Securities Commission revises FAQs on Contracts for Difference

The Securities Commission Malaysia (‘SC’) issued a revised set of Frequently Asked Questions (‘Revised FAQs’) in respect of the Guidelines on Contracts for Difference1 (‘CFD’) on 25 May 2023. The Revised FAQs supersede the previous set of Frequently Asked Questions issued on 6 April 2018.
 
Reproduced below are the more significant new questions and answers in the Revised FAQs.
2.8 Is there a specific arrangement on how a CFD provider is to maintain records for trades with clients, and other trades?
 
The CFD provider can decide on the method of record keeping, provided that separate records for its clients and other trades can be presented when requested by the SC.
2.9 What does the statement ’transaction entered into between the CFD provider and the entity that provides the white label solutions must be separated, and must not involve the client’s transaction’ as stated in paragraph 4.11 of the Guidelines mean?
 
The CFD provider must always act as principal to the client and segregate its own assets from client’s assets. Thus, any transactions entered into between the CFD provider and other entities must remain separated and recorded as such from those trades with clients.
 
2.10 Can a CFD provider (who is also a Trading Participant) place all its clients’ assets into a single segregated account?
 
A separate account must be maintained for purposes of CFD trades and should not be co-mingled with clients’ other trades e.g. futures contracts.  
 
2.13 How should periodic reports be submitted to the SC, as required under Chapter 4 of the Guidelines?
 
All periodic reports under Chapter 4 of the Guidelines shall be submitted electronically to the SC via the SC Common Reporting Platform (ComRep).2 
 
2.14 Is a CFD provider required to obtain approval(s) from Bank Negara Malaysia?
 
A CFD provider may require approval from Bank Negara Malaysia (‘BNM’) depending on their targeted investor types (i.e. resident and/or non-resident) and the currency of denomination of their CFD. CFD providers should ensure compliance to requirements under the Foreign Exchange Policy Notices issued by BNM.
 
3.1 Is a suitability assessment required to be conducted?
 
A CFD provider is required to conduct a suitability assessment when an investor intends to trade CFD.
 
The suitability assessment is required even if the investor has been previously assessed for purposes of futures trading.
 
3.2 Is there a requirement for a CFD provider to conduct educational programmes?
 
CFD providers are required to conduct educational programmes to educate investors on CFD. The programmes can be in the form of seminars, workshops or interviews and must be conducted at least on a quarterly basis.3
 
4.2 Is the CFD provider required to prepare a different set of disclosure document and PHS4 for CFD based on different underlying assets?
 
A CFD provider can choose to either – 
(a) prepare a single set of disclosure document and PHS for CFD with different underlying assets; or
(b) prepare separate sets of disclosure document and PHS for each CFD with a different underlying asset type.
The disclosure document and PHS must disclose information to potential investor in a clear, concise and effective manner.
 
Should the CFD provider choose to prepare a single set of disclosure document and PHS as in (a) above, the CFD provider must ensure that specific and distinguishable information attributable to each particular underlying asset type (such as the specific features and risks associated with the different underlying asset) is disclosed to enable the investor to arrive and make an informed decision.
 
5.4 For a CFD where the underlying instrument is a share, what happens if there is a corporate exercise on the underlying share?
 
A corporate exercise involving dividend payment, bonus issue or rights issue may impact an investor’s CFD holdings or obligations. The investor may be required to take further action arising from a corporate exercise.
 
For example, in the event of a rights issue, an investor holding a long CFD position may be given the opportunity to trade the CFD arising from the rights issue. Alternatively, an investor may be required to close his open CFD position before the ex-date of the entitlement for the rights issue.
 
A CFD provider is required to explain the impact of a corporate exercise on an investor’s CFD holdings or obligations in the disclosure document.
 
In addition to the above, the answer to Question 4.3 of the Revised FAQs now states that the disclosure document and PHS are to be deposited with the SC at least one business day prior to the offer of the CFD. The answer to the corresponding Question of the superseded FAQs (i.e. Question 3.2) merely states that a disclosure document and PHS to be deposited with the SC prior to the offer of the CFD.
 
Comments
 
The additional FAQs and the answers thereto provide helpful guidance to CFD providers and investors. In particular, CFD providers should ensure that a separate account must be maintained for CFD trades and should not be co-mingled with the clients’ other trades, and where required, ensure compliance with BNM’s Foreign Exchange Policy Notices.
 
Alert by Kok Chee Kheong (Partner) of the Corporate Practice of Skrine. 
 
 

1 A Contract for Difference is an over-the-counter or off-exchange derivative product entered into between a CFD provider and an investor that tracks the price movement of an underlying instrument whereby differences between the closing and the opening value will be settled solely through cash payments.
3 Refer to Question 3.3 of the Revised FAQs for topics that should be included in a CFD provider’s educational programme.
4 ‘PHS’ refers to Product Highlights Sheet.
 

This alert contains general information only. It does not constitute legal advice nor an expression of legal opinion and should not be relied upon as such. For further information, kindly contact skrine@skrine.com.