should have policies in place not to allow release of securities until
the cheques have been cleared.

It is important therefore to look at the country’s risk, the business activity of the client, whether it came
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 onboarding or monitoring the
account.

7.9.7 Non-Face-to-Face Business Relations or Clients

CMIs should develop and implement policies and procedures to address specific risks related with business
relationships or transactions where there is no face-to-face verification. Such policies and procedures should
be implemented when establishing business relations with a client and when conducting ongoing due
diligence.

One reliable and independent source for the purposes of verifying the client’s name, unique identification
number, date of birth, nationality and residential address is MyInfo, which MAS has stated is a verified source
of identification information. MAS will not require CMIs to obtain additional identification documents to
identify a client’s identity and will also not expect CMIs to separately obtain a photograph of the client where
MyInfo is used.180

CMIs 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, CMIs 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 unauthorized access, absence of physical documents, and so on.

The policies and procedures for establishing new client 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

180 MAS Circular on the Use of MyInfo and CDD Measures for Non-Face-to-Face Business Relations (Circular No.: AMLD 01/2018).
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stringent as those that would be performed if there was face-to-face contact. CMIs should also perform
additional checks if there is no face-to-face contact with the business or the client, such as robust anti-fraud
checks, such as through telephone contact with the client at a residential or business number that can be
verified independently, or confirmation of the customer's salary details by requiring the presentation of recent
bank statements from a bank. Where identity is obtained through non-face-to-face means, CMIs should also
apply additional checks to mitigate the risk of impersonation, such as by holding real-time video conference,
verifying the identity of a client with a secure digital signature, or new technology solutions such as biometric
technologies181.

CMIs which rely on new technology solutions to perform such checks should ensure that these solutions
continue to facilitate customer due diligence measures that are at least as robust as those performed with
face-to-face contact. This should include a once-off independent assessment 182 from a suitably qualified
professional to certify, at the first-year mark after implementation, the effectiveness of the new technology
solution in managing impersonation risk.

7.9.8 Verification of Client

CMIs must complete verification of the identity of a client, natural persons appointed to act on behalf of the
client and BOs of the client:
i. before the CMI establishes business relations with the client; or
ii. before the CMI undertakes any transaction of a value exceeding S$20,000 for the client, where the client
has not otherwise established business relations with the CMI.

However, there are some circumstances where CMIs may establish business relations with a client 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 and provided
the risks of ML/TF can be effectively managed by the CMIs.

A technique which CMIs 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 client
(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. CMIs 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, the
CMI should suspend business relations with the client 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
CMI should terminate business relations with the client; and

181 MAS Circular on the Use of MyInfo and CDD Measures for Non-Face-to-Face Business Relations (Circular No.: AMLD 01/2018).
182 This independent assessment should be retained by the financial institution for as long as that technology solution is in use, and
for a minimum period of 5 years after it ceases to be in use. MAS may request to review the independent assessment as part of
MAS' supervisory process.
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(e) these time limitations are factored into the CMI’s policies, procedures and controls.

Where the CMI is unable to complete the verification (i.e. where the CMI has obtained, screened and verified
all necessary CDD information and received satisfactory responses to all inquiries in relation to such necessary
CDD information), it shall not commence or continue business relations with any client, or undertake any
transaction for the client. In addition, the CMI shall consider if the circumstances are suspicious as to warrant
the filing of a STR.

7.9.9 Screening of Clients

CMIs must conduct screening of their clients, natural persons appointed to act on their behalf, and their
connected parties and BOs before establishing business relationships, irrespective of the clients’ 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 STR should
be filed (refer to Section 7.9.20 for details).

Screening is normally conducted as an automated process against available databases, so CMIs 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).

Screening must be performed by the CMI:

i. when, or as soon as reasonably practicable after, the CMI establishes business relations with a client;

ii. when the CMI undertakes any transaction of a value exceeding S$20,000 for any client who has not
otherwise established business relations with the CMI;

iii. on a periodic basis after the CMI establishes business relations with the client; and

iv. where there are any changes or updates to:

a. the lists and information provided by MAS or other relevant authorities in Singapore to the CMI; or

b. the natural persons appointed to act on behalf of a client, connected parties of a client or BOs of a
client.

The results of screening and assessment by the CMI shall be documented.

Periodic screening should also be conducted to monitor any changes in clients’ status or risks, or to assess
whether to impose additional ML/TF risk mitigation measures (e.g. enhanced CDD measures). CMIs should
also ensure that there are adequate arrangements to perform screening of their client database when there
are changes to the lists of sanctioned individuals and entities. CMIs should implement “four-eye checks” or
quality assurance checks on alerts from sanctions reviews before closing an alert.

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7.9.10 Simplified Customer Due Diligence (CDD)

As CMIs are allowed to do risk based CDD, simplified CDD can be considered if the ML risks are low, or if the
client is a specified type of financial institution under MAS’ supervision. The following could be considered as
‘’low-risk’’:
a) For companies listed on the stock exchange and subject to regulatory disclosure requirements (relating to
adequate transparency in respect of BOs (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 client is a specified financial institution under MAS supervision183; and
d) The client is a Singapore government entity. In this regard, the CMI shall only be required to obtain such
information as may be required to confirm that the client is a Singapore government entity as asserted.
The assessment of low risks shall be supported by an adequate analysis of risks by the CMI, and the simplified
CDD measures shall be commensurate with the level of risk, based on the risk factors identified by the CMI.

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 (a) if the CMI suspects that money laundering or terrorist financing is involved, (b) where a
customer or any beneficial owner of the client is from or in a country or jurisdiction in relation to which the
FATF has called for countermeasures, or (c) where a client or any BO of the client is from or in a country or
jurisdiction known to have inadequate AML/CFT measures, as determined by the CMI for itself or notified to
the CMI generally by MAS, or other foreign regulatory authorities.

Where a CMI performs simplified CDD measures, it shall document the details of its risk assessment and the
nature of the simplified CDD measures.

Where a CMI applies simplified CDD measures, it is still required to perform ongoing monitoring of business
relations under the Notice.

Reliance on Third Parties - There is a separate provision permitting a CMI to rely on a third party to perform
the CDD measures (namely, specific types of financial institutions), subject to certain conditions184. However,
CMIs should satisfy themselves that the third party's CDD standards meet regulatory requirements as well as
their own internal policies. CMIs should also assess that the third parties used are licensed and supervised for
compliance with AML/CFT requirements that are consistent with FATF standards and have adequate measures
to comply with those requirements (i) before placing reliance on third parties for CDD and (ii) on a periodic
basis185. Reliance on such a third party does not diminish the responsibility of the CMI in fulfilling its obligations

183 Please see Appendix 2 of the MAS Notice on the Prevention of Money Laundering and Countering the Financing of Terrorism –
Capital Markets Intermediaries (SFA 04-N02) for the list of financial institutions supervised by MAS to which this clause applies.
184 Please see Paragraph 9 of the MAS Notice on the Prevention of Money Laundering and Countering the Financing of Terrorism –
Capital Markets Intermediaries (SFA 04-N02) for the list of third parties to which a CMI can rely on to perform the CDD measures,
and the criteria for relying on such third party, and Paragraph 9 of the Guidelines to SFA 04-N02.
185 For examples, please refer to Case Study O of the MAS Guidance to CMIs on Enhancing AML/CFT Frameworks and Controls dated
Jan 2019.
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to the regulations and regulator. In instances where CMI or financial institutions rely on intermediaries to
perform CDD, the CMI or financial institutions would need to immediately obtain the CDD information from
the intermediaries. If this is not done, the CMI should carry out its own due diligence.

A CMI may not rely on a third party to conduct ongoing monitoring of business relations with clients.

The “Reliance on Third Parties” scenario is different from an outsourcing arrangement or agreement. In an
outsourcing scenario, the outsourced service provider performs the CDD measures on behalf of the CMI, in
accordance with the CMI’s AML/CFT policies, procedures and standards, and is subject to the CMI’s control
measures to effectively implement the CMI’s AML/CFT procedures. A CMI may also outsource a part of the
ongoing monitoring processes. For example, the first-level review of alerts from the transaction monitoring
systems, or sanctions reviews, to another party. However, the CMI remains responsible for complying with
ongoing monitoring requirements186.

7.9.11 CDD Measures for Joint Account Holder and Related Transactions

In the case of a joint account, a CMI shall perform CDD measures on all the joint account holders as if each of
them was individually clients of the CMI.

Where a CMI suspects that two or more transactions are or may be related, linked or the result of a deliberate
restructuring of an otherwise single transaction into smaller transactions in order to evade the CDD measures
(i.e. to ensure that each transaction does not exceed S$20,000), the CMI shall treat the transactions as a single
transaction and aggregate their values for the purpose of AML/CFT and CDD.

7.9.12 CDD Measures for Existing Clients

A CMI shall also perform the CDD measures in relation to its existing clients, based on its own assessment of
materiality and risk, considering any previous measures applied, the time when the measures were last applied
to such existing customers and the adequacy of date, documents or information obtained.

7.9.13 CDD Measures for Non-Account Holders

Where the CMI undertakes any transaction of a value exceeding S$20,000 for any client who does not
otherwise have business relations with the CMI, the CMI shall:

(i) Perform CDD measures as if the client had applied to the CMI to establish business relations; and

(ii) Record adequate details of the transaction to permit the reconstruction of the transaction, including the
nature and date of the transaction, the type and amount of currency involved, the value date, and the
details of the payee or beneficiary.

186 Guidelines to Notice SFA 04-N02 on Prevention of Money Laundering and Countering the Financing of Terrorism.
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7.9.14 Enhanced Due Diligence (EDD)

When the Risk Score is high, a CMI must carry out EDD. EDD is conducted on potentially high-risk clients,
geographic 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 CMI 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 CMI and the client);
• are companies that have nominee shareholders or shares in bearer form;
• are cash intensive businesses; or
• are from or in, or where any BO of the client is from or in a country or jurisdiction in relation to which the
FATF has called for countermeasures, or known to have inadequate AML/CFT measures, as determined
by the CMI for itself or notified to the CMI generally by MAS or other foreign regulatory authorities.

Examples of higher geographic risk include countries or jurisdictions which have been identified by the FATF
or other credible international bodies such as Transparency International as having significant levels of
corruption, TL, 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.
• when processing the application to establish business relations, the CMI shall understand and as
appropriate, obtain from the customer information as to the purpose and intended nature of business
relations.

For higher risk clients, CMIs should take reasonable means to establish and corroborate their source of wealth
and source of funds. Where it is not possible to obtain reliable supporting documents from the clients (e.g.
audited financial statements, salary slips, documentary evidence of sale of property), CMIs should, at
minimum, validate clients’ representations against independent sources of information (e.g. salary
benchmarking reports from Human Resource consultancy firms, publicly available financial performance data
for businesses of similar scale and nature), and document their assessment of the plausibility of the clients’
wealth. Where necessary, CMIs should consider obtaining more stringent independent verification options
such as obtaining clients’ tax returns filed with the relevant tax authorities or commissioning external
intelligence reports.

7.9.15 Red Flags in Account Opening

Examples of red flags to watch out for include:

• Prospective client is evasive about source of funds;

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• 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; or
• Non-transparent ownership.

7.9.16 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 match the size of the 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 the client for AML/CFT reasons. The decision and reason to close the
account must be recorded and filed.

7.9.17 Politically Exposed Person

7.9.17.1 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; or
• Close associate of such a person.

“Prominent public functions” includes the roles held by heads of state, heads of government, government
ministers, senior civil servants, senior judicial or military officials, senior executives of state-owned
corporations, senior political party officials, members of the legislature and senior management of
international organizations. The MAS has clarified that the definition of PEPs also include Singapore PEPs.

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 CMI should also put in place proper policies and
procedures for EDD including but not limited to the following:
i. Implementing appropriate internal risk management systems, policies, procedures and controls to
identify and determine if a client, any natural person appointed to act on behalf of the client, any
connected party of the client or BO of the client is a PEP, i.e. a PEP policy;
ii. Obtaining the approval from the CMI’s senior management to establish or continue business relations
where the client or BO of the client is a PEP or subsequently a PEP;

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iii. Establishing the source of wealth and source of funds of any client or BO by appropriate and reasonable
means; and
iv. Conducting, during the course of business relations with the client, enhanced monitoring of business
relations with the client. In particular, the CMI shall increase the degree and nature of monitoring of the
business relations with and transactions for the client, in order to determine whether they appear unusual
or suspicious.

7.9.18 Personal Data Protection Act

The PDPA governs the collection, use, disclosure and care of personal data. Therefore, PDPA has implications
for CMIs. It is important for CMIs not to share information without consent or release information to third
parties. Any unauthorised release of information may result in legal action taken against it. It is important that
CMIs incorporate disclosure clauses related to PDPA in the terms and conditions for account opening to
provide for such situations. In the absence of such provisions, the CMI may breach the PDPA which serves to
maintain the confidentiality of clients’ information. It should be noted that express consent from client is
needed and should be obtained. CMIs should add disclosure clauses or update their Terms and Conditions in
account opening documents and check the “Do Not Call Registry” (DNC) if marketing calls are intended.

However, for the purposes of complying with the Notice, a CMI may, whether directly or through a third party,
collect, use and disclose personal data of an individual187 client, an individual beneficiary of a life insurance
policy, an individual appointed to act on behalf of a client, an individual connected party of a client or an
individual BO of a client, without the respective individual's consent.

CMIs may only under limited circumstances188 provide an individual client, an individual beneficiary of a life
insurance policy, an individual appointed to act on behalf of a client, an individual connected party of a client
or an individual BO of a client with:

i. any access to personal data about the individual that is in the possession or under the control of the CMI,

ii. any information about the ways in which the personal data of the individual under subparagraph (i) has
been or may have been used or disclosed by the CMI, or

iii. any right to correct an error or omission of the personal data about the individual that is in the possession
or under the control of the CMI.

7.9.19 Record Keeping

All documents of checks and transactions with the client (which are required to be obtained or produced to
meet the requirements under the Notice) have 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.

Data, documents and information may be retained as originals or copies, in paper or electronic form or on
microfilm, provided they are admissible as evidence in a Singapore court of law.

187 For the purposes of Chapter 7, Section 7.9.15, "individual" means a natural person, whether living or deceased.
188 Please see Paragraph 12.3 of the MAS Notice on the Prevention of Money Laundering and Countering the Financing of Terrorism
– Capital Markets Intermediaries (SFA04-N02) for the circumstances under which the CMI may do so.
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Records of data, documents and information on all business relations with or transactions for a client
pertaining to a matter which in under investigation or which has been the subject of a STR should be retained,
in accordance with any request or order from Suspicious Transaction Reporting Office (STRO) or other relevant
authorities in Singapore.

7.9.20 Reporting Suspicious Transactions

CMIs shall keep in mind the provisions in the CDSA189 and in the TSOFA that provide for the reporting to the
authorities of transactions suspected of being connected with money laundering or terrorism financing. CMIs
shall report any suspicious transactions to STRO, Commercial Affairs Department (CAD) of the Singapore Police
Force, as well as extend a copy of the report to MAS for information. Such reports on suspicious transactions
(including attempted transactions) should be submitted regardless of the amount of the transaction. When a
suspicion arises, an investigation should be conducted by Compliance and management, and a STR should be
filed as soon as is reasonably practicable but no later than 15 business days after the case is referred by the
relevant employee, officer or representative, unless the circumstances are exceptional or extraordinary.

As long as there are reasonable grounds for suspicion that funds are/were connected to criminal conduct or
TL, CMIs have an obligation to lodge a STR with STRO and extend a copy to MAS. The CMI does not have to
prove beyond doubt that a client was involved in criminal activity before a STR is filed.

Examples of suspicious transactions or circumstances that may warrant the filing of a STR to the relevant
authorities include the client:
• being unable to complete CDD measures;
• being reluctant, unable, or unwilling to provide any information requested by the CMI; or
• deciding 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 MAS Notice on Reporting of Suspicious Activities and
Incidents of Fraud (CMG-N01). A CMI 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 CMI190. Examples of suspicious transactions are set out in Appendix B of the Guidelines. This
can also be found in Appendix C of this Study Guide.

STRs should be filed to the STRO, as required under the CDSA and the Notice. For incidents of fraud, the CMI
should lodge a police report and submit to the MAS a copy of the report. Where the CMI has not lodged a
police report, it should notify the MAS of the reasons for its decision191.

CMIs should also implement appropriate internal policies, procedures, and controls for meeting their
obligations under the law, including the following:

189 Please note in particular section 57 of the CDSA on tipping-off.

190 The report shall be in Form F1 – Suspicious Activities & Incidents of Fraud Report of the MAS Notice on Reporting of Suspicious
Activities & Incidents of Fraud (CMG-N01) and shall be lodged not later than 5 working days after the discovery of the activity or
incident by the CMI.
191 MAS Notice on Reporting of Suspicious Activities & Incidents of Fraud (CMG N01).
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(i) Establish a single reference point within the organisation to whom all employees, officers and
representatives are instructed to promptly refer all transactions suspected of being connected with ML or
TF, for possible referral to STRO via STRs, and
(ii) Keep records of all transactions referred to STRO, together with all internal findings and analysis done in
relation to them.

7.9.21 Policies and Procedures for Ongoing Monitoring

CMIs must establish appropriate policies and procedures to combat financial crimes and appoint a central
contact point or liaison for regulators. The CMI shall put in place and implement adequate systems and
processes, commensurate with the size and complexity of the CMI.

During the course of business relations, CMIs and representatives should observe the conduct of the client’s
account and transactions undertaken to ensure that the client’s behavior is consistent with their knowledge
of the client, 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.

CMIs need to ensure that their ongoing monitoring is conducted meaningfully based on patterns of
transactions and aggregated positions (e.g. for client with multiple accounts, and accounts of related client)
to: (a) better understand the risks associated with their client; (b) identify potential ML/TF risks; and (c) report
suspicious transactions192.

CMIs and representatives should make further inquiries into the background and purpose of any unusual
transactions and document their findings with a view to making this information available to the relevant
authorities should the need arise.

Periodic review of client identification and beneficial ownership information should be conducted to ensure
the information is kept up to date, particularly for higher-risk categories of clients. The frequency of CDD
review may vary depending on each client’s risk profile. Higher-risk clients should be subject to more frequent
periodic reviews.

Where there are reasonable grounds for suspicion that existing business relations with a client are connected
with ML or TF, and where the CMI considers it appropriate to retain the client: (a) the CMI shall substantiate
and document the reasons for retaining the client; and (b) the client’s business relations with the CMI shall be
subject to commensurate risk mitigation measures, including enhanced ongoing monitoring. Where the CMI
assesses the client or the business relations with the client to be of higher risk, the CMI shall perform enhanced
CDD measures, which shall include obtaining the approval of the CMI's senior management to retain the client.

For higher-risk categories of clients, a CMI should obtain CDD information as part of its periodic CDD review,
or upon the occurrence of a trigger event as deemed necessary by the CMI, whichever is earlier, and for all
other risk categories of clients, obtain updated CDD information upon the occurrence of a trigger event.
Trigger events include:

(i) when a significant transaction takes place,

192 For examples, please refer to Case Study Q of the MAS Guidance to CMIs on Enhancing AML/CFT Frameworks and Controls dated
Jan 2019.
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(ii) a material change occurs in the way a client’s account is operated,

(iii) the CMI’s policies, procedures or standards relating to the documentation of CDD information change
substantially, and

(iv) the CMI becomes aware that it lacks sufficient information about the client concerned.

7.9.21.1 Tax-Related ML risk

CMIs should exercise vigilance and avoid having a complacent mindset when assessing tax-related ML risks of
their clients. In this regard, a CMI could consider in its assessment of tax-related ML risks, factors such as the
relevant countries’ 193 compliance with the Exchange of Information on Request standard as well as
commitment to adopt Common Reporting Standard (CRS)/Automatic Exchange of Information, level of
AML/CFT compliance in relation to CDD, and the client’s participation in a tax amnesty programme.

Tax arbitrage opportunities remain despite Foreign Account Tax Compliance Act (FATCA) and CRS
implementation, as not all countries have signed agreements to automatically exchange information with one
another. For instance, a client may choose to change his tax residency to a country without an arrangement
with Singapore to exchange information. Although he may have good reasons for the change in tax residency,
the CMI should enquire further into this change and request for corroborative evidence of the tax legitimacy
of his funds, where relevant. CMIs should be alert to the possibility that the client may be trying to circumvent
CRS requirements to countries where he is a tax resident.

Likewise, tax-related ML risk remains a relevant AML/CFT consideration for client in spite of their participation
in tax amnesty programme. CMIs should not assume that the tax affairs of these clients are fully regularized
and should continue to monitor for tax-related red flags194.

7.9.22 Summary of a “KYC” Framework

A KYC framework can be summarized 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 should be reported to the police/
relevant authorities;
• Avoid tipping off.

A flowchart of the KYC process is shown in Figure 7.9.22.

193 These could include the customers’ countries of incorporation/origin as well as countries where the customers’ sources of funds
originate from.
194 For examples, please refer to Case Study N of the MAS Guidance to CMIs on Enhancing AML/CFT Frameworks and Controls dated
Jan 2019.
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Figure 7.9.22 - Workflow of the KYC Process

KYC, Client Onboarding &

Customer Due Diligence

• CMI / 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

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7.10 Enterprise-Wide Risk Assessment

In addition to assessing the ML/TF risks presented by an individual client, a CMI 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 CMI should consider
include target customer markets and segments (i.e. its clients, and the countries or jurisdictions its clients are
from or in); countries or jurisdictions the CMI is exposed to, especially countries or jurisdictions with relatively
higher levels of corruption, organised crimes 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 CMI (i.e. the
products, services, transactions and delivery channels of the CMI).

CMIs should analyse and get a proper understanding of the risk factors that they have included in their
enterprise-wide risk assessment methodologies and ensure that the calibration of the risk scores is aligned
with the degree of ML/TF risks195.

The scale and scope of the enterprise-wide ML/TF risk assessment should be commensurate with the nature
and complexity of the CMI’s business. As far as possible, a CMI’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 CMI’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 CMI shall consider 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 CMI 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 client segments or delivery channels, or the launch of new products and services by the
CMI. The results of these reviews should be documented and approved by the senior management even if
there are no significant changes to the CMI’s enterprise-wide risk assessment.

Risk Mitigation

A CMI shall also develop and implement policies, procedures and controls, which are approved by senior
management, to enable the CMI to effectively manage and mitigate the risks that have been identified by the
CMI or notified to it by MAS or other relevant authorities in Singapore. In addition, the CMI should also monitor
the implementation of those policies, procedures and controls and enhance them if necessary.

Further, the CMI should perform enhanced measures where higher risks are identified, to effectively manage
and mitigate those higher risks, and ensure that the performance of measures or enhanced measures to
effectively manage and mitigate the identified risks address the risk assessment and guidance from MAS or
other relevant authorities in Singapore.

195 For examples, please refer to Case Study D of the MAS Guidance to CMIs on Enhancing AML/CFT Frameworks and Controls dated
Jan 2019.
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7.11 Risk Controls for New Products, Practices and Technologies

A CMI shall identify and assess the money laundering and terrorism financing risk that may arise in relation to
the development of new products and new business practices, including new delivery mechanisms, and the
use of new or developing technologies for both new and pre-existing products. This assessment of ML/TF risks
in relation to new products, practices and technologies is separate from, and in addition to, the CMI's
assessment of other risks such as credit risks, operational risks or market risks, and should be approved by
senior management and heads of business, risk and compliance.

A CMI shall undertake the risk assessments, prior to the launch or use of such products, practices and
technologies, and shall take appropriate measures to manage and mitigate the risks. The CMI shall pay special
attention to any new product, new business practice (including new delivery mechanisms) or new or
developing technologies that favors anonymity.

7.12 Operational Risk Controls to Prevent Financial Crimes

7.12.1 Prevention and Operational Control - “A Risk Management Framework”

In the Technology Risk Management Guidelines issued in January 2021196, 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;
• PDPA;
• Civil action;
• Fines;
• Imprisonment terms; and
• Reputation.

7.12.2 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;

196 MAS Guidelines on Risk Management Practices - Technology Risk (January 2021).
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• Dual or Independent Control of Payment Instructions;

• Hold-mail Control;
• Training on IT awareness & Fraud; and
• Audit.

7.12.3 FRAUD – Prevention and Detection in Summary

• F – Follow Policies and Procedures. If you do not know what these are, ask Compliance where to find
them.
• R – Report any suspicious transactions or inconsistencies to Compliance and Management through a
whistle blowing process.
• A – Act if you have any suspicion and investigate.
• U – Unite with Management, Compliance and Enforcement Agencies to bring perpetrators to justice.
• D – Disciplinary action to be taken and criminal charges imposed.

7.13 Reporting and Filing Requirements

A CMI shall have policies and procedures in place for the reporting of any suspicious transaction197 or client as
well as an appropriate escalation process. It should have a single reference point to whom all staff are
instructed to promptly refer all transactions which are suspected of ML or used for terrorist activities. This is
to enable quick investigations to take place so that a decision can be taken to file a STR.

Once a decision is made to file an STR, such filing must be done as soon as is reasonably practicable but no
later than 15 business days after the case is referred by the relevant employee, officer or representative,
unless the circumstances are exceptional or extraordinary. Such reports are to be filed with the CAD, 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 CMI 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 STRs filed and the
supporting documents must similarly be maintained and retained for the minimum period.

(For examples of suspicious transactions, please refer to Appendix B of the Guidelines198 which can also be
found in Appendix E of this Study Guide).

197 Guidelines to MAS Notice SFA 04-N02 on Prevention of Money Laundering and Countering the Financing of Terrorism, Appendix B
– Examples of Suspicious Transactions
198 Guidelines to MAS Notice SFA 04-N02 on Prevention of Money Laundering and Countering the Financing of Terrorism, Appendix B

– Examples of Suspicious Transactions.

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7.14 Penalties and 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-off offences carry with it both fines and imprisonment
terms.

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.

7.15 Internal Policies, Compliance, Audit and Training

7.15.1 Group Policy

A CMI 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.

A CMI incorporated in Singapore shall develop a group policy on AML/CFT to meet all requirements of the
Notice and extend this to all its branches and subsidiaries in its financial groups. Such group policy should
include procedures for sharing information between its branches and subsidiaries required for the purposes
of CDD and for ML/TF risk management, and for the provision of client, account, and transaction information
from its branches and subsidiaries to the CMI's group-level compliance, audit and AML/CFT functions, when
necessary, for ML/TF risk management purposes.

Where the AML/CFT requirements in the host country or jurisdiction differ from those in Singapore, the CMI
shall require that the overseas branch or subsidiary apply the higher of the two standards, to the extent that
the law of the host country or jurisdictions so permits. In cases of conflict between the law of the host country
and Singapore law such that the overseas branch or subsidiary is unable to fully observe the higher standard,
the CMI shall apply additional appropriate measures to manage the ML and TF risks, report this to MAS and
comply with such further directions as may be given by MAS.

7.15.2 Compliance

Compliance control programmes should include key performance indicators as well as control tests and
procedures to check on PEPs and that 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.

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At the minimum, an AML/CFT compliance officer at the management level must be appointed, and all
compliance staff must be suitably qualified and has adequate resources and timely access to all client records
and other relevant information which they require to discharge their functions.

7.15.3 Audit

A CMI 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.

7.15.4 Training

A training programme should be in place to ensure that staff are regularly and appropriately trained on
AML/CFT, fraud and other financial crimes prevention. It is important that such training be refreshed at least
once every two years. Training can be in the form of e-learning, face-to-face training (whether internal or
externally provided training, etc.) and such training received should be recorded for audit purposes and
monitored for effectiveness.

To ensure that staff can fulfil their respective AML/CFT responsibilities, tailored training should be provided
for staff performing different AML/CFT functions. CMI should also consider expounding learning points from
specific real-life case studies, e.g. sharing with front office and other relevant staff suspicious transactions and
client behaviours which could lead or led to filing of STRs that have been encountered by other staff of the
CMI199.

7.15.5 Employee and Representative Hiring200

In addition, there must be proper policies and procedures in place for the proper selection of employees,
appointing officers and representatives and their screening when hiring. The screening procedures applied
should include:

(a) Background checks with past employers,

(b) Screening against ML/TF information sources, and

(c) Bankruptcy searches.

In addition, credit history checks, on a risk-based approach, should be conducted, when hiring employees, and
appointing officers and representatives.

199 For examples, please refer to Case Studies L and M of the MAS Guidance to CMIs on Enhancing AML/CFT Frameworks and Controls
dated Jan 2019.
200 Guidelines to MAS Notice SFA 04-N02 on Prevention of Money Laundering and Countering the Financing of Terrorism, paragraph
14-5.
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7.16 Effectiveness of AML/CFT Framework

Following a series of AML/CFT inspections by MAS that examined the effectiveness of the AML/CFT
frameworks and controls of CMIs, MAS has published a guidance paper setting out MAS' supervisory
expectations of sound practices for CMIs (Guidance).

In determining whether a CMI's AML/CFT framework and control is effective, MAS applies the following three-
pillar framework in its AML/CFT inspections:

(a) Governance: The board and senior management of a CMI plays an important role in maintaining sound
governance frameworks for active management of ML/TF risks. Setting a firm tone from the top with
adequate oversight for effective AML/CFT controls should be a priority. There should be clear lines of
responsibility and active involvement in the deliberation and resolution of AML/CFT issues.

(b) Risk awareness: Strong risk awareness across the CMI is needed to enhance the assessment of the nature
and level of ML/TF risks faced by the firm and strengthen the CMI's ability to properly identify and escalate
risk issues as well as determine appropriate risk mitigation measures. There should be a clear
understanding of individual ownership and accountability for managing ML/TF risks.

(c) Execution: Effective execution of controls within the organization is necessary to achieve desired
outcomes of detecting, preventing and deterring ML/TF risks. There should be proper implementation of
policies, procedures and controls that comply with the requirements in the Notice, effective risk
assessment and mitigation measures, timely escalation and resolution of red flags, and timely and
effective resolution of past issues.

7.16.1 Governance

To build a robust AML/CFT governance framework, the board and senior management should have adequate
oversight of the effectiveness of AML/CFT systems, processes and controls, and put in place competent and
adequately resourced compliance and independent audit arrangements. There should also be adequate and
timely reporting to the board and senior management on key ML/TF risks issues and concerns. CMIs should
also:

i. Put in place a review process to periodically assess the adequacy and effectiveness of the firm's
AML/CFT compliance frameworks, systems and processes. The enterprise-wide risk assessment
framework should be one of the key areas prioritized for the initial review.

ii. Clearly define the roles and responsibilities of compliance and independent audit functions, and
periodically review their effectiveness in acting as the second and third lines of defence respectively.

iii. Review and enhance AML/CFT reporting processes to ensure that (a) the board and senior management
receives enough and timely updates on key ML/TF risks and challenges so that ML/TF concerns are
actively monitored, decisions on mitigation measures are taken and guidance for effective execution
are provided where necessary; and (b) the remediation of audit findings is timely, effective and
sustainable.

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7.16.2 Risk Awareness

To strengthen risk awareness of the board and senior management and staff, CMIs should:

i. Formalize individual ownership and accountability over AML/CFT controls, so that the board and senior
management and staff are aware of and understand their respective AML/CFT responsibilities.

ii. Develop and communicate clear guidance tailored for the various AML/CFT functions. Guidance should
include the nature of ML/TF risks that arises from the firm's business, red flags based on customer
behaviours and account activities, and appropriate escalation and risk mitigation measures.

iii. Review periodically and enhance training programmes and curriculum (e.g. by including new relevant
typologies as and when they arise) to ensure that specialized training is provided for the various
AML/CFT functions and a framework for continuous learning is developed within the CMI. To help staff
obtain a better understanding of the AML/CFT issues they might encounter in their daily work, case
studies and/or role plays should be incorporated, where appropriate, in AML/CFT trainings.

7.16.3 Execution

To support effective execution of AML/CFT frameworks, systems and controls, CMIs should:

i. Periodically review and enhance policies and procedures to ensure that they are aligned with regulatory
requirements and supervisory expectations, as well as any audit recommendations. In this regard, the
corroboration of sources of wealth and source of funds of higher risk client and timeliness of periodic
review assessments should be amongst the key focus areas.

ii. Implement an ongoing risk-based monitoring framework which ensures that enhanced CDD measures
are adequately applied on clients that pose higher ML/TF risks.

iii. Put in place systems and processes for the identification, assessment, and escalation of ML/TF red flags,
as well as the implementation of risk mitigation measures, including filing of STRs, where required.

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167 | Appendix A: Criteria for the Assessment of a Customer Account Review

Appendix A:
Criteria for the Assessment of a
Customer Account Review201

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 Listed 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; Association of Chartered Certified Accountants (ACCA)
Qualifications; Associate Wealth Planner or Certified Financial Planner by the Certified Financial
Planners Board of Standards, USA; Certified Financial Risk Manager Programme by the Global
Association of Risk Professionals, USA; Chartered Alternative Investment Analyst Examination
conducted by the Chartered Alternative Investment Analyst Association, USA; or Chartered Financial
Consultant by the American College, USA);
(c) The customer has transacted in Listed Specified Investment Products 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 Listed Specified Investment
Products.

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

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Appendix B - Criteria for the Satisfaction of the Customer Knowledge Assessment | 168

Appendix B:
Criteria for the Satisfaction of the
Customer Knowledge
Assessment202

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:
(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; Association of Chartered Certified Accountants (ACCA)
Qualifications; Associate Wealth Planner or Certified Financial Planner by the Certified Financial
Planners Board of Standards, USA; Certified Financial Risk Manager Programme by the Global
Association of Risk Professionals, USA; Chartered Alternative Investment Analyst Examination
conducted by the Chartered Alternative Investment Analyst Association, USA; or Chartered Financial
Consultant by the American College, USA);
(c) The customer has invested in the following unlisted Specified Investment Products:
(i) For transactions in collective investment schemes (CIS) and investment-linked life insurance
policies (ILPs), the customer has transacted in CIS or ILPs at least 6 times in the preceding 3
years; or
(ii) For transactions in unlisted Specified Investment Products (excluding CIS and ILPs), the
customer has transacted in any unlisted Specified Investment Products (excluding CIS and ILPs)
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 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.

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

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169 | Appendix B – Criteria for the Satisfaction of the Customer Knowledge Assessment

2. Where a customer is assessed to not possess knowledge or experience 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.

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Appendix C – Risk Warning Statement for Overseas-Listed Investment Products | 170

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
approved in-principle for listing and quotation only on, or listed for quotation or quoted only on, one or more
overseas exchanges.

1. This statement is provided to you in accordance with paragraph 29D of the Notice on the Sale of
Investment Products (SFA 04-N12).

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171 | Appendix C - Risk Warning Statement for Overseas-Listed Investment Products

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 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.

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Appendix C – Risk Warning Statement for Overseas-Listed Investment Products | 172

(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 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: ______________________

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173 | Appendix D - Excluded Investment Products

Appendix D:
Excluded Investment Products203
Any capital markets products that belong to a class of capital markets products listed in the Schedule to the
Securities and Futures (Capital Markets Products) Regulations 2018.

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

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Appendix E – Examples of Suspicious Transactions l 174

Appendix E:
Examples of Suspicious
Transactions204
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 not exhaustive
and will require constant updating and adaptation to changing circumstances and new methods of laundering
money or financing terrorism. 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
flags205.

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 client 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 client 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 client, for example switching from
trading only penny stocks to predominantly blue chips.

(ii) A customer relationship with the CMS licence holder where a client has a large number of accounts with
the same CMS licence holder, and has frequent transfers between different accounts.

204 Guidelines to MAS Notice SFA 04-N02 on Prevention of Money Laundering and Countering the Financing of Terrorism, Appendix
B.
205 The website address as at 24 April 2015: 20 August 2018: https://www.police.gov.sg/about-us/organisational-structure/specialist-
staffdepartments/commercial-affairs-department/aml-cft/suspicious-transaction-reporting-office/suspicious-
transactionreporting.

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(iii) Transactions in which assets are withdrawn immediately after being deposited206, unless the client’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 client’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 client or his business.

(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 client, particularly if the client is not a listed company.

(vii) Request by a client for investment management services where the source of funds is unclear or not
consistent with the client’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 client.

3. Transactions Involving Large Amounts of Cash

(i) Frequent withdrawal of large cash amounts that do not appear to be justified by the client’s business
activity.

(ii) Provision of funds for investment and fund management purposes in the form of large cash amounts.

(iii) clients 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
client 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.

206 For CMS licence holders, this could mean depositing of funds into trust accounts, margin accounts, as collaterals or for fund
management purposes.

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Appendix E – Examples of Suspicious Transactions l 176

4. Transactions Involving 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.

(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 client’s apparent standing.

(viii) Requests for refunds of unaccountable “erroneous” payments to CMS licence holders or clients’ 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 client 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 client.

(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.

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(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
client.

(vi) clients who wish to maintain a number of trustee or clients’ accounts that do not appear consistent with
their type of business, including transactions that involve nominee names.

(vii) Requests by a client for investment management services where the source of funds is unclear.

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 client which is not in line with his business or
background.

(viii) Purchase of bank cheques on a large scale by a client.

8. Other Types of Transactions

(i) Account activity is not commensurate with the client’s known profile (e.g. age, occupation, income).

(ii) The client 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.

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(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 client 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.

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179 | Appendix F – Review Questions

Appendix F:
Review Questions
Candidates should note that the sole purpose of the Review Questions is to familiarize 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.

The correct answer for each question is in bold.

Chapter 2 – Licensing and Business Operations

1. Under the SFA, a CMS licence holder must inform the MAS if there is a change in its records relating to
which of the following?

a. The back-office settlement infrastructure used by the CMS licence holder.

b. The name of the CMS licence holder under which the business is carried on.
c. The address of the principal place of business in respect of the licensed activity.
d. The contact numbers of the CMS licence holder’s pool of clients.

▪ (a) and (b).

▪ (b) and (c).
▪ (c) and (d).
▪ (b) and (d).

2. If a CMS licence holder has ceased to conduct business in the activity that it is regulated for, when must
it inform the MAS of this?

a. On the same business day of the cessation of activity.

b. Within 7 days after the cessation of activity.
c. Within 14 days after the cessation of activity.
d. Within 21 days after the cessation of activity.

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3. CMS licence holders must ensure that customers’ transaction and trading records are kept for a period of
___ years.

a. 2
b. 5
c. 7
d. 10

Chapter 3 – Market Conduct

4. Which statement below defines the practice of “hunting for stops”?

a. Withholding or withdrawing customers’ orders from the market for the broker’s own benefit.
b. Accepting simultaneous buy and sell orders at the same price for the same underlying.
c. Entering into trades that have no real economic value.
d. Deliberately pushing prices up or down with the sole intention of triggering stop orders.

5. Which of the following are forms of market misconduct under the SFA?

a. Insider Trading.
b. False Trading.
c. Pre-Arranged Trading.
d. Under Trading.

▪ (a), (b) and (c).

▪ (a), (c) and (d).
▪ (a) and (b).
▪ (b) and (c).

6. A trading representative has received orders from a customer to purchase 150 lots of Brent Crude futures
contracts. Knowing that the customer’s order will drive up prices, he decides to purchase some lots of the
same contracts for his personal account before executing the customer’s order.

What act of misconduct has the trader committed?

a. No misconduct was committed.

b. Front running.
c. Pre-arranged trading.
d. Dissemination of false information.

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Chapter 4 – Over-the-Counter Derivatives

7. Which of the following are examples of OTC derivatives products?

a. Commodity Swaps.
b. Fixed Income Securities.
c. Forward Rate Agreements.
d. Cross-Currency Swaps.

▪ (a), (b) and (c).

▪ (b), (c) and (d).
▪ (a), (c) and (d).
▪ (a) and (d).

Chapter 5 – Ethics, Codes and Standards of Professional Conduct for Derivatives Dealing

8. Which of the following is the main objective of the ethical framework?

a. To execute transactions as quickly as possible.

b. To develop an expert understanding of financial products.
c. To avoid financial risks to the employer.
d. To serve the best interests of the clients.

9. Tim is a portfolio manager of the new Octava Hedge Fund. In his first year, the fund managed to achieve
a return of 25%.

He then created new marketing materials that showed the fund’s previous 5 years’ performance through
back testing. However, he did not state in the marketing materials that the fund's previous 5 years’
performance was obtained through back testing.

In the above scenario, how has Tim demonstrated unethical behaviour?

a. Tim made use of material non-public information to make capital gains.

b. Tim has failed to uphold standards for performance presentation.
c. Tim has misused confidential information provided by the employer.
d. Tim has committed self-dealing by appropriating information from his employer.

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10. Which of the following are elements of best execution practices that traders should be mindful of?

a. Speed of trade execution.

b. Keeping information on prices confidential.
c. Opportunities for price improvement.
d. Client-specific instructions.

▪ (a), (b) and (c).

▪ (a), (c) and (d).
▪ (b), (c) and (d).
▪ (a) and (d).

Chapter 6 – Derivatives Dealing Practice and Skills

11. For retail customers who wish to trade, under what circumstance would a Customer Knowledge
Assessment NOT be required?

a. When the customer has invested in blue-chip shares in the past 3 years.
b. When the customer has invested in blue-chip shares in the past 6 years.
c. When the customer has invested in unlisted SIPs at least 6 times in the past 3 years.
d. When the customer has invested in unlisted SIPs at least 3 times in the past 6 years.

12. In the context of derivatives trading, what does the term “regulatory risk” refer to?

a. Risk of changes in commodities prices that may impact companies and markets.
b. Risk of a brokerage firm being unable to meet its short-term financial obligations.
c. Risk of change in laws and regulations that may impact companies and markets.
d. Risk of financial crimes being committed by employees within a brokerage firm.

Chapter 7 – Prevention of Financial Crimes

13. Which of the following statutes governs money laundering in Singapore?

a. Banking Act.
b. Securities and Futures Act.
c. Suppression of Financing of Terrorism Act.
d. Corruption, Drug Trafficking and Other Serious Crimes (Confiscation of Benefits) Act.

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14. Upon learning that a client is on a money laundering sanctions list, what action must a trading
representative take?

a. Immediately freeze the account and delete all relevant records and particulars.
b. Immediately freeze the account and report this to the authorities.
c. Continue to closely monitor transactions on the affected account.
d. Port the client to another trading representative or trading firm.

15. 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.

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Appendix G:
Essential Readings
1. Securities and Futures Act
Available online on Attorney-General’s Chambers website - Singapore Statutes Online
(https://sso.agc.gov.sg)

2. Securities and Futures (Licensing and Conduct of Business) Regulations

Available online on Attorney-General’s Chambers website – Singapore Statutes Online
(https://sso.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
(https://sso.agc.gov.sg)

4. Personal Data Protection Act

Available online on Attorney-General’s Chambers website – Singapore Statutes Online
(https://sso.agc.gov.sg)

5. Corruption, Drug Trafficking and Other Serious Crime (Confiscation of Benefits) Act
Available online on Attorney-General’s Chambers website – Singapore Statutes Online
(https://sso.agc.gov.sg)

6. Mutual Assistance in Criminal Matters Act

Available online on Attorney-General’s Chambers website – Singapore Statutes Online
(https://sso.agc.gov.sg)

7. Terrorism (Suppression of Financing) Act

Available online on Attorney-General’s Chambers website – Singapore Statutes Online
(https://sso.agc.gov.sg)

8. Income Tax Act

Available online on Attorney-General’s Chambers website – Singapore Statutes Online
(https://sso.agc.gov.sg)

9. Goods and Services Tax (GST) Act

Available online on Attorney-General’s Chambers website – Singapore Statutes Online
(https://sso.agc.gov.sg)

10. Guidelines on Criteria for the Grant of a CMS Licence Other Than for Fund Management and Real Estate
Investment Trust Management
(Guideline No. SFA 04-G01)
Available online on Monetary Authority of Singapore website (https://www.mas.gov.sg/)

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11. Notice on Competency Requirements for Representatives of Holders of CMS Licence and Exempt
Financial Institutions
(Notice No. SFA 04-N22)
Available online on Monetary Authority of Singapore website (https://www.mas.gov.sg/)

12. Guidelines on Fit and Proper Criteria

(Guideline No. FSG-01)
Available online on Monetary Authority of Singapore website (https://www.mas.gov.sg/)

13. 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 (https://www.mas.gov.sg/)

14. Notice on Sale of Investment Products

(Notice No. SFA 04-N12)
Available online on Monetary Authority of Singapore website (https://www.mas.gov.sg/)

15. Notice on Execution of Customers’ Orders

(Notice No. SFA 04-N16)
Available online on Monetary Authority of Singapore website (https://www.mas.gov.sg/)

16. Guidelines to Notice SFA 04-N16 on Execution of Customers’ Orders

Available online on Monetary Authority of Singapore website (https://www.mas.gov.sg/)

17. Notice on Reporting of Misconduct of Representatives by Holders of CMS Licence and Exempt Financial
Institutions
(Notice No. SFA 04-N11)
Available online on Monetary Authority of Singapore website (https://www.mas.gov.sg/)

18. Guidelines to MAS Notice SFA 04-N02 on Prevention of Money Laundering and Countering the Financing
of Terrorism
Available online on Monetary Authority of Singapore website
(https://www.mas.gov.sg/)

19. Notice to Capital Markets Intermediaries on Prevention of Money Laundering and Countering the
Financing of Terrorism (Notice No. SFA 04-N02)
Available online on Monetary Authority of Singapore website (https://www.mas.gov.sg/)

20. MAS Notice on Prevention of Money Laundering and Countering the Financing of Terrorism – Banks
(Notice No. 626)
Available online on Monetary Authority of Singapore website (https://www.mas.gov.sg/)

21. SGX Futures Trading Rules

Available online on the Singapore Exchange Limited website
(http://rulebook.sgx.com/rulebook/futures-trading-rules)

22. Intercontinental Exchange Futures Trading Rules

Available online on the ICE Futures Singapore’s website
(https://www.theice.com/futures-singapore/regulation)

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23. APEX Trading Rules

Available online on the Asia Pacific Exchange Singapore’s website
(https://www.asiapacificex.com/?p=trading_rule)

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The Institute of Banking & Finance IBF Assessment Centre
10 Shenton Way 20 Anson Road
MAS Building #13-07/08 Twenty Anson #05-01
Singapore 079117 Singapore 079912
www.ibf.org.sg