Section 3.1 - International Regulation: EU Directives, Regulation and Guidance

Question 1

What is the main objective of FSAP 1999

Answer 1

• To create prudential rules and supervision in the market.
• To promote EU wider economy by removing barriers of entry and promoting competition.

Question 2

What are EU Directives

Answer 2

*Directives are introduced under section 58 in the European Treaty to try and harmonise laws.

*They are either implemented by primary legislation (new law) or by delegated legislation (amended law)

*Problems can arise when a directive has not been implemented by its due date – known as ‘vertical-direct effect ‘ (given precedence over national law)

Question 3

What is the objective of EU regulation

Answer 3

Most direct form of EU law

Immediately binding in all EU states

Question 4

In what way does UK sought to mitigate regulatory uncertainty

Answer 4

Through the introduction of TPR - helps EEA financial firms

EEA - Economic European Area

Question 5

What is the objective of the ESMA

Answer 5

ESMA aims to:
*Ensure orderly function of secruties market

*Enhance investor protection

Supervisory Authority, created in 2011

Question 6

What are the four levels of ESMA regarding the legislation procedure in the harmonisation process?

Answer 6

• Level 1- ESMA may be asked techincal advice by EU commission
• Level 2 - ESMA plays a primary role in drafting ‘subordinates act’
• Level 3 - ESMA develops guidelines and recommendations of establishing consistent supervision within the ESFS.
• Level 4 - ESMA can launch enquires addressed to the national authority within 2 months of launching its investigations

ESFS- European System of Financial Supervision

Question 7

MiFID and harmonisation

Single passport

Answer 7

• MiFID allows firms to trade financial services across EEA with the use of a ‘single passport’ and without separate authorisation from host countries
• Can take up to 6 months for a firm to obtain a ‘single passport’

* Investment Services Directive (ISD) created ‘single passport’

Question 8

When was MiFID II and MiFIR introduced

Answer 8

January 2018

Question 9

Key changes to MiFID II

TOILEt:

Answer 9

• More transparency requirements
• New OTF facility to capture unregulated trades
• Increased infomation on products and services to clients
• Rules to avoid potential risk in disorderly markets through increased technology
• Limiting size of posotions held in commodity derivatives

Question 10

What does MiFID distinguihs between as

Answer 10

Distinguishes between investment services and ancillary services

Ancillary Services - Non core (add on) services that compliments the core services.

Companies which perform both services are subject to MiFID, but companies that perform just ancillary services are not subject to MiFID.

Question 11

What are examples of investment services

Answer 11

• Transmission of orders
• Execution of orders on behalf of clients
• Dealing on own account
• Portfolio Management
• Investment Advice
• Operation of OTF/MTF

Question 12

What are examples of Ancillary Services

Answer 12

• Safekeeping Investments
• Granting loans to investors
• Advice on capital structure, mergers and purchase of undertakings
• FX services
• Providing investment services related to underlying derivatives

Question 13

What is the purpose of an OTF being subjected to MiFID

Answer 13

A regulated OTF means it is more transaprent and can be seen by all - helps to capture unregulated trades

Question 14

How has transparency requirements increased under MiFID II

Answer 14

Trade reporting and transaction reporting has strengthened

Question 15

What financial instruments fall under MiFID II

Answer 15

• Transferable secruties
• Money-market instruments
• Units in collective investment undertaking
• Derivative contarcts for the transfer of credit risk (E.G. Credit default swaps)
• Financial contarcts for differences

• An investment firm looking to extend its activties, but not granted intial authorization, must submit a request for extension
• Example of money -makret instrument - Product with a life span less than 12 months.
• Example of a financial contract for differences - Cash settled products and non-cash settled prodcuts

Question 16

What is MiFIR main objective

Answer 16

• Regulated authority for MiFID II
• Sets out reporting requirements to the disclosure of trade data to the public

Question 17

Difference between MiFID II and MiFIR

Answer 17

• MiFIR is not implemented into national law - third contry firms must establish a branch in a state before providing any service to retail clients
• Under the scope of MiFIR, MiFID II is looking to cover more asset classes so more firms will be caught up by the reporting obligation.

Question 18

What is UCITS responsible for

Answer 18

Creating a ‘single market’ for collective investment schemes in the EU

Question 19

What are two types of Collective Investment Schemes (CIS) are there in the UK

Answer 19

Unit trusts and Open-Ended Investment Companies (OEIC)

OEIC issues shares, wheres unit trusts issue units

Question 20

What does legislation does a unit trust and OEIC operate under

Answer 20

• Unit trust - Common law
• OEIC - Company law

Question 21

What is Undertakings for Collective Invetsment in Transferable Secruties (UCITS)

Answer 21

• FCA are responsible for recognising UK schemes under UCITS
• Creates cross-boarder invetsment opportunties across the EU

Question 22

What developments are under UCITS III

Answer 22

UCITS is split into two parts:
* Management Directive - Aim to protect investors by ensuring companies have appropriate risk management measures and are suitably capitalised

• Product Directives - Expands the range of financial instruments

Question 23

What developments are under UCITS IV

Answer 23

• Implemented 2011, main changes include:
• Passport for management companies
• Strengthneing supervisory corporation

Question 24

What developments are under UCITS V

Answer 24

• Introduced remuneration policy for fund managers
• Enhances rules on responsbility of depositaries

Question 25

What is AFMID

Answer 25

• AFMID was implemented in 2013 and covers AIF’s such as Hedge funds and private equity funds
• Focus of AFMID is on AIF managers

The Alternative Investmend Fund Managers Directive (AFMID)
Alternative Investment Funds (AIF’s)

Question 26

What is the objective of EMIR

Answer 26

• Requires OTC derivative trades to be reported and appropriatley risk managed
• Must report derivative transactions to a trade repositary

European Markets Infrastructure Regulation(EMIR) came into force in 2012

Question 27

What is the objective of EU Benchmark Regulation

Answer 27

• Came into force in 2018
• BMR groups benchmarks into 6 different catogeries:

Critical benchmarks - Value of coontracts is at least £500bn

*Significant benchmarks - Value of contarcts is at least £50bn

Non significant benchmarks - Value of contracts is less than £50bn.

Question 28

What is Forgien Account Tax Compliance Act (FACTA)

Answer 28

• Is a US law to prevent tax evasion by US citizens using offshore banking facilties
• 30% witholding tax of US source income must be paid to Non US financial institutions.

Question 29

What does FACTA require

Answer 29

• Requires all FFI’s to provide infomation about their US customers to the IRS
• The reporting to the IRS takes form of an annual report and must include total gross amount of interest credited to the account.

Forgien Financial Institutions (FFI)

Question 30

What is the Common Reporting Stanadard

Answer 30

• Developed in 2014 by the OECD
• Main purpose is to combat tax evasion. Any UK resident who has forgien investments must disclose this infomation to HMRC.