Prudential Standards for Memberships
KLCE and its Clearing House impose stringent financial requirements on their
corporate Members to ensure that they have sufficient working capital to cover
their day to day obligations to the Clearing House and their clients, in the
case of broker Members. In addition, executive directors and managers of a broker
Member must pass a competency test to prove that they have appropriate knowledge
and experience to operate a futures brokering company. Further, a potential
broker Member must prove that it has appropriate client accounting and risk
management systems to enable it to comply with the provisions of the law relating
to client documentation.
Rules Relating to Client Protection
There are various rules and procedures to regulate broker Member dealings with
their clients. These requirements are designed to give added protection to clients,
namely:
- Time-stamping of Clients’ Orders
All clients’ orders have to be time-stamped when received in a Member’s
office, when received in the Member’s booth on the Floor of KLCE and when
finally executed. This is to ensure efficient execution of clients’ orders
and to prevent unfair allocation of trades among clients.
- Trading Ahead of Clients’ Orders Restricted
Broker Members are not allowed to trade ahead of their clients’ orders.
This is to ensure that the clients have preference over the broker Member in
obtaining the best prices in the market.
- Trading Against Clients’ Orders Prohibited
Broker Members are not allowed to trade against their clients unless they have
their clients’ prior consent. Once again, this is to ensure that the clients
obtain a fair price and that the broker Member does not profit at clients’
expense.
- Segregation of Clients’ Funds
All clients’ positions and moneys are required to be separately accounted
for and segregated from the positions and moneys of a broker Member of KLCE.
This requirement is designed to prevent any use of those funds other than for
purposes intended by the clients and to protect clients in the event of the
insolvency or financial instability of the broker Member through which they
conduct business.
- Payment of Minimum Margins
Broker Members are required to receive at least the minimum Initial Margin
in respect of each client’s contract. In addition, clients’ positions
have to be marked-to-market daily and the resulting variation margins have
to be called. This is to ensure that a broker Member does not become unduly
exposed to his clients’ positions, thereby weakening his financial positions.
As long as the broker Member remains financially sound, his clients will be
protected.
- Risk Disclosure Statement
A broker Member, before being allowed to open a futures trading account for
his non-member client, must furnish the client with a written Risk Disclosure
Statement approved by the Exchange and receive acknowledgment from the client
of his understanding of the risk involved.
- Client’s Agreement and Client’s Statements
When a Customer Agreement is signed between the broker and the client, the client
can then deposit funds with the broker, and transactions can be initiated at
any time. When the trading positions have been established, a broker firm is
required to promptly furnish in writing directly to each client:-
- A Confirmation or Contract Note containing details of purchases and sales
- A Purchases and Sales Statement showing profits and losses sustained on
closed-out positions, after charging the commission and other fees due;
and
- A Monthly Statement of Account showing the current status of the clients’
account
- Discretionary Account
To operate a discretionary account for a client, the Broker Member must be authorized
in writing by the client for such purpose and for each transaction undertaken
on behalf of the client, to provide the following:
- A written confirmation within 24 hours of every transaction
- A statement clearly showing the loss or profit on settlement or liquidation
of each position
- A fortnightly statement showing the status of the client’s account.
- Fidelity Fund
The KLCE, pursuant to the requirements of the Futures Industry Act 1993, provides
further protection for clients of broker Members who suffer monetary loss because
of defalcation or fraudulent misuse of money or property of the client by the
broker Member, by providing a fidelity fund.
A client suffering such loss may claim against the fidelity fund up to the limit
provided by the KLCE Rules. The KLCE Rules limit the amounts of compensation
which may be claimed by the said client in accordance with the limit imposed
in general by other exchanges in the Malaysian derivatives industry i.e. a limit
of RM 500,000.
The above safeguards will enable KLCE and its Clearing House to protect the financial
integrity of the marketplace under normal market conditions.
Registration of Brokers
The Securities Commission (SC) is an independent national regulatory agency
that is responsible for the regulation and supervision of commodity futures
trading in Malaysia.
A Member of the Exchange who handles clients’ commodity futures accounts,
must be licensed as a futures broker by the SC under the FIA.
A futures broker has to ensure that every accredited director or employee is
a licensed futures broker’s representative by the SC.
Information compiled and extracts
from COMMEX Malaysia
