Regulation of Investment Exchanges Flashcards
Who recognises the recognised investment exchanges (RIEs)?
FCA
Who recognises the recognised clearing houses (RCHs)
Bank of England
List the Recognised Investment Exchanges
London Stock Exchange (LSE)
Aquis Stock Exchange (AQSE).
London Metal Exchange
ICE Futures Europe
List the Recognised Clearing houses
ICE Clear Europe
LME Clear
LCH.Clearnet
CME Clearing Europe
What is special about the Recognised Investment exchanges and clearing houses
As bodies they are exempt persons
What is the exchange status of ICE futures Europe?
Recognised Investment exchange (RIE)
What trading system does ICE futures Europe use?
Electronic order matching system
Who are the market participants for ICE futures Europe
o Traders: act on their own (‘locals’) or their company’s behalf
o Brokers: act for clients
What is exchanged on ICE futures Europe
Derivatives exchange
Talk about UK regulation of derivatives exchange
o RIE status granted to exchanges by the FCA
o Detailed trading rules governed by the exchange
Talk about US regulation of exchange traded derivatives
Split between the Securities and Exchange Commission (SEC) and the Commodities Futures Trading Commission (CFTC)
Talk about US regulation of OTC derivatives
Dodd-Frank act
What is ICE Clear Europe’s key function?
o Central Counterparty (CCP) to derivatives trades
What is novation and what does it ensure?
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
what can a clearing house be said to do with a deal between the clearing members
Novates the deal
Who do clearing houses have no involvement in
Clearing member/ client relationship (have a seperate ‘back-to-back’ contract for this between the member and the member’s client)
How do CCPs (clearing houses) make profit
From margins
What are the two margins CCPs / Clearing houses use?
Initial Margin
Variation Margin
What is a initial margin?
‘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.
What is a variation margin?
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
What was the impact of MiFID on Derivatives?
o Brought commodity derivative into the list of regulated investments
What was the impact of IFRS 9 on derivatives
o Requires derivatives to be measured at fair value and changes in value to be recognised in the accounts
What was the Impact of EMIR on derivatives?
o Clearing of OTC derivatives has largely moved to central counterparties
