Ch 6 Regulatory Environment Flashcards
Regulatory environment in Aus is comprised of 4 elements
4 elements:
- law
- ethics
- industry standards
- organisational policies and procedures
Legislation:
- Corporations Act 2001
- Anti Money Laundering and Counter Terrorism Financing Act 2006
- Corporations Act 2001
- Main consumer protection and market integrity laws
- regulates establishment and operation of many entities incl providers of financial services
- relevant provisions are in Ch 7.
- Supervisor = ASIC - Anti Money Laundering and Counter Terrorism Financing Act 2006
Contract Law
- legally binding between 2 or more persons
- contracts can be written, verbal or both
- enforceablity and validity will depend on
- whether all parties have legal capacity to enter agreement
- whether all essential elements of binding contract are present
Duty of Care
If firm does not act with reasonable care, skill & diligence; to establish negligence consider:
- was there a duty of care owed
- what is standard of care for reasonable person
- has the standard of care been met
- has the person wronged suffered injury or loss that could have been forseen
Fiduciary Duty
A fiduciary owed a duty of good faith and loyalty to another person because of the position of trust and confidence that exists
Fiduciary duty requires higher standard of behaviour than the general law duty of care
Ethics
AFMA Code of ethics
AFMA Code of Conduct
Overview: legal department
Legal department:
- has oversight over all issues of legal nature which may impact on organisation
- Provides legal advice, reviews legal docs, responds to legal actions, initiates legal actions
Overview: compliance
compliance department:
- ensure organsiation complies with a subset of its legal obligations (eg staff, markets, clients)
- assist in conducting business efficiently, whilst meeting regulatory requirements
- internal policies & processes, advising & training staff; monitor effectiveness of controls, reporting
Chapter 7 of Corps Act contains licencing requirements for:
Chapter 7 of Corps Act contains licencing requirements for:
- financial service providers
- operators of financial markets
- operators of clearing and settlement (CS) facilities
Australian Financial Services (AFS) Licence must be held if a ‘person’ provides a financial service. Corps Law defines financial service as:
Corps Law defines financial service as:
provision of:
- financial product advice
- deal in a financial product (does not include dealing on own behalf - unless you are the issuer)
- make a market for a financial product
- operate a managed investment scheme
- provide a custodial or depository service
Corps Act defines a financial product as:
Corps Act defines a financial product as: a facility through which a person: - makes a financial investment - manages financial risk - makes a non cash payment
Also certain products;
- securities
- listed managed investments
- unregistered wholesaler managed investments
- derivatives
- govt securities
- spot FX
Excluded:
- credit facilities, currency exchange, fully deliverable commodity derivatices
Corps Law provides for an exemption from the requirement to hold an AFS licence for those who are a representative of an AFS licensee. A representative means:
A representative means:
- an employee or director of an AFS licensee or its related company
- person authorised in writing to provide specified financial services on behalf of the licensee
Exemptions from requirement to hold AFS licence may exist for:
Exemptions from requirement to hold AFS licence may exist for:
- services provided to wholesale clients by an APRA regulated body
- services provided to wholesale clients by an overseas regulated entity
- end user hedging
Financial Markets - what licence must they hold
- must hold (?)
- define
Financial markets must hold Aus market licence
Financial market is defined by Corps Act as a facility through which offers to acquire or discpose of financial products are regularly made or accepted eg ASX, Chi X, Yieldbroker
Clearing & Settlement facilities:
- must hold (?)
- define
- regulated by:
Clearing & Settlement facilities:
- must hold: Australian CS faciltity licence
- define: facility that provides regular mechanism for the parties to financial product transactions to meet their obligations to each othger. CCP is a CS facilituy, interposes itseld between counterparties
- regulated by ASIC and RBA
Regulators: 3
plus AUSTRAC
- RBA: responsible for monetary policy, financial system stability and the payments system
- APRA: prudential regulation and supervision
- ASIC: market integrity and consumer protection
Australian Transaction Reports and Analysis Centre (AUSTRAC): responsible for overseeing compliance with Australia’s anti money laundering and counter terrorism financing laws
RBA
- area of supervision
- legislation administered
RBA
- area of supervision: MP, financial system stability, payments system
- legislation administered: Reserve Bank Act 1959
Australian Prudential Regulation Authority
- area of supervision
- legislation administered
Australian Prudential Regulation Authority
- area of supervision: Prudential regujlation and supervision
- legislation administered: Banking Act 1959; Insurance Act 1973; Superannuation Industry (Supervision) Act 1993
Australian Securities and Investments Commission
- area of supervision
- legislation administered
Australian Securities and Investments Commission
- area of supervision: market integrity and consumer protection
- legislation administered: Australian Securities and Investments Commission Act 2001; Corporations Act 2001
Australian Transaction Reports and Analysis Centre (AUSTRAC):
- area of supervision
- legislation administered
Australian Transaction Reports and Analysis Centre (AUSTRAC):
- area of supervision: Anti money laundering and counter terrorism finance
- legislation administered: Anti money laundering and counter terrorism financing Act 2006 (AML / CTF Act)
AFMA Code of Conduct:
Confidentiality
AFMA Code of Conduct:
Confidentiality: confidential information may relate to clients, negotiations, transactions, dealings or their employers… Representatives must be vigilent and guard against inadvertent disclosure, such as where discussions may be overheard by outside parties
AFMA Code of Conduct:
Privacy
AFMA Code of Conduct:
Privacy
“Personal information must only be collected when it is necessary. It must be protected, and used only for approved purposes. Members who possess, and Representatives who have access to, private informaqtion must ensure that such information is not misused”.
Also: Privacy Act 1988
Deal Cycle:
Pre Deal
- department responsible:
- deal flow
Deal Cycle:
Pre Deal
- department responsible: dealing room and middle office
- deal flow: pitch, deal execution, deal capture
Deal Cycle:
Operations
- department responsible:
- deal flow
Deal Cycle:
Operations
- department responsible: operations
- deal flow: confirmation, settlement, reconciliation
Deal Cycle:
Finance
- department responsible:
- deal flow
Deal Cycle:
Finance
- department responsible: financer
- deal flow: P& L management
Regulations through Deal Cycle
8
Predeal:
- AML / CTF Due Diligence
- International sanctions
- Capacity to deal
- Creditworthiness
- False/misleading statements
- Misleading / deceptive conduct
- Unconcscionable conduct
- Hawking
Deal Execution: regulations through cycle (6)
Deal Execution:
- Deal execution with client and market (proper confo)
- price manipulation
- false or misleading appearance of active trading
- fictitious or artificial transaction or device
- rumourtrage
- front running
- unauthorised short selling
Deal Capture: regulations through cycle (4)
Deal Capture: - confirmation - Segregation of dealing and confirmation - records and reports - ISDA Master Agreement -
Settlement: regulations through cycle (3)
Settlement:
- Good value
- 3rd Party Payments
- Payments netting (authorised under legislation)
Reconciliation: regulations through cycle (1)
Reconciliation:
- not mandated by law, but helps fulfil legals obligations and manage risk.
P&L management: regulations through cycle (1)
- APRA prudential standard APS 116
P&L management / APS 116:
- if operating trading book: allocate posiitons held with trading intent or in order to hedge
- maintain framework for prudent valuations for trading book positions
- FX: commodityies, interest rate or equities: ensure robust risk measurement and management systems in place
- hold capital against market risks arising from positions allocated to the trading book and all FX and commodity risks
- calculate this capital in accordance with a standard method or an internal model approachy
Where ADI uses internal method, APRA imposes additional requirements such as stress testing, model review, verification of model inputs, treatment of specific risk and backtesting
