THE SUPERVISORY ARCHITECTURE OF FINANCIAL MARKETS Flashcards
What roles do banks and investment firms play in financial intermediation?
Banks play a credit intermediation role. Investment firms and collective investment funds play an investment intermediation role. Both ensure that surplus resources can flow to those who need them.
How does the risk exposure of banks differ from that of investment firms?
Generally, while banks bear the risk of failure to repay deposits, investment firms and collective investment funds are not subject to this kind of risk.
What is the European Union’s approach to establishing and maintaining the internal market?
- The EU takes actions to set up and keep the internal market working, following the rules in the Treaties.
- The internal market is a space without borders where goods, people, services, and money can move freely, according to the Treaties.
What does the European Union say about restrictions on capital and payments?
- All restrictions on the movement of capital between Member States and between Member States and third countries shall be prohibited.
- All restrictions on payments between Member States and between Member States and third countries shall be prohibited.
What does the free movement of capital allow individuals to do in the EU?
It allows individuals to carry out many transactions, including opening bank accounts abroad, buying shares in non-domestic companies, investing where the best return is, and purchasing real estate in another country.
How does the free movement of capital benefit businesses in the EU?
It allows businesses to invest in and own other European businesses and to raise finance where it is cheapest.
What are the goals of the European Union in relation to financial markets?
Create a safe environment where users can invest their savings, ensuring the safety of transactions.
Ensure the sound and careful management of enterprises operating in financial markets.
Ensure that businesses can offer their services across the EU.
Ensure that EU citizens can take advantage of the best conditions for investing their money.
What is needed to achieve the goals of the European Union in relation to financial markets?
Harmonised regulation
An effective and integrated supervisory system
What makes up the European System of Financial Supervision (ESFS)?
- European Systemic Risk Board (ESRB)
- 3 European Supervisory Authorities (ESAs):
- European Banking Authority (EBA)
- European Securities and Markets Authority (ESMA)
- European Insurance and Occupational Pensions Authority (EIOPA) - NCA’s (National Competent Authorities)
What are some international organizations involved in financial supervision?
Financial Stability Board (FSB)
Basel Committee on Banking Supervision (BCBS)
International Organization of Securities Commissions (IOSCO)
What are the key components of the European Banking Union?
Single Supervisory Mechanism (SSM)
Single Resolution Mechanism (SRM)
European Deposit Insurance Scheme (EDIS)
The project of a Capital Markets Union (2015)
What is the Lamfalussy method in the European lawmaking process for the financial sector?
Level 1: Framework principles
Level 2: Technical rules (RTS and ITS)
Level 3: Consistent implementation and enforcement by the Authorities
Level 4: Ensuring correct enforcement by the Commission
What regulations and authorities govern banks (credit institutions) in the EU?
Directive 2013/36/EU, which sets rules for banks’ activities and how they are supervised (CRD IV)
Regulation (EU) No 575/2013, which sets rules for banks’ financial requirements (CRR)
Competent Authorities at both European and national levels
What rules and authorities govern investment firms in the EU?
Directive 2014/65/EU on markets in financial instruments (MiFID II)
Regulation (EU) 2019/2033 on the prudential requirements of investment firms
Directive (EU) 2019/2034 on the prudential supervision of investment firms
Competent Authorities at the national level
What does the free movement of services in the EU allow?
The freedom to establish a company in another EU country
The freedom to provide services in an EU country other than the one where the company is established
What is the EU passport in the context of financial services?
Mutual recognition of activities
Increasing harmonisation of legislation
Home country control principle
What are the different investment services and activities?
Reception and transmission of orders in relation to one or more financial instruments
Execution of orders on behalf of clients
Dealing on own account
Portfolio management
Investment advice
Underwriting of financial instruments and/or placing of financial instruments on a firm commitment basis
Placing of financial instruments without a firm commitment basis
Operation of a Multilateral Trading Facility (MTF)
Operation of an Organized Trading Facility (OTF)
What activities are subject to mutual recognition for banks in the EU?
Taking deposits and other repayable funds
Lending, including consumer credit, credit agreements related to immovable property, factoring (with or without recourse), and financing of commercial transactions (including forfeiting)
Financial leasing
Payment services
Issuing and administering other means of payment (e.g., travellers’ cheques and bankers’ drafts), if not covered by payment services
Guarantees and commitments
Advice to undertakings on capital structure, industrial strategy, related questions, and services relating to mergers and acquisitions
Money broking
Portfolio management and advice
Safekeeping and administration of securities
Credit reference services
Safe custody services
Issuing electronic money
What does the freedom to provide investment services and activities mean for investment firms in the EU?
EU countries must allow investment firms, authorised and supervised by another country, to provide investment services or activities and related services within their own country, as long as these are covered by their authorisation. Ancillary services can only be offered along with an investment service or activity.
EU countries cannot add extra rules for these investment firms or credit institutions beyond what is already in the Directive.
How can investment firms establish a branch in another Member State?
Member States must allow investment firms and credit institutions to offer their services in other Member States by setting up a branch or using a tied agent located outside their home country. However, these services must be covered by the authorization given in the firm’s home country.
Ancillary services can only be provided alongside an investment service or activity.
Member States cannot impose extra rules on how the branch is organized and operates if those matters are already covered by this Directive.
What are the key governance, transparency, and prudential supervision measures under CRD IV?
CRD IV focuses on improving governance, transparency, and financial stability for credit institutions. It requires better risk management by management bodies and more diversity in board memberships. From 2015, institutions must disclose key financial information, such as profits and taxes, on a country-by-country basis. The directive also sets rules for holding extra capital (Pillar 2) and introduces capital buffers to protect solvency. These buffers limit dividend and bonus payments, becoming stricter if the institution uses up its buffer to prevent capital loss.
What are the key requirements under the Capital Requirements Regulation (CRR)?
The Capital Requirements Regulation (CRR) sets rules for banks to ensure they have enough capital and liquidity. Banks must hold capital equal to at least 8% of their risk-weighted assets, with riskier assets requiring more capital. The regulation includes two liquidity measures: the Liquidity Coverage Ratio, ensuring banks have enough liquid assets in the short term, and the Net Stable Funding Requirement, ensuring they don’t rely too much on short-term funding. It also sets a leverage ratio to limit how much debt banks can use to finance their activities.
What is the biggest challenge in investment in financial products?
Investing in financial products always carries some level of risk that cannot be avoided. Additionally, some financial products and markets can be very complex. The main challenge is making sure the capital markets work efficiently and that investors can make informed decisions when choosing where to invest.
What is the purpose of Regulation (EU) 2017/1129 in the primary market?
Regulation (EU) 2017/1129 sets the rules for the prospectus that must be published when securities are offered to the public or admitted to trading on a regulated market. The regulation aims to ensure transparency and provide investors with the necessary information to make informed decisions before investing in securities.
What are the transparency rules under Regulation (EU) No 600/2014 (MiFIR) in the secondary market?
The transparency rules under MiFIR in the secondary market aim to ensure that trading happens on well-regulated and organized trading venues. They require market operators and investment firms to publicly disclose information, such as bid and offer prices and trading volumes, both before and after trading. The post-trade information should be made available in real-time as much as possible.
There are limited exemptions from these requirements, but the information must be available to the public on a reasonable commercial basis, in a non-discriminatory manner, and for free 15 minutes after it is published. Additionally, MiFIR sets specific rules for systematic internalisers and investment firms that trade over-the-counter without exchange supervision.
What does Regulation (EU) No 596/2014 (Market Abuse Regulation) say about inside information and insider trading
Regulation (EU) No 596/2014 (Market Abuse Regulation) makes insider trading a crime by prohibiting individuals with inside information from using it for personal gain in financial trading. It also requires that inside information be disclosed to the public promptly to ensure fair and transparent markets.
