Chapter 9: Regulatory Requirements Flashcards
What are self-regulatory organisations (SROs)?
Nationally-licensed exchanges
What is The International Organization of Securities Commissions (IOSCO)?
Association of organisations that regulate the worlds securities and futures markets
What is the The International Swaps and Derivatives Association (ISDA) ?
Members are the main participants in OTC derivatives
ISDA master, FpML
What have UK firms had to do to post brexit to service EU clients?
Create EU subsidiaries
What are the two participants that retain “passporting” after brexit?
CSDs and Clearing Houses
What is the Capital Requirements Directive
(CRD)?
Part of MiFID
Sets out requirements for the regulatory capital a firm must hold
What is the range of UK firms that are classified as MiFID firms? (3)
- firms dealing and managing investments
- firms operating an MTF, OTF and/or SI
- venture capital firms that meet certain criteria.
What is the penalty for breaching international financial sanctions?
10% annual turnover or twice the amount of the benefit derived from the violation
What is the Operations Steering Committee (OSC)?
Part of ISDA
Improve infrastructure of OTC derivatives
OTC broker dealers, buy-side
What are the European regulators? (2)
European Banking Authority (EBA)
Conducts stress tests on EU banks, overrule national regulators
European Securities and Markets Authority (ESMA)
Assess risks, and provide rulebook for financial markets
Supervisory convergence - across all authorities
What are the regulators in;
China
Hong Kong
Singapore
CSRC - China Securities Regulatory Commission
SFC - Securities and Futures Commission of Hong Kong
MAS - Monetary Authority of Singapore
What are the 3 main elements in the FCAs regulation?
- broad-based standards in preference to detailed rules
- outcomes-based regulation, and
- increasing senior management responsibility
What are the 3 ways a client is categorised in COBS?
Retail client
Professional client
Eligible counterparty (institutions, firms, pensions funds, banks)
What is FCA’s Conduct of Business Sourcebook (COBS)
11 key principles for business which authorised firms must observe
How can a client elect to have more protection?
Changing client category
E.g. professional to retail
When is a client treated as an elective professional client? (2)
Qualitative
Firm believes they have expertise, knowledge to make decisions
Quantitative
>10 large transactions a year
>500k in portfolio
Worked in financial services for at least a year
What do firms have to do to achieve best execution?
That firms take all reasonable steps to obtain, when executing orders, the best possible result for their clients taking into account the execution factors
Not just best price
These factors are price, cost, speed, likelihood of execution and settlement, size, nature or any other consideration relevant to the execution of an order.
What is a suitability assessment?
Requires that a firm complies evidence of a prospective clients;
Product knowledge
Financial situation
Investment objectives
What is a appropriateness assessment?
Firm must discover whether client has adequate knowledge to trade specific financial instruments
How do UK/EU and US regulators differ in their approach?
UK/EU use principals based approach
US is rules based regulation
What is the FCA and PRAs main responsibility?
FCA - Covers UK financial markets, MiFID etc
PRA - Regulates deposit takers, insurers and investment firms
What is the transparency directive (TD)?
Establish minimum requirements on periodic financial reporting
Disclosure of major holdings
- The minimum content of annual, half-yearly and interim management statements.
- The notification requirements of both issuers and investors in relation to the acquisition and
disposal of the major holdings in companies. - The method of disseminating and storing the information covered in 1 and 2 on a pan-European basis
What does CASS 6 & 7 cover?
6 - custody of client assets
7 - client money
What is an internal vs external reconciliaiton?
Internal - Client accounts vs records of client money held by the firm
External - checking records vs market level or bank level
What is the maintenance requirement?
Minimum amount to be collateralised to keep an open position
What did EMIR introduce? (2)
Reporting obligation for OTC derivatives
Central counterparties for all OTC derivative trades
What does the SEC not regulate?
Any futures products or exchanges
What does the SEC regulate?
Options, stocks and relevant exchnages
What does the Commodities Futures Trading Commission (CFTC) regulate?
On-exchange derivative transactions
What is does the National Futures Association (NFA) do?
Overseen by CFTC
Oversee firms operating in derivatives industry
Financed by membership fees
Regulatory programs to safeguard integrity of derivatives market
What is a single stock future (SSF)?
A futures contract on an individual share
Was illegal, made not illegal
What must a firm or individual that conducts business with the public on a futures exchange be?
REGISTERED with CFTC
MEMBER of NFA
What is CFTC Part 30?
Illegal to trade with US customers on US exchange without NFA authorisation, UNLESS done via NFA firm
What are non-US firms prohibited from doing as per CFTC Part 30?
Dealing with US customers on any non-US exchange, UNLESS they trade via US firm or have exemption
What is CFTC Reg 30.5?
Exemption for registration for any non-US person who needs to be registered under CFTC apart from futures commission merchants
How can non-US firms seek Part 30 exemption?
US client funds segregated
Risk disclosures
Join NFA arbitration scheme
Jurisdiction under US Commodity Exchange Act
What are security based swaps?
Swaps based on individual securities or loans, subject to SEC regulation
Government security swaps are regulated by CFTC
