Discretionary Trading
FAQ for Participating Organisations
Note: Discretionary Trading (“DT”) includes Shariah DT unless stated otherwise.
- What is the process for a Participating Organisation (“PO”) to offer Discretionary Trading (“DT”) service?
A PO that has yet to commence DT will be regarded as commencing a new business activity and the PO will need to notify the Exchange via the Self-Assessment Approach (“SAA”) readiness audit.
The PO shall be guided by Directive No. 2.01(2)-006 under Appendix 1 and 2 which elaborates in detail the procedures, documentations and declaration required to be submitted to the Exchange.
(Refer to: Framework for DT) - Must a PO undergo a readiness audit prior to offering DT to its clients? Is there a template for this?
Yes. The DT readiness template will be provided to the PO upon request.
The PO may contact the Exchange's Intermediary Supervision Department to obtain the ‘Checklist on Participating Organisation Readiness to Commence Discretionary Trading’. - Is there any written agreement required between POs and clients for DT? Is there a standard legal agreement for this?
Yes. A written agreement is required to be executed by the PO and the DT client. However, the Exchange does not provide any template for the written agreement to allow flexibility to the POs to construct their own DT structure and terms and conditions as the POs deem fit for their businesses.
For reference purposes, the written agreement should at least include the following information:
(i) Personal particulars
(ii) Overall investment objective and approach
(iii) Brokerage fees and charges
(iv) Withdrawal and termination
(v) Other salient features of the product
(vi) Other terms and conditions - Will a risk disclosure statement for DT be prescribed?
The Rules and Directives of Bursa Malaysia Securities Berhad in relation to the DT do not prescribe a risk disclosure statement. However, the PO must ensure that all DT clients fully understand the terms and conditions (including risk arising from DT) prescribed under the investment management agreement for each PO, prior to execution of the said agreement.
- Can commission be charged on DT service?
There is no prohibition to charge commission on DT service. Conversely, a PO can also apply at its discretion to implement DT without commission.
- Can a PO provide financing on a Discretionary Account (“DA”)?
Pursuant to paragraph 14A.3(2)(c), Directive No. 5-001 of the POs’ Directives and Guidance, trading must be carried out on a cash upfront basis. Hence, a PO must not provide financing for DT Accounts.
(Refer to: Framework for DT) - Can multiple DT clients be pooled into one DA?
No. A PO must ensure that it opens an account designated as a ‘DA’ for each of its clients. Each DA must be subjected to an account qualifier beginning with the word “DISC”, followed by the Dealer’s Representative (“DR”) code in brackets and the full name of the client.
For DA qualifier naming convention, the PO may refer to Category C8 in the Appendix 16 of the CDS Procedures Manual for Authorised Depository Agent (“ADA”).
(Refer to: CDS Procedures Manual for ADA) - Can a new client of a PO choose to only open a DA under an eligible DR?
Yes, the new client may opt to only open a DA. For POs’ existing clients, they must open a new account in order to opt for DT service.
- Can a DT client’s account be managed by more than one DR?
Pursuant to the requirement on account qualifier for DT Account in paragraph 14A.3(1)(b) of Directive No. 5-001 of the POs’ Directives and Guidance where only one DR code must be set out in the account qualifier, only one DR is allowed to manage each DT Account.
- Can a client commencing DT with a PO execute a transfer of shares as capital?
This is not allowed. The client intending to commence DT with a PO must make a cash transfer instead of a transfer of securities or other types of collateral as capital.
- Is another DR allowed to replace the DR in charge of DA in the event the DR goes on leave, resigns, or changes their portfolio?
Yes, provided the DT client is informed with proper documentation to evidence that the DT client agrees to the change. The PO must continue to act in the best interest of the client where the DR goes on leave, resigns, or changes their portfolio.
- Can the DT portfolio management be outsourced to other personnel within the company/ group, i.e. to be managed by the PO’s wealth management team?
DT service can only be operated by licensed DRs who fulfil the eligibility criteria.
- Is there any specific rule for error trades in respect of DA?
No, the general error trade rules will apply.
- If a PO intends to establish an Investment Advisory Committee or a similar committee for oversight of the DT service managed by its DRs, are there any prescribed eligibility criteria for such committee members?
There are no prescribed requirements for POs which intend to establish such committee for the purpose of oversight of the DT service.
- What are the requirements for Islamic POs to offer Shariah DT?
The requirements are as follows:
(i) Shariah Discretionary Account (“Shariah DA”)
Islamic PO should separate Shariah DA from a new or existing trading account and should additionally ensure that the Shariah DA of its clients within the Islamic window services is clearly tagged and used as a Shariah DA for the purpose of Islamic window services only.
(ii) Fee-based and Profit-Sharing Model and Structure
As stated in item 3, section F of Best Practice No. 7.16-001 (Best Practices in the Islamic Stockbroking Services Undertaken by Participating Organisations), Islamic PO may offer Shariah DT based on the following models and structures:
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a) Wakalah
Under the Wakalah principle, Islamic PO may impose a Wakalah fee to its client. The Wakalah fee may be mutually agreed by the Islamic PO and its client as a fixed amount or as a percentage on the value of assets or portfolio under management.
Illustration:
- b) Mudarabah
Under the Mudarabah principle, Islamic PO may have an arrangement with the client to accept a share in the profits from the client’s DA. The profit should not be fixed in the form of a certain percentage of the capital.
Illustration:
- c) Musharakah
Under the Musharakah model, the Islamic PO and its client(s) are to enter into a contractual partnership agreement, whereby both parties are to invest a sum of money as capital and share its profit according to the agreement.
The parties in a Musharakah contract may agree to appoint only one (1) party who will be acting as the managing party, which in this case will be the Islamic PO. The managing party may be entitled to an agreed remuneration on top of his share in profit as a party in the Musharakah contract.
Illustration:
(Refer to: Best Practices for Islamic Stockbroking Services) -
a) Wakalah
- Have the fee and profit-sharing structure under Shariah DT i.e. Wakalah, Mudarabah and Musharakah been approved by Shariah Committee of Bursa Malaysia?
Yes, the current fee and profit-sharing structures under Shariah DT have been approved by Shariah Committee of Bursa Malaysia.
- Can Islamic PO use fee and profit-sharing structure other than Wakalah, Mudarabah and Musharakah under Shariah DT?
Yes. The existing contract, i.e. Wakalah, Mudarabah and Musharakah are not exhaustive and Islamic POs may refer to their respective Shariah Adviser or Shariah Committee for any other suitable contract for their Shariah DT structure. However, any other Shariah contract from the above used for the Shariah DT structure should be presented to Shariah Committee of Bursa Malaysia for notification.
- Can conventional POs offer Shariah DT service?
No. Shariah DT is only applicable to Islamic POs.
- If an Islamic PO intends to offer Shariah DT service, is approval required from a Shariah Adviser?
Yes. An Islamic PO should obtain approval from its Shariah Adviser to ensure that the Shariah DT service complies with Shariah principles and requirements.
- How can POs assist clients in DT and Shariah DT?
(i) Portfolio construction
POs may assist clients in constructing equity and/ or Shariah-compliant equity portfolio solution that is aligned with their investment objectives and risk tolerance, providing clients with a diversified investment opportunity.
(ii) Shariah-compliant investment options
POs may offer a range of investment instrument options that adhere to Shariah principles. Only Shariah-compliant securities are allowed to be traded in Shariah DT.
(iii) Regular reporting
POs should provide clients with regular updates and reports on the performance of their DT portfolios.