Regulation Of Investment Exchanges And Clearing Houses

Question 1

Briefly explain what RIEs are

Answer 1

1. Recognised Investment Exchanges
2. The FCA recognises and supervisor as a number of RIEs under the FSMA
3. Recognition gives them exemption from the need to be authorised to carry out regulated activities in the UK.
4. They must comply with the recognition requirements laid down in FSMA 2000.
5. They can operate in regulated markets and MTFs

Question 2

Briefly explain what the role of Bank of England is?

Answer 2

1. Responsible for regulating settlement systems and RCHs
2. Also responsible for regulation of recognised payment systems under the Banking Act 2009
3. Institutions that provide both exchange services and CPP clearing services are regulated by the BoE with respect to the activities as an RCH
4. FCA regulates RCHs separately for their exchange services.
5. BoE also regulates financial market infrastructures - these are RCHs and recognised payment systems

Question 3

How does the Bank of England regulate clearing houses in the UK?

Answer 3

1. BoE expects institutions to meet principle set out by the:
   A. Payments and Settlement systems
   B. Technical Committee of International Organisation of Securities Commissions
   C. EMIR
2. BoE recognises a number of clearing houses -
   A. ICE Clear Europe
   B. LME Clear
   C. LCH ltd
   D. CME Clearing Europe
3. Recognised status of the RIE/ RCH means that it can develop its own means of fulfilling regulatory objectives and obligations.

Question 4

A RIE is required to deliver high standards of investor protection and to maintain market integrity.

What does this include?

Answer 4

1. Arrangements to ensure performance of transactions.
2. Financial resources sufficient for the proper performance of its functions.
3. Roles and practices to ensure that business on the exchanges conducted in an orderly manner and afford proper protection to investors
4. Dealings on the exchange should be limited to investments in which there is a proper market. (Trade in good transparency markets)
5. Satisfactory recording of transactions.
6. Effective monitoring and enforcement of compliance with rules and clearing arrangements.
7. Complaint investigation arrangements.
8. Promote and maintain high standards of integrity and fair dealing.
9. Corporate by means like sharing information with other regulatory bodies.
10. Rules setting out procedures in the event of a default by a member of the exchange. (E.g. when traders defaults - fail to meet their obligations, like paying for trades or delivering assets.)

Question 5

RIE vs RCH.

What are these?

Answer 5

1. RIE (Recognised Investment Exchange) - A. financial market or exchange that is recognised by the FCA
   B. It provides a platform for trading financial instruments like stocks, bonds, or derivatives.
2. RCH (Recognised Clearing House) -
   A. central counterparty (CCP) that is recognised by the BoE.
   B. Helps manage the risks of trades by acting as an intermediary between buyers and sellers.
   C. When two parties trade - RCH steps in to ensure the trade is settled even if one party fails to meet their obligations, reducing the overall risk to the financial system.

In short:
RIE is for trading and market rules
RCH is for clearing and reducing trade risk.

Question 6

What are the two main transparency requirements under MiFID?

Answer 6

1. Pre-trade transparency -
   A. Publish real time current orders and quotes. (Live prices and amounts for buy/sell)
   B. Publish depth of trading interests at those prices (see how much demand/supply exists at different price levels)
2. Post trade transparency -
   A. Publish price, volume and time of the transaction and execution venue
   B. Must be published as close to the real time as possible - after the transaction took place
   C. Ok to delay publication for certain transactions that are large compared to the NMS.

Question 7

MiFID II extended the scope of publication of quotes and transactions to the market.

Under MiFID II, what instruments are included?

Answer 7

1. Other equity-like instruments e.g. ETFs
2. Non-equity instruments. e.g. bonds, derivatives, structured financial products
3. Systematic internalisers have pre-trade transparency obligations

Question 8

Pre-trade transparency rules DO NOT need to be followed/ waived in certain situations where revealing trade details could disrupt the market or where normal price publishing isn’t practical. These waivers apply in cases like:

Answer 8

1. Illiquid markets – If a financial instrument (stock) isn’t traded often - no constant flow of buy/sell orders, so real-time price publishing may not be useful.
2. Negotiated transactions – When two parties privately agree on a trade, publishing the details beforehand isn’t necessary.
3. Large orders – If an order is much bigger than the normal market size, revealing it too soon could move prices unfairly or cause market instability.
4. Orders in an order management facility pending disclosure - orders that are temporarily held before being made public. Helps prevent sudden price swings.

Question 9

MiFID II harmonise the commodity derivative trading regime by requiring trading venues to have arrangements in place that monitor and manage positions held by persons trading in such investments.

What are the key changes introduced by MiFID II for this?

Answer 9

1. Position limits –
   A. Limits are set by the FCA
   B. Tells how many contracts a trader/ firm can hold in a commodity derivative
   C. Prevents anyone from dominating the market and causing price distortions.
2. Daily reporting –
   A. Trading venues must report daily to the regulator
   B. Need to show who is trading and how much for monitoring purposes
3. FCA enforcement power –
   A. FCA can request more information from traders or firms.
   B FCA can check if firms are following the position limits and take action if needed.