Principles of Conduct of Derivatives Business

Summary

This is a statement of Principles issued by the Guernsey Financial Services Commission setting out expected standards of conduct for firms and individuals engaged in derivatives business in the Bailiwick of Guernsey. The Principles do not have the force of law, but non-compliance is taken into account by the Commission when assessing the fitness and propriety of regulated institutions and individuals, and can affect registration, authorisation or licensing decisions.

The Principles apply to a broad range of financial institutions and individuals conducting any derivatives business, whether or not they are otherwise subject to statutory regulation. They cover foreign exchange forwards, forward rate agreements, futures, options, structured notes, swaps, warrants, contracts for differences, and any business involving products comprised wholly or partly of derivatives, whether exchange traded or over the counter.

• Resources and competence: Institutions must have sufficient resources, experience and capability, and staff must be appropriately qualified with ongoing training in derivatives business.
• Know your customer: Institutions must understand clients' affairs and ensure clients have adequate knowledge of derivatives risks.
• Legal compliance: Institutions must have regard to and comply with all relevant legislation and regulatory requirements.
• Governance and controls: A board approved written policy, board level oversight, segregation of client and proprietary business, segregation of dealing and settlement functions, authorised dealers only, daily independent review, and prompt reporting of unusual profits, losses, errors or breaches to the board.
• Recording: Proprietary derivatives business must be fully recorded by the end of the business day it occurs; non proprietary business by the end of the following business day.
• Reporting to the Commission: Significant areas of concern relating to derivatives business must be reported to the Commission without delay.
• Information systems: Systems must verify source data, track margin and settlement obligations, and monitor exposures at least daily, preferably instantaneously.
• Risk warnings and advertising: Clients must receive clear risk warnings, and advertisements must not exaggerate opportunities and must include appropriate risk warnings.
• Client asset protection: Institutions acting as trustee or custodian of derivatives must ensure proper protection of client assets.
• Compliance documentation: Institutions must maintain documentation adequate to demonstrate compliance with the Principles.

The Principles are stated to be non exhaustive and complementary to, rather than replacing, the separate Principles of Conduct of Finance Business.

Key obligations

• Financial institutions conducting derivatives business must possess sufficient resources, experience and capabilities for that business.
• Institutions must ascertain appropriate knowledge of clients' affairs and ensure clients understand derivatives risks.
• Staff conducting or monitoring derivatives business must be appropriately qualified and undergo continuing education.
• Institutions must comply with all relevant legislation and regulatory requirements applicable to derivatives business.
• Institutions must establish a board approved written policy on derivatives business and ensure staff adhere to it.
• At least one board member must have full knowledge and understanding of the derivatives business undertaken.
• Client derivatives business must be segregated from proprietary trading.
• Proprietary derivatives business must be fully recorded no later than the end of the business day it is conducted; non proprietary business no later than the end of the following business day.
• Dealing and settlement functions must be conducted by separate, independent persons.
• Only individuals specifically authorised by the institution may conduct derivatives business.
• Derivatives business must be reviewed at least daily by staff independent of dealing and settlement, with results reported to senior management.
• Unusual profits, losses, errors, omissions or policy breaches must be reported as soon as possible to the board.
• Controls over intra-group derivatives business must be at least as strong as controls over third party business.
• Significant areas of concern regarding derivatives business must be reported to the Commission without delay.
• Information systems must verify source data, track margin and settlement obligations, and monitor exposures at least daily.
• Clients must be given clear warnings of derivatives risks, and advertisements must include appropriate risk warnings and not exaggerate opportunities.
• Institutions acting as trustee or custodian of derivatives must ensure proper protection of client assets.
• Institutions must maintain documentation adequate to demonstrate compliance with the Principles.

Applies to

accountants, administrators, advisers, banks, brokers, building societies, credit unions, custodians/trustees, dealers, fiduciaries, friendly societies, collective investment schemes, industrial and provident societies, insurance companies/managers, intermediaries, investment managers, lawyers, market makers, promoters/sponsors

Deadlines

• end of the business day on which conducted: Proprietary derivatives business must be fully recorded by this deadline
• end of the business day following the business day on which conducted: Non-proprietary derivatives business must be fully recorded by this deadline