CMFAS Futures and Derivatives M4 3 — Questions and Answers
Question 1: Under MAS Notice SFA 02-N02, what is required before a futures broker can execute transactions for a client?
- The client must have a properly completed account opening form and signed risk disclosure documents (Correct answer)
- The client must deposit a minimum of SGD 100,000 as initial capital
- The client must hold a relevant financial qualification
- The client must obtain approval from MAS before trading
Correct 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.
Question 2: What is the difference between cash settlement and physical delivery in futures contracts?
- Cash settlement involves a monetary payment of the price difference at expiry, while physical delivery requires transfer of the actual underlying asset (Correct answer)
- Cash settlement occurs before expiry while physical delivery always occurs at expiry
- Cash settlement applies only to equity futures while physical delivery applies to commodity futures only
- Cash settlement requires approval from MAS while physical delivery does not
Correct 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.
Question 3: A futures broker in Singapore has a duty to segregate client funds. What is the primary purpose of this requirement?
- To protect client assets from the firm's creditors in the event of the broker's insolvency (Correct answer)
- To ensure clients earn interest on their deposits
- To allow MAS to monitor trading activity more easily
- To prevent clients from withdrawing funds during volatile markets
Correct 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.
Question 4: What is a 'position limit' in futures markets and who sets it in Singapore?
- A cap on the maximum number of futures contracts a person may hold, set by MAS or the exchange to prevent market manipulation (Correct answer)
- The minimum number of contracts required to qualify for a discount on commissions
- A limit on the profit a trader can realise from a single contract
- The maximum margin a broker may charge on a futures position
Correct 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.
Question 5: Which of the following transactions would offset (close out) an existing long position in SGX Nifty 50 Index futures?
- Selling the same number of SGX Nifty 50 Index futures contracts for the same delivery month (Correct answer)
- Buying additional SGX Nifty 50 Index futures contracts
- Entering into an OTC forward agreement on the Nifty 50 Index
- Purchasing Nifty 50 Index ETF units on the Singapore Exchange
Correct 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.
Question 6: Under the SFA, the offence of 'insider trading' in the context of futures markets refers to:
- Trading futures contracts based on material, non-public information that would, if known, likely affect the futures price (Correct answer)
- Executing trades before market open using pre-market information
- Trading larger volumes than permitted under position limits
- Placing orders through an overseas broker without MAS approval
Correct 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.
Question 7: What obligation does a Futures Trading Representative in Singapore have when a client's investment objectives do not align with a futures trading recommendation?
- Disclose the mismatch to the client and ensure the client acknowledges the risks before proceeding (Correct answer)
- Refuse to execute the trade and report the client to MAS
- Proceed with the trade if the client insists, without any further disclosure
- Transfer the client account to a more suitable broker
Correct 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.
CMFAS Futures and Derivatives M4 3
Under MAS Notice SFA 02-N02, what is required before a futures broker can execute transactions for a client?