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Securities Commission issues 3rd Revision of the Guidelines on Contracts for Difference

27 June 2024

The Securities Commission Malaysia (“SC”) issued the 3rd revision of the Guidelines on Contracts for Difference on 14 June 2024 (“Revised Guidelines”) which came into effect immediately upon its issuance.
 
This article provides a summary of the main amendments introduced under the Revised Guidelines.1
 
New underlying instruments
 
The most significant change to the 2nd revision of the Guidelines on Contracts for Difference issued on 5 February 2024 (“Superseded Guidelines”) is the introduction of three new types of underlying instruments for a Contract for Difference (“CFD”), namely: 
  1. units of a Real Estate Investment Trust (“REIT”) listed on Bursa Malaysia Securities Berhad (“Bursa Securities”) or a stock exchange outside Malaysia;
  2. units of an Exchange Traded Fund (“ETF”) listed on Bursa Securities or a stock exchange outside Malaysia; and
  3. commodity derivatives listed on Bursa Malaysia Derivatives Berhad (“Bursa Derivatives”) or a Specified Exchange2.
Requirements for REIT listed on Bursa Securities
 
Where the underlying instrument is units of a REIT listed on Bursa Securities, the following requirements are applicable: 
  1. the underlying instrument must be listed on the Main Board of Bursa Securities;
  2. the REIT must have an average daily market capitalisation of at least:
  1. RM500 million in the past three months ending on the market day of the calendar month immediately preceding the date of the offer; or
  2. in the case of a newly listed REIT that does not meet the 3-month market capitalisation track record, RM3 billion; and
  1. the REIT must meet the public shareholding spread requirement at the date of the offer. 
Requirement for ETF listed on Bursa Securities
 
Where the underlying instrument is units of an ETF listed on Bursa Securities, the underlying instrument must be listed on the Main Board of Bursa Securities.
 
Requirements for REIT and ETF listed on foreign securities exchange
 
Where the underlying instrument is units of a REIT or units of an ETF listed on a securities exchange outside Malaysia: 
  1. the REIT or ETF is listed on an exchange in a jurisdiction where the capital market operator is a signatory of the International Organisation of Securities Commissions multilateral memorandum of understanding concerning consultation and co-operation, and the exchange of information among securities regulators (IOSCo MMoU);
  2. the REIT or ETF has an average daily market capitalisation of at least:
  1. RM3 billion in the past three months ending on the market day of the calendar month immediately preceding the date of the offer; or
  2. in the case of a newly listed REIT or ETF that does not meet the 3-month market capitalisation track record, RM5 billion;
  1. the REIT or ETF must be in compliance with the listing rules and requirements of its home exchange at the date of offer; and
  2. information on the price, volume, financial information and price-sensitive information in relation to the REIT or ETF must be easily accessible by investors. 
Additional requirement where underlying instrument is ETF units
 
Where the underlying instrument is units of an ETF, the CFD provider must ensure that the ETF is not a leveraged ETF3 or an inverse ETF4.
 
Requirements for commodity derivatives
 
Where the underlying instrument is commodity derivatives: 
  1. the underlying commodity derivatives is listed on Bursa Derivatives or a Specified Exchange; and
  2. information relating to the underlying commodity derivatives traded on the Specified Exchange, including price, volume, and contract specifications must be easily accessible by investors. 
Additional requirement where underlying instrument is REIT units
 
A CFD where the underlying instrument is units of a REIT shall not carry any voting rights or embedded options for the conversion into the underlying units of a REIT.
 
Minimum margin requirements
 
The minimum margin to be maintained for all open positions for a CFD where the underlying instrument is ETF units or REIT units or commodity derivatives is as follows: 
  1. ETF units : 20%;
  2. REIT units : 10% for index REIT and 20% for non-index REIT; and
  3. Commodity derivatives : 15%. 
Other significant amendments
 
The other significant amendments under the Revised Guidelines are as follows:
 
SC’s powers to grant exemptions or variations
 
The SC’s powers under Paragraph 1.04 of the Revised Guidelines to grant an exemption from or a variation to the requirements of the Revised Guidelines are now clarified in the following respects: 
  1. such power is only exercisable upon application whereas previously, the SC could grant exemptions or variations where it deems appropriate; and
  2. such variation is not contrary to the intended purpose of the relevant requirement of the Revised Guidelines; or
  3. there are mitigating factors justifying the said exemption or variation. 
Reduction in market capitalisation requirement for shares listed on Bursa Securities
 
Where the underlying instrument is shares listed on Bursa Securities, the minimum average daily market capitalisation (excluding treasury shares) for the three months preceding the date of the offer has been reduced from RM1 billion to RM500 million under Paragraph 3.02A(a)(i) of the Revised Guidelines.5
 
Guidance to Paragraph 6.01(a)
 
A new guidance note has been added to Paragraph 6.01(a) of the Revised Guidelines to clarify that the disclosure document and product highlights sheet (“PHS”) to be furnished to a client under Paragraph 6.01(a) prior to the opening of an account would include any supplementary disclosure document and supplementary PHS issued by the CFD provider.
 
Minimum information to be disclosed
 
Paragraph 6.02 of the Revised Guidelines has been redrafted to make a clear distinction between the minimum information to be disclosed in a disclosure document (Schedule 1 of the Revised Guidelines) and in a PHS (Schedule 2 of the Revised Guidelines). In addition, Paragraph 6.02 now expressly requires a CFD provider to comply with the requirements applicable to a PHS in the SC’s Guidelines on Sales Practices of Unlisted Capital Market Products.
 
Registration of disclosure document
 
Paragraph 6.07 of the Superseded Guidelines provided that a disclosure document is considered to be registered once the document is deposited with the SC as prescribed in the SC’s Guidelines on Disclosure Documents. This paragraph has been amended in the Revised Guidelines to provide that the disclosure document is considered registered if the document is deposited with the SC in the manner described in Paragraph 6.13 of the Revised Guidelines which specifies the other documents to be provided to the SC together with the disclosure document.
 
Submission Procedure
 
The requirements to submit documents under Paragraphs 6.13(e) and 6.13(f) of the Revised Guidelines have been amended as follows: (a) the requirement for submission of documents in CD-ROM format has been replaced by electronic copies; and (b) in addition to the disclosure document and PHS, all accompanying documents are also to be submitted in electronic format.
 
Schedule 2
 
The following paragraphs of Schedule 2 of the Superseded Guidelines have been removed from Schedule 2 of the Revised Guidelines as the requirements therein are already included in the Guidelines on Sales Practices of Unlisted Capital Market Products, which as stated in Paragraph 6.02 of the Revised Guidelines, must be complied with in relation to a PHS: 
  1. Paragraph 3(a) – Date of issuance of a PHS on the first page;
  2. Paragraph 3(g) – Contact information for enquiries or complaints;
  3. Paragraph 4 – Requirement relating to font size and for pagination of a PHS; and
  4. Paragraph 8 – Advice to investors that a PHS is a summary and that they should read and understand the disclosure document before deciding to invest. 
Other amendments
 
In addition, amendments were made under the Revised Guidelines to, inter alia, clarify certain provisions, remove certain definitions, relocate certain provisions to other parts of the Revised Guidelines and to include consequential amendments arising from the introduction of the three new types of underlying instruments.
 
Comments
 
In addition to shares and indices which are existing underlying instruments for a CFD, the introduction of three new underlying instruments, namely units of a REIT, units of an ETF and commodity derivatives means that CFDs may now be issued in respect of five types of underlying instruments under the Revised Guidelines.
 
The reduction of the three months minimum average daily market capitalisation from RM1 billion to RM500 million under Paragraph 3.02A(a)(i) of the Revised Guidelines for shares listed on Bursa Securities will significantly increase the number of companies whose shares will qualify as underlying instruments for CFDs.
 
These amendments may stimulate the issuance of CFDs, thereby enhancing the width and vibrancy of the Malaysian capital market.
 
Article by Phua Pao Yii (Partner), Kok Chee Kheong (Partner) and Tan Wei Liang (Senior Associate) of the Corporate Practice of Skrine.
 
 
1 A summary of all the amendments introduced under the Revised Guidelines can be accessed here.
2 A “Specified Exchange” is a person or body that operates a derivatives market outside Malaysia and is specified as a Specified Exchange under section 105 of the Capital Markets and Services Act 2007.
3 A “leveraged ETF” is an ETF whose aim is to deliver multiples of the daily performance of the index or benchmark (SC’s Guidelines on Exchange-traded Funds).
4 An “inverse ETF” is an ETF whose aim is to deliver the opposite of the daily performance of the index or benchmark being tracked (SC’s Guidelines on Exchange-traded Funds).
5 This requirement was previously set out in Paragraph 3.02(b)(i) of the Superseded Guidelines.

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.

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