Derivatives Agent/Dealer Licensing and
Registration Guide
What is a "Derivatives Agent /Dealer"
?
Under
Section 3 of the Derivatives Act B.E. 2546 (the DA), a " derivatives
agent " is a person who, in the ordinary course of business, engages or
present himself/herself to the general public as being ready to engage as an
agent in the business of trading in derivatives with others. Thus, in this
context, any person soliciting and executing derivatives transactions for the
account of others is a derivatives agent or broker.
Concurrently, a " derivatives
dealer " acts as principal, or is a person who, in the ordinary course
of business, presents himself/herself out to the general public as being
willing to engage as a counterparty with any person who intends to trade in OTC
derivatives. As a result, any person soliciting and executing derivatives
transactions by offering, through his/her own trading account, to enter into
such contracts outside the exchange is considered a dealer.
Under Section 16 of the Act, those who wish to conduct derivatives
business as agents or dealers abovementioned may obtain permissions under 2
regimes:- licensing and registration. Under the licensing regime, a license
from the SEC is required if the business involves retail or public investors in
general. However, if the transactions are limited to institutional clients,
including those further prescribed by the SEC, a license is not necessary, and
only registration with the Office of the SEC is required.
Operating
derivatives business without a license or registration will result in a penalty
not exceeding a 3 year-term of imprisonment, a fine not exceeding Bt. 300,000,
together with a daily fine.
For more
details and inquiries, please call the SEC Information Center at 66-2695-9999
or e-mail: seccom@sec.or.th
At present, only brokerage and dealing
businesses can apply to the Office of the SEC under this regime.
Transactions are limited to those executed off-exchange with
institutional clients, including those prescribed by the SEC. As a result,
registered derivatives agents who wish to expand their brokering services to
retail investors on the derivatives exchange are required to apply for a
separate brokering license (to become a derivatives agent) to the SEC under the
DA.
The SEC allows
the following persons to apply for a registration : (Notification No. GorThor.
7/2547)
(1) a Thai commercial bank
(2) a Thai finance company
(3) a securities broker or dealer under
the SEA, whose businesses are not limited to debt securities (prior approval
from the SEC to perform other types of business under section 98 (8) of the SEA
is necessary)
(4) Thailand Securities Finance
Corporation (TFSC) (prior approval from the SEC to perform other types of
business under section 98 (8) of the SEA is necessary)
(5) a foreign entity which has obtained
approval to undertake derivatives dealing business in its home country (for
derivatives dealing registration only).
In addition, in order to apply for
registration, banks, finance companies and securities companies have to
demonstrate that 1) they have in place policies and procedures to prevent
conflict of interests & insider trading, as well as systems to ensure such
compliance , and that 2) they are able to maintain the minimum
amount of capital (in case of banks and finance companies) or net liquid
capital (in case of securities companies) required under the respective
regulations. Also, prior approvals from lead regulators (i.e. the Bank of
Thailand, the Ministry of Finance) are required in the case of banks or finance
companies, while policies and procedures for internal control and risk
management, as well as systems to ensure such compliance, must be well
established by securities companies under the SEA. (Notification No. GorThor.
7/2547)
As regards foreign entities,
registration for a derivatives dealer license shall be granted if the same or
higher standards of regulations are applied in the home country, and if the
entities are not subject to any suspension or banning order issued by the home
regulator. (Notification No. GorThor. 7/2547)
How to apply for the
registration company?
Applicants must submit Form 16-4 to the
Office of the SEC, together with all specified documents. (At present, there is
no fee involve)
The Office shall consider and
respond within 60 days after receipt of the application form and all necessary
documents
Associated Persons
In addition to the brokerage license or
registration, the provisions require that specified persons associated with a
derivatives agent must be subject to a number of statutory disqualifications or
minimum qualification requirements, while in some cases approvals or
registrations of persons with the Office are necessary, as follows:-
Major shareholders of more than 10
percent stake
Directors, managers, management,
advisors or external persons to whom the securities company contractually gives
the managing power (Section
24 of the Securities and Exchange Act B.E. 2535, Notification No.
TorThor/Nor/Khor. 85/2552, No. TorThor/Nor/Khor. 87/2552 and No.
OrThor/Nor/Khor. 11/2548) One-fourth of directors must be independent directors
(effective from January 1, 2007). (Notifications No. TorThor. 80/2552)
Key Regulations of Derivatives Agent/Dealer Supervision
A. Under the Licensing Regime
1. Financial Responsibility
Rules
1.1 Net Liquid
Capital Rule (Notification No. GorThor. 66/2547 and SorThor.
24/2549)
A licensed derivatives agent is
required, on a daily basis, to maintain the minimum net liquid capital of Bt.
15 million, together with the minimum NCR of 7% of general indebtedness (as
specified by the SEC) plus the collateralized assets as follows:
NCR = liquid assets (haircut adjusted) - total
liabilitie
general indebtedness as specified by SEC + collateralized assets
In case of shortfalls in NCR, a
broker/dealer is therefore required to do the following :
NC =< 1.5 times of minimum requirement (early warning)
that means NC =< 10.5% or =< Bt. 22.5 million
Notify and file with the SEC daily Net Capital (NC) reports until NC
increases to > 1.5 times of minimum requirement for at least 2 consecutive
days
Company operating only
derivatives business NC < 7% or < 15 million baht Company holding securities
license NC < 7% or < 25 million baht
The brokerage/dealing business is, therefore, frozen, and the broker/dealer
is required to submit a 120-day contingency plan to the SEC within 30 days.
In case the broker/dealer (a) fails to submit such
plan, (b) fails to operate in accordance with the plan,(c)
experiences negative NCs for 5 consecutive days, or (d) fails to
fulfill its obligations as to clearing and settlements, all operations must be
ceased, risks associated with investments will be minimized, and client
positions are to be transferred to other broker/dealer.
Customers’ funds and assets must
be segregated from those of derivatives agen
Licensed derivatives agents must
maintain accurate and current records of customer accounts and provide customer
account statements to clients as specified by the SEC.
Derivatives agents must not access
clients’ assets unless written authorizations are granted.
Licensed derivatives agents are
required to determine the position limits for their clients, as well as margin
levels to be collected. The amount of initial margin to be collected from
a client must be equivalent to or higher than the minimum level set forth by
the SEC.
Initial margins in the amount
consistent with the SEC regulations shall be deposited before executions of
clients’ trades, except for those of institutional investors which can be
extended to the following day (T+1).
Clients’ positions are to be
marked to market at least on a daily basis at the close of trading, in
accordance with the rules prescribed by the derivatives exchange, to determine
if the deposited amount satisfies the required margin
In case of a margin deficiency,
additional margin (maintenance margin) is required to be deposited within the
following day (T+1).
In case of a failure to satisfy a
margin call, a derivatives agent must not permit the client to increase his/her
position, and must liquidate such position by the next business day (T+2) to
reduce the deficit in the account and to satisfy the margin requirement.
Margins in the amount required by
the clearing house must be deposited by a derivatives agent (who is also a
clearing member) under the terms and conditions specified by the clearinghouse.
In this regard, offsetting of clients’ positions is not
allowed.
Licensed derivatives agents are
not allowed to extend credits to clients for margining purposes
1.4 Books & Records
Requirements (Notification No. TorThor. 80/2552)
Licensed derivatives agents are
required to maintain current and accurate all books and records, including
advice and those in electronic formats, as well as proper procedures to ensure
secrecy of clients’ information, as specified by the SEC.
Licensed derivatives agents
should have proper risk management systems to ensure their financial soundness,
and to address all aspects of risks associated with undertaking
businesses.
1.6 Report Making and
Submission
Licensed derivatives agents must prepare and
submit the following reports to the SEC Office:
Licensed derivatives agents must
furnish each customer with a risk disclosure document, containing at least
information prescribed by the SEC, and obtain a signed acknowledgement from
such customer indicating that he/she is informed of all the risks associated
with trading.
Licensed agents must not advertise
/ give false or misleading statements, or omit to state a material fact to
clients.
Licensees must have proper
procedures to prevent possible conflicts of interests, and to maintain
confidentiality of clients’ information.
All advices should be in the
best interest of the clients, and must not contain any statement to limit
losses, or guarantee gains from trading
2.2 Trading Practices
All clients should be treated
fairly and without any prejudice
Licensed derivatives agents should
keep clients informed and seek written consent before taking the opposite sides
of the clients’ trades.
2.3 Other Conduct Rules
Licensees must implement
reasonable procedures to verify the identities of new clients to assess their
investment objectives and financial net worth and update such information as
prescribed by the SEC.
There should be in place systems, as
specified by the SEC, to handle customer complaints.
Derivatives agents must have
effective and comprehensive compliance programs, as well as internal control
systems.
B. Under the Registration Regime
1. Financial Responsibility
Rules
1.1 Capital & Reserves
(Notification No. TorThor. 81/2552)
Registered
derivatives agents or dealers are required to maintain the minimum
amount of capital and reserves specified by the lead regulators, and must keep
the SEC informed immediately in case of such failure.
1.2 Books & Records
Requirements
Registered derivatives agents or
dealers are required to maintain current and accurate all books and records for
at least 5 years, including those in electronic formats, as well as proper
procedures to ensure secrecy of clients’ information as specified by the
SEC.
Registrants must not give false or
misleading statements, or omit to state a material fact, to clients.
Registrants must have proper
procedures to prevent possible conflicts of interests, and to maintain
confidentiality of information.
2.2 Other Conduct Rules
Derivatives agents must have
effective and comprehensive compliance programs, as well as internal control
systems
However, foreign
entities registered with the SEC to perform OTC derivatives dealing are
required to maintain the qualifications and requirements abovementioned, as
well as to notify the SEC immediately in circumstances prescribed in
Notification No. TorThor. 81/2552. In this connection, the SEC may impose
any administrative order or condition as is deemed appropriate.
This guide contains highlights of related provisions and
regulations, and is not meant for reference. Readers seeking
comprehensive guidance of complance requirement must refer, instead, to the
actual or complete version of the laws, notifications, rules, regulations,
interpretations or circulars.
Intermediaries Supervision and Development Department
Kornwara 0-2695-9554
Rangrong 0-2263-6050
Email : insec@sec.or.th
Last Updated
16 Jan 2013
Last Reviewed
16 Jan 2013
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Operating
derivatives business without a license or registration will result in a penalty
not exceeding a 3 year-term of imprisonment, a fine not exceeding Bt. 300,000,
together with a daily fine.