Chapter 2: The Regulatory Framework Flashcards
What are the main aims of regulation in global markets
- Maintain and promote fairness, efficiency, competitiveness, transparency and orderliness of the securities and futures industry
- Promote understanding by the public of, and trust in, the operaton and functioning of the securities and futures industry
- Provide protection for memebers of the public investing in, or holidng, financial products
- Minimise crime and misconduct in the securities and futures industry, and
- Assist in maintaining the markets financial stability
What is prudential regulation
It is concerned with the financial soundness of regulated financial services firms, making sure that they are not about to become bankrupt. The purpose of prudential regulaton is to prevent investors and the economy in general from suffering losses as a result of the failure of individuak firms or, at worst, multiple firms
What is business conduct regulation
It is concerned with the way in which business is done, particularly the way investment and savings products are marketed and sold.
How can somone become authorised to carry out regulated activities
They must apply for permission from the FSA
What are the 11 FSMA principles
- conduct its business with integrity
- conduct its business with due skill, care and diligence
- take reasonable care to organise and control its affairs responsibly and effectively, with adequate
risk management systems - maintain adequate financial resources
- observe proper standards of market conduct
- pay due regard to the interests of its customers and treat them fairly
- pay due regard to the information needs of its clients, and communicate information to them in
a way which is clear, fair and not misleading - manage conflicts of interest fairly, both between itself and its customers and between a customer
and another client - take reasonable care to ensure the suitability of its advice and discretionary decisions for any
customer who is entitled to rely upon its judgement - arrange adequate protection for clients’ assets when it is responsible for them, and
- deal with its regulators in an open, cooperative way, and must disclose to the regulator appropriately
anything relating to the firm of which the regulator would reasonably expect notice.
What are the 3 sets of rules used by the UK regulator
MiFID II, Capital Requirements Directive (CRD), European Market Infrastructure Regulation (EMIR)
What is the difference between Level 1 and Level 2 legislation
Level 1 legislation typucally refersto when the European Union legislates for the whole of the EU, where the legislation tends to be quite broad. Level 2 refers to legislation put in place by the member states e.g. UK and tends to be more specific
Which 3 regulatory bodies replaced the FSA
Financial Policy Commitee (FPC), Prudential Regulatory Authority, Financial Conduct Authority (FCA)
What is the purpose of the FPC
Responsible for macro-prudential regulation
What is the purpose of the PRA
Responsible for the prudential regulation and supervision of substantial individual firms
What is the purpose of the FCA
The FCA focuses on the regulation of all retail and wholesale firms. It also has the responsibility for frims that do not fall within PRA’s scope. Main objective is to ensure markets function well.
What is the purpose of ESMA
ESMA is a European-wide regulation and their mission is to protect investors and reinforce stable and well functioning markets in the EU.
What did MiFID II replace
The Investment Services Directive (1993)
What is the difference between MiFID and MiFIR
MiFID is a directive and thereofre has to be transposed into each countries laws individually, whereas MiIFR is a regulation governed by european Law and therefore automatically became a law in member states when enacted
What is a multi-lateral trading facility (MTF)
A system that brings together multiple parties that are interested in buying and selling financial instruments, and enables them to do so.
What is a systematic Internaliser
a firm that, on a frequent and systematic basis, delas on its own account by executing client orders outside of an MTF or regulated market
What is transaction reporting
Most firms employ a nominated Approved Reporting Mechanism (ARM) to report to the relevant regulator on their behalf. Although, some firms (typically large investment banks) will report to the regulator directly
What is trade publication
Needs to be reported to a nominated Approved Publication Arrangement (APA) on a near real-time basis (Less than 15 minutes depending on the asset class)
What is an LEI
Legal Entity Identifier
What is best execution
An obligation on the sell side firm to take all significant steps to get the lowest available price for its customer when the customer is buying, and the highest available when selling
What is an OTF
Any facility or system that is not an MTF or regulated market, operated by an investment firm or market operator, in which multiple third-party buying and selling interests in fincnail instruments are able to interact in the system in a way which results in a contract
What must third-country firms first do in order to offer services in the UK
Thye are reuqired to open a branch in the countries in which they wish to offer services. Since Brexit, the UK is considered a third country
Which two sets of reporting are required under MiFID II
Ex ante (Pre-sales) showing which costs are predicted, and ex post (post sales) showing the actual costs incurred over the period
How long should telephone recordings be kept
5 years unless requested by the FCA for 7 years
What is the minmium periodic portfolio reporting frequency
Quaterly
What percentage value drop needs to be reported to the investor within 24 hours
10% since the last periodic report
What is GDPR
The General Data Protection Regulation is a regulation within the EU that focuses on data protection and privacy
What are the principles of GDPR
- Lawfulness, fairness and transparency
- Purpose limitation
- Data minimisation
- Accuracy
- Storage limitation
- Integrity and confidentiality
What are the penalties for GDPR Non-Compliance
fines up to 20 million Euros or 4% of group worldwide turnover (Whichever is higher)
What is SYSC and what is its prupose according to regulators
Senior Management Arrangements, Systems and Controls
* Encourage directors and sneior management to take an approrpiate practical responsibility for their firm’s arrnagements on mater that are likely to be relevent to regulators
* Increase cerainity by amplifying principle 3
* Encourage firms to vest resonsibility for effectove and responsible organisation in the specific directors and snior managers
* Ceate a common platform of organisationalk and systems and controls requirements for all firms.
How many COBS rules are there and what is their purpose
Rule 2.1 states the purpose of the set of rules, which is to ensure that firms alwys act honestly, fairly, and professionally in accordance with the best interests of thier clients
What are the CASS rules
Client Asset Sourcebook rules. If a firm physically holds onto assets that belong to a client then these assets must be:
* Segregated from assets that belong to the frim itself
* Regularly reconciled, and if a short fall is found, the firm must rectify it
What is the SMCR
Senior Managers and Certification Regime which consists of the Senior managers Regime (SMR) and the cCertification Regime.
What is the SMR
The Senior Managers Regime whuch focuses on holding senior managers accountable.
What is the Certification Regime
It applies to ‘material risk takers’ and It states that firms need to firms need to indetigy those who are certified, assess they are fit and proper, and have the ability to reassess them on an annual basis
What is the minimum capital ratio per Basel II
Between 8% and 15%
How to calculate Capital Ratio
(Capital Requirement)/(Credit risk exposure + market risk exposure + operational risk exposure)
What are the three methods of calculating risk exposure
The basic inidcator approach, the standardised appraoch and the Advanaced measurement approach
What is the basic inidcator approach
Where tha bank holds a fixed percentage of its gross income as operational risk capital - percentage is set at 15%
What is the standardised approach
It splits the frims ross income between a number od defined business lines and then multiplies by a factor (dentoted beta) specific to each business line
What is the advanced measurement approach
This approach allows banks to use their own meausirng process such as their own VaR models, provided they are approved.
What is the purpose of FATCA
It compels US citizens to file annual reports on any foerign account holdings
What is an FFI
Foreign Financial Institution
What is the CSDR
The Central Securities depositories Regulation aims to harmonise the authorisation and supervision of EU central security depositories (CSDs) as well as certain settlement aspects.
What are the 4 phases of CSDR
Omnibus/segregated Accounts
Internalised Settlement Reporting
Settlement Discipline Regime
Electronic Book Entry
When should CDD checks be done
When a regulated firm:
Establishes a new business relationship
Carries out an occasional transaction
Suspects money laundering or terrorist financing
doubts the integrity of information previously obtained
