UNIVERSITI TUNKU ABDUL RAHMAN

ACADEMIC YEAR 2023/2024

MAY EXAMINATION

UKFB3053/ UKFB3093 FINANCIAL MARKETS AND REGULATIONS

THURSDAY, 9 MAY 2024 TIME: 9.00 AM - 12.00 PM (3 HOURS)

MARKING SCHEME

BACHELOR OF ACCOUNTING (HONOURS)

BACHELOR OF FINANCE (FINANCIAL TECHNOLOGY) WITH HONOURS

Instructions to candidates:

Section A: [Total: 40 marks]

ONE (1) compulsory question to be answered.

Section B: [Total: 60 marks]

Choose TWO (2) out of three (3) questions to be answered.

For calculation questions, marks will ONLY be awarded with detailed workings.

This marking scheme has 4 suggested answers out of 13 pages.

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Section A – Answer ALL questions. (Compulsory) [Total: 40 marks]

Q1. (a) Great Bank is offering Share Margin Financing, a secured credit facility, with
details of the facility are stated therein:

Margin of Financing : up to 60%

Margin Multiple
(Trading Limit)
Margin Call
Force-selling
Effective Lending Rate
: Collateral Pledges
Cash/ Fixed deposit - 2.5 times
Unit trust/ shares - 1.5 times
: ≥ 65%
: ≥ 80%
: *SBR + 2.05% p.a.

*The Standardized Base Rate (SBR) is currently sets as the Overnight Policy
Rate (OPR) as announced by the Monetary Policy Committee of Bank Negara
Malaysia in their statement dated 2 November 2023.

Total outstanding balance/loan - Collateral

Margin of financing formula =
Total Share Equity

Total outstanding balance of the day x i

Interest charge formula = T
where: i = interest rate (p.a.)
T = Number of months in a year
The interest is to be serviced monthly in arrears, on monthly rest basis.

Aliaa collateralized RM170,000 for 60 percent margin of finance from Great

Bank. When the loan was disbursed on 1 March 2024, quarter of the amount
were used to buy YTL shares at RM1.70 per unit of shares while the
remaining balance were used to purchase Penta shares at RM5.00 per unit of
shares. On 31 March 2024, the share price of YTL closed at RM2.00 and
Penta was at RM5.20, which subsequently reduced her margin. Aliaa decided
to increase her financing amount, which later to be used to buy additional YTL
shares at RM2.00 per share. On 30 April, YTL price became RM1.80 and
Penta dropped to RM5.00.

Required:

(i) Determine whether there was a margin call or force-selling triggered as

of 30 April 2024. (14
marks)

(ii) Compute the interest charged by the Bank as of 30 April 2024.

(2 marks)
Note: Answers must be rounded up to TWO decimals.

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Answers:

Total Outstanding Loan- Cash Deposit

(i) Margin of financing =
Total Share Equity
Total outstanding loan = 2.5 x 170,000
and total share equity = RM425,000 1m

01 March 2023 31 March 2023

0. 25 x 425,000
YTL = 62,500 units x RM2.00 =
RM1 .70
RM125,000 2m

0.75 x 425,000
Penta = 63,750 units x RM5.20 = RM331,500 2m
RM 5.00
RM456,500
425,000−170,000
Margin of financing =
456,500
255,000
= = 55.86% 2m
456,500

0.6 = (RM425,000 + x) – RM170,000 / (RM456,500 + x)

x = RM47,250 additional financing 2m

Add YTL @ RM2.00 = 23,625 units

30 April 2024
YTL 62,500 + 23,625 x RM1.80 = RM155,025 1m
Penta 63,750 x RM5.00 = RM318,750 1m
RM473,775

( 425,000+47,250)−170,000
Margin of financing =
473,775
= 63.80% 2m,

Hereby, there is NO force selling or margin call. 1m

(ii) Interest 30 April 2024

47 3,775 x 5.05 %
12
=RM1,987.39 2m
(16 marks)

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(b) Case Study – Securities Commission Stock Screening Methodology.

Ni Hsin Sdn. Bhd. (Ni Hsin), a leading manufacturer of premium stainless

steel multi-ply cookware in Asia, is expected to be listed in Bursa Malaysia in
September 2024. The company has requested a Shariah compliant review at its
IPO stage upon its application to Securities Commission. Based on the latest
annual audited financial statements ended 31 December 2023, the company’s
total revenue and profit before tax were recorded at RM39.6 million and
RM25.9 million, respectively. The strong performance of the company was
reflected in the company’s statement of financial position with shareholders’
funds stood at RM53.98 million and total assets of RM90.57 million.

Ni Hsin has emerged as a substantial shareholder in a stockbroking company

by acquiring 17 percent stake in Ada Wang Securities Sdn. Bhd. The
acquisition brought in RM0.618 million revenue and RM0.43 million in gross
income. The company has also moved a step further by investing in an
insurance business with 5 percent market share in Practical Assurance
Malaysia Berhad. The investment contributes towards the company’s revenue
for RM5.25 million and profit before tax of RM1.35 million.

Ni Hsin is in a positive net cash position for RM9.44 million with quarter of
the amount were placed in Nation Islamic Bank while the remaining were in
several conventional banks. The company’s net cash inflow from financing
activities was reported at RM3.63 million, attributable to the proceeds from its
Redeemable Convertible Commercial Papers and Medium-Term Notes.

Required: Determine the Shari’ah compliant status of Ni Hsin Sdn. Bhd. in

accordance with the Securities Commission screening methodology.
Note: 1 The descriptive analysis to employ quantitative approach ONLY at all
levels.
2 Answers must be supported with figures and reasons.
3 All figures to be rounded up to two decimal places. (16
marks)
Answers:

 Business segment: Less than 5%

Against Conventional Insurance

5.25
Grp total revenue x 100 = 13.26% 2m
39.6

1.35
Group PBT x 100 = 5.21% 2m
25.9

 Business segment: Less than 20%

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Against Stock broking

0.618
Grp total revenue x 100 = 1.56% 2m
39.6
0.43
Group PBT x 100 = 1.66% 2m
25.9

 Financial segment: Less than 33%

3
x 9.44
Conventional cash 4 x 100 = 7.82% 2m
90.57

3.63
Conventional debt x 100 = 4.01% 2m
90.57

Overall status of Ni Hsin Berhad.: Shari’ah non-compliant 2m

The Company failed the 5% business segment threshold 2m

(c) Bank Negara Malaysia at its Monetary Policy Committee (MPC) meeting on
May 3, 2023, increased the Overnight Policy Rate (OPR) by 25 basis points to
3.00%. Briefly explain how the increase affects young generation’s investment
in stock market. (8
marks)

Answers:

Young Malaysians might not proceed to investment in stock market or will put
their decision to invest on hold. This is due to an increase in interest rate for
all types of loans that they have committed such as credit cards, housing, and
others. Their high commitment for debts repayment could limit their ability to
save and subsequently reduce their opportunity to invest in stock market. On
the other point, they might turn their attention to more profitable investment,
example, fixed deposit or bonds. 4 marks

Young Malaysians who have invested in the stock market or other financial
instruments may see a decline in the value of their investments due to the OPR
increase. However, this circumstance is for short term period and the only
thing that they can do is wait for time of recovery. However, there are some of
them see this as an opportunity for them to buy stock with cheaper price,
knowing that in future, the price will go up once again based on market
condition or the performance of the companies themselves. 4 marks
[Total: 40 marks]

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Section B – Answer TWO (2) questions only. [Total: 60 marks]

Q1. (a) Nicole decided to return to her home city, which is Melbourne, Australia.
Before she departed from the States, she sold her estate house for USD7.635
million. In Melbourne, she bought a modest house for AUD3.75 million, with
a conversion rate of AUD/USD 0.68/0.65.

Nicole furnished her new house with imported furniture from the United
Kingdom, which cost her GBP2.3 million. She paid the price at an exchange
rate of GBP/USD 1.25 instead of 1.26 when the invoice was issued. The
settlement amount was made via Bank of America, New York when she was
still in the States. The same amount was squared off by Bank of America with
an US exporter who converted the same amount of GBP to USD with a spot
rate of GBP/USD 1.24/1.25.

Nicole also used AUD1 million to start trading in foreign exchange market by
buying USD at open and reverse the position back to AUD at close. She took
her position when AUD/USD spot exchange rates were 0.65 at open and 0.68
at close.

Required:

(i) Estimate the balance of AUD that Nicole has in hand after she has
done with all payments and forex trading. (8
marks)

(ii) Determine the percentage of appreciation/ deprecation of USD against

GBP when Nicole paid for her furniture. (2
marks)

(iii) Indicate the amount of profit made by Bank of America, New York.
(4 marks)
Note: Final answers are to be rounded up to THREE decimals.

Answers:

(i) Sold house @ AUD0.65 = USD7.635 mil.

Bought furniture (GBP2.3 @ USD1.25) = (USD2.875 mil) 2m
USD4.76 mil.

Converted USD4.76 mil. To AUD @ USD0.68 = AUD7.0 mil 2m

Bought house = (AUD3.75 mil)

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AUD3.25 mil

-AUD1,000,000 @ USD0.65 = USD650,000

+AUD1,000,000 @ USD0.68 = (USD680,000)
Loss (USD30,000) equivalents to
AUD 44,117.647 2m

Cash Balance = 3.25 mil – 44,117.647

= AUD 3,205,882.353 2m

(ii) USD appreciated 1m

1.26−1.25
x 100 = 0.8% 1m
1.25

(ii) Profit of Bank of America, NY

Nicole bought GBP2.3 mil @ USD1.25 = USD2.875 mil 2m

US exporter sold GBP2.3 @ USD1.24 = USD2.852 mil 2m
The bank is making = USD0.023 mil

(b) The Overnight Policy Rate (OPR) is a key interest rate used by Bank Negara
Malaysia to influence the economy’s monetary conditions. This factor affects
inflation, economic growth, and the exchange rate. Comment how a high OPR
could affect the value of Ringgit. (16
marks)

Answers:

1. Interest rates factor

A raising OPR may signal confidence in the economy’s strength and

stability that could attract capital inflows from foreign investors as the
rate enhances investors’ confidence in the currency. Investors will
investment in Ringgit-denominated assets for higher investment return.
This increased the demand for the Ringgit and subsequently, lead to its
appreciation relative to other currencies.

However, high OPR will not guarantee an appreciation of Ringgit.

Looking at U.S. monetary policy whereby the Fed adopted a hawkish
monetary policy stance by increasing their interest rates, generally
attract global investors to sell their investments denominated in Ringgit
in exchange for U.S. dollar-denominated investments. This resulted a
weakness of Ringgit in favour of the U.S. dollar.

2. Inflationary factor

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A higher OPR can curb inflation by reducing spending and investment.

When the inflation is lower, BNM might incline to raise the interest
rates, which can further strengthen Ringgit as the purchasing power is
preserved and making export less competitive.

Contrariwise, as the Ringgit is strong in value, it could lead to an

increase of purchasing power of imported goods. When this happens,
there will be selling of Ringgit to pay for the trade transactions, which
could possibly lead to a depreciation of Ringgit.
3. Market expectation

Market anticipation towards higher interest rates in the future would

invite speculative activities in the forex market. High interest rate will
slow down the inflation to preserve the purchasing power and the value
of Ringgit. Hence, people will buy Ringgit now, which is to be sold
later for profit when Ringgit is getting stronger in the future. This will
lead to the appreciation of Ringgit.

4. Monetary policy

Tightening monetary policy by raising the OPR to curb inflationary

pressures tend to cool down economy growth (overheating). Higher
interest rates make borrowing more expensive, reduced consumer
spending. Therefore, there is less money supply to stimulate the
economy. As such, there will be less demand for Ringgit as there are
less development to be done in the country.
(4 marks for each point = 16 marks)
[Total: 30 marks]

Q2. (a) On 3 May 2023, Bank Negara Malaysia (BNM) announced an increase of the
Overnight Policy Rate (OPR) by another 25 basis points (bps) to 3.00%. BNM
later decided to maintain the OPR at present rate to contain inflationary
pressures on top of a sluggish outlook of economic growth for the coming
years. Critique the impact of the rise on Malaysia’s inflation control,
individual loans, and savings.
(12 marks)

Answers:

OPR on inflation

Having a high OPR discourage spending as people become more cautious on

their expenses due to high loan commitments. This will subsequently reduce
consumers’ overall demand for goods and services, which consequently will
pull down the prices. As the demand is more in line with supply, the prices
could increase more slowly keep inflation within the target range set by BNM.

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OPR on loans

When OPR was set to be higher, the bank’s interest rates will be increased
accordingly. This can result in higher borrowing costs, so it becomes more
expensive for bank’s loan. As such, this will discourage people and businesses
to take up new loans from financial institutions.

Conversely, those who have already committed with variable-rate loans, such
as adjustable-rate mortgages or variable-rate personal loans or corporate loans,
an increase in OPR can directly lead to additional loan repayment amount.

OPR on savings

In contrast, high OPR makes borrowing less attractive. As a result, some

individuals may choose to save more instead of taking on additional debts.
The higher interest rates can create an incentive for individuals to save more
and earn interest on their savings.

On the other hand, those who have already committed in debts, their savings
could be reducing as more money need to be used for the additional amount of
loan repayment.
(4 marks for eaxh point = 12 marks)

(b) Murni Berhad’s sukuk is currently trading in Bursa Malaysia under Exchange
Traded Bonds and Sukuk (ETBS) counter. Below are the details of the
instrument:

Listing date & tenure : 31 August 2014; 10-year

Tranche value : RM50 million
Par value : RM100 per lot with a minimum subscription of 10 lots
Profit rate : 4.8% per annum (to be paid at the end of financial
year)

(i) Assuming Donnie purchased this sukuk on the listing date and sold
them after 5 years holding for RM1,400, calculate his investment
profit.
Note: The investment rate of return did not take into consideration the
transaction costs and time value of money. (2
marks)

(ii) If Donnie invested RM25,000 in this ETBS when the initial price was
RM100, determine his total return on investment (amount and
percentage) if he sold his portfolio after 90-day holding period when
the price was RM105.
Note: The investment rate of return did not take into consideration the
transaction costs and time value of money. Final answer is to be

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rounded up to TWO decimals and there are 365 days in year.

(4 marks)

Answers:

(i) = Capital gain + accumulated interest for 5 years

= (RM1,400 – RM1,000) + (4.8% x RM1,000 x 5 years)
= RM400 + RM240 = RM640 2 marks

105
(i) Profit = RM25,000 ( ) = RM26,250
100
Total Profit = RM26,250 – RM25,000
= RM1,250 2 marks

1,250
¿
Investment rate of return = 90
25,000 x ( ¿
365
= 20.28% 2 marks

(c) In January 2017, the Securities Commission removed the mandatory bond
rating as part of measures to liberalize the financial sector and broaden the
corporate bond market. Although the decision will spur the growth of the
Malaysian bond and sukuk markets, however, there are still disadvantages on
the decision. Briefly explain THREE (3) negative impacts of scrapping bond
ratings on the domestic bond market. (12
marks)

Answers:

1. Disadvantage to less reputable companies.

Rating grades actually provides information on bonds whether it is a

good one to invest in. Without rating grades in the bond industry, less
reputable companies benefit from it. This is due to lack of tracking
financial records of those particular companies that make investors
lose confidence to invest in such companies. Hence, it craetes a huge
gap between rated and unrated companies in the bond industry, which
eventually de-promote competition in any industry.

2. Issuers Default Issue

Liberalisation of bond credit rating means issuers can now issue bonds
without going through credit rating process. This might increase the
possibility of occurance of defaulted bonds. When it happens, it create

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chaos among bond investors, which could lead to a financial disaster

and lower the investors’ confidence level.

3. Reduce Transparency

Supporters of rated bonds contend that ratings improve market

transparency with independent and comparable assessments of
creditworthiness. Some argues that the absence of rating can
impact investor’s knowledge of financial health and reduce
transparency. Any absence of information may result in investor’s loss
in bond market.
(4 marks for each point = 12 marks)
[Total: 30 marks]
Q3. (a) On March 19, 2020, Bank Negara Malaysia relaxed the Statutory Reserve
Requirement (SRR) to 2 percent from 3 percent, at the onset of the Covid-19
pandemic. Discuss THREE (3) implications of the reduction of SRR towards
banks’ lending activities, interest on loans/ cost of funds, and profitability.
(12 marks)
Answers:

1. Increase the banks’ lending activities.

If the SRR is reduced, banks will have to hold less of their deposits as
reserves with BNM. Therefore, banks will have more funds available
to lend out to customers. This could potentially increase lending
activities by banks, as they have more funds to extend loans, which can
stimulate economic growth and increase investment in economy.

2. Decrease banks’ interest on loan.

Lower SRR can also lead to lower interest rates, making borrowing
cheaper for business and individuals. With more money circulating in
the economy, there is potentially for interest rates to decrease as banks
now can compete among themselves to offer loans to people. However,
the interest rate on loans also depends on the credit assessment of
clients, banks’ business strategy, the size of loans, or the banks
themselves.

3. Reduce the banks’ cost of funds.

A lower SRR means BNM freeing up more funds for lending and
investment activities for banks. This can result the reduction of costs of
funds for banks as they have more flexibility deploying their resources
and may not need to rely heavily on attracting deposits (marketing
costs) or seeking alternative funding resources (if there is a shortage).

4. Positive impact on banks’ profit and growth.

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Technically, a reduction in the SRR increases a bank's ability to create

loans. As banks lend out more money, they earn interest on those
loans, potentially boosting their overall profitability. Besides, the freed
money can also be placed in other yield-bearing assets and earn
interest from the investment. However, there are other determinants on
the banks’ profitability and its growth and not solely based on interest
on loans or investment.
(4 marks for any 3 points = 12 marks)

(b) Case study – Corporate Governance of Financial Institutions

In 2023, the Audit Committee of KJH Bank conducted their meetings on

March 21, August 28, and November 25, with a summary of attendance for all
directors was stated below.

Member Attendance
Ybhg Tan Sri Lee Zheng Yeh 3/3
(Independent Non-Executive Director/ Chairman)
Ybhg Dato’ Lew Fung Lim 3/3
(Independent Non-Executive Director)
Ybhg. Datin Jocelyn Goh 3/3
(Independent Non-Executive Director)
Ybhg. Datin Paduka Christina Ding 3/3
(Independent Non-Executive Director)
Ybhg. Datuk Kevin Lim 1/3
(Independent Non-Executive Director)
Ybhg. Datuk Lee Chien Huey 2/2
(Independent Non-Executive Director)

In April 2023, Datuk Kevin Lim stepped down from his post after serving the
bank for five years. His position was replaced by a new director, Datuk Lee
Chien Huey, who commenced her duty in May 2023 after receiving Bank
Negara’s approval. Datuk Lee is currently a practising accountant in her own
established firm, which, at present, been engaged for consultancy work for
KJH Bank’s corporate investment projects. Due to her tight schedule of
becoming a new director, she only managed to attend the bank’s in-house
orientation and education programs after six months from her date of
employment.

It was notable that the husband of Datin Paduka Christina is a substantial

shareholder in KJH Asset Management Funds Sdn. Bhd., a subsidiary of KJH
Bank. Meanwhile, she, herself was a former Chief Financial Officer of the
bank from 2013 to 2022 before resigning from the bank.

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All board committees of KJH Bank is chaired by an independent director

except the chairman of nominations committee, who is the Chief Executive
Officer of the bank.

Required: Evaluate whether the bank's practices violate the Corporate

Governance codes and Guidelines by Bank Negara Malaysia (CG-BNM).
(18 marks)

Answers:

1. Violation: The Audit Committee’s meetings did not hold a minimum

of 4 meetings in a financial year, with only 3 meetings in total. 1m

According to CG BNM
The committee should hold regular meetings, at least once every
quarter and should report regularly to the full board. 2m

2. Violation: The new appointed director, Datuk Lee Chien Huey, is a

practising accountant, who at the same time, owns an accounting firm
that is also engaged in KJH’s corporate investment projects. 1m

According to CG BNM
Practising accountants may be appointed as directors of a Licensed
Institution provided, they are not employed or are not partners in an
accounting firm, which has been engaged to conduct audit or
consultancy work for that Licensed Institution. 2m

3. Violation: The new director, Datuk Lee, attended the in-house

orientation and educational programs only after six months from his
employment date. 1m

According to CG BNM
A Licensed Institution is required to develop in-house orientation and
education programs for its newly appointed directors to familiarize
them with the industry and the Licensed Institution within three
months of the appointment. 2m

4. Violation: Datin Paduka Christina’s husband is holding more than 5%

equity interest as a substantial shareholder in KJH Asset Management
Funds Sdn. Bhd., a subsidiary of KJH Bank Berhad. 1m

According to CG BNM
An independent director shall not be connected to a substantial
shareholder of the Licensed Institution or under an obligation to act in
accordance with the substantial shareholder or any other person. 2m

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5. Violation: Datin Paduka Christina was KJH’s former CFO for less
than 2 years. 1m

According to CG BNM
An independent director shall not be employed in an executive position
in the Licensed Institution or its related companies, at least two years
prior to his appointment date. 2m

6. Violation: Chairperson of nomination committee is a non-independent

executive director (CEO). 1m

According to CG BNM
Each board committee must be chaired by an independent director. 2m
[Total: 30 marks]

This marking scheme has 4 suggested answers out of 13 pages.