Capital Adequacy Requirements Quiz
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Questions and Answers

What determines the minimum capital a trading member must maintain?

  • The total liabilities of the trading member
  • The total equity reported in the last financial year
  • The greater of initial capital or specified risk requirements (correct)
  • A fixed percentage of revenue generated

    • Which of the following is NOT included in the capital adequacy requirements for trading members?

  • Position risk requirement
  • Liquidity risk requirement (correct)
  • Foreign exchange risk requirement
  • Counterparty risk requirement

    • What must a foreign parent's written confirmation to the JSE include?

  • A statement of compliance with like capital adequacy requirements (correct)
  • An assurance of operational independence
  • A declaration of corporate governance policies
  • A guarantee of financial support to the local branch

    • What is a defining feature of the inter-dealer broker's role in the JSE listed bonds market?

    <p>Facilitates transactions between two counterparties on a name give-up basis.</p> Signup and view all the answers

    Which type of trading member is exempt from the monthly capital adequacy returns to the Director: Market Regulation?

    <p>A trading member that trades derivatives for its own account</p> Signup and view all the answers

    In the event of a foreign bank having a local branch, which regulation must they comply with?

    <p>The capital adequacy requirements as per the Banks Act, 1990</p> Signup and view all the answers

    What is the primary purpose of the JSE IRC Rules and Directives?

    <p>To ensure fair market operations and compliance with the Act.</p> Signup and view all the answers

    Which of the following requirements must an inter-dealer broker meet to maintain their status?

    <p>Provide a list of clients upon request when trading on a matched principal basis.</p> Signup and view all the answers

    What is restricted for an inter-dealer broker when transacting in bonds on a matched principal basis?

    <p>They must not take proprietary positions against the trading member or client.</p> Signup and view all the answers

    What does the thirteen weeks fixed operating costs requirement pertain to?

    <p>Operating costs of the local branch in the Republic</p> Signup and view all the answers

    Who must adhere to the JSE IRC Rules and Directives?

    <p>Trading members, officers, clients, and others engaging in transactions.</p> Signup and view all the answers

    Which of the following accurately describes the limitations placed on inter-dealer brokers by the JSE?

    <p>Their business activities are strictly limited to arranging and facilitating bond transactions.</p> Signup and view all the answers

    For a trading member that does not trade in bonds, what must their assets exceed?

    <p>Total liabilities excluding valid subordinated loans</p> Signup and view all the answers

    What condition is attached to every transaction in IRC securities by a trading member?

    <p>It must adhere to the rules and directives in place.</p> Signup and view all the answers

    What does the term 'matched principal basis' refer to in the context of inter-dealer brokers?

    <p>Facilitating trades between two parties without taking a proprietary position.</p> Signup and view all the answers

    What could happen to trading members exempt from IRC Rules regarding capital adequacy?

    <p>They must abide by different exchange capital adequacy requirements</p> Signup and view all the answers

    What was the outcome of integrating the Yield-X and BESA markets?

    <p>The combination of their rules into a single set of directives called JSE IRC rules.</p> Signup and view all the answers

    What role can the JSE fulfill regarding clearing operations?

    <p>The JSE can appoint a clearing house or a CCP for facilitating trades.</p> Signup and view all the answers

    What was the main intent behind the transitional provisions established by the JSE?

    <p>To facilitate the integration of different market rules and directives.</p> Signup and view all the answers

    Which market rules currently form the foundation for the integrated markets after the merger?

    <p>Yield-X rules with certain amendments.</p> Signup and view all the answers

    What is a core objective of the JSE in relation to its operation as stated in the provisions?

    <p>Ensuring the orderly conduct of business in the exchange.</p> Signup and view all the answers

    What is the primary purpose of the Compensation Funds established by the JSE?

    <p>To pay claims related to IRC securities transactions up to a specified limit.</p> Signup and view all the answers

    Who is responsible for determining the levy payable by trading members to the Compensation Funds?

    <p>The JSE, as per its established rules.</p> Signup and view all the answers

    What is a requirement for a trading member to enter into a clearing agreement?

    <p>They may only enter into such an agreement with one clearing member.</p> Signup and view all the answers

    What does the income of the Compensation Funds primarily consist of?

    <p>Levy contributions made by trading members.</p> Signup and view all the answers

    What role do the trustees have concerning the Compensation Funds?

    <p>They are involved in acquiring, incurring, and managing assets and liabilities.</p> Signup and view all the answers

    In what capacity can a trading member operate in relation to clients?

    <p>They can trade both for themselves and on behalf of clients.</p> Signup and view all the answers

    What stipulations can the JSE prescribe regarding the settlement systems?

    <p>The JSE can determine both procedures and fees for trading members.</p> Signup and view all the answers

    What kind of liabilities can claims from the Compensation Funds cover?

    <p>Liabilities specified in the rules of the Compensation Funds.</p> Signup and view all the answers

    What restrictions apply to a trading member operating as an inter-dealer broker (IDB) when arranging transactions in JSE listed bonds?

    <p>It must limit its activities to arranging transactions on a name give-up basis.</p> Signup and view all the answers

    When transacting on a matched principal basis, what condition must be adhered to by an inter-dealer broker?

    <p>The broker must not take a proprietary position against the other party.</p> Signup and view all the answers

    What must an inter-dealer broker provide to any trading member upon request during a matched principal transaction?

    <p>A list of clients who may be opposite counterparties.</p> Signup and view all the answers

    Which of the following statements about inter-dealer brokers is false?

    <p>IDBs can trade bonds on a proprietary basis when requested.</p> Signup and view all the answers

    Which of the following best describes the activity limitations imposed on inter-dealer brokers in the JSE listed bonds market?

    <p>They can arrange transactions on a name give-up basis or matched principal basis only.</p> Signup and view all the answers

    What is the maximum amount that can be paid out of the Compensation Funds for claims arising from transactions in IRC securities?

    <p>The amount specified in the rules of the Compensation Funds</p> Signup and view all the answers

    Who is allowed to impose a levy on trading members for the use of Compensation Funds?

    <p>The JSE or its designated authority</p> Signup and view all the answers

    Which of the following best describes the role of trustees in the Compensation Funds?

    <p>They administer the assets and liabilities of the Compensation Funds.</p> Signup and view all the answers

    What conditions must a trading member meet to operate in a clearing agreement?

    <p>They may only enter an agreement with one clearing member.</p> Signup and view all the answers

    How does a trading member recover the levy imposed by the Compensation Funds?

    <p>By incorporating the costs into the transaction fees charged to clients.</p> Signup and view all the answers

    What is primarily included in the income of the Compensation Funds?

    <p>Levy contributions by trading members.</p> Signup and view all the answers

    What procedural authority does the JSE have concerning settlement systems?

    <p>To prescribe compliance requirements for trading members.</p> Signup and view all the answers

    What limitation exists for claims from the Compensation Funds against a defaulting trading member?

    <p>Claims are subject to any defenses the defaulting member may have.</p> Signup and view all the answers

    What is required of the foreign parent company of a local branch regarding compliance with capital adequacy requirements?

    <p>They must confirm compliance with local requirements in writing.</p> Signup and view all the answers

    Which of the following components is NOT part of the total capital requirements for a trading member?

    <p>The liquidity risk requirement</p> Signup and view all the answers

    For a trading member that solely trades derivative instruments for its own account, what is required regarding its assets and liabilities?

    <p>Assets must exceed liabilities excluding certain subordinated loans.</p> Signup and view all the answers

    What can exempt a trading member from the monthly capital adequacy returns to the Director: Market Regulation?

    <p>Being an authorised user of another exchange.</p> Signup and view all the answers

    What does the requirement for thirteen weeks fixed operating costs relate to for a trading member that is an external company?

    <p>The operating costs of the local branch in the Republic.</p> Signup and view all the answers

    What must a trading member that is exempt from IRC Rules ensure regarding its financial standing?

    <p>Their total assets must exceed total liabilities, excluding certain subordinated loans.</p> Signup and view all the answers

    Which regulatory framework must external trading members, particularly branches of foreign banks, comply with if they are exempt from IRC Rules?

    <p>The capital adequacy requirements prescribed by the Banks Act.</p> Signup and view all the answers

    What is the main condition a trading member must satisfy concerning their own funds at all times?

    <p>They must meet either the initial capital or total risk requirements.</p> Signup and view all the answers

    What must a trading member ensure when conducting transactions in IRC securities?

    <p>Transactions are subject to the provisions of the Act, these Rules, and Directives.</p> Signup and view all the answers

    Which of the following defines the role of the clearing house appointed by the JSE?

    <p>To clear and/or settle trades in IRC securities according to the Rules.</p> Signup and view all the answers

    What significant organizational change occurred to the Yield-X and BESA markets?

    <p>They were integrated, leading to a renaming and merging of rules.</p> Signup and view all the answers

    Who must be informed of any decisions made under the JSE IRC Rules?

    <p>All trading members and their clients.</p> Signup and view all the answers

    What is a primary objective of the JSE as indicated in its framework?

    <p>To regulate fair and efficient markets.</p> Signup and view all the answers

    What is expected of clients interacting with trading members regarding the JSE Rules?

    <p>Clients are bound by the Rules when concluding transactions.</p> Signup and view all the answers

    Which entity is responsible for conducting oversight on transactions within IRC securities?

    <p>The controlling body of the JSE.</p> Signup and view all the answers

    What adaptation was necessary for the merging of Yield-X and BESA into the JSE?

    <p>Selective amendments were made to integrate the rules effectively.</p> Signup and view all the answers

    Study Notes

    Capital Adequacy Requirements

    • Trading members must have sufficient funds to cover various risks, including initial capital, operating costs, position risk, counterparty risk, large exposure risk, and foreign exchange risk.
    • External companies operating as trading members must meet specific requirements with regard to their local branch, including confirmation of compliance by the foreign parent company.
    • Trading members that are branches of foreign banks are exempt from the capital adequacy requirements of the IRC Rules and must comply with the requirements of the Banks Act, 1990.
    • Trading members that do not trade in bonds and only trade in derivative instruments for their own account are exempt from the IRC Rules, but must ensure their assets exceed their liabilities.
    • Trading members that are authorized users of another recognized exchange are exempt from the IRC Rules and must comply with the capital adequacy requirements of that exchange.

    The Rules and Directives

    • The purpose of the JSE Interest Rate and Currency Derivatives (IRC) Rules and Directives is to establish and regulate fair and efficient markets.
    • These rules and directives are binding upon all trading members, officers, employees, clients, and other parties involved in transactions with trading members.
    • Every transaction in IRC securities must be entered into subject to the provisions of the Act, these Rules, and the Directives.

    Clearing House

    • The JSE may appoint a clearing house or a central counterparty (CCP) to clear and settle trades in IRC securities.

    Transitional Provisions

    • The Yield-X and BESA markets have been integrated.
    • The integrated rules and directives are now known as the JSE interest rate and currency ("IRC") rules and directives.
    • The transitional provisions facilitate the integration of the Yield-X and BESA rules and directives.

    Compensation Funds

    • The JSE may establish and maintain Compensation Funds to cover claims arising from the default of a trading member.
    • The Compensation Funds are administered by trustees.
    • Trading members pay a levy to the Compensation Funds on transactions in IRC securities.

    Settlement System

    • The JSE may operate or contract with a third party to operate settlement systems.
    • The JSE can prescribe procedures and requirements for trading members using these systems, including fees payable.

    General Membership Requirements

    • All trading members must comply with the requirements outlined in the rules and determined by the JSE.
    • Trading members are categorized based on their authorized activities.
    • Trading members may be clearing members and may trade for and on behalf of clients.
    • Inter-dealer brokers (IDBs) are a sub-category of trading members that are subject to specific rules, including limitations on their activities and disclosure requirements.
    • The JSE may impose restrictions or conditions on trading members in relation to the securities services they are authorized to provide.
    • IDBs must meet specific requirements to maintain their status, including limitations on their business activities, restrictions on proprietary positions, and disclosure obligations.

    Capital Adequacy Requirements

    • Trading members must maintain own funds equal to the greater of the initial capital requirement or 13 weeks' fixed operating costs, plus various risk requirements.
    • For trading members who are external companies (excluding branches of foreign banks), the own funds requirement applies to the local branch, the foreign parent must confirm compliance with similar capital adequacy requirements in their jurisdiction, and the 13 weeks fixed operating costs requirement relates only to the local branch.
    • Branches of foreign banks are exempt from the capital adequacy return requirements and instead comply with the Banks Act, 1990 and related regulations.
    • Trading members who trade solely in derivative instruments listed on the JSE for their own account and are exempt from capital adequacy returns are required to maintain assets (excluding goodwill and intangible assets) exceeding their liabilities (excluding subordinated loans).
    • Authorized users of other exchanges who are exempt from capital adequacy returns must comply with the capital adequacy requirements of those exchanges.

    Purpose of the JSE IRC Rules and Directives

    • Purpose of the JSE IRC Rules and Directives is to ensure fair and efficient markets and orderly business practices, in accordance with the JSE's Memorandum and Articles of Association and the applicable Act.

    Binding Nature of the Rules and Directives

    • Rules and Directives are binding on all trading members, officers, employees, clients of trading members, and other persons who transact with trading members in the course of their business.
    • The rules also apply to CSDPs acting on behalf of trading members and their clients.
    • The controlling body of the JSE will notify trading members of any decisions or determinations made under these rules.

    Transactions Subject to the Rules and Directives

    • All transactions in IRC securities entered into by a trading member must be subject to the provisions of the Act, the Rules, and the Directives.

    Clearing House Appointment

    • The JSE may appoint a clearing house or a clearing house and central counterparty (CCP) to clear and settle trades in IRC securities in accordance with the Rules.

    Transitional Provisions

    • The JSE integrated its Yield-X and BESA markets, resulting in the joining of their respective rules and directives and membership.
    • The integrated rules and directives are based on the Yield-X rules, with appropriate amendments, and have been renamed the JSE Interest Rate and Currency (IRC) Rules and Directives.

    Compensation Funds

    • The JSE is empowered to establish and maintain Compensation Funds for paying claims arising from liabilities of defaulting trading members.
    • Payment from the Funds is limited to claims arising from transactions in IRC securities with or on behalf of other persons and other liabilities specified in the rules.
    • The JSE determines a levy payable by trading members on IRC securities transactions.
    • Trustees of the Compensation Funds acquire, incur, and administer the assets and liabilities of the Funds.
    • Income of the Compensation Funds vests in the trustees and is administered by them.

    Settlement System

    • The JSE may operate or contract with a third party to operate one or more settlement systems.
    • The JSE may prescribe procedures and requirements for trading members using the settlement systems and determine the fees payable for such use.

    Membership Requirements

    • To qualify as a trading member, an applicant must comply with the requirements outlined in the rules and any additional requirements determined by the JSE. -Trading members are categorized and registered in a register maintained by the JSE.

    Categories of Membership

    • A trading member may only enter into a clearing agreement with one clearing member.
    • Trading members can be clearing members and trade for and on behalf of clients.
    • Inter-dealer brokers (IDBs) are a subcategory of trading members subject to specific rules and cannot be clearing members.

    Specific Requirements for Inter-Dealer Brokers (IDBs)

    • IDBs must limit their JSE listed bond business to arranging transactions between counterparties on a name give-up basis or trading with or on behalf of other parties on a matched principal basis.
    • IDBs cannot take a proprietary position against another trading member or client when trading on a matched principal basis.
    • IDBs must provide a list of clients who may be involved in matched principal transactions upon request.

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    Related Documents

    JSE Rules and Directives PDF

    Description

    Test your understanding of capital adequacy requirements for trading members. This quiz covers various risks that members must address, exemptions, and compliance criteria based on their operations and affiliations. Gain insights into how these regulations impact trading activities.

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