Guidelines on Outsourcing for Capital Market Intermediaries
This list of FAQs is intended to provide guidance and clarification on various requirements in the Guidelines on Outsourcing for Capital Market Intermediaries.
|1.||Is a market intermediary required to seek prior approval from the Securities Commission Malaysia (SC) or Bursa Malaysia (exchange) for all outsourcing arrangements?|
|No. Prior approval from the SC or the exchange is not required for outsourced functions that are determined as non-material. A market intermediary is to be guided by chapter 4 of the Guidelines in determining whether the outsourced function is a material or a non-material function (refer diagram below on illustration of the outsourcing framework). This assessment process has to be documented.
In addition, a holder of a Capital Markets Services Licence (CMSL) for regulated activities of dealing in securities or trading in futures contracts must also be guided by the Rules of the exchange in outsourcing any of its functions.
|2.||Is prior approval of the SC or the exchange required for all outsourcing arrangements to service provider outside Malaysia or if there is a sub-contractor?|
|A market intermediary has to seek the prior approval of the SC or the exchange if a material function is outsourced to a service provider outside Malaysia or involves a sub-contractor.|
|3.||Is a market intermediary required to notify the SC or the exchange if the service level agreement is amended to factor in a new outsourced function?|
|If the changes in the said agreement resulted from an addition of a new material function, a market intermediary has to submit fresh a outsourcing application to the SC or the exchange.|
|4.||Is a market intermediary allowed to sub-contract its supervisory functions such as internal audit, risk management or compliance functions?|
|No. Paragraph 3.04 (b) stipulates that these functions are not allowed to be sub-contracted.|
|5.||Can a market intermediary outsource the maintenance of unit holder register to a service provider outside Malaysia?|
|In outsourcing the maintenance of unit holder register, a market intermediary has to comply with sections 308 and 309 of the Capital Markets and Services Act 2007 which stipulates that the unit holder register must be maintained at the registered office of the market intermediary in Malaysia.|
|6.||If a market intermediary outsources maintenance of unit holder register, could there be interaction or contact with the clients of the market intermediary in the course of performing the function?|
|The interaction must not have the elements of core functions that formed part of licensed activities.|
|7.||Where it involves outsourcing of a compliance function, is the designated compliance officer required to be registered with the SC?|
|Yes. The compliance officer must have the necessary qualifications and passed the necessary examinations or courses set out by the SC.|
|8.||What can be considered as non-material functions which do not require the SC’s approval?|
|Examples of non-material functions that do not require the SC’s approval are human resource (e.g. payroll, performance of appraisal, employment of personnel) and finance.|
|9.||What are the functions/services which are not subject to the Guidelines?|
|The following are examples of functions/ services which are not subject to the Guidelines-
|10.||Is outsourcing of clearing and settlement as provided under paragraph 4.01 applicable to all market intermediaries?|
|No. The outsourcing of clearing and settlement function is applicable only for a holder of a CMSL for regulated activities of dealing in securities or trading in futures contracts.|
|11.||Is there a standard letter of undertaking to be submitted by a service provider or a sub-contractor, as required under paragraph 5.01 (a)?|
|No. There is no standard format. Nonetheless, the letter of undertaking is to be addressed to the SC or the exchange, as the case may be. The content should stipulate that the service provider or the sub-contractor will allow the SC, the exchange, or their agents to have access to and are able to make copies of information, records and documents relating to the outsourced functions.|
|12.||What type of variation requires notification to the SC or the exchange, as required under paragraph 5.03?|
|Any variation of the commercial terms need not require notification to the SC or the exchange. Commercial terms can be defined as those terms which are not stipulated in paragraph 6.09 (a) to (k).|
|13.||Does a market intermediary need to monitor the conduct of a sub-contractor?|
|Yes. A market intermediary must ensure that the service provider has the necessary monitoring mechanism to monitor conduct of its sub-contractor.|
|14.||Is a market intermediary required to conduct an assessment on internal audit that is being outsourced?|
|An assessment is not required where the internal audit function of a market intermediary is outsourced. However, the audit committee or the board of directors of the market intermediary is required to ensure the effectiveness of the internal audit function outsourced.|
|15.||What is the frequency of the assessment to be carried out as provided under paragraph 6.05?|
|The first assessment must be carried out on the twelfth month from commencement of the outsourcing arrangement and a report of this assessment must be submitted immediately to the SC or the exchange, as the case may be. Report of any subsequent assessments shall only be submitted to the SC or the exchange, as and when requested.|
|16.||Is the market intermediary required to change the existing outsourcing agreement to reflect current requirements?|
|No. This requirement does not have a retrospective effect as long as the said outsourcing arrangement is approved by the SC or the exchange. However, it would be a good measure for the market intermediary to adopt the revised criteria stated in paragraph 6.09 in the said agreement.
Nevertheless, the market intermediary has to be guided by these Guidelines for future obligations e.g. the need to notify the SC or the exchange of any variations of non-commercial terms in the agreement.
|17.||What other written laws are required to be adhered to in maintaining confidentiality of clients’ information?|
|A market intermediary, that is a holder of a CMSL for regulated activities of dealing in securities, must give due attention to the requirements stipulated under Sections 43 and 45 of the Securities Industry (Central Depositories) Act 1991.|