2B.6 Derivatives dealing practices and skills
How a derivatives representative profiles a client, analyses markets, formulates a strategy, executes and monitors it, and manages the risks — including CAR/CKA for SIP accounts.
6.1 Scope
Section titled “6.1 Scope”Recommendations require a reasonable basis unless the firm merely executes instructions or gives qualifying execution-related advice on listed EIPs. The process runs from client profiling and market analysis to strategy formation, implementation, execution, monitoring and risk management.
6.2 Market-information analysis
Section titled “6.2 Market-information analysis”| Approach | Basis | Best horizon |
|---|---|---|
| Fundamental | company/industry financials, ratios and valuation | long-horizon equity decisions |
| Technical | historical price/volume patterns and charts | shorter horizons and market fluctuations |
| Global macro | interest rates, policies, geopolitics, systemic forces | thematic/top-down views |
Use reliable sources and conduct due diligence on third-party research, including the author’s experience, reputation and possible bias.
6.3 Trading-strategy formulation
Section titled “6.3 Trading-strategy formulation”Reassess the overall purpose: alpha/excess return or hedging. Define return and risk objectives, performance targets, benchmarks, fees/taxes/inflation/spending assumptions, asset-allocation targets and ranges, and risk tolerance. Address time horizon, liquidity needs, legal constraints and foreign-investment restrictions.
Risk management should use consistent metrics, a rebalancing plan and the five-step cycle: identify, assess, evaluate, respond and report. Rebalancing can reduce exposure to events or implement tactical asset allocation.
6.4 Implementation and monitoring
Section titled “6.4 Implementation and monitoring”Obtain client information before advice; review profiles/needs at least annually; disclose margin risks; document recommendations/warnings for at least five years as good practice; disclose conflicts; ensure disclaimers match actual conduct; and execute with regard to size, frequency, cost, derivatives exposure, DMA/algorithmic execution for small liquid trades and custom handling for large information-sensitive trades.
Risk skills include stop-losses, daily loss limits and Value at Risk. Monitor risk, return, performance versus benchmark and variances, report and explain changes, and refine the portfolio.
6.5 KYC for derivatives clients
Section titled “6.5 KYC for derivatives clients”Obtain client information before advice and keep it current; the onboarding and CDD standards of RES 1B Chapter 5 apply.
6.6 SIP accounts
Section titled “6.6 SIP accounts”For retail clients trading SIPs, conduct CAR for listed SIPs and CKA for unlisted SIPs. The same qualification, six-transaction and three-year relevant-experience tests apply, with product-specific experience for unlisted SIPs.
- Independent senior management approval is needed for a SIP account.
- A negative CAR may still lead to a listed-SIP account only with written outcome, customer confirmation, risk explanation and responsibility warning.
- A negative CKA generally prevents unlisted-SIP dealing unless the firm is also an exempt financial adviser providing advice.
- Validity: CAR three years; CKA one year. Keep assessment, outcome, approval and communications.
- For overseas-listed products, give and record the risk warning; classify EIPs accurately; if classification is not implemented, treat as SIP and perform CAR; outsourced classification remains the CMS holder’s responsibility.
6.7 Risk management
Section titled “6.7 Risk management”| Risk | Meaning / control |
|---|---|
| Operational | failed processes, people, systems, external events — business continuity, controls, trained staff, recovery |
| Market | FX, interest, credit-spread, equity, commodity movement — diversification, limits, monitoring |
| Correlation | linked instruments move together and amplify exposure |
| Political/legal | policy, intervention, conflict, terrorism, regulatory change |
| Gap | price jumps past a stop-loss with no tradable prices in between |
| Capital | loss of principal, potentially exceeding it in margin trading |
| Technology | cyberattack, outage, system failure — critical-system downtime requires prompt MAS notification |
| Credit/counterparty | an obligor defaults — reduce exposure, set limits, use collateral/clearing |
| Liquidity | inability to fund obligations or close positions without unacceptable loss — liquid assets, diversified funding, scenario analysis |
| Regulatory | laws/rules make activities more costly or unavailable — monitor and adapt |
| Interconnected/systemic | one institution or market failure transmits through connected counterparties |
MAS’s CRAFT/impact-and-risk supervision uses diagnostic and remedial tools. AML/CFT risk management requires risk comprehension, board governance, transaction monitoring and customer acceptance/risk profiling.
Exam cues
Section titled “Exam cues”- CAR vs CKA: listed SIP → CAR; unlisted SIP → CKA. Negative CAR may still permit a listed-SIP account with written confirmations; negative CKA generally blocks unlisted dealing unless the firm is also an exempt financial adviser.\n- Analysis tools: fundamental (long horizon), technical (short horizon), global macro (top-down).\n- Risk cycle: identify → assess → evaluate → respond → report.\n- Risk types: operational, market, correlation, political/legal, gap, capital, technology, credit/counterparty, liquidity, regulatory, interconnected/systemic.\n- Trap: a negative CAR is not an automatic bar (with written confirmations); a negative CKA is a bar unless the firm can give advice as an exempt financial adviser.