SFA Regulated Activity — Trading in Futures Contracts¶

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Definition¶

Trading in futures contracts means soliciting or accepting orders for, or otherwise dealing in, futures contracts on behalf of any other person, whether on an organised market or otherwise. This definition is set out in Paragraph 2 of the Second Schedule to the Securities and Futures Act 2001 (SFA).

Under Section 2(1) of the SFA, a "futures contract" means a contract or arrangement (whether standardised or not) the effect of which is that one party agrees to deliver a specified commodity, asset, or thing, or to pay a specified amount determined by reference to a specified index, rate, or price, to another party at a specified future time and at a specified price. This includes:

Commodity futures (e.g., crude oil, gold, palm oil, rubber)
Financial futures (e.g., interest rate futures, currency futures, equity index futures such as the MSCI Singapore Index Future on SGX)
Options on futures contracts — options giving the holder the right (but not the obligation) to enter into a futures contract at a specified price

Scope of Activity¶

What Constitutes Trading in Futures Contracts¶

This regulated activity is specifically focused on the intermediation and brokerage function for futures — acting on behalf of clients rather than dealing as principal:

Futures commission merchant (FCM) activities: - Accepting and carrying client orders for futures contracts - Maintaining client margin accounts for futures positions - Clearing futures trades through an approved clearing house (e.g., Singapore Exchange Derivatives Clearing, SGX-DC) - Settling futures contracts on behalf of clients (physical delivery or cash settlement)

Introducing broker activities: - Soliciting client orders for futures contracts - Routing client orders to an FCM for execution and clearing - Providing market information and trade ideas related to futures markets (note: providing personalised recommendations crosses into advising territory)

Floor broker / execution activities: - Executing futures orders on the floor of an exchange or via electronic trading systems on behalf of clients - Managing order types (market, limit, stop, contingent) for client accounts

Off-exchange (OTC) futures intermediation: - Arranging or facilitating OTC futures contracts between counterparties - This includes non-standardised forwards that are economically equivalent to exchange-traded futures

What Does NOT Constitute Trading in Futures Contracts¶

Dealing as principal — A firm trading futures contracts from its own proprietary book (not on behalf of clients) falls under "dealing in capital markets products" (Paragraph 1), not trading in futures contracts (Paragraph 2). Many firms hold licences for both.
End-user hedging — A commercial entity entering into futures contracts to hedge its own commercial risk (e.g., an airline hedging fuel costs, a palm oil producer hedging crop prices) is not trading in futures contracts for SFA purposes, as it is acting for its own account, not on behalf of others.
Mere order transmission — A person who merely transmits a client's order to a CMS licence holder for execution, without exercising any discretion, is not trading in futures contracts.
Providing market data — Disseminating futures prices, charts, or market statistics without soliciting or accepting orders does not constitute trading.

Distinction from Dealing in Capital Markets Products¶

The distinction between Paragraph 1 (dealing in capital markets products) and Paragraph 2 (trading in futures contracts) is historically rooted in the merger of the Securities Industry Act and the Futures Trading Act into the SFA in 2001:

Aspect	Dealing (Paragraph 1)	Trading in Futures (Paragraph 2)
Role	Principal or agent	Agent/intermediary only
Products	All capital markets products (securities, futures, OTC derivatives, CIS)	Futures contracts specifically
Core function	Making or facilitating transactions (buying, selling, underwriting)	Soliciting and accepting orders for execution on behalf of clients
Key focus	Transaction commitment	Brokerage and intermediation

In practice, most intermediaries dealing in futures products hold CMS licences for both Paragraph 1 and Paragraph 2 to cover the full range of their activities.

Margin Requirements¶

Margin is a core regulatory concept in futures trading. Because futures contracts involve deferred settlement and leverage, MAS and the exchanges impose strict margin requirements:

Initial Margin¶

The minimum amount a client must deposit before a futures position can be established
Set by the clearing house (SGX-DC) based on the volatility and risk profile of each futures contract
Typically expressed as a fixed dollar amount per contract (e.g., S$X per MSCI Singapore Index Future contract)
The CMS licence holder may impose higher margins than the exchange minimum (house margin)

Maintenance Margin¶

The minimum account balance that must be maintained while a futures position is open
Typically set at a percentage of the initial margin (e.g., 75% of initial margin)
If the account balance falls below the maintenance margin due to adverse price movements, a margin call is triggered

Margin Call Procedures¶

The CMS licence holder must issue a margin call to the client, requiring the client to deposit additional funds to restore the account to the initial margin level
Margin calls must be met within a specified timeframe (typically by the next business day)
If the client fails to meet a margin call, the CMS licence holder has the right (and regulatory obligation) to close out the client's positions to prevent further losses
All margin call communications must be documented and retained

Client Margin Segregation¶

Client margin deposits must be held in segregated trust accounts, separate from the CMS licence holder's proprietary funds
Client funds must be deposited with approved financial institutions
The CMS licence holder must reconcile client trust accounts daily
Client funds may not be used for the firm's own purposes or to meet other clients' margin calls

Clearing Obligations¶

Central Clearing¶

All exchange-traded futures contracts on SGX are cleared through SGX-DC (Singapore Exchange Derivatives Clearing):

SGX-DC acts as the central counterparty (CCP), interposing itself between the buyer and seller
This novation process eliminates bilateral counterparty credit risk
Clearing members must maintain clearing fund contributions and meet SGX-DC's financial requirements
Non-clearing members must clear through a clearing member

Settlement¶

Futures contracts are settled in one of two ways:

Cash settlement — The difference between the contract price and the final settlement price is paid in cash. Most financial futures (equity index, interest rate) are cash-settled.
Physical delivery — The underlying commodity or asset is physically delivered. Some commodity futures (e.g., rubber, palm oil on SGX) provide for physical delivery, though many participants close out positions before the delivery date.

CMFAS Examination Requirements¶

Representatives appointed to trade in futures contracts must pass the following Capital Markets and Financial Advisory Services (CMFAS) examinations:

Mandatory Modules¶

Module	Title	Scope
M2	Rules and Regulations for Trading in Futures Contracts	SFA provisions specific to futures, SGX derivatives rules, margin requirements, clearing and settlement, client asset segregation, position limits
M6	Securities Products and Analysis	Securities, futures, and fund products, financial analysis, risk management
M6A	Securities and Futures Product Knowledge	Updated version of M6 covering securities, futures, and fund products

Note on CMFAS regime change (1 April 2024): M2, M6, and M6A were retired under SFA 04-N22. Current modules are RES-2A (Trading in Futures Contracts, replacing M2) and CM-EIP (Excluded Investment Products, replacing M6/M6A). Old M-series passes before 1 April 2024 are grandfathered.

Additional Modules by Product¶

Product Scope	Additional Module
Commodity futures (if advising)	Relevant product training (in-house)
OTC derivatives	M1A (Rules and Regulations for Dealing in Securities) may also be required if dealing in OTC products

Continuing Professional Development (CPD)¶

Minimum of 6 CPD hours per calendar year
Topics must be relevant to futures trading, risk management, regulatory developments
Tracked by the employing CMS licence holder

Key Regulatory Requirements¶

Position Limits¶

Exchanges impose position limits on the maximum number of futures contracts that any single account (or related group of accounts) may hold
Position limits are designed to prevent market manipulation and excessive concentration
The CMS licence holder must monitor client positions and ensure compliance with position limits
Large position reporting requirements apply when positions exceed specified thresholds

Large Trader Reporting¶

When a client's position in a particular futures contract exceeds a specified reporting threshold, the CMS licence holder must report the position to the exchange and/or MAS
Reports must include the identity of the position holder, the size of the position, and whether the position is speculative or hedging

Risk Disclosure¶

Before opening a futures trading account for a client, the CMS licence holder must: - Provide the client with a standardised risk disclosure statement prescribed by MAS - Obtain the client's written acknowledgment that they have read and understood the risk disclosure - The risk disclosure must explain: the nature of futures contracts, the leveraged nature of futures trading, the risk of losses exceeding the initial margin, and the obligation to meet margin calls

Account Opening¶

The CMS licence holder must conduct the following before opening a futures trading account: - Customer due diligence (CDD) and identity verification under the MAS AML/CFT Notice - Customer knowledge assessment — determining the client's knowledge and experience in futures trading - Financial assessment — determining whether the client has sufficient financial resources to bear the risks of futures trading - Suitability assessment (where the firm provides recommendations) — ensuring that futures trading is suitable for the client

Market Conduct Obligations¶

Representatives and CMS licence holders involved in futures trading must comply with the SFA's market conduct provisions:

No market manipulation (Section 206) — cornering the market, creating artificial prices, or creating a false or misleading appearance of active trading in futures contracts
No dissemination of false information (Section 207) — spreading false or misleading information likely to induce transactions in futures contracts
No front-running — trading ahead of client orders in the same or related contracts
No churning — excessive trading in a client's account for the purpose of generating commissions
No bucketing — directly or indirectly taking the opposite side of a client's order without executing the order on an exchange

Relevance to Regnify Form 3A¶

When an FI submits a Form 3A to appoint a representative for trading in futures contracts:

CMFAS results — Evidence of passing M2 and M6/M6A
Fit and proper — No disqualifying criminal record, regulatory sanctions, or bankruptcy
10-year employment history — Complete with explanations for any gaps
Regulatory track record — All prior appointments, refusals, revocations, or disciplinary actions
Educational qualifications — As prescribed by MAS
Reference checks — From the most recent financial services employer

The FI must confirm due diligence on the representative's competency in futures markets and that adequate supervision arrangements are in place for the representative's futures trading activities.

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