“Chapter 3- The Regulation of Financial Markets and Institutions- Section 4”

Question 1

What is the role of an investment exchange?

Answer 1

They are regulated by the FCA but develops own means of fulfilling objectives.

Provide arrangements to ensure that appropriate arrangements for proper financial performance.

Satisfactory recording of transactions.

Question 2

Who are RCH (Recognised Clearing Houses) regulated by?

Answer 2

BoE (The Bank of England)

Question 3

Explain pre trade transparency

Answer 3

Publish in real time current orders and quote information.

Question 4

Explain post trade transparency

Answer 4

Publish price, volume, time and venue of the trade as quickly as possible after trade execution.

Question 5

Role of LSE (London Stock Exchange)

Answer 5

Authority responsible for admitting public companies for listing.

If not met, can apply for the lighter requirement, AIM.

RIE as well

Question 6

Explain role of ICE Futures Europe

Answer 6

RIE, where futures and options are traded by electronic order matching.

Two types are on ICE Futures:

Traders, for their own trades or on the company’s behalf.

Brokers act for other clients as well, charging a commission.

Question 7

Explain derivative: Features, regulations, market transparency

Answer 7

Features: Electronic order matching, on RIEs and OTCs

All derivative exchanges are RIEs so regulations is largely carried out by the exchanges.

Must risk manage positions on commodity derivatives.

Question 8

Explain clearing in derivatives markets

Answer 8

• Clearing house is the central counterparty which bears the risk if the trade defaults.
• Need to place risk management procedures for positions that are not cleared.
• All trade details must be with a trade repository, by next day.

ICE Clear Europe and LME Clear for their constituent derivatives.

Question 9

Explain margin requirements and calculations for derivatives

Answer 9

Initial margin must be lodged, if breached, more must be put through or else the position will be closed.

This is re-evaluated and margin ledger recalculated daily until breach or settlement.

Question 10

List the clearing thresholds for derivatives markets.

Answer 10

1bn EUR for OTC credit and equity derivatives

3bn EUR for notional value for interest rate and forex

Combined for all parties - 3bn EUR for commodities

Question 11

Explain TTCAs -

Answer 11

Can only use with retail clients if risks are explained beforehand.

Margin money for clients do not have to be segregated; can be kept as working capital.

If insolvent, TTCAs would only be recoverable under a unsecured creditor basis.