- Published on
Malaysian Banking Law – Code of Conduct in the Wholesale Financial Market and Prohibited Conduct
Introduction
To strengthen consumer protection, market integrity, and confidence in the financial system, the Financial Services Act 2013 (FSA 2013) prohibits certain forms of improper business conduct. Section 124 of the FSA 2013 provides that financial institutions must not engage in prohibited business conduct as prescribed under Schedule 7 of the Act.
In furtherance of these objectives, Bank Negara Malaysia (BNM) issued the Code of Conduct for Malaysia Wholesale Financial Markets, which governs the conduct of participants operating in Malaysia’s wholesale financial markets. The Code applies to a wide range of market participants, including banks, investment banks, Islamic banks, development financial institutions, insurers, takaful operators, money brokers, operators of electronic trading or broking platforms, corporations, and investment institutions.
Part C of the Code highlights several serious forms of misconduct that are strictly prohibited under both the Financial Services Act 2013 and the Islamic Financial Services Act 2013 (IFSA 2013).
Definition of Wholesale Financial Market
A Wholesale Financial Market refers to a financial market where large-scale financial transactions are conducted between institutional participants rather than retail customers or members of the general public.
The market typically involves transactions among:
Because these markets significantly influence the economy and the financial system, participants are expected to adhere to the highest standards of professionalism, integrity, transparency, and ethical conduct.
Case Scenario
ABC Bank Berhad is actively involved in Malaysia’s wholesale financial market. A senior treasury dealer employed by the bank becomes aware that a large institutional client intends to purchase a substantial amount of government securities the following day.
Before the transaction takes place, the dealer secretly purchases similar securities for his personal account, anticipating that prices will rise once the institutional order is executed.
At the same time, the dealer circulates false information among market participants, claiming that the government is planning to issue a large volume of new securities, knowing that this information is untrue. The false rumour causes temporary market uncertainty and affects trading decisions.
In addition, the dealer executes several artificial transactions designed to create the appearance of active market demand for certain securities, thereby misleading other participants regarding the true market conditions.
Subsequently, Bank Negara Malaysia discovers the dealer’s activities during a market surveillance review.
Legal Principles
1. Code of Conduct for Malaysia Wholesale Financial Markets
The Code of Conduct establishes standards of professionalism, integrity, transparency, and ethical behaviour expected from all participants in the wholesale financial market.
The Code aims to ensure that market participants:
2. Prohibited Conduct
Part C of the Code identifies three major categories of prohibited conduct under the FSA 2013 and IFSA 2013.
(A) Market Manipulation
Market manipulation occurs when a person deliberately interferes with the normal operation of a financial market to create a false or misleading impression regarding:
(B) Misinformation and Rumour
Misinformation and rumour involve the dissemination of false, misleading, inaccurate, or deceptive information that may influence market behaviour.
This may include:
(C) Insider Dealing
Insider dealing occurs when a person trades or procures trading based on confidential, non-public, price-sensitive information obtained through their position, employment, or relationship.
Such information may relate to:
Application to the Case Scenario
In the present case, the treasury dealer committed multiple prohibited acts.
First, the dealer used confidential information concerning the institutional client’s planned purchase of government securities to conduct personal trading before the information became public. This constitutes insider dealing because the dealer exploited non-public, price-sensitive information for personal gain.
Second, the dealer intentionally spread false information regarding a purported government securities issuance. This amounts to misinformation and rumour, as the information was knowingly false and capable of influencing market participants’ decisions.
Third, the dealer carried out artificial transactions intended to create a misleading appearance of market demand. Such conduct constitutes market manipulation, as it distorted the true state of the market and misled other participants.
Accordingly, the dealer breached the Code of Conduct and violated the prohibitions contained in the FSA 2013 and IFSA 2013.
Solution to the Case Scenario
ABC Bank Berhad’s treasury dealer engaged in three distinct forms of prohibited conduct within the wholesale financial market.
The dealer committed insider dealing by purchasing securities using confidential information regarding the institutional client’s forthcoming transaction before the information became publicly available.
The dealer committed misinformation and rumour offences by deliberately spreading false information concerning an alleged government securities issuance in order to influence market sentiment.
The dealer also committed market manipulation by carrying out artificial trades designed to create a false impression of demand and market activity.
These actions undermine market integrity, distort price discovery, and create an unfair trading environment for other participants.
Consequently, Bank Negara Malaysia may initiate:
Depending on the circumstances, enforcement action may also be taken against ABC Bank Berhad if deficiencies in governance, supervision, compliance controls, risk management systems, or internal monitoring contributed to the misconduct.
Practical Application
The prohibitions on market manipulation, misinformation, and insider dealing are highly relevant to the daily operations of financial institutions, particularly within:
Critical Analysis
The prohibition of market manipulation, misinformation, and insider dealing reflects the regulatory objective of maintaining a fair, orderly, transparent, and efficient financial market.
Wholesale financial markets form the backbone of the financial system because they facilitate the movement of large volumes of funds between institutions. Any misconduct within these markets can have significant consequences for financial stability, investor confidence, and economic growth.
Without these prohibitions, individuals possessing confidential information could exploit their positions for personal gain, while false information could distort market prices and influence investment decisions unfairly. Market manipulation can further undermine confidence by creating artificial market conditions that do not reflect genuine supply and demand.
The Code of Conduct complements the statutory provisions of the FSA 2013 and IFSA 2013. While legislation establishes legal obligations and penalties, the Code provides practical guidance on the standards of behaviour expected from market participants.
Nevertheless, enforcement remains challenging due to increasingly sophisticated trading strategies, technological developments, algorithmic trading systems, and cross-border financial transactions. Effective surveillance technology, strong compliance cultures, and active regulatory oversight are therefore essential to detect and prevent misconduct.
The combination of statutory regulation, ethical standards, and supervisory enforcement is necessary to preserve the integrity and stability of Malaysia’s wholesale financial markets.
Conclusion
Section 124 of the Financial Services Act 2013, together with the Code of Conduct for Malaysia Wholesale Financial Markets issued by Bank Negara Malaysia, seeks to ensure that participants in Malaysia’s wholesale financial markets conduct themselves with honesty, integrity, professionalism, and transparency.
A wholesale financial market is a market where large-scale financial transactions are conducted between institutional participants such as banks, financial institutions, corporations, insurers, and investment entities rather than individual retail customers.
Three major forms of prohibited conduct are specifically identified:
Introduction
To strengthen consumer protection, market integrity, and confidence in the financial system, the Financial Services Act 2013 (FSA 2013) prohibits certain forms of improper business conduct. Section 124 of the FSA 2013 provides that financial institutions must not engage in prohibited business conduct as prescribed under Schedule 7 of the Act.
In furtherance of these objectives, Bank Negara Malaysia (BNM) issued the Code of Conduct for Malaysia Wholesale Financial Markets, which governs the conduct of participants operating in Malaysia’s wholesale financial markets. The Code applies to a wide range of market participants, including banks, investment banks, Islamic banks, development financial institutions, insurers, takaful operators, money brokers, operators of electronic trading or broking platforms, corporations, and investment institutions.
Part C of the Code highlights several serious forms of misconduct that are strictly prohibited under both the Financial Services Act 2013 and the Islamic Financial Services Act 2013 (IFSA 2013).
Definition of Wholesale Financial Market
A Wholesale Financial Market refers to a financial market where large-scale financial transactions are conducted between institutional participants rather than retail customers or members of the general public.
The market typically involves transactions among:
- Banks;
- Investment banks;
- Islamic banks;
- Development financial institutions;
- Insurance companies;
- Takaful operators;
- Pension funds;
- Asset management companies;
- Corporations;
- Government agencies; and
- Other institutional investors.
- Foreign exchange (FX);
- Money market instruments;
- Government securities;
- Corporate bonds;
- Sukuk;
- Interest rate products;
- Islamic financial instruments;
- Derivatives; and
- Other capital market products.
Because these markets significantly influence the economy and the financial system, participants are expected to adhere to the highest standards of professionalism, integrity, transparency, and ethical conduct.
Case Scenario
ABC Bank Berhad is actively involved in Malaysia’s wholesale financial market. A senior treasury dealer employed by the bank becomes aware that a large institutional client intends to purchase a substantial amount of government securities the following day.
Before the transaction takes place, the dealer secretly purchases similar securities for his personal account, anticipating that prices will rise once the institutional order is executed.
At the same time, the dealer circulates false information among market participants, claiming that the government is planning to issue a large volume of new securities, knowing that this information is untrue. The false rumour causes temporary market uncertainty and affects trading decisions.
In addition, the dealer executes several artificial transactions designed to create the appearance of active market demand for certain securities, thereby misleading other participants regarding the true market conditions.
Subsequently, Bank Negara Malaysia discovers the dealer’s activities during a market surveillance review.
Legal Principles
1. Code of Conduct for Malaysia Wholesale Financial Markets
The Code of Conduct establishes standards of professionalism, integrity, transparency, and ethical behaviour expected from all participants in the wholesale financial market.
The Code aims to ensure that market participants:
- Act honestly and fairly;
- Maintain market integrity;
- Avoid conflicts of interest;
- Conduct transactions in a transparent manner;
- Protect market confidence;
- Promote fair dealing; and
- Comply with applicable laws and regulatory requirements.
2. Prohibited Conduct
Part C of the Code identifies three major categories of prohibited conduct under the FSA 2013 and IFSA 2013.
(A) Market Manipulation
Market manipulation occurs when a person deliberately interferes with the normal operation of a financial market to create a false or misleading impression regarding:
- Market activity;
- Supply and demand;
- Trading volume;
- Market prices; or
- The true state of the market.
- Artificial trading activities;
- Wash trades;
- Creating false market demand;
- Manipulating benchmark rates;
- Manipulating prices of financial instruments; or
- Conduct intended to distort market prices.
(B) Misinformation and Rumour
Misinformation and rumour involve the dissemination of false, misleading, inaccurate, or deceptive information that may influence market behaviour.
This may include:
- Spreading false market reports;
- Publishing inaccurate financial information;
- Circulating unverified rumours;
- Making misleading statements regarding financial instruments;
- Disseminating false information concerning financial institutions; or
- Creating market panic through fabricated information.
(C) Insider Dealing
Insider dealing occurs when a person trades or procures trading based on confidential, non-public, price-sensitive information obtained through their position, employment, or relationship.
Such information may relate to:
- Future transactions;
- Corporate actions;
- Government decisions;
- Financial results;
- Market-sensitive developments;
- Merger activities; or
- Significant investment decisions.
Application to the Case Scenario
In the present case, the treasury dealer committed multiple prohibited acts.
First, the dealer used confidential information concerning the institutional client’s planned purchase of government securities to conduct personal trading before the information became public. This constitutes insider dealing because the dealer exploited non-public, price-sensitive information for personal gain.
Second, the dealer intentionally spread false information regarding a purported government securities issuance. This amounts to misinformation and rumour, as the information was knowingly false and capable of influencing market participants’ decisions.
Third, the dealer carried out artificial transactions intended to create a misleading appearance of market demand. Such conduct constitutes market manipulation, as it distorted the true state of the market and misled other participants.
Accordingly, the dealer breached the Code of Conduct and violated the prohibitions contained in the FSA 2013 and IFSA 2013.
Solution to the Case Scenario
ABC Bank Berhad’s treasury dealer engaged in three distinct forms of prohibited conduct within the wholesale financial market.
The dealer committed insider dealing by purchasing securities using confidential information regarding the institutional client’s forthcoming transaction before the information became publicly available.
The dealer committed misinformation and rumour offences by deliberately spreading false information concerning an alleged government securities issuance in order to influence market sentiment.
The dealer also committed market manipulation by carrying out artificial trades designed to create a false impression of demand and market activity.
These actions undermine market integrity, distort price discovery, and create an unfair trading environment for other participants.
Consequently, Bank Negara Malaysia may initiate:
- Criminal proceedings;
- Civil enforcement actions; and/or
- Administrative enforcement measures
Depending on the circumstances, enforcement action may also be taken against ABC Bank Berhad if deficiencies in governance, supervision, compliance controls, risk management systems, or internal monitoring contributed to the misconduct.
Practical Application
The prohibitions on market manipulation, misinformation, and insider dealing are highly relevant to the daily operations of financial institutions, particularly within:
- Treasury departments;
- Foreign exchange trading desks;
- Money market operations;
- Government securities trading;
- Bond and sukuk trading activities;
- Investment banking divisions;
- Corporate finance departments;
- Islamic capital market operations; and
- Financial market dealing rooms.
- Establish comprehensive compliance frameworks;
- Maintain effective information barriers (“Chinese Walls”);
- Monitor employee trading activities;
- Conduct regular ethics and compliance training;
- Implement whistleblowing mechanisms;
- Perform transaction surveillance and market monitoring;
- Maintain proper record-keeping systems; and
- Promptly report suspicious activities to regulators where required.
Critical Analysis
The prohibition of market manipulation, misinformation, and insider dealing reflects the regulatory objective of maintaining a fair, orderly, transparent, and efficient financial market.
Wholesale financial markets form the backbone of the financial system because they facilitate the movement of large volumes of funds between institutions. Any misconduct within these markets can have significant consequences for financial stability, investor confidence, and economic growth.
Without these prohibitions, individuals possessing confidential information could exploit their positions for personal gain, while false information could distort market prices and influence investment decisions unfairly. Market manipulation can further undermine confidence by creating artificial market conditions that do not reflect genuine supply and demand.
The Code of Conduct complements the statutory provisions of the FSA 2013 and IFSA 2013. While legislation establishes legal obligations and penalties, the Code provides practical guidance on the standards of behaviour expected from market participants.
Nevertheless, enforcement remains challenging due to increasingly sophisticated trading strategies, technological developments, algorithmic trading systems, and cross-border financial transactions. Effective surveillance technology, strong compliance cultures, and active regulatory oversight are therefore essential to detect and prevent misconduct.
The combination of statutory regulation, ethical standards, and supervisory enforcement is necessary to preserve the integrity and stability of Malaysia’s wholesale financial markets.
Conclusion
Section 124 of the Financial Services Act 2013, together with the Code of Conduct for Malaysia Wholesale Financial Markets issued by Bank Negara Malaysia, seeks to ensure that participants in Malaysia’s wholesale financial markets conduct themselves with honesty, integrity, professionalism, and transparency.
A wholesale financial market is a market where large-scale financial transactions are conducted between institutional participants such as banks, financial institutions, corporations, insurers, and investment entities rather than individual retail customers.
Three major forms of prohibited conduct are specifically identified:
- Market Manipulation;
- Misinformation and Rumour; and
- Insider Dealing.
0 Comments