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Questions and Answers
What investment activity involves derivative instruments designed for transferring credit risk?
What investment activity involves derivative instruments designed for transferring credit risk?
- Derivative instruments for the transfer of credit risk (correct)
- Exchange-traded funds
- Commodity derivatives with physical settlement
- Options related to emissions
Which option correctly identifies an instrument that must be settled in cash or may be settled in cash at the option of one party?
Which option correctly identifies an instrument that must be settled in cash or may be settled in cash at the option of one party?
- Cash settled derivatives based on inflation rates (correct)
- Collective investment units
- Physically settled commodities options
- Transferable securities
Which of the following is an example of a service at issuance rather than an investment activity?
Which of the following is an example of a service at issuance rather than an investment activity?
- Transferable securities issuance
- Money-market instruments
- Options on interest rates
- Units in collective investment undertakings (correct)
Which type of derivative is explicitly outlined as related to commodities that may be settled either physically or in cash?
Which type of derivative is explicitly outlined as related to commodities that may be settled either physically or in cash?
Which component is NOT considered a derivative financial instrument under the given definitions?
Which component is NOT considered a derivative financial instrument under the given definitions?
Which type of financial instrument includes options and swaps related to emission allowances recognized for compliance?
Which type of financial instrument includes options and swaps related to emission allowances recognized for compliance?
What governs the trading of options and swaps relating to commodities on regulated markets?
What governs the trading of options and swaps relating to commodities on regulated markets?
Which of the following best describes units in collective investment undertakings?
Which of the following best describes units in collective investment undertakings?
Which regulatory tool primarily aims to minimize transaction costs in investment services?
Which regulatory tool primarily aims to minimize transaction costs in investment services?
What is a key objective of regulatory strategies in reducing information asymmetry?
What is a key objective of regulatory strategies in reducing information asymmetry?
Which aspect of regulatory strategies is most focused on managing psychological costs for investors?
Which aspect of regulatory strategies is most focused on managing psychological costs for investors?
Fiduciary duties imposed by regulators primarily aim to:
Fiduciary duties imposed by regulators primarily aim to:
Which regulatory principle is essential for achieving both market efficiency and orderly markets?
Which regulatory principle is essential for achieving both market efficiency and orderly markets?
Which factor is considered a key driver of transaction costs in investment services?
Which factor is considered a key driver of transaction costs in investment services?
What is a common result of information asymmetry in investment markets?
What is a common result of information asymmetry in investment markets?
Psychological costs often affect an investor's decision-making. Which of the following describes this phenomenon?
Psychological costs often affect an investor's decision-making. Which of the following describes this phenomenon?
Which regulatory strategy is most effective in mitigating risks associated with fiduciary duties?
Which regulatory strategy is most effective in mitigating risks associated with fiduciary duties?
What measure is designed to ensure transparency to clients in investment services?
What measure is designed to ensure transparency to clients in investment services?
Which term describes the obligation of financial advisors to act in the best interests of their clients?
Which term describes the obligation of financial advisors to act in the best interests of their clients?
Which of the following can significantly reduce information asymmetry in investment services?
Which of the following can significantly reduce information asymmetry in investment services?
What are KYC rules primarily aimed at preventing?
What are KYC rules primarily aimed at preventing?
Which of the following can be categorized as a psychological cost in the context of investing?
Which of the following can be categorized as a psychological cost in the context of investing?
Which element is crucial for effective investor protection under the EU regulatory framework?
Which element is crucial for effective investor protection under the EU regulatory framework?
What is the main responsibility of providers under the duty of suitability?
What is the main responsibility of providers under the duty of suitability?
What should happen if the suitability assessment is negative?
What should happen if the suitability assessment is negative?
Which of the following criteria is NOT part of the suitability test?
Which of the following criteria is NOT part of the suitability test?
What is the purpose of the annual review of the suitability report?
What is the purpose of the annual review of the suitability report?
What can discharge the intermediary's responsibility regarding client information?
What can discharge the intermediary's responsibility regarding client information?
What should investment advisors do when a client’s suitability assessment is positive?
What should investment advisors do when a client’s suitability assessment is positive?
How does information asymmetry affect the investment relationship?
How does information asymmetry affect the investment relationship?
Which factor does NOT directly relate to psychological costs in investment decision-making?
Which factor does NOT directly relate to psychological costs in investment decision-making?
What does MiFID2 require from investment firms to enhance the quality of investment advice?
What does MiFID2 require from investment firms to enhance the quality of investment advice?
What does the term 'passive alertness' imply concerning an intermediary's responsibilities?
What does the term 'passive alertness' imply concerning an intermediary's responsibilities?
Which measure has been strengthened under MiFID2 concerning client assets?
Which measure has been strengthened under MiFID2 concerning client assets?
What regulatory strategy is implied in the suitability test?
What regulatory strategy is implied in the suitability test?
Which of the following statements best describes the role of tied agents as per MiFID2?
Which of the following statements best describes the role of tied agents as per MiFID2?
What responsibility is given to senior management under MiFID2?
What responsibility is given to senior management under MiFID2?
How does MiFID2 address the issue of monetary inducements in portfolio management services?
How does MiFID2 address the issue of monetary inducements in portfolio management services?
What is one impact of the regulatory strategies implemented under MiFID2?
What is one impact of the regulatory strategies implemented under MiFID2?
What is a consequence of reducing the power of member states to exempt certain investment firms from rules under MiFID2?
What is a consequence of reducing the power of member states to exempt certain investment firms from rules under MiFID2?
In the context of information asymmetry, how does MiFID2 aim to protect retail investors?
In the context of information asymmetry, how does MiFID2 aim to protect retail investors?
What role do tied agents play in investment firms under MiFID2?
What role do tied agents play in investment firms under MiFID2?
What defines a 'subsidiary' in the context of intended holdings acquisition or sale under MiFID2?
What defines a 'subsidiary' in the context of intended holdings acquisition or sale under MiFID2?
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Study Notes
Financial Instruments (section C, Annex I, MiFID II)
- Financial instruments include transferable securities, money-market instruments, units in collective investment undertakings, options, futures, swaps, forwards, derivative contracts relating to securities, currencies, interest rates, emission allowances, and financial indices.
- Commodities that must be settled in cash or can be settled in cash at the option of one of the parties, other than by reason of default or other termination event are also financial instruments.
- Commodities traded on a regulated market, MTF, or OTF are financial instruments unless they are wholesale energy products that must be physically settled.
- Derivative instruments for the transfer of credit risk, financial contracts for differences, and derivative contracts relating to climatic variables, freight rates, inflation rates or other official economic statistics that must be settled in cash or can be settled in cash at the option of one of the parties, other than by reason of default or other termination event are also financial instruments.
- Emission allowances are financial instruments.
‘Core’ investment services (section A, Annex I, MiFID II)
- Reception and transmission of orders in relation to one or more financial instruments is an investment service.
- Execution of orders on behalf of clients is an investment service.
- Dealing on own account is an investment service.
- (Individual) Portfolio management is an investment service.
- Investment advice is an investment service.
- Underwriting of financial instruments and/or placing of financial instruments on a firm commitment basis is an investment service.
- Placing of financial instruments without a firm commitment basis is an investment service.
- Operation of an MTF is an investment service.
- Operation of an OTF is an investment service.
Investor Protection Under MiFID 2
- MiFID 2 requires firms to extend conduct of business and conflicts of interest rules to the sale of structured deposits.
- MiFID 2 strengthens safekeeping of assets (clients’ asset segregation) rules.
- MiFID 2 reduces the power of member states to exempt certain investment firms from given rules.
- Senior management is responsible for approving the policy governing the services and products offered by the firm.
- MiFID 2 monitors the quality of best execution by imposing transparency obligations on firms and venues.
- MiFID 2 aims to improve investment advice by requiring firms to disclose if the advice is independent, considering a broad range of instruments, strengthening ongoing suitability, and banning all monetary inducements for independent advice.
- Monetary inducements are banned for portfolio management services.
KYC (Know Your Client) Rules
- KYC rules include Know Your Product (KYP) rules.
- As part of its due diligence, an investment firm must conduct a suitability test to assess whether a financial instrument or investment service is suitable for a client.
- An investment firm must conduct a suitability test by taking into consideration factors such as the client’s:
- Investment objectives and financial situation
- Investment experience and knowledge
- Risk tolerance
- Investment time horizon
- The suitability test is meant to help ensure that the investment advice or portfolio management is aligned with the client’s financial situation and investment objectives.
Reliance on Information Disclosure by the Client
- The investment firm’s responsibility for the suitability of the investment is discharged when the client discloses their financial situation and investment objectives, unless the firm is aware that the information is outdated, inaccurate or incomplete.
Key Principles and Regulatory Tools
-
The key principles for investment services regulation include:
- Investor Protection
- Orderly Markets and Financial Stability
- Market Efficiency
-
The regulatory tools for investment services regulation include:
- Organisational Requirements
- Conduct of Business Rules and Market Transparency
- Market Access and Integrity
Regulatory Tools
- Four main regulatory tools are generally adopted to regulate the provision of investment services:
- Organisational rules
- Conduct of business rules
- Market access rules
- Market integrity rules
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