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Technology in investment management > Chapter 2: Regulatory Framework > Flashcards

Chapter 2: Regulatory Framework Flashcards

1
Q

why do financial markets needs regulation?

A

to protect investors and the public from financial loss

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2
Q

what are the purposes and aims of regulation?

A
  • Maintain and promote the fairness, efficiency, competitiveness, transparency and orderliness
  • promote understanding
  • provide protection for the public
  • minimise crime and misconduct
  • reduce systematic risks
  • assist in financial stability
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3
Q

what dis the FSMA 2000 do?

A
  • created the FSA
  • greater prudential regulation
  • increased business conduct regulation
  • outlined authorization principles
  • defined regulated activities
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4
Q

how many principles are regulated firms expected to adhere to?

A

11

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5
Q

what 3 EU laws does the UK regulator supervise member firms’ compliance with?

A
  • the Markets in Financial Instruments Directive II (MiFID II),
  • the Capital Requirements Directive (CRD) (the EU’s specific
    implementation of Basel II), and
  • the European Market Infrastructure Regulation (EMIR)
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6
Q

what did the FSA 2012 establish?

A

established 3 new regulatory bodies:
- FPC
- PRA
- FCA

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7
Q

what is the ESFS?

A

European System of Financial Supervision (ESFS) was created by the EU in response to the 2007-2008 financial crisis

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8
Q

what comprises the ESFS?

A
  • EBA (banking)
  • EIOPA (insurance and pensions)
  • ESMA (securities and markets)
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9
Q

what are the regulatory objectives of MiFID II?

A

regulates firms who provide services to clients linked to ‘financial instruments’, including shares, bonds, and derivatives

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10
Q

what are the key elements of MiFID II?

A
  • conflicts of interest
  • handling of client orders and trade execution (MTFs, SIs, trade transparency, best execution, electronic trading)
  • third country firms
  • investor protection
  • client money and assets
  • costs and charges reporting
  • reporting
  • inducements
  • agreements and advice
  • suitability
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11
Q

what were the technology implications of MiFID II?

A

range of new or upgraded systems was required for a range of
needs and demands

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12
Q

what is GDPR?

A

General Data Protection Regulation. regulation within EU law which focuses on data protection and privacy

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13
Q

what does GDPR apply to?

A
  • if the data controller, the processor, or the data subject is based in the EU
  • to organisations based outside the EU, if they collect or process the personal data of EU residents
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14
Q

what does GDPR require firms to do?

A

firms to carefully think about where personal data is stored,
who can access it and how the data is protected

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15
Q

what are the principles of GDPR?

A
  • Lawfulness, fairness and transparency
  • Accuracy
  • Purpose limitation
  • Storage limitation
  • Data minimisation
  • Integrity and confidentiality
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16
Q

what are the penalties for non-compliance with GDPR?

A

Fines of up to €20 million or 4% of group worldwide turnover
(whichever is the greater)

17
Q

what are the practical tech issues for the GDPR?

A
  • New governance and control processes
  • privacy by design
  • conditions of consent
18
Q

what are the three sets of identical rules the FCA and PRA have covering conduct of business, management of customer assets, and responsibilities of senior management?

A
  1. Senior Management Arrangements, Systems and Controls
    (SYSC)
  2. Conduct of Business Sourcebook (COBS)
  3. Client Asset Sourcebook (CASS)
19
Q

what is the purpose of SYSC?

A
  • increase accountability
  • ensure firms take reasonable care to organise effectively and responsibly
  • encourage firms to vest responsibility in directors/SMs
  • establish a common platform for reqs for all firms
20
Q

what is the purpose of COBS?

A

to ensure that firms always act honestly, fairly and professionally in accordance with the best interests of their clients

21
Q

what is the purpose of CASS?

A

outline the management of client assets (including cash and securities) and insist that if a firm holds these assets, they must be separated from the firm’s own assets, regular reconciliation

22
Q

what is the SMCR?

A

Senior Managers and Certification Regime, aimed at increasing accountability and responsibility among senior managers in financial firms. Consists of SM regime and Certification regime

23
Q

what does the SMCR establish?

A
  • ensures each senior manager has a statement of responsibilities setting out the areas for which they are accountable
  • produces a responsibilities map
  • ensures all senior managers are pre-approved by the regulators before carrying out their roles
24
Q

what are the Technology Implications for SMCR?

A

A large amount of data needs to be kept to ensure firms comply with SMCR

25
Q

what is the APER and its technology implications?

A

sets standards for personal conduct for those in financial
services
Technology implications include monitoring staff capability and managing system access. Firms use technology solutions to record, update, and monitor this data

26
Q

what did Basel I and II establish?

A

published a set of minimal capital requirements for banks, uses a three pillars concept

27
Q

what does Basel pillar 1 outline?

A

Provides improved risk-sensitivity by calculating the risk components in ways of varying sophistication. outlines 3 diff methods for measuring risk exposure (Basic Indicator, Standardised, Advanced Measurement Approach)

28
Q

what are the Technology Implications of Basel II?

A
  • major change programme
  • affects the content of business applications
  • emphasis on op. risk affects the way the tech department manages its activities
29
Q

what are the 7 operational risk events outlined by Basel?

A
  • Internal/ external fraud
  • employment practices and workplace safety
  • Client and business practices
  • Damage to physical assets
  • business disruption and system failures
  • execution, delivery and process management
30
Q

what does Basel III outline?

A
  • Banks will have to hold 4.5% of common equity and 6% of Tier I capital of risk-weighted assets (up from
    2% and 4% in Basel II)
  • mandatory capital conservation buffer of 2.5% and a discretionary countercyclical buffer of up to 2.5% during high credit growth
  • minimum 3% leverage ratio and two required liquidity ratios: Liquidity Coverage Ratio and Net Stable Funding Ratio
31
Q

what is FATCA?

A

Foreign Account Tax Compliance Act enacted in 2010, aims to combat tax evasion by US citizens with foreign investments by
requiring them to report such investments to the IRS. requires certain foreign financial institutions (FFIs), such as UK securities and investment companies, to comply with its requirements

32
Q

what are the tech implications of FATCA?

A

required corporations to create one-time reports or downloads to establish if any of their accounts were US-owned

33
Q

what is the Dodd-Frank Act?

A

comprehensive financial regulatory law passed by
the US in response to the 2008 financial crisis. It aims to increase transparency and accountability in the
financial system, reduce systemic risk, and protect
consumers

34
Q

what are the tech implications of Dodd-Frank?

A

Transaction reporting
- Swap trades need to be reported within 15 minutes of trade execution
- Swap trades now need to be reported within 15 minutes of trade execution

Clearing and Settlement of OTC Derivative Transactions:
- OTC derivative trades should be cleared through a recognised clearing house (RCH)

The Use of OTC Derivative Trade Repositories:
- All OTC derivative trades need to be entered into a trade repository maintained by an independent third party

35
Q

what is EMIR and its tech implicaitons?

A

European Market Infrastructure Regulation. aimed at improving transparency and reducing risks in the derivatives market. requires organizations to invest in
technology to capture and report derivative contracts to the appropriate trade repositories, meet clearing obligations, and support new risk management standards

36
Q

what is CSDR?

A

aims to harmonize the authorizations and supervision of EU central security depositories

37
Q

what are the CSDR implications on tech?

A
  • second phase requires some upgrades to trading and settlement systems
  • third phase will require significant upgrades to settlement and accounting systems to accommodate cash levies and track late settlements

Technology in investment management (10 decks)

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