2B.5 Ethics and standards for derivatives dealing
The ethics framework applied to derivatives, plus the best-execution standard and the wholesale-market codes. The examination tests the same framework as RES 1B with derivatives-specific risks.
5.1 Ethics and importance
Section titled “5.1 Ethics and importance”Apply the same client-first ethical framework as RES 1B — ethics goes beyond the legal minimum.
5.2 Ethical framework
Section titled “5.2 Ethical framework”The client-centred cycle and the three threats (self-interest, self-review, influence) apply as for RES 1B.
5.3 Ethical dilemmas
Section titled “5.3 Ethical dilemmas”With derivatives-specific attention to leverage, complexity, long-lived OTC exposures, principal/client information and market integrity.
5.4 Standards and procedures
Section titled “5.4 Standards and procedures”Professionalism requires law, independence/objectivity, no misrepresentation or misconduct and continuing competence. Protect market integrity from material non-public information and informational/transactional manipulation. Duties to clients include loyalty, prudence, care, fair dealing, complaints handling, suitability, written investment-management agreements, accurate performance presentation and confidentiality of clients/principals/counterparties. Do not reveal a principal’s identity prematurely or pressure other market participants. Duties to employers include loyalty, no misuse of confidential information, no client-list solicitation/misappropriation/self-dealing, transparent additional compensation and proper supervision/whistleblowing.
Diligence requires a reasonable basis and research. Communicate investment process, limitations, risks, important factors, costs, fact/opinion distinctions and retain records. Avoid or disclose conflicts; give client/employer trades priority; disclose referral fees, gifts and benefits. Procedures include segregation of sales/dealing/research, resisting sponsor/issuer influence, protecting opinion integrity, supervisory reviews, gift limits, a designated compliance officer and continuous training.
- SFEMC Blue Book: wholesale-market standards covering general dealing, ethics, governance/risk/compliance, back office and instrument-specific practices.
- BIS FX Global Code: ethics, governance, information sharing, execution, risk management/compliance, and confirmation/settlement.
5.5 Best execution for derivatives
Section titled “5.5 Best execution for derivatives”Take reasonable steps for the best overall result, considering price, cost, speed, likelihood of execution/settlement, size and execution quality. Use written policies, time priority for comparable orders, no PFOF, monitoring and clear disclosure. Distinguish agent and principal capacities, handle orders fairly and transparently, prohibit improper staff/client or house-account cross trades, and disclose risk.
5.6 Applying the ethical framework
Section titled “5.6 Applying the ethical framework”Gather facts, identify ethical issues, identify stakeholders, use internal reporting/whistleblowing, evaluate alternatives, implement and monitor the best action, and document the reasoning. In suitability cases, protect the client’s long-term objectives even where a more aggressive strategy would earn more commission.
Exam cues
Section titled “Exam cues”- Same framework as RES 1B, with derivatives-specific emphasis on leverage, complexity, long-lived OTC exposures and principal/client information.
- Best execution: price, cost, speed, likelihood of execution/settlement, size, execution quality. No PFOF.
- Codes: the SFEMC Blue Book (Singapore wholesale market, instrument-specific) and the BIS FX Global Code (global conduct principles).
- Trap: suitability — protect the client’s long-term objectives even where a more aggressive strategy earns more commission.