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Financial Markets And institutions > Investment Exchanges and Derivatives Markets > Flashcards

Investment Exchanges and Derivatives Markets Flashcards

1
Q

What does RIE status exempt an exchange from doing?

A

Getting regulatory approval as the status assures parties their are reasonable rules protecting them. This exists because the act of running an investment exchange is in itself a regulated activity requiring regulatory approval.

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2
Q

What do many members of an RIE still need to do.

A

As membership of an RIE does not confer authorisations to conduct regulated activities many firms which are RIE must be authorised and regulated by the FCA.

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3
Q

Where are the requirements set out for an exchange to gain recognised status?

A

FSMA 2000 (recognition requirement for investment exchanges and clearing house) regulations 2001

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4
Q

What are the requirements for an exchange to be an RIE?

A
  • financials resources - these must be ‘sufficient for the proper performance of its functions’
  • suitability- the exchange must be a fit and proper person, taking account of all circumstances including connections with other persons
  • Systems and control - must be adeuate and appropriate for scale and nature of business, including those related to risk management, transmission of info and safeguarding of assets
  • Safeguards for investors- busineess conducted in orderly manner, investments only in proper markets and measure to reduce likely hood of financial crime or market abuse
  • Rules regarding disclosure by securities issuers- this enable, in the event of a failure by the issuer, suspension of trading and publication of the non-compliance
  • Promotion and maintenance of standards
  • Complaints investigation and resolution arrangements
  • Effective discipline arrangements, for monitoring and enforcing compliance
  • Rules covering default by an exchange member
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5
Q

What are some exchange that are RIE?

A

-ICE Futures Europe
-BATS Trading Limited
-CME Europe Limited
-Euronext UK Markets Limited
-ISDX
LIFFE Administration and Management
-London Stock Exchange plc
-LME

some ROIE are permitted to operate in the UK

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6
Q

What is Liffe?

A

The most important London market for financial futures and options and is part of ICE after if took over NYSE Euronext in 2013

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7
Q

From what does the abbreviation Liffe come from?

A

London International Futures and Options Exchange

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8
Q

How does trading take place on Liffe?

A

On an electronic order matching system known as Liffe.Connect

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9
Q

What are only Liffe members allowed to do?

A

trade and clear contracts

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10
Q

What is the role of LCH.Clearnet with Liffe.

A

Once a trade has been matched it is registers with LCH.Clearnet who become the CCP and to protect itself from the risk that firms default it requests a margin to be posted

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11
Q

What are the features of the initial margin requested by LCH.Clearnet?

A
  • payable on opening a contract
  • returnable ‘good faith’ deposit for all those entering ‘risky’ positions - will be returned if investor honours the contract
  • usually linked to worst probable one day loss
  • payable in cash and various acceptable collateral
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12
Q

What is variation margin?

A

‘pay as you go’ profits and losses on a daily basis and usually payable in cash only

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13
Q

Who conducts the day to day supervision of the rules on Euronext.Liffe?

A

Market Supervision Department

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14
Q

What are the membership rules for Liffe members.

A
  • focus on trading conduct

- primary focus on relations between members rather than between members and customers.

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15
Q

What does membership of Liffe allow?

A

Access to the market place but not any kind of authorisation to conduct investment business in the UK

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16
Q

With regards to Liffe what happens upon an infringement of the rules?

A

initially the Market Supervision Department will investigate and this may lead to a disciplinary hearing for the member concerned.

17
Q

What are the potential penalties imposed on Liffe members?

A

fines
trading suspension
expulsion from exchange membership

18
Q

What are FMI?

A

RCH’s,
recognised payments systems
securities settlement systems

19
Q

Who has responsibility for supervising FMI’s?

A

BOE

20
Q

What are the RCH’s?

A
  • CME Clearing Europe Limited
  • Euroclear UK & Ireland Limited
  • ICE Clear Europe Limited
  • LCH.Clearnet Limited
  • LME Clear Limited
21
Q

What is a DIE?

A

overseas exchange that have a form of approval but can’t conduct regulated activities in the UK

22
Q

What does DIE status assure?

A

UK users know that the FCA believes there are appropriate forms of local regulation that guarantee the investor’s rights

23
Q

What are some examples of DIE’s?

A
  • TSE
  • NYSE
  • NY Futures Exchange
  • Euronext Amsterdam Commodities Market
  • Hong Kong Exchanges and Clearing Limited
24
Q

Who is responsible for the financial soundness and conduct of business of exchange members?

A

FCA

25
Q

Who regulates derivatives market?

A

Mainly the exchanges such as Liffe and LME

26
Q

In europe what is the most important source of regulation for derivatives markets?

A

Mifid

27
Q

Mifid applies to investment firms carrying out activities in relation to what derivative instruments?

A

-Derivatives using currencies, interest rates and yields, financial indices and measure settle either physically or in cash including options futures swaps and forward rate agreements
-Commodity derivatives capable of being settled in cash, on a regulated market or MTF and certain other commodity derivatives which are not for commercial purpose
Thus mifid introduced commodity derivatives into the list of regulated investments
-Derivative instruments for transferring credit risk
-Financial contracts for differences (CfD’s)
- Derivatives relating to climatic variables, freight rates, emmission allowances, inflation rate or other official economic statistic capable of being settled in cash

28
Q

Where would a UK based firm normally receive authorisation to trade in derivatives

A

From either the FCA or PRA depending on the type of firm.

29
Q

What are the two main regulatory bodies?

A

SEC - primarily regulates derivatives on securities

CTFC- primary regulates derivatives on commodities

30
Q

Where did US regulations on derivatives come from?

A

Crash of 29 and are contained in the Commodity Exchange Act 1936 which have been updated through Commodity Futures Modernization Act 2000

31
Q

What does IAS 39 state?

A

Derivatives must be recognised in the balance sheet at fair value (except those that are used as a hedge)

32
Q

What is fair value with relation to derivatives?

A
  • value at which a contract could be exchanged or
  • liability settled between two parties in an arm’s length transaction. All (non-hedge) derivatives must therefore, be ‘marked to market’ and stated at their current market value
33
Q

How are gains and losses treated with relation to IAS 39

A

depends on whether or not the derivative can be recognised as a hedging instrument. However, assuming this is not the case (the usual situation), gains and losses from changes in market value will be recognised as income or expenses in the company’s income statement

34
Q

For derivatives what does the Transparency directive require?

A

pre and post trade transparency. This back up mifid which had other regulatory provisions

35
Q

How is trading undertaken on Liffe?

A
  • On LIFFE CONNECT which is an e-order matching system
  • LCH acts as CCP and receives a feed of trade from LIFFE CONNECT trading system.
  • These are agree trade and the TRS and CPS permit clearing members to confirm business into the correct clearing accounts
  • LCH acts and principal and buys and sells to everyone and to mitigate the risk it requires margins
36
Q

What are the two individuals who will use the services of Liffe members?

A

Traders- these are people seeking a profit on their behalf or their companies and are known as ‘locals’
Brokers- people acting for a third party and making profits by charging commission

37
Q

Who carries out day to day supervision of LIFFE

A

MSD of the exchange

38
Q

What has recently happened with OTC derivatives.

A

Through EMIR there have been moves to have all OTC derivatives cleared through clearing housed increasing transparency and reducing risk of counter party default. These may help to reduce systematic risk arising from OTC derivatives trading. Before EMIR settlement was done directly with a counter party through exchange or broker

Financial Markets And institutions (14 decks)

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