Futures and Derivatives M4 Flashcards

Under MAS Notice SFA 02-N02, what is required before a futures broker can execute transactions for a client?

Answer: The client must have a properly completed account opening form and signed risk disclosure documents

Futures brokers are required to complete proper know-your-client (KYC) procedures, obtain signed risk disclosure statements, and complete account opening documentation before executing any trades.

What is the difference between cash settlement and physical delivery in futures contracts?

Answer: Cash settlement involves a monetary payment of the price difference at expiry, while physical delivery requires transfer of the actual underlying asset

In cash-settled contracts, the profit or loss is paid in cash at expiry; in physically settled contracts, the actual underlying commodity or financial instrument must be delivered.

A futures broker in Singapore has a duty to segregate client funds. What is the primary purpose of this requirement?

Answer: To protect client assets from the firm's creditors in the event of the broker's insolvency

Segregation of client funds ensures that client money is kept separate from the firm's own assets, protecting clients if the broker becomes insolvent.

What is a 'position limit' in futures markets and who sets it in Singapore?

Answer: A cap on the maximum number of futures contracts a person may hold, set by MAS or the exchange to prevent market manipulation

Position limits are maximum holding thresholds imposed by MAS or SGX to prevent any single entity from accumulating enough contracts to manipulate the market price.

Which of the following transactions would offset (close out) an existing long position in SGX Nifty 50 Index futures?

Answer: Selling the same number of SGX Nifty 50 Index futures contracts for the same delivery month

A long position is closed by entering an equal and opposite short (sell) position in the same contract and delivery month, netting the obligations to zero.

Under the SFA, the offence of 'insider trading' in the context of futures markets refers to:

Answer: Trading futures contracts based on material, non-public information that would, if known, likely affect the futures price

Insider trading involves using material non-public information to trade, which gives an unfair advantage and undermines market integrity under the SFA.

What obligation does a Futures Trading Representative in Singapore have when a client's investment objectives do not align with a futures trading recommendation?

Answer: Disclose the mismatch to the client and ensure the client acknowledges the risks before proceeding

Representatives must ensure suitability and, when a recommendation does not match client objectives, must disclose the conflict and obtain informed client acknowledgement before execution.