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July 2024
By Leong Wei Chung
A. Introduction
Leveraging the dynamic landscape of Malaysia’s financial sector, venturing into capital markets requires adherence to strict regulatory standards overseen by the Securities Commission Malaysia (“SC”). Central to this regulatory framework is the Capital Market Services License (“CMSL”), a prerequisite for entities engaging in various capital market activities. Let’s delve into the essential requirements for obtaining this pivotal license.
B. Regulated Activities under the CMSA 2007
Within Malaysia, it is a requirement under Section 58 of the Capital Markets and Services Act 2007 (“CMSA 2007”) for businesses engaging in regulated activities to obtain a valid CMSL from the SC. Such CMSL is essential for compliance with regulations, ensuring investor protection, maintaining market integrity, fostering trust, and accessing business opportunities in Malaysia’s regulated financial markets.
Correspondingly, there are 8 types of regulated activities which require a CMSL from the SC as stipulated under Schedule 2 of the CMSA 2007, as follows:
- Dealing in securities
- Dealing in derivatives
- Fund management
- Advising on corporate finance
- Investment advice
- Financial planning
- Dealing in private retirement schemes
- Clearing for securities or derivatives
Considering that each regulated activity entails different licensing requirements as set out by the SC, in this article, we will use “dealing in securities” and “dealing in derivatives” as examples to illustrate the application requirements for a CMSL.
C. Dealing in Securities
Knowing that Part 2 of Schedule 2 of the CMSA 2007 defines “dealing in securities” as engaging in various activities related to securities, whether as a principal (directly) or agent (on behalf of someone else), these activities include acquiring, disposing of, subscribing for, or underwriting securities. It also encompasses making or offering to make agreements with others that involve acquiring, disposing of, subscribing for, or underwriting securities. Additionally, it covers agreements whose purpose is to secure profit from the yield of securities or fluctuations in their value, excluding derivatives.
D. Dealing in Derivatives
You can find “dealing in derivatives” is defined as engaging in various activities related to derivatives, whether as a principal (directly) or agent (on behalf of someone else). These activities include making or offering to make agreements with others, inducing or attempting to induce others, or soliciting or accepting orders for derivatives. It encompasses entering into or taking assignments of derivatives, closing out derivatives, exercising or allowing rights under options, and initiating, originating, or issuing over-the-counter derivatives.
E. CMSL Requirements and Considerations
A CMSL applicant must be fit and proper and satisfies the criteria or standards referred to in Sections 64 and 65 of the CMSA 2007. The application requirements for a CMSL in dealing in securities and dealing in derivatives are stipulated in Chapter 4 of the Licensing Handbook issued by the SC. Key requirements include, amongst others:
(a) Fit and Proper Criteria
The SC scrutinizes the integrity, competence, and financial soundness of the applicant as an organisation (either as a company, sole proprietorship or partnership) and its key personnel. This involves assessing the applicant’s track record, qualifications, organisational composition including its shareholding and management, and any regulatory infractions.
(b) Compliance Framework
Applicants must demonstrate robust compliance policies and procedures to ensure adherence to regulatory requirements. This encompasses compliance with securities laws, market conduct standards, and anti-money laundering regulations.
(c) Minimum Capital Requirements
Entities applying for a CMSL must meet prescribed minimum capital requirements throughout the license term as stipulated by the SC. The capital adequacy ensures that license holders have the financial capacity to conduct their activities prudently and withstand market risks.
(d) Business Plan
A comprehensive business plan detailing the applicant’s proposed capital market activities is a prerequisite for the CMSL application. The plan should outline the entity’s market strategy, operational framework, risk management practices, and financial projections.
(e) Qualified Personnel
Applicants must have competent and experienced personnel to manage their capital market activities effectively. This includes individuals with the requisite qualifications, including the completion of the SC Licensing Examination, and experience in areas such as securities dealing and derivatives trading.
(f) Systems and Infrastructure
Entities are required to have robust systems and infrastructure to support their capital market operations. This includes technology platforms for trading, risk management tools, and adequate physical facilities.
(g) Risk Management Framework
A sound risk management framework is essential for identifying, assessing, and mitigating risks associated with capital market activities. Applicants must demonstrate proficiency in risk management practices tailored to their specific operations.
F. Application Process
The application process for a CMSL typically involves several stages:
(a) Preparation: Applicants should familiarize themselves with the regulatory requirements and seek professional advice and consultation with the regulators, if needed.
(b) Submission of Application: The applicant submits a completed application form along with supporting documents to the SC.
(c) Assessment and Review: The SC evaluates the application based on the prescribed criteria, conducting due diligence on the applicant and its proposed activities.
(d) Approval and Issuance: If the application meets all requirements, the SC would grant the CMSL to the applicant which may subject to further conditions or restrictions deemed necessary.
G. Conclusion
Navigating the requirements for obtaining a CMSL in Malaysia demands meticulous attention to detail and a thorough understanding of regulatory standards. By fulfilling the stipulated criteria and demonstrating a commitment to compliance and sound governance practices, entities can secure the CMSL and embark on their journey within Malaysia’s vibrant capital market landscape. Collaboration with regulatory authorities and engaging professional expertise can streamline the application process and pave the way for a successful entry into the realm of capital markets.
This material is for general information only and is not intended to provide legal advice. If you have any queries regarding the above, please feel free to contact us at insights@chooi.com.my.