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Technology in Investment Management > Chapter 2: The Regulatory Framework > Flashcards

Chapter 2: The Regulatory Framework Flashcards

1
Q

What is an OTF?

A

Organised Trading Facility

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2
Q

Components of MiFID II Post Trade Transparency & Transaction Reporting?

A

Transaction Reporting - Must employ a nominated Approved Reporting Mechanism to report to the regulator.

Trade Publication- Needs to be reported to a nominated approved publication, on a real-time basis (<15 minutes)

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3
Q

MiFID II Systemic Internaliser Requirements?

A

Undertake what is effectively a public market obligation.

The firm must provide definite bid and offer quotes in liquid shares for other below “standard market size”

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4
Q

Pre-Trade Transparency Quote Driven Markets (MiFID II)?

A

The best bids and offers for all market makers must be made available.

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5
Q

Pre-Trade Transparency Order Matching Systems (MiFID II)?

Show 5 what?

A

Must make aggregated order info available at the five best price levels. (Buy side and sell side).

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6
Q

MiFID II Conflict Management Policy Requirements?

A

1) Take steps to prevent COI, even if it damages client interest.

2) Identify business areas where it could rise.

3) Document each potential conflict.

4) Disclose its policy to its clients.

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7
Q

MiFID II Conflict or Interest Recognition Points?

A

1) Investors and Issuers holding the same security.

2) For more than one investor that has an interest in a particular security.

3) For investors that have an interest in a particular security at the same time the firm itself is interested in that security.

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8
Q

What is the FSMA?

A

Financial Services and Markets Act 2000.

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9
Q

Main Purposes and Aims of Regulation?

A
  • Maintain and promote fairness, efficiency, competitiveness, transparency, and orderliness in the securities and futures industry.
  • Promote understanding.
  • Provide protection.
  • Minimise crime.
  • Reduce Systemic Risk.
  • Assist in maintaining financial stability.
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10
Q

Regulatory Framework Structure?

A

GLOBAL - Basel II sets standards for capital adequacy.

Within EEA - CRD directive based on Basel II.

Within EEA - MiFID II directive and EMIR (derivatives) Regulation.

Individual Countries - CRD. EMIR. MIFID in EEA.

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11
Q

What is Level 2 Legislation?

A

The detailed list of rules that are to be followed within a specific member state. i.e Germany in the EU.

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12
Q

What is Level 1 Legislation?

A

When the EU enacts European Regulation as a whole.

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13
Q

Under Which Set of Rules Do UK Regulators Use to Monitor Compliance?

A
  • MiFID II (Markets in FInancial Instruments Directive)
  • CRD (Capital Requirements Directive)
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14
Q

What is CFEB?

A

Consumer and Financial Educating Body

(Oversees the FOS)

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15
Q

What is MAD?

A

Market Abuse Directive

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16
Q

What is the FOS?

A

Financial Ombudsman Service

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17
Q

What is the ESFS?

A

European System of Financial Supervision

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18
Q

The List of European Regulators?

A
  • ESA (European Supervisory Authorities)
  • EBA (European Banking Authority)
  • EIOPA (European Insurance & Occupational Pensions Authority)
  • ESMA (European Securities & Markets Authority)
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19
Q

Article 21 of MiFID II, Require Firms that Execute Trades on Behalf of Clients to?

A
  • Establish execution policy
  • Disclose the policy to its clients and obtain their consent
  • Monitor its effectiveness
  • Upon clients request, be ready to deliver the order that has been executed in line with its execution policy
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20
Q

What is a Third-Country Firm?

A

A country that is outside of the jurisdiction in which a regulatory framework operates.

E.g. Now the UK is out of the EU, we would need to establish a branch in a European country if we were to provide financial services in the EU.

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21
Q

MiFID II Investor Protection Details?

A
  • Receipt of monetary inducements is banned.
  • Advice must meet certain criteria in order to be classified as independent.
  • The definition of non-complex instruments was updated to remove “Structure UCITS”. Preventing them from being sold to clients, without establishing if they meet their interests.
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21
Q

What are the 3 MiFID II Handling of Client Money and Assets Requirements?

A
  • Record-keeping
  • Segregation
  • Reconciliation
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22
Q

MiFID II Cost and Charger Reporting ?

A
  • ex ante, reporting will be required showing what costs are predicted.
  • ex post, reporting will be required showing the actual cost incurred during the period.
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23
Q

Frequency and Nature of MiFID II Reporting?

A

Minimum quarterly frequency.

Notify the client if a 10% or more portfolio drop is seen within 24 hours.

24
Q

MiFID II Inducement Tolerance?

A

None, unless a “minor” non-monetary benefit is seen.

25
Q

Contents of a MiFID II Client Agreement Document?

A
  • Information about the firm and its services.
  • Instruments and strategies.
  • Execution venue.
  • Costs and associated charges.
  • Order handling.
  • Client Money & Assets.
  • COI
26
Q

How Long Does Telecomms Need to be Recorded For?

A

5 years (7 years where requested by the FCA)

27
Q

What were the Tech Upgrades Required for MiFID II?

A

New systems were required for:

  • Transaction Reporting
  • Trade Reporting
  • Best Execution Reporting
  • Cost and Charges
  • Telephone recording
  • Recording Additional Client Data
  • Tracking Research Consumption
28
Q

What is the Memorandum of Understanding?

A

Established a joint EU/UK financial regulatory forum, where debates and cooperation on financial service issues between the two parties.

29
Q

What are Principles of GDPR?

A
  • Lawfulness, fairness, and transparency
  • Purpose Limitation
  • Data Minimisation
  • Accuracy
  • Storage Limitation (delete data when is no longer needed)
  • Integrity & Confidentiality
29
Q

Article 21 of MiFID II Require Firms that Execute Trades on Behalf of Clients to?

A
  • Establish execution policy
  • Disclose the policy to its clients and obtain their consent
  • Monitor its effectiveness
  • Upon clients request, be ready to deliver the order that has been executed in line with its execution policy
29
Q

What is a Third-Country Firm?

A

A country that is outside of the jurisdiction in which a regulatory framework operates.

E.g. Now the UK is out of the EU, we would need to establish a branch in a European country if we were to provide financial services in the EU.

29
Q

MiFID II Investor Protection Details?

A
  • Receipt of monetary inducements is banned.
  • Advice must meet certain criteria in order to be classified as independent.
  • The definition of non-complex instruments was updated to remove “Structure UCITS”. Preventing them from being sold to clients, without establishing if they meet their interests.
30
Q

MiFID II Investor Protection Details?

Ind…

Structure UCITS

Advice…..

A
  • Receipt of monetary inducements is banned.
  • Advice must meet certain criteria in order to be classified as independent.
  • The definition of non-complex instruments was updated to remove “Structure UCITS”. Preventing them from being sold to clients, without establishing if they meet their interests.
30
Q

Penalties for not following GDPR?

…..4

A

Fines up to 20mm EUR or 4% of annual turnover

31
Q

The US GDPR Equivalent?

A

America Data and Privacy Protection Act

32
Q

Japanese GDPR Equivalent?

A

Act on the Protection of Personal Information.

Overseen by the Personal Information Protection Commission.

33
Q

Practical Technology Issues for the GDPR and Other Data Privacy Regulations?

Rights….

PBD…..

My Job….

A
  • New governance and control processes.
  • All systems need to include “privacy by design”.
  • Systems , process and procedures globally will need updating.
  • Conditions of consent tightened.
  • Data subjects have the legal right to request what is being processed.
  • GDPR has a “right to be forgotten”, upon request data can be deleted.
  • Right to receive a report of any personal data held.
  • Outsourcing arrangement.
34
Q

How are Firms Using Technology to Comply with Regulation?

A
  • Creating new tech systems, need to be created to collect all the data required (accuracy and timeliness).
  • Creating dedicated technology teams to provide the people and skills to manage the regulatory technology.
35
Q

What are the Ways in Which “FCA Specific Regulation” Impacts Technology at a Firm?

A

The sets of rules covering:

  • Conduct of Business
  • Management of Customer Assets
  • Responsibilities of Senior Management
36
Q

SYSC?

Senior management…….

A

Senior Management Arrangements, Systems and Controls

There are 21 rules that are to:

  • Encourage senior managers to take responsibility
  • Increase certainty of principle 3 (adequate risk management)
  • Encourage firms to vest responsibility
  • Create a common platform of organisational and systems and controls requirements for all firms
37
Q

CoBS?

A

Conduct of Business Sourcebook.

21 principle that ensures honesty, fairness etc.

38
Q

CASS?

A

Client Asset Sourcebook.

Sets out the rules on how assets must be managed.
* Segregates assets that belong to the firm.
* Regular Reconciliation.

39
Q

SMCR?

A

Senior Managers & Certification Regime.

40
Q

SMR?

A

Senior Managers Regime.

  • Ensure responsibility is defined
  • Produce a list of responsibilities, a map that joins them
  • Ensure managers are pre approved for their role
41
Q

What are the 3 Factors for the Certification Regime?

A

Applies to material risk takers.

  • Have identified all certified individuals
  • Have assessed them as fit and proper
  • Have procedure to asses mangers effectiveness annually
42
Q

What Did the SMCR Replace?

A

Approved Persons Regime

43
Q

Requirements for APER?

A
  1. Meet the requirements of the FCAs fit and proper test.
  2. Comply with the statements of principle code of practice.
  3. Report anything that could affect their ongoing suitability to the FCA and the authorized firm.
44
Q

Basel Accord Pillars?

A

1 - Minimum Capital Requirement
2 - Supervisory Review
3 - Market Discipline

45
Q

Pillar I Calculation Approaches?

A
  • Basic Indicator Approach: Requires a bank to hold a fixed percentage (alpha) of its gross income as operational risk capital (15%)
  • Standardised Approach: Divides a firms activities into a number of standardised business lines to apply more complex risk profiles to each. (12%-18%)
  • Advance Measurement Approach: More sepcific risk profiles applied to the LOBs, that can alter the capital requirements. Provided the regulators approve. (Value-at-risk)
46
Q

What is Pillar II of Basel II?

A

Requires supervisors to ensure that each bank has sound internal processes to asses capital adequacy. Provides a framework for dealing with other risks.

47
Q

What is Pillar III of Basel II?

A

Increases the level of disclosure required by banks. To allow for more transparency of its risk position for other firms.

48
Q

Tech Apps that are Affected by Basel II?

A
  • Apps that are able to calculate VAR
  • Apps that mark market positions
  • Apps that perform interest accruals
  • Apps that perform both internal and external reconciliation of cash and securities.
49
Q

What is FATCA 2013?

A

Foreign Account Tax Compliance Act.

US aim to prevent tax evasion.

50
Q

Technology Implications of FATCA?

A
  • One off reports of their existing account had to be assessed to establish if there was any US ownership.
  • Specialist Workflows had to be developed.
  • Reports had to be written to provide the necessary information to regulators.
51
Q

What are the 8 Dodd-Frank Legislations (2010 enf. 2012)?

A
  1. Consumer Protection
  2. Investor Protection
  3. End “too big to fail” bailouts
  4. Advanced Warning System
  5. Executive Compensation and Corporate Governance
  6. Regulatory Enforcement
  7. Technical Expertise
  8. Making Risk Transparent
52
Q

What are the 4 Phases of the CSDR?

A

Phase 1 - Omnibus and Segregated Accounts

Phase 2 - Internalised Settlement Reporting

Phase 3 - Settlement Discipline Regime (Submit ASAP)

Phase 4 - Electronic Book Entry

53
Q

What are the 3 Client Types Under MiFID II (KYC)?

A
  • Eligible Counterparty
  • Professional Client
  • Retail Client

Technology in Investment Management (9 decks)

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