Regulatory requirements Flashcards
MiFID business
- Reception and transmission of orders
- Execution of orders
- Portfolio management
- Investment advice
- Underwriting and placing
MiFID specifically covers these investments related to derivatives:
- Derivatives on securities, currencies, interest rates or yields
- Commodity derivatives (traded on regulated market or MTF)
- Credit derivatives
- Financial CFD
- Exotic derivatives (e.g. weather, carbon emissions, etc.)
Principle-based regulation
• Moving away from reliance on detailed, prescriptive rules and relying on highlevel principles
- Allows for flexibility
- Puts the focus on the purpose of regulation
- Can be said it is better for today’s financial markets
Rule-based regulation
• The traditional form of regulation
- It is clearly defined
- However can be inflexible due to one size fits all rules
Treating customers fairly
- To ensure fair treatment is embedded in the industry
- Based on six ‘outcomes’, i.e. principle-based
- FCA’s approach is that all advisers adhere to its “Good practice in your behaviour’s” policy
Client categorisation
- When considering derivatives client categorisation must be considered fully under the principle based approach
- Retail client
- Professional client
- Eligible counterparty
Best execution
• Purpose
- A firm must take all reasonable steps to obtain the best possible result for its clients, taking into account the execution factors
• Execution factors
- Price, costs, speed, likelihood of execution and settlement or any other consideration
Suitability
• Applied before managing or recommending derivatives for any client or before
introducing a retail client to derivative instruments
• A firm must take into consideration a client’s:
- Knowledge and experience
- Financial situation
- Investment objectives
Appropriateness
• Where a firm provides services without advice
- Knowledge and experience
- Financial situation
• Risk warnings – must be given if a US client
Securities and exchange commission
• The SEC is responsible for:
- Stock options
- Stock index options
- Currency transactions undertaken on exchange
- The CBOE
Commodity futures trading commission
• The CFTC is responsible for:
- Regulating US derivatives exchanges (except CBOE)
- Enforcing the Commodities Exchange Act and Commodity Futures Modernisation Act 2000
- Overseeing the NFA
National futures authority
- Self-regulatory organisation (SRO)
- Oversees derivative firms
- Runs an arbitration scheme
US regulators (cont.)
Part 30 of the Commodities Exchange Act
• For any firm to act for investors on a US exchange, the firm must be fully registered with the CFTC
• For an FCA firm to deal on behalf of US investors on non-US derivative exchanges, all orders must be routed through a US firm
CFTC Part 30 exemption. On gaining Part 30 exemption, the firm may deal directly with US
investors when carrying out deals on non-US exchanges.
Commodity Futures Modernisation Act 2000
• Lifted a ban on single stock futures
- Regulated by both SEC and CFTC
• Provides legal guidelines for OTC derivatives
• Gives legal authority to CFTC for retail FX trading
EU Regulation
European Market Infrastructure Regulation (EMIR)
• Improve transparency and reduce the risk associated with the derivatives market that contributed to the financial crisis of 2007/2008
• Increase in trade reporting rules, risk management standards and clearing now mandatory for certain OTC transactions
Introduces:
• Reporting obligation for OTC derivatives
• Clearing obligation for eligible OTC derivatives
• Measures to reduce counterparty credit risk and operational risk for bilaterally cleared OTC derivatives
• Common rules for central counterparties (CCPs) and for trade repositories
• Rules on the establishment of interoperability between CCPs
