Chapter 9: Regulatory Requirements

Question 1

What are self-regulatory organisations (SROs)?

Answer 1

Nationally-licensed exchanges

Question 2

What is The International Organization of Securities Commissions (IOSCO)?

Answer 2

Association of organisations that regulate the worlds securities and futures markets

Question 3

What is the The International Swaps and Derivatives Association (ISDA) ?

Answer 3

Members are the main participants in OTC derivatives
ISDA master, FpML

Question 4

What have UK firms had to do to post brexit to service EU clients?

Answer 4

Create EU subsidiaries

Question 5

What are the two participants that retain “passporting” after brexit?

Answer 5

CSDs and Clearing Houses

Question 6

What is the Capital Requirements Directive
(CRD)?

Answer 6

Part of MiFID
Sets out requirements for the regulatory capital a firm must hold

Question 7

What is the range of UK firms that are classified as MiFID firms? (3)

Answer 7

• firms dealing and managing investments
• firms operating an MTF, OTF and/or SI
• venture capital firms that meet certain criteria.

Question 8

What is the penalty for breaching international financial sanctions?

Answer 8

10% annual turnover or twice the amount of the benefit derived from the violation

Question 9

What is the Operations Steering Committee (OSC)?

Answer 9

Part of ISDA
Improve infrastructure of OTC derivatives
OTC broker dealers, buy-side

Question 10

What are the European regulators? (2)

Answer 10

European Banking Authority (EBA)
Conducts stress tests on EU banks, overrule national regulators
European Securities and Markets Authority (ESMA)
Assess risks, and provide rulebook for financial markets
Supervisory convergence - across all authorities

Question 11

What are the regulators in;
China
Hong Kong
Singapore

Answer 11

CSRC - China Securities Regulatory Commission
SFC - Securities and Futures Commission of Hong Kong
MAS - Monetary Authority of Singapore

Question 12

What are the 3 main elements in the FCAs regulation?

Answer 12

• broad-based standards in preference to detailed rules
• outcomes-based regulation, and
• increasing senior management responsibility

Question 13

What are the 3 ways a client is categorised in COBS?

Answer 13

Retail client
Professional client
Eligible counterparty (institutions, firms, pensions funds, banks)

Question 14

What is FCA’s Conduct of Business Sourcebook (COBS)

Answer 14

11 key principles for business which authorised firms must observe

Question 15

How can a client elect to have more protection?

Answer 15

Changing client category
E.g. professional to retail

Question 16

When is a client treated as an elective professional client? (2)

Answer 16

Qualitative
Firm believes they have expertise, knowledge to make decisions
Quantitative
>10 large transactions a year
>500k in portfolio
Worked in financial services for at least a year

Question 17

What do firms have to do to achieve best execution?

Answer 17

That firms take all reasonable steps to obtain, when executing orders, the best possible result for their clients taking into account the execution factors
Not just best price
These factors are price, cost, speed, likelihood of execution and settlement, size, nature or any other consideration relevant to the execution of an order.

Question 18

What is a suitability assessment?

Answer 18

Requires that a firm complies evidence of a prospective clients;
Product knowledge
Financial situation
Investment objectives

Question 19

What is a appropriateness assessment?

Answer 19

Firm must discover whether client has adequate knowledge to trade specific financial instruments

Question 20

How do UK/EU and US regulators differ in their approach?

Answer 20

UK/EU use principals based approach
US is rules based regulation

Question 21

What is the FCA and PRAs main responsibility?

Answer 21

FCA - Covers UK financial markets, MiFID etc
PRA - Regulates deposit takers, insurers and investment firms

Question 22

What is the transparency directive (TD)?

Answer 22

Establish minimum requirements on periodic financial reporting
Disclosure of major holdings

1. The minimum content of annual, half-yearly and interim management statements.
2. The notification requirements of both issuers and investors in relation to the acquisition and
   disposal of the major holdings in companies.
3. The method of disseminating and storing the information covered in 1 and 2 on a pan-European basis

Question 23

What does CASS 6 & 7 cover?

Answer 23

6 - custody of client assets
7 - client money

Question 24

What is an internal vs external reconciliaiton?

Answer 24

Internal - Client accounts vs records of client money held by the firm
External - checking records vs market level or bank level

Question 25

What is the maintenance requirement?

Answer 25

Minimum amount to be collateralised to keep an open position

Question 26

What did EMIR introduce? (2)

Answer 26

Reporting obligation for OTC derivatives Central counterparties for all OTC derivative trades

Question 27

What does the SEC not regulate?

Answer 27

Any futures products or exchanges

Question 28

What does the SEC regulate?

Answer 28

Options, stocks and relevant exchnages

Question 29

What does the Commodities Futures Trading Commission (CFTC) regulate?

Answer 29

On-exchange derivative transactions

Question 30

What is does the National Futures Association (NFA) do?

Answer 30

Overseen by CFTC Oversee firms operating in derivatives industry Financed by membership fees Regulatory programs to safeguard integrity of derivatives market

Question 31

What is a single stock future (SSF)?

Answer 31

A futures contract on an individual share Was illegal, made not illegal

Question 32

What must a firm or individual that conducts business with the public on a futures exchange be?

Answer 32

REGISTERED with CFTC MEMBER of NFA

Question 33

What is CFTC Part 30?

Answer 33

Illegal to trade with US customers on US exchange without NFA authorisation, UNLESS done via NFA firm

Question 34

What are non-US firms prohibited from doing as per CFTC Part 30?

Answer 34

Dealing with US customers on any non-US exchange, UNLESS they trade via US firm or have exemption

Question 35

What is CFTC Reg 30.5?

Answer 35

Exemption for registration for any non-US person who needs to be registered under CFTC apart from futures commission merchants

Question 36

How can non-US firms seek Part 30 exemption?

Answer 36

US client funds segregated Risk disclosures Join NFA arbitration scheme Jurisdiction under US Commodity Exchange Act

Question 37

What are security based swaps?

Answer 37

Swaps based on individual securities or loans, subject to SEC regulation Government security swaps are regulated by CFTC