Regulation of Investment Exchanges

Question 1

Who recognises the recognised investment exchanges (RIEs)?

Answer 1

FCA

Question 2

Who recognises the recognised clearing houses (RCHs)

Answer 2

Bank of England

Question 3

List the Recognised Investment Exchanges

Answer 3

London Stock Exchange (LSE)
Aquis Stock Exchange (AQSE).
London Metal Exchange
ICE Futures Europe

Question 4

List the Recognised Clearing houses

Answer 4

ICE Clear Europe
LME Clear
LCH.Clearnet
CME Clearing Europe

Question 5

What is special about the Recognised Investment exchanges and clearing houses

Answer 5

As bodies they are exempt persons

Question 6

What is the exchange status of ICE futures Europe?

Answer 6

Recognised Investment exchange (RIE)

Question 7

What trading system does ICE futures Europe use?

Answer 7

Electronic order matching system

Question 8

Who are the market participants for ICE futures Europe

Answer 8

o Traders: act on their own (‘locals’) or their company’s behalf
o Brokers: act for clients

Question 9

What is exchanged on ICE futures Europe

Answer 9

Derivatives exchange

Question 10

Talk about UK regulation of derivatives exchange

Answer 10

o RIE status granted to exchanges by the FCA

o Detailed trading rules governed by the exchange

Question 11

Talk about US regulation of exchange traded derivatives

Answer 11

Split between the Securities and Exchange Commission (SEC) and the Commodities Futures Trading Commission (CFTC)

Question 12

Talk about US regulation of OTC derivatives

Answer 12

Dodd-Frank act

Question 13

What is ICE Clear Europe’s key function?

Answer 13

o Central Counterparty (CCP) to derivatives trades

Question 14

What is novation and what does it ensure?

Answer 14

Novation is what the Clearing houses e.g. ICE Clear Europe (CCPs) offer.

It negates the need for a principle to principle process and means the relations are with the clearing house and the buying/ selling member rather than them having a relationship with one another.

Novation ensures that the deal is honoured by both parties on the buy and sell end

Question 15

what can a clearing house be said to do with a deal between the clearing members

Answer 15

Novates the deal

Question 16

Who do clearing houses have no involvement in

Answer 16

Clearing member/ client relationship (have a seperate ‘back-to-back’ contract for this between the member and the member’s client)

Question 17

How do CCPs (clearing houses) make profit

Answer 17

From margins

Question 18

What are the two margins CCPs / Clearing houses use?

Answer 18

Initial Margin

Variation Margin

Question 19

What is a initial margin?

Answer 19

 ‘Goodwill deposit’
 Ensures an exchange member can satisfy the conditions of the contract
 Cuts the maximum daily probable loss – takes into consideration what would happen if one party defaults and what is needed to cover the consequences of this.

Question 20

What is a variation margin?

Answer 20

 Daily payment of gains/demanding of losses
 Covering the unrealised profit loss
 Every day you mark the contract to market and cover the realised profit and loss for every day the contract is open

Question 21

What was the impact of MiFID on Derivatives?

Answer 21

o Brought commodity derivative into the list of regulated investments

Question 22

What was the impact of IFRS 9 on derivatives

Answer 22

o Requires derivatives to be measured at fair value and changes in value to be recognised in the accounts

Question 23

What was the Impact of EMIR on derivatives?

Answer 23

o Clearing of OTC derivatives has largely moved to central counterparties