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LEVEL 6 Regulation and Compliance > REGULATION OF MARKETS AND EXCHANGES > Flashcards

REGULATION OF MARKETS AND EXCHANGES Flashcards

1
Q

List of RECOGNISED INVESTMENT EXCHANGES

A

LONDON STOCK EXCHANGE

ICE FUTURES EUROPE - owned by Intercontinental exchange

LONDON METALS EXCHANGE

AQUIS STOCK EXCHANGE LIMITED - exchange for growth enterprises

IPSX property stock exchange - PUBLIC STOCK MARKET for trading of companies owning and managing individual commercial property assets

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2
Q

ROIE

A

NASDAQ

AUSTRALIAN SECURITIES EXCHANGE

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3
Q

RECOGNISED CLEARING HOUSES

A

They facilitate the clearing and settlement of trades

LCH LIMITED - ccp for trades on Euronext and some stocks on the LSE

EUROCLEAR - formerly CREST

LME CLEAR LIMITED

ICE CLEAR EUROPE LIMITED

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4
Q

What are the requirements for recognition by the FCA for RIEs, ROIEs, RCHs and ROCHs?

A
  • fit and proper
  • maintain financial resources
  • have adequate controls
  • record and monitor trades
  • investigation complaints

Once they have been granted recognised status, the FCA will undertake continuous supervision

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5
Q

DESIGNATED INVESTMENT EXCHANGES

A

The overseas market to be equivalent to the UK in terms of local regulation and investor rights

There are 29 DIEs

TOKYO STOCK EXCHANGE

NYSE

HONG KONG EXCHANGES AND CLEARING LTD

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6
Q

What is the difference between QUOTE AND ORDER DRIVEN Markets?

A

ORDER DRIVEN
- Buyers and sellers disclose the prices at which they are willing to trade. When the price matches the order is undertaken.

QUOTE DRIVEN
- continuity of bid and offer prices is ensured by having certain exchange members who are obliged by the exchange rules to provide buying and selling prices throughout the day. Trades are executed through dealers.

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7
Q

What is LIQUIDITY KNOWN AS?

A

“the ability to enter or exit the market, in reasonable size, at an acceptable price speed, and create only modest distortion”

needs to be free availability of the security being traded

the ability of the stock to be freely borrowed or rep’d

the existence of suitable derivatives for trading and hedging purposes

well-capitalised market exchange membership

efficient settlement systems

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8
Q

What are the most relevant bits of the LSE rule book?

A
  • Definitions
  • Core rules
  • Trading rules
  • Off order book trading rules
  • Compliance
  • Default
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9
Q

TRANSACTION REPORTING

A

It is required under the FCA’s supervision sourcebook (from UK MiFIR) and for market surveillance and market manipulation rather than market transparency purposes

When a firm provides a report of its transactions to an APPROVED REPORTING MECHANISM then it is fulfilling its obligations to the FCA as required in the SUPERVISION sourcebook

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10
Q

What information should transaction reports contain?

A

Reporting firm’s identity - legal entity identifier

trading venue identifier code

executing entity identifier code

trading date and time

whether the transaction is a buy/sell

trading capacity

quantity

settlement date

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11
Q

COMMODITIES EXCHANGE

A

physical goods such as agricultural products, metals and energy commodities

ICE FUTURES EUROPE

LME

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12
Q

What are the MiFID obligations for an MTF?

A

Must be pre trade transparent - price of existing orders must be made available on the market data feeds
- MTF may be exempted from pre-trade transparency via the use of an appropriate waiver

must be post-trade transparent - any trades carried out on the platform must be published in real time

Prices and charges must be public and applied consistently across all members

must be a rule book advising how the system works and a means for applying for membership

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13
Q

What are MTFs notable for?

A

HIGH TRADING SPEEDS

LOW COST BASES - running organisations with low head counts

MAKER/TAKING PRICES - paying members to trade on platform as long as the trading adds liquidity

TRADING INCENTIVES

Bloomber, MarketAxess, Tradeweb 360T

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14
Q

What are OTFs

A

Multilateral system which is not a RIE or a MTF

Multiple third party buying and selling interests in bonds, structured finance products, emission allowances and derivatives are able to interact.

Equities are not permitted to be traded through an OTF

The requirements that apply to OTFs and their transactions are generally the same as the requirements for MTFs. As with MTFs, OTFs must establish clear rules and processes around trading under MiFID.

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15
Q

What are Systematic Internalisers?

A

The systematic internaliser regime or trading on own account acting on a ‘principal’ basis was not a new concept

Introduced with the implementation of MiFID in 2007, applying to shares and did not have a quantitative test.

The reason behind amending the SI regime to include post-trade reporting requirements was to ensure enhanced transparency around trading

An ‘SI’ is defined as an investment firm which, on an organised, frequent, systematic and substantial basis, deals on own account by executing client orders outside a regulated market (RM), MTF or OTF without operating a multilateral system

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16
Q

What are the pre-trade requirements?

A

EQUITIES - the quantitative thresholds are:
- frequent/systematic basis (liquid instrument) - number of OTC transactions undertaken by a firm is equal to or larger than 0.4% of transactions in the same financial instrument

  • frequent/systematic basis (illiquid instrument) firm carries out a transaction in the financial instrument at least daily
  • substantial basis - the size of the OTC trading carried out on own account or on behalf of the client in the last six months is equal to or larger than
  • 15% of the total nominal value
  • 0.4% of the total of the total nominal value

NON-EQUITIES
QUANTITATIVE THRESHOLDS

  • frequent/systematic basis (illiquid instrument) number of OTC transactions undertaken by a firm is equal to or larger than 2.5% or 4% of transactions in the same financial instrument in the UK

Firms cannot opt out of the SI regime if they meet the quantitative threshold conditions.

17
Q

What are the post-trade requirements?

A

The normal timeframe for reporting is within one minute for equity/non equity like instruments - within 5 mins for non-equity instruments deemed liquid and by 7pm local time on a T+2 Basis for illiquid instruments

Reporting is single sided - either the trading venue or the SI

It does not include information on who the other counterparty to the trade was

18
Q

Why be a SYSTEMATIC INTERNALISER?

A

Being a firm that provides liquidity in a range of financial instruments and indicates that it is willing to trade with clients outside a trading venue

trading with an SI means no post trade reporting requirements

Best execution policy applies

As a systematic internaliser, a firm can decide in an objective non-discriminatory way:
- the clients who it will grant access
- the processes and circumstances for updating/withdrawing quotes
- length of time a quote is firm and can be dealt with against by clients
- the obligations when dealing in sizes above the ‘size specific to the financial instrument’

19
Q

What is the main purpose and aims of regulation?

A
  • maintain and promote the fairness, efficiency, competitiveness, transparency and uniformity of the securities and futures industry
  • promote understanding by the public of the operation and functioning of the securities and futures industry
  • provide protection for members of the public investing or holding financial products
  • reduce systemic risks in the securities and futures industry
20
Q

Regulation of OTC Derivatives

A

Moves to put OTC Derivatives through clearing houses/CCPs

it wants it to increase transparency and reduces the risk of counterparty default

21
Q

What is UK EMIR?

A

EUROPEAN MARKET INFRASTRUCTURE LEGISLATION

It requires
- the clearing of standardised OTC derivatives through CCPs in order to reduce counterparty risk

  • the reporting of all derivative contracts to trade repositories. These repositories will have to publish aggregate positions by class of derivatives so market participants have a clearer view of derivative markets.
  • put in place risk management procedures for OTC derivative transactions that are not cleared through a CCP

The FCA is now responsible in the UK for the surveillance of trade repositories and for granting and withdrawing their registration. It is also responsible for the identification of contracts subject to the clearing obligation.

22
Q

US: DODD FRANK ACT

A

The Act creates an extensive regulatory framework for swaps and security-based swaps, capturing substantially all derivatives transactions that previously were exempt from regulation under the Commodity Futures Modernization Act.

The act provides for mandatory clearing and trading on regulated facilities for derivatives contracts

Swap dealers and major swap participants are subject to capital and margin requirements, business conduct rules and special duties in their dealings with governmental entities

The act seeks to establish parallel rules for swaps and security based swaps

Mixed swaps which are a mix of swaps and security based swaps are regulated jointly by the CFTC and the SEC

Swaps based on government securities (other than municipal securities) are excluded from the security-based swap definition, and thus are subject to regulation by the CFTC.

It requires the SEC and the CFTC on an ongoing basis to review swaps and categories or classes of swaps with a view to determining whether clearing should be mandatory

Clearing organisations will be required to offset swaps with the same terms and conditions on an economically equivalent basis within the clearing organisation, and to provide for non-discriminatory clearing of transactions executed bilaterally or on unaffiliated facilities

23
Q

what are SWAPs?

A

options, swaps, other transactions based on rates, commodities, securities, debt instruments, indices

They are subject to the commodity futures trading commission jusrisdiction

They do not include security based swaps

24
Q

SECURITY BASED SWAPS

A

swaps based on individual securities or loans, on narrow based securities or on events affecting individual issuers of securities

Subject to securities and exchange commission jurisdiction

25
Q

FX GLOBAL CODE

A

Developed by a partnership between central banks and market participants from 16 jurisdictions around the globe

Purpose is to promote a robust, fair, liquid, open and transparent market in which a diverse set of market participants supported by resilient infrastructure are able to confidently and effectively transact at competitive prices that reflect market information in a manner that conforms to acceptable standards of behaviour

It does not impose legal or regulatory obligations on market participants or substituting for regulation, but it serves as a supplement

26
Q

What are the Ethics for promoting fairness and integrity in the FX Market?

A

Market Participants need to
- act honestly in dealings with clients

  • act fairly dealing with clients and other market participants
  • act with integrity and avoid questionable practices and behaviours
27
Q

UK MONEY MARKETS CODE

A

Voluntary code written by market participants - originally published in 2017

It sets out the standards and practice expected from participants in the deposits, repo and securities lending markets in the UK

The Code is endorsed by the Bank of England’s Money Markets Committee (MMC), made up of market participants from a wide range of banks and other financial and non-financial institutions

The Code applies to:
- execution of transactions in the deposit markets
- the repo market
- securities lending transactions

28
Q

GLOBAL PRECIOUS METALS CODE

A

London Bullion Markets Association introduced in 2017 the PRECIOUS METALS CODE

It applies to all precious market metal participants and provides participants with guidance on best practice

All market participants involved in the global wholesale precious metals market are expected to act according to the principles of this Code.

LBMA members will attest to this code by signing a Letter of Commitment

LEVEL 6 Regulation and Compliance (17 decks)

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