Technology in Investment - Chapter 2 Flashcards
What is self regulation
`market participants agree on behaviours and a mechanism so disputes can be easily settled
What was the outcome of the financial services and markets act 2000 (FSMA)
established a new single regulator for the UK. (the FSA)
What is prudential regulation
concerned with financial soundness of regulated financial services firms.
Preventing investors and the economy from loss
What is business conduct
The way which business is done, how products are marketed and sold
What does part 2 of the Financial Services and Markets Act (FSMA cover (3 points)
- Regulated and prohibited activities.
- no person can carry on a regulated activity in UK unless authorized or exempt
- authorization is bought about by relevant person applying to the regulator for permission. FSA grants permission
What are the regulated activities under FSMA
defined by type of investment and the range of activity. all regulated firms are expected to adhere to the 11 principles (fca)
What 3 sets of rules, as well as the UK regulator, monitors members from EU legislation
markets in financial instruments directive II (MiFID II)
capital requirements directive (CRD)
european market infrastructure regulation (EMIR)
What is the level 1 and level 2 legislation
1 - when EU legislates for europe as a whole
2 - detailed instructions that have to be complied with are usually found in individual legislation of member states. MiFID 2, EMIR & Basel 2
Who is responsible for level 2 legislation?
UK Government are responsible for MiFID 2, EMIR & Basel 2
What happened post the Financial Services act 2012?
This act was abolished and replaced with three new bodies:
FPC, PRA, FCA
What is the FPC
established within BoE
macro-prudential regulation of financial system as a whole.
What is the PRA
established within BoE
prudential regulation of large firms (1500) of their balance sheet
What is the FCA
regulation of all firms in retail and wholesale markets. also responsible for firms that dont fall in PRA scope (60,000 firms aprox)
What is the Europe-Wide regulation: European System of Financial Supervision (ESFS)
Institutional architecture of EU’s framework of financial supervision in response to the 2008 crash. replaced three existing committees with three new ones called European supervisory authority (ES
What makes up the ESA
insurance and occupational pensions authority (EIOPA)
European banking authority (EBA)
European securities and markets authority (ESMA)
What is the FCAs role (3 points)
- Supervision of investment exchanges and monitoring firms market abuse
- Insider dealing
- Working closely with the PRA and FPC
When was the FCA and PRA begin work
April 2013
What is ESMA’s mission
protection of investors via a single rulebook
When did MiFID 1 enact?
enacted - 2004
When did MiFID 1 come into force?
November 2007
Why was MiFID 1 introduced
to set out European Union (EU) regulation in respect of securities and financial markets.
When did MiFID 2 commence
January 2018
What happened in October 2011
MiFID 1 was revised to make MiFID 2
MiFIR was introduced
What is MiFID 2
Comprehensive and profound set of reforms which is leading to a reshaping of financial markets
MiFIR proposals
although on EU, has global impact as it affects capital markets
What is a multi lateral trading facility (MTF)
Systems that bring together multiple parties that are interested in buying and selling financial instruments
What is a systematic internaliser
A firm executes client orders outside of an MTF or regulated markets
What is a systematic internalizer
A firm that executes client orders, outside of an MTF or regulated market
What is a pre-trade transparency
Aggregated order info available at the five best price levels on the buy/sell side
What does MiFID 2 make SIs undertake?
a public market making obligation
What is transaction reporting for small firms?
Nominate a approved reporting mechanism
What is transaction reporting for large firms?
Larger firms directly report to the regulator
What is the rule with LEI’s
No LEI, No trade!!
What records are used to monitor market abuse
Post trade transaction reports via ESMA
Why has BREXIT affected UK regulation
No longer required to forward data to ESMA
What is best execution
Obligation of the sell side of a firm to take all steps to ensure the best price for selling or buying
Article 21 of MiFID requires firms that execute orders on behalf of clients to? (4 points)
- Establish an execution policy
- Disclose policy to clients
- Monitor effectiveness and correct deficiencies
- Be able to demonstrate the clients request was executed inline with the policy
What is an OTF
An OTF is an organized trading facility
What is a third country firm
firms outside of the EU that have business or a branch inside the EU. UK is now an example
What is investor protection (3 rules)
- Independent advice is banned
- Advice must meet certain criteria
- Non-complex instruments updated to remove Structured UCITS
handling of client assets (3 rules)
-Record-Keeping
- Segregation
- Reconciliation
Cost and Charges Reporting ( 2 types )
- Ex ante (Pre-sales)
- Ex post (Post-sales)
Reporting percentage
Any move of 10% or more in a portfolio must be reported within 24 hours to the investor
Inducements
No more the ‘minor’ benefits are permitted under MiFID 2
3rd party research inducements rule
3rd party Research has to be paid by firm itself or separate client account
What is a client agreement
Under MiFID 2, investment firms have to provide:
A basic written agreement, setting out the essential rights and obligations of the firm and the client
What is included in the client agreement
- Information about the firms and services
- Instruments and strategies
- Execution values
- Client money
- Order handling
- Client money & assets
How long must telephone recordings be retained?
5 years
What is suitability
Understanding clients capacity for loss
What are the six tech implications of MiFID 2
- Transaction reporting
- Trade Reporting
- Best execution reporting
- Cost & Charges
- Recording additional client data
- Tracking research consumption
6 Principles of the GDPR
-Lawfulness, fairness & Transparency
-Purpose Limitation
-Data minimization
-Accuracy
-Storage Limitation
-Integrity and confidentiality
What is the USA’s version of the GDPR
American Data and Privacy Protection Act (ADPPA) - 2022
Rule 2.1 of the Conduct of Business Sourcebook (COBS)
Firms always act honestly, fairly and professionally in accordanc with clients best interest
What are the two components to Senior Managers & Certification Regime (SMCR)
Senior Managers Regime
Certification regime
What is Japans version of the GDPR
Act of the protection of personal information (APPI) - 2003
What is the Aussies version of the GDPR
Privacy act - 1998
Senior management arrangements, systems and controls (SYSC) (4 purposes)
21 Individual rules
- Encourage firms directors and senior managers to take responsibility
- Amplify principle 3
- Directos and senior managers to be responsible
- Create a common platform of systems and controls
What is principle 3
A firm must take reasonable care to organize and control its affairs responsibly and effectively, with adequate risk management systems
What 2 things do firms need to do to re-enforce Senior Managers Regime
- Ensure each senior manager has a statement of responsibilities
- Produce a firm responsibilities map
What is the BCBS
Basel Committee on Banking Supervision.
What is the certification regime
Applies to ‘Material Risk Takers’
- Have identified all certified individuals
-Have assessed them as fit and proper
-Have assessment of fitness of staff
What is the Bank for International settlements
a primary global standard setter for prudential regulation for banks
How are the technological implications of the Approved Persons Regime managed?
Monitoring staff capability
Three Technological implications for the Senior Managers & Certification Regime (SM&CR)
- All senior managers statements of responsibilities
-Responsibilities map
- Details of the regulatory approvals
What is an approved person
An individual who is approved to do one or more activities.
How can one become an approved person (3 requirements)
- FCA’S ‘Fit and Proper’ test and follow its principles
- Comply to the code of practice
- Report anything that could effect their ongoing suitability to adhere to the FCA
How should client assets be handled under CASS.
segregated from firms assets and regularly reconciled
What is equation for Pillar 1 of the Basel Committee
Capital requirement
Capital ratio = ————————————————–
(Credit risk exposure + market risk exposure + operational risk exposure)
Why was the BCBS set up
Messy liquidation of a German bank in 1974
How many pillars in Basel 2
3
What are the 3 pillars in Basel 2
- Minimum capital requirements (Pillar 1)
2.Supervisory review (Pillar 2)
3.Market discipline (Pillar 3)
What is the basic indicator approach?
Hold a fixed percentage (alpha) set by Basel at 15%. Useful for smaller firms.
What is standardized approach
Uses Risk Weighted Assets to calculate the operational risk
What is the Advanced Measurement Approach
Most risk sensitive, allows banks to use their own measurement system for calculating the capital at risk. Uses VAR and must be held at 99% confidence and a period of 250 days
