CMFAS RES 2B Derivatives-Specific Conduct Rules & OTC Market Infrastructure question: Foo manages a discretionary account for a retired

CMFAS RES 2BDerivatives-Specific Conduct Rules & OTC Market Infrastructure

Ms Foo manages a discretionary account for a retired customer with a balance of S$200,000. Over one month she executes 63 round turns in index futures, producing S$18,000 of commission for her firm and no net gain for the customer. The account never exceeded a position limit set by the exchange, the clearing house or her firm, and the customer's mandate permits discretionary trading. Which act of misconduct is this?

A Churning, because the trades were made to generate commission rather than for sound market reasons
B No misconduct, because discretion was granted and no position limit was ever breached
C Bucketing, because the customer did not authorise each of the 63 trades individually
D Overtrading, because the number of trades in one month was excessive for the account size

Show the answer and explanation

Answer: A. Churning, because the trades were made to generate commission rather than for sound market reasons

Churning is the execution of as many trades as possible in a customer's account for the purpose of billing more commission. Overtrading has a different meaning in the RES guides: it is trading or holding positions that breach limits set by sponsoring members, approved exchanges, clearing houses or regulators, which did not happen here.

Common mistake

Overtrading is about limits, not volume of commission; discretion is no defence to churning.

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Related CMFAS RES 2B questions

Which of the following are CORRECT?Which combination correctly matches the offence to its core feature?Mr Sim, a representative at Arc Futures, receives an order from a fund to buy 400 lots of a crude oil futures contract. Before entering it he buys 20 lots for his own account. He then telephones a dealer at another firm and the two agree to trade 200 lots at 78.40 before either side reaches the market. For the remaining 200 lots he tells the fund the order was filled at 78.45, when in truth nothing was sent to the exchange and Arc booked the other side internally at 78.35. How are the three acts classified, in order?

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Original study material mapped to the public CMFAS RES 2B syllabus. Unofficial, not endorsed by MAS or IBF. Verify figures and rules against current guidance before relying on them.