Chapter 2: The Regulatory Framework Flashcards
What is the FSMA?
Financial Services and Markets Act 2000
What is the FSA? 2 meanings
Financial Services Authority
Financial Services Act (2012)
What is prudential regulation?
Regulates the financial stability of a firm, prevents bankruptcy.
Protects investors and economy
What is business conduct regulation?
Regulated the way business is done.
Specifically how investment products are marketed and sold.
Protects investors from bad business practices.
What is Part II of the FSMA?
No entity can carry out regulated activity in the UK without authorisation from the regulator
What does MiFID II stand for?
Markets in Financial Instruments Directive II
What does EMIR stand for?
European Market Infrastructure Regulation
What does CRD stand for?
Capital Requirements Directive
What is Level 1 and Level 2 legislation?
Level 1 is high level, set by governing bodies such as EU/Basel
Level 2 is the more detailed legislation, set by members states
What did the FSA turn into? (3)
The FPC (Financial Policy Committee)
The PRA (Prudential Regulation Authority)
The FCA (Financial Conduct Authority)
What does the FPC (Financial Policy Committee) do?
Set macro regulation to cover the financial system as a whole
What does the PRA (Prudential Regulation Authority) do?
Responsible for prudential regulation of individual firms/insurers, ensuring investor safety and stability.
What does the FCA (Financial Conduct Authority) do?
Focuses on regulation of all firms in retail and wholesale financial markets. Ensures these markets function well. “Business Conduct”
What is MiFID II?
A detailed and wide ranging financial instruments directive for EU states
What is the difference between regulation and directives?
Directives are to be transposed by member states individually
Regulations are put in place for all member states
What is a systematic internaliser?
A firm that deals on its own account by executing client trades outside of an MTF/Market
What are the two types of reporting firms need to do in MiFID?
Transaction reporting (T+1)
Trade publication (real-time)
What is an organised trading facility? (OTF)
system that is not an MTF or regulated market, where multiple third parties can interact to result in financial contracts
What was the UK TCA?
Trade and Cooperation Agreement (2020)
Allowed the UK to still do financial business with EU states
What is the penalty for GDPR non-compliance?
20m EURO or 4% of global turnover, whichever is greatest
What does GDPR give the user the right to?
“Data erasure” or the “right to be forgotten”
How does technology link with changing regulations?
Firms need technology capability in order to keep up with regulations
e.g. instant trade reporting MiFID II
What is COBS?
Conduct of Business Sourcebook
Ensure firms act honestly, fairly and professionally
What is CASS?
Client Asset Sourcebook
Rules that define how client assets are managed.
What 2 things does CASS cover?
- Ensure client assets are segregated
- Regularly reconciled, and rectify shortfalls
What is the Senior Managers Regime?
Statement of responsibilities per manager
Ensure there are no firmwide gaps
Duty of responsibility - managers are liable for breaches
What are the 3 Basel Pillars?
- Minimum Capital Requirement
- Supervisory review
- Market discipline
What is the Basel Minimum Capital Requirement calculation?
cap ratio = (capital requirement) / (credit + market + operational risk)
What are the 3 approaches to calculation Pillar 1 cap requirement?
Basic Indicator - 15% of income
Standardised - Risk weighted % of income
Advanced Measurement - VaR models
What are the seven operational risk events per Basel?
Internal fraud
External fraud
Employment practices
Clients, product and business practice
Damage to physical assets
Business disruption and system failures
Execution, delivery, and process management
What is FATCA?
Foreign Account and Tax Compliance Act
Compels US citizens to file reports on foreign account holdings
What is an FFI?
Foreign Financial Institution
non-US financial instituations
What do FFIs have to do to comply with FATCA?
Report any potential US-based clients to the US
What were the technological implications of FATCA?
specialist workflows had to be developed to ensure all documents are collected
reports had to be written to provide the necessary regulatory information to HMRC
What is the Dodd-Frank act?
A large piece of legislation put in place after the 2008 crisis and Lehman Brothers collapse
Main provisions;
Consumer protection
Ending large bailouts
Regulatory enforcement
What were the technological implications of Dodd-Frank?
Increased transaction reporting, CP identified by LEI
OTC Derivatives need to be cleared through a clearing house
Singular trade repositories/databases
What is EMIR?
European Market Structure Regulation
Similar to U.S. Dodd-Frank
Improve transparency and reduce risks
What asset were EMIR and Dodd-Frank regulations mainly focused on?
Derivatives - need a central trade repository
What does CSDR stand for?
Central Securities Depositories Regulation
What are the 4 Key Phases of CSDR?
Phase 1 - Omnibus/Segregated Accounts
Clients are offered the choice between omnibus segregation and individual client segregation
Phase 2 - Internalized Settlement Reporting
Must report what volume of transactions are settled internally.
Phase 3 - Settlement Discipline Regime
Fines on delayed settlement
Phase 4 - Electronic Book Entry
All stocks settling in the EU must be held in demat form.
What is internalised settlement?
Under the CSDR, an institution is considered to be a settlement internaliser if it settles transfer orders on behalf of clients on its own account rather than through a Central Securities Depository (CSD).
What are the technological implications of CSDR?
Seg - easy, already done
Settlement Internaliser - report to aggregate and define internal settlement
Settlement Fines - need to record settlement delays
What 3 things does MiFID require firms to classify their clients as?
eligible counterparty
professional client (fund)
retail client (person)
When must CDD (Client Due Diligence) be done?
established business relationship
occasional transactions
suspects money laundering or terrorist financing
Who requires EDD (Enhanced Due Diligence)? (2)
persons not present during CDD checks
politically exposed persons
What is a ‘recalcitrant account holder’?
Client that does not provide documentation to an FFI
30% withholding tax
