3 - Regulation of Financial Markets Flashcards
What is the Central Counterparty to derivatives trade in the UK?
ICE Clear Europe
How does the derivatives clearing house protect themselves, whilst they remove counterparty risk for members?
- Margin *
Initial margin - the maximum probable daily loss of the contract - a goodwill deposit paid by both buyer and seller
Variation margin: daily payment of gains/demanding of any losses on the contract
What are the regulators of Exchange traded derivatives in the US?
Securities and Exchange Commission (SEC) and Commodities Futures Trading Commission (CFTC)
Regulation of UK derivative exchanges consist of?
Recognised Investment Exchange (RIE) status granted by FCA
and
Detailed trading rules governed by the exchange
What investment exchanges are recognised by the FCA?
London Stock Exchange (LSE)
Aquis Stock Exchange (AQSE)
London Metal Exchange (LME)
ICE Futures Europe
What clearing houses are recognised by the BOE? (RCH)
ICE Clear Europe
LME Clear
LCH Clearnet
CME Clearing Europe
Which of the below are professionalism requirements for retail advisers (RDR)?
1• Subscribe to a code of ethics
2• Hold an appropriate qualification
3• Carry out at least 50 hours of CPD
4• Hold a statement of professional standing (SPS) from an accredited body
1, 2 and 4
3 is wrong and should be 35 hours of CPD
What does SMCR stand for and who does it apply to?
Senior Managers and Certification Regime applies to dual regulated firms (FCA and PRA)
What are the 3 stages of approval for a Senior Management Function (SMF)?
- Pre approved by FCA
- Continually assessed by the firm
- Subject to conduct rules
What are the 2 stages of approval for Prescribed Responsibilities (PRs)?
Certified as fit and proper by the firm and subject to conduct rules
What are the 3 levels of responsibility under SMCR?
Senior management function (SMF)
Prescribed Responsibilities (PRs)
Key Functions = other staff (excluding ancillary)
The following threshold conditions are needed to apply to the FCA in the UK for what?
Legal status
Registered office
Effective supervison: structure and close links (20+% shareholders)
Appropriate resources
Suitability: fitness and propriety of the applicant
Business model of the firm
Business conducted in a prudent manner
Appointment of claims representative (insurance companies only)
FSMA Part 4A permission (to carry on a regulated activity)
Within the FCA Handbook there are 7 ‘blocks’, name them
No.2 is not relevant
- High level standards (ethics)
- Not relevant
- Business standards ( Conduct of Business Rules)
- Regulatory process
- Redress (compensation, Financial Services Compensation Scheme)
- Specialist sourcebooks (rules within rulebook)
- Listing, prospectus and disclosure rules (UKLA)
Block 1 of the FCA Handbook of rules “high level standards” states the 11 principles of business - what are they?
- Integrity
- Skill, care and diligence
- Management and control - procedures
- Financial prudence
- Market conduct
- Customers interest - retail/professional client
- Communication with clients - retail/professional AND eligible counterparty
- Conflicts of interest
- Customers: relationship of trust
- Clients’ assets -CASS client asset source book
- Relationship with regulators
What is the outcome for breaching a principle of business?
Doesn’t give rise to discipline as it is not legal but how we SHOULD act as an ethics based approach
Here are 4 statutory objectives of the FCA - which one is the strategic one?
1.secure an appropriate degree of PROTECTION for consumers
2. Ensuring relevant markets function well
3. Promote effective COMPETITION in the interests of consumers
4. Protect / enhance the integrity of the UK financial system
Number 2 is strategic, the others are operational
What is the most flexible trust?
Discretionary trust
EU directives issued under article 58 of European treaty to HARMONISE laws - how quickly are they implemented?
They are directives so are gradually implemented via primary legislation or delegated legislation (amending existing law) if they aren’t implemented by due date then they take precedence over national law
Eu regulations - how quickly do they come into effect?
IMMEDIATELY BINDING
Under MiFID, firms may trade throughout EEA with single authorisation/passport - what country’s rules apply to them?
Passport is obtained from the HOME regulator but HOST State conduct rules apply
Key changes to MiFID II?
- Transparency
- OTF
- size of positions in commodity derivatives
- High speed electronic tech risk aversion
- Increased information on products and services
MiFID services and activities (core)
Reception and transmission of orders
Execution of orders for clients
Dealing ‘own account’ (PRINCIPAL)
Managing investment portfolios
Investment advice
Underwriting
Placing
Operating an MTF
Operating and OTF
MiFID II instruments
- basically all derivatives contracts
- Transferable securities
- UCITS
- Money market instruments
MiFIR ( direct effect as it’s regulation) what does it do?
Sets out reporting requirements in relation to disclosure of trade data to the public and competent authorities
Extends MiFIDs scope to more asset classes
UCITS directive - what is it
A passport for collective investment schemes - creating a ‘single market’ in EU and can be marketed without further authorisation
Who is responsible for recognising schemes under UCITS directive?
FCA
Under which UCITS directive did the prospectus get replaced with the KIID?
UCITS IV
what is the AIFMD?
Alternative Investment Fund Management Directive
What is the focus of the AIFMD?
Regulation of managers of alternative investment funds rather than the fund itswlf
Main requirements for AIFMD?
Authorisation is needed from home state if AUM exceeds €100m for AIF using leverage
Or
€500m not using leverage
EMIR what is it?
European market infrastructure regulation
What are the 3 main requirements for OTC trades under EMIR?
- Standardised reporting
- Compulsory central counterparty clearing
- Risk management procedures
What is FATCA?
Foreign Account Tax Compliance Act - a US law to prevent tax evasion by US citizens using offshore banking facilities
What does FACTA apply to and impose?
Applies to non- US Financial institutions and imposes 30% withholding tax on payments to non US financial institutions
And all FFI foreign financial institutions are required to report on their US Customers
