Chapter 9: Regulatory Requirements

Question 1

Main market regulators - page 275

Answer 1

saved on phone

Question 2

Main aims and purpose of regulations

Answer 2

• Maintain and promote fairness, efficiency, competition, transparency and orderliness of the securities and futures industry
• Promote public understanding of teh securities/futures industry and define thresholds of knowledge required to participate in certain mkts
• Provide protection foor members of the public investing in and holding fin. products
• Minimise crime in the industry and reduce systematic risks.

Without regulations markets are deemed unfair and unsafe and the mkt will eventually disappear. Russia is an example

Question 3

Self regulatory organisations - 3 types

Answer 3

• Exchanges - act to maintain mkt integrity
• International organisation of securities commissions (IOSCO) - group of main regulators for each country regulating 95% of the securities+ftrs mkts
  1. Promotes high reg. standards
  2. shares info between exchanges to assist with tech/ops issues
  3. establish global standards to monitoroing global transactions
• ISDA - mainly involved in OTC mkts with ISDA agreements and XML and FpML OTC messaging standards

Question 4

UK and EU regulation - MiFID

Answer 4

• MiFID II - regulation for deriv mkts. This is ongoing since brexit as the UK slowly removes itself from the EU
• Home states - have EU passports and authorise a firm to deal
• Host states - states that the firm with a passport operates in but is does not originate from
• UK based firms have had to create EU subsidiaries to operate in the EU except CHs and securitires depositiories
• UK have implemented UK MiFID to show the EU we have strict enough standards to deal in the EU (word around their bureaucracy)
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Question 5

5 Financial activities regualted under MiFID + benefits

Answer 5

• inv. advice
• Some underwriting activies
• Operating multilateral trading facilities (MTF), organised trading facilities (OTFs) and systematic internalisers
• Inv activity realting to commod derivs, credit derivs, contracts for difference (CFDs)
• investment research where it is a bolt on service to another core service

Benefit of MiFID - improves passporting of regulated firms as clarifies differences between home and host mkts regs.
Set up the Capital Requirements Directive (CRD), defines min required capital a firm must hold to improve client protection

Question 6

MiFID II (2018) differences to MiFID I (2004)

Answer 6

• Expanded scope of coverage for credit institutions, alogorithmic trading, emissions contracts and custodians
• Licensing exceptions narrowed for prop trading and commod derivs
• Non-EU/EEA firms can establosh a subsidiary in the EU to benefit from a ‘passport’ if dealing to non-professional clients
• Strciter client classification
• Greater investor protection and clarity from firms
• Tighter KYC requirements for execution only businesses
• Additional corporate governance requirements
• Firms must record telephone conversations and electronic comms
• OTFs are inscope trading venues
• All regulated markets have strciter obligations
• Mandatory exchange trading of dervis (EMIR)
• Regultors have the power to make participants reduce their deriv positions and restrict the marketing/sale of a particular instrument
• Penalties for firms breaching regulation of at least 10% of annual turnover and 5Mil EUR for natural persons (or 2X the profit derived from the violation, whicheever is greater)

Question 7

High level - UK firms classified as MiFID firms

Answer 7

• Subjective based on their underlying activity but high level:
• Firms dealing in and managing investments
• Firms operating an MTF, OTF or SI
• Venture capital firms meeting certain criteria

Question 8

Operations Steering Committee (OSC) - what body is it part of, increased emphasis on what, target for equity derivs

Answer 8

• OSC of ISDA aims to improve operational infrastrcuture of the OTC deriv industry by increasing the type and number of OTC prods that can be centraly cleared
• Increased emphasis on collateral mgmt - daily reconcilliation of all collaterlised inter-dealer positions exceeding 500 positions
• Targetted that 50% of all equity derivs can be matched, processed and cleared electronically

Question 9

European banking authority (EBA)

Answer 9

• 1/3 members of the european supervisory authorities (ESAs)
  Goals
  1. Stress test EU banks
  2. increase transparency within the EU fin. system
  3. identify weaknesses in bank’s capital structures
  4. Investigate incorrect application of EU law by EU local regulators
  5. resolve disputes
  6. promote transparency, simplicity and fairness
• Ability to overrule any local regulators in the EU, reduces reg. arbitrage
  *

Question 10

European Securities and Markets Authority (ESMA)

Answer 10

• main role = establish an EU wide fin regulator with a single EU rulebook to promote sound, efficient and consistent regulation in the EU
• conducts peer reviews, set EU wide reporting reqs, etc

Question 11

China Securities Regulatory Commision

Answer 11

• Oversees CHN’s centralised securities supervisory system
• Creates and reviews securities regulation/law
• regulates the trading, issuance and settlement of stocks, FI and funds
• Supervise the conduct of shareholders and securities brokers
• oversee the issuance of Non-Chinese listings and offerings on chinese exchanges (H-shares on the HK exchange e.g.)

Question 12

Hong Kong - Securities and Futures Commission (SFC)

Answer 12

• Independant regulator in HK
• responsible for ensuring the orderly funaction of mkts, protect investors, promote HK as a fin. centre
• Responsible for securities and futures mkts

Other HK refulators are HKMA, MPFA and OCI

Question 13

Singapore - Monetary Authority of Singapore (MAS)

Answer 13

• Singapore central bank as well as reg. authority that covers all fin activity in Sgp
• Regulates all mkt operators under either Approved Exchanges (AEs) and Recognised Mkt Operators (RMO). Systematically important AEs and RMOs are subject tto higher regulation thta standards RMOs
• For an entity to operate in the fin svs industry in SGP, they need to have a Capital Markets Services License