Guide for Digital Asset Exchanges to be Recognized Market Operators (RMO) Pt. II
by Edwin Lee
To view Part I, click here.
PART II: SPECIFIC REQUIREMENTS
In addition to the general requirements set out in the previous article, a DAX operator must also comply with the specific requirements set out under Chapter 15.
What are the eligibility and financial requirements?
A DAX operator must be locally incorporated and have a minimum paid-up capital of RM5 million. The SC reserves the power to impose additional financial requirements.
If the DAX operator is a public company, the DAX operator must appoint at least one independent director on its board.
What are the approvals required from the SC?
To issue a Digital Asset in Malaysia – yes, subject to SC’s ICO guidelines
To list a Digital Asset on a DAX – yes, subject to SC’s RMO guidelines
To operate a DAX – yes, subject to SC’s RMO guidelines
What are the obligations on the DAX operator?
A DAX operator must:
- ensure its DAX is operating in an orderly, fair and transparent manner;
- have in place rules and procedures for the trading, clearing and settlement of Digital Assets on the DAX;
- ensure that all disclosures are fair, clear and not misleading including risk warning statements and other qualifications to enable investors to have an accurate understanding of the associated risks; and
- conduct real-time market surveillance.
What are the policies and procedures that need to be put in place?
1) To deal with conflict of interest. The framework needs to cover the following:
- proprietary trading by the DAX operator on its DAX;
- trading in Digital Assets by its officers and employees on its own or other platforms;
- the management of non-public material information;
- the offering of any Digital Asset to be traded on its DAX;
- prohibition on direct or indirect financial assistance to investors, including its officers; and employees, to invest or trade in Digital Assets on its DAX.
2) To deal with trading operations: The framework needs to cover the following:
- description of order types, order matching processes (e.g. matching algorithm), trading hours;
- volatility control mechanisms (including circuit breakers, price limits and trading halts);
- details of arrangements and processes to manage error trades, system error, failure and malfunction, investors’ assets in the event of any suspension or outage.
3) To deal with market transparency: The framework needs to cover the following:
- publish trading information, both pre-trade and post-trade on a real-time basis;
- publish material information or changes to the tradeable Digital Assets; and
- publish trading operations and arrangements.
4) To deal with market making and proprietary trading for providing liquidity. If a DAX operator intends to carry out market making activities, it must first obtain the SC’s approval. It must also ensure sufficient disclosure of all market making arrangements to its investors.
5) To deal with other compliance arrangements. The framework needs to cover the following:
- monitoring processes and procedures to ensure investors’ compliance with the DAX’s terms and conditions;
- arrangements and processes to deter and detect financial crime (AML/CFT);
- arrangements and processes to deter and detect market abuse;
- arrangements and processes to manage investors’ disputes and complaints; and
- details of recovery and resolution processes.
Risk Management Policy:
To deal with potential sources of operational risk (both internal and external). The framework needs to cover the following:
- IT systems utilised in platform operationalisation;
- details of main business risks; and
- risk management framework including framework for cyber security management.
Business Continuity Plan:
To deal with events that pose a significant risk of disrupting operations, to set out disaster recovery plans
Internal Audit Policy:
To audit and test systems, policies and procedures periodically. The framework needs to cover the following:
- details of internal audit function; and
- record keeping and audit trail processes.
To set out trading and execution process flow, settlement and clearing activities, transfer and withdrawal of fiat currency or Digital Asset.
To deal with procedures relating to listing and trading of Digital Assets. A DAX should also perform Digital Asset audit and vetting to ensure only high quality Digital Assets are listed on the DAX. Specifically, a DAX operator is required to submit an application to the SC enclosing the following before listing a particular Digital Asset on its DAX:
- the nature of the project, the profile of its founders and management team if the Digital Asset has not been issued pursuant to an ICO approved by the SC;
- the rights, benefits or utility represented by the Digital Asset;
- the liquidity of the Digital Asset;
- the level of distribution of the Digital Asset;
- all relevant information related to the project, including the white paper, disclosure document and progress report;
- security of the underlying distributed ledger; and
- compliance with all other legal and regulatory frameworks in Malaysia and other jurisdictions which the project operates in.
Client’s Asset Protection Policy:
To deal with investors’ monies and Digital Assets. The framework needs to cover the following:
- details of monies handling arrangements;
- maintain records of investors and any monies or Digital Assets held by the DAX;
- identity of licensed financial institution;
- identity of trustee;
- maintain a sufficiently and verifiably secured storage medium designated to store Digital Assets; and
- maintain processes to protect against risk of loss, theft or hacking.
Settlement and Custody Policy:
To deal with settlement and custody structure to ensure the fund safety of investors, exchange and owners. The framework needs to cover the following:
- details of Digital Asset custody arrangements (including upfront deposit of monies and Digital Assets with the DAX before entering into a transaction on the DAX);
- name of e-wallet service provider(s); and
- details of safeguards for custody of Digital Assets (e.g. multi-signature, two-factor authentication, hot/cold e-wallet).
Standard Terms and Conditions for investors/customers
Risk Warning Statement & Disclosure and Self-Declared Risk Acknowledgement Forms for investors/customers
AML/KYC Compliance Manual and Policy
Other documents to be prepared for submission:
- Business model and plans for the next 5 years
- Details of fees structure
- Details of key personnel and designated roles
- Organisational structure/chart
- Financial resources such as monthly cash flow forecast, pro forma income statement, financial statements (cash flow statement, balance sheet, income statement)
- Details of education and awareness programme
The view expressed in this article is intended to provide a general guide to the subject matter and does not constitute professional advice. You are advised to seek proper advice for your specific situation.