A derivatives contract derives its value from an underlying thing — a security, currency, rate, index, commodity or credit event (SFA s.2). OTC contracts are negotiated bilaterally; exchange-traded contracts are standardised and centrally cleared. The exam tests the mechanics and payoffs of forwards, futures, options, swaps, CDS, CFDs and leveraged FX, the risks each carries, and the ISDA documentation that governs them.
7 sections·~5 min read
✓Checked against the IBF RES 2B Study Guide v1.0 (6 Jun 2024) ch.4 and appendices, 2026-09-12. Unofficial prep, not endorsed by MAS or SCI.
★
Must-know for the exam
✓Forward: bilateral, customised, binding on BOTH sides, no upfront premium, symmetric payoff.
✓Future: standardised, exchange-traded, novated to a CCP, marked to market daily with initial and variation margin.
✓Option: holder pays premium for a RIGHT; writer receives premium and bears the OBLIGATION. Premium = intrinsic value + time value. Naked written calls have unlimited loss.
✓Swap: exchange of cash flows on a notional that is not exchanged (except cross-currency swaps). Pay fixed / receive floating hedges a floating-rate borrower. A par swap has zero value at inception.
✓CDS: protection buyer pays a spread and is paid on a defined credit event (bankruptcy, failure to pay, restructuring). Share-price falls are not credit events.
✓CFD / leveraged FX: cash-settled on price differences, no ownership, overnight financing, margin-based — losses can EXCEED the deposit.
✓ISDA architecture: one Master Agreement + Schedule, a CSA for collateral, a confirmation per trade; close-out netting reduces gross exposure to one net amount on default.
✓Common OTC contracts (RES 2B Table 4.1.1): interest rate swaps, non-deliverable interest rate swaps (major vs non-convertible minor currency, no physical currency flows), cross-currency swaps, forward rate agreements, commodity swaps. A listed index option such as a Nifty option is exchange-traded, NOT OTC.
✓OTC market vs securities market, the four differences: clientele (sophisticated and institutional, little retail), relationship with clients (OTC obligations may last years; a share or futures trade is discharged on close-out), standardisation (privately negotiated, not centrally cleared, terms may be incompletely documented), brokering (inter-dealer brokers between major dealers instead of licensed exchange brokers).
✓SGX-DC clears OTC financial AND commodity derivatives: SGD IRS; THB and MYR NDIRS; commodity swaps on iron ore, rubber, freight forward agreements, coking coal, petrochemicals, oil and gas.
✓Dealing practice (Blue Book Chapter IX): no standardised procedure, but the ISDA Master Agreement is the de facto standard (governing law, conditions precedent, netting, undertakings, events of default, termination; negotiable). Credit support documents govern collateral and their governing law (English, New York, Japanese) changes how collateral is transferred. A broker that cannot substantiate a quote closes at the next available price and pays the difference.
What makes a contract a derivative
•SFA s.2(1) defines a derivatives contract by its underlying thing: securities, CIS units, currencies, interest rates, indices, commodities, credit events and more. Dealing in derivatives is dealing in capital markets products — a regulated activity needing a CMS licence or an exemption.
•Exchange-traded derivatives are traded on an organised market (SGX-DT in Singapore) and cleared by a CCP (SGX-DC). OTC derivatives are anything else: negotiated bilaterally, customised, and — unless voluntarily or mandatorily cleared — exposed to the counterparty's credit.
•A securities-based derivatives contract is one whose underlying is a security or CIS unit; the label matters because some securities regimes (market conduct, offers) extend to it.
The OTC market versus the securities market
•OTC derivatives trade through a decentralised network (typically a dealer) rather than on a central exchange such as SGX-DT, ICE Futures Singapore or APEX, and the price of an OTC trade is not necessarily published. The risks are seen as more opaque because each trade carries bilateral counterparty risk: the other side may default before expiry. Sending the trade to a clearing house cures this: the CCP becomes buyer to the seller and seller to the buyer, backed by margin and a mutualised default fund.
•The guide's list of common OTC contracts is exam material: IRS (swap one stream of interest for another on a notional), NDIRS (major against a non-convertible minor currency, no physical currency flows), cross-currency swaps (swap interest and principal in two currencies), FRAs (fix the rate on an obligation starting at a future date) and commodity swaps (cash flows tied to a commodity price, used to hedge price swings). Trap: an index option that is listed and traded on an exchange, for example a Nifty option, is exchange-traded, not OTC.
Four differences from the securities market. Clientele: sophisticated and institutional players, little retail. Relationship with clients: obligations on a share or futures trade are largely discharged once the trade is completed and closed out, while an OTC counterparty relationship can run for years. Standardisation: the securities market is standardised with procedures and clearing facilities; OTC contracts are privately negotiated, not centrally cleared as a rule, and terms may not be documented properly and wholly. Brokering: exchange brokers earn commission bringing buyers and sellers together under an exchange licence; in the OTC market inter-dealer brokers facilitate trades between major dealers.
•SGX-DC provides CCP services for OTC commodity and OTC financial derivatives: SGD IRS, THB and MYR NDIRS, and commodity swaps on iron ore, rubber, freight forward agreements, coking coal, petrochemicals, oil and gas. Takeaway: SGX-DC is not only a commodity clearer.
CMFASPrep