Dealing in Derivatives
The product and the licence
A derivative is a contract whose value derives from an underlying - index, commodity, currency, rate or event. Futures, options, forwards and swaps fall under the CMSA definition, and dealing in derivatives is a separate regulated activity requiring its own CMSL and CMSRs, whether the contract is exchange-traded or over-the-counter.
- Exchange-traded contracts trade on Bursa Malaysia Derivatives Berhad and clear through Bursa Malaysia Derivatives Clearing. Specifications to know: FTSE Bursa Malaysia KLCI Futures (FKLI) settle in cash at RM50 per index point; crude palm oil futures (FCPO) are 25 tonnes per contract.
- Leverage means the position is revalued daily: profit or loss hits the client account through mark-to-market and variation margin, on top of initial margin held as collateral.
- Client margin must be segregated from the firm's own money and never used to fund house positions; excess margin is returned under the client agreement.
- Before the first trade the client needs a risk disclosure statement and a client agreement, and suitability must be documented - some strategies, such as writing options, can lose more than the amount paid.
- Sales conduct: no promised returns, no misleading statements about futures, orders routed to the exchange, position limits respected.
Worked example
A client buys one FKLI contract at 1,600 on a rising-index view. The index closes at 1,580. Loss = 20 points x RM50 = RM1,000, debited the same day. If account equity falls below maintenance margin, the dealer issues a margin call and closes the position if it is not met by the deadline. The client's long-term conviction does not defer the call, and the dealer does not need fresh consent to liquidate.
Traps
- Calling margin a deposit: it is collateral and is topped up.
- Assuming a securities dealing licence extends to derivatives.
- Forgetting that dealers may close out on a margin default without further instruction.