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Global Financial Compliance Study Material
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Global Financial Compliance Study Material

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Questions and Answers

What are the objectives and benefits of regulation?

  • Increase in confidence and trust in financial markets, systems, and products
  • Reduction of market and system failures and their economic consequences
  • Enhancement of consumer protection
  • All of the above (correct)

    • Define laws and regulations in the context of financial services.

    Laws are principles and regulations established in a community, enforced by authority. Regulations consist of rules and standards covering market conduct, customer treatment, and more.

    In a rules-based approach to regulation, strict adherence to precise rules is necessary.

    True

    Principles-based regulations focus on the spirit of the rules and the types of __________ and outcomes.

    <p>behavior</p> Signup and view all the answers

    What is the main aim of the Payment Services Directive 2 (PSD2)?

    <p>To provide legal foundation for electronic payments in the EU</p> Signup and view all the answers

    Market Abuse Regulation (MAR) applies to financial instruments traded on organized trading facilities (OTF).

    <p>True</p> Signup and view all the answers

    What is the purpose of a market sounding?

    <p>To assess the interest of potential investors in relation to a transaction, potential size, and pricing.</p> Signup and view all the answers

    European Market Infrastructure Regulation (EMIR) requires over-the-counter (OTC) derivative contracts to be __________ and derivatives contracts to be reported.

    <p>cleared</p> Signup and view all the answers

    What does GDPR stand for?

    <p>General Data Protection Regulation</p> Signup and view all the answers

    Under GDPR, companies can use long illegible terms and conditions.

    <p>False</p> Signup and view all the answers

    What is the maximum fine that can be imposed for the most serious infringements under GDPR?

    <p>4% of the annual global turnover of the previous financial year or €20 million (UK – £17.5 million), whichever is greater</p> Signup and view all the answers

    Under GDPR, breach notification is mandatory within __ hours of first becoming aware of the breach.

    <p>72</p> Signup and view all the answers

    Match the term with its description:

    <p>Right to be Forgotten = Allows data subjects to have their personal data erased Data Portability = Right for a data subject to receive their personal data in a machine-readable format Privacy by Design = Concept of including data protection from the beginning of system design</p> Signup and view all the answers

    What is the principle-based approach in regulation?

    <p>Provides scope for innovation and freedom to develop services and business models within the framework of the principles</p> Signup and view all the answers

    Principles-based decision making has been deemed a complete failure.

    <p>False</p> Signup and view all the answers

    What is self-regulation in the financial sector?

    <p>A situation where groups or industries mutually agree on rules that govern their own collective behavior</p> Signup and view all the answers

    What are the broad objectives of self-regulation in financial markets?

    <p>Preserve market integrity, preserve financial integrity, and protect investors</p> Signup and view all the answers

    The adoption of self-regulation differs from country to country, across _______ sectors and across developed and emerging markets.

    <p>market</p> Signup and view all the answers

    What is an example of faith- and ethical-based regulation in the financial sector?

    <p>The Islamic finance industry</p> Signup and view all the answers

    What is the purpose of the International Swaps and Derivatives Association (ISDA) Master Agreement?

    <p>To facilitate effective risk management for all users of derivatives products</p> Signup and view all the answers

    What is the purpose of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI)?

    <p>To formulate and issue accountancy, auditing, ethics, governance, and Shariah standards for the international Islamic banking and finance industry</p> Signup and view all the answers

    The extra-territorial reach of legislation is limited to the EU.

    <p>False</p> Signup and view all the answers

    What is the purpose of the EU regulations outlined in the chapter?

    <p>To provide a framework for implementation of similar rules in countries outside the EU, amended to cater for specific local circumstances</p> Signup and view all the answers

    What is the purpose of the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions?

    <p>To criminalize the bribery of foreign public officials in international business transactions and provide related measures to make it effective.</p> Signup and view all the answers

    Which countries have adopted the OECD Convention on Combating Bribery of Foreign Public Officials?

    <p>Argentina, Brazil, Bulgaria, South Africa</p> Signup and view all the answers

    The UK Bribery Act 2010 only focuses on the demand side of bribery transactions.

    <p>False</p> Signup and view all the answers

    Section 12 of the UK Bribery Act 2010 grants jurisdiction to UK courts for offences committed _____ and outside the UK.

    <p>inside</p> Signup and view all the answers

    Match the following terms with their descriptions:

    <p>Foreign Corrupt Practices Act (FCPA) = Prohibits corrupt payments to foreign officials SOX legislation = Requires disclosure of instances of fraud Anti-Money Laundering Directive (AMLD) = Risk-based approach to combat money laundering</p> Signup and view all the answers

    What is OTC derivatives trading characterized by?

    <p>Private negotiation</p> Signup and view all the answers

    The lack of information on positions and exposures of individual firms in OTC derivatives helps regulators respond effectively in case of a default.

    <p>False</p> Signup and view all the answers

    What is counterparty credit risk in OTC derivatives?

    <p>the risk that a counterparty may not honor its obligations under the contract when they become due</p> Signup and view all the answers

    _________ is the technological infrastructure that allows simultaneous access, validation, and updating across a network spread out over multiple entities or locations.

    <p>Distributed Ledger Technology (DLT)</p> Signup and view all the answers

    Match the following regulatory actions with their purpose:

    <p>Increase transparency of the derivatives market = Require market participants to report all necessary information on their OTC derivatives portfolios Reduce counterparty credit risk in trading = Use CCP clearing for OTC derivatives and set specific targets for legal and process standardization Enhance market integrity and oversight = Use a post-trading market infrastructure</p> Signup and view all the answers

    What is the main purpose of Bank for International Settlements (BIS)?

    <p>Serve as a central bank for central banks and foster international monetary and financial cooperation</p> Signup and view all the answers

    Which of the following countries' banking associations are members of International Banking Federation (IBFed)?

    <p>Australia</p> Signup and view all the answers

    The regulatory guidelines produced by Bank for International Settlements (BIS) automatically have force in national or international law.

    <p>False</p> Signup and view all the answers

    What is the OECD CRS?

    <p>A framework for automatic exchange of information</p> Signup and view all the answers

    What is the purpose of the Sarbanes-Oxley (SOX) Act of 2002?

    <p>All of the above</p> Signup and view all the answers

    What does the International Banking Federation (IBFed) facilitate?

    <p>Efforts to implement international regulations in banking</p> Signup and view all the answers

    What is the aim of the OECD CRS framework?

    <p>to obtain information from financial institutions and exchange it with other jurisdictions on an annual basis</p> Signup and view all the answers

    Sarbanes-Oxley (SOX) Act of 2002 applies only to US public companies.

    <p>False</p> Signup and view all the answers

    Financial institutions are required to report the different types of accounts and taxpayers covered under the OECD CRS.

    <p>True</p> Signup and view all the answers

    The OECD CRS relies heavily on local ______ and know your customer (KYC) requirements.

    <p>anti-money laundering</p> Signup and view all the answers

    What is the purpose of the European Banking Authority (EBA) in relation to payment institutions under PSD2?

    <p>The role of the EBA is to develop regulatory technical standards on strong customer authorisation, assist in dispute resolution between national authorities, and maintain a central register of authorised payment institutions.</p> Signup and view all the answers

    Match the following terms with their descriptions:

    <p>Multilateral Trading Facilities (MTFs) = System that brings together multiple parties interested in trading financial instruments away from exchanges Systematic Internalisers (SIs) = Investment firms that match 'buy' and 'sell' orders from clients internally</p> Signup and view all the answers

    Sarbanes-Oxley Act Section 404 requires the management of a US public company to report annually on the operational effectiveness of the company's internal controls over financial reporting. The company's auditors must attest to and report on the management's assertion over the effectiveness of internal _________ controls.

    <p>financial</p> Signup and view all the answers

    Match the following terms with their descriptions:

    <p>Settlement Fail = Non-occurrence of settlement or partial settlement of a securities transaction on the intended settlement date Straight-through Processing (STP) = Essential for maintaining timely settlement for high volumes of transactions SDR (Settlement Discipline Regime) = Introduces new cash penalties for settlement fails</p> Signup and view all the answers

    Study Notes

    Models of Regulation

    • Effective capital and financial markets are essential for economic development and wealth creation.
    • Regulation aims to increase confidence and trust in financial markets, systems, and products.
    • Objectives of regulation:
      • Establish an environment to encourage economic development and wealth creation.
      • Reduce the risk of market and system failures, including their economic consequences.
      • Enhance consumer protection, giving them the reassurance they need to save and invest.
      • Reduce financial crime by ensuring financial systems cannot easily be exploited.

    Law and Regulation

    • Law provides the structural framework for the financial sector, as well as the products it offers.
    • Financial services legislation includes the Financial Services and Markets Act 2000 (FSMA) in the UK.
    • National and international laws regarding the prevention of money laundering and terrorist financing (ML/TF) will be incorporated into relevant regulations.
    • Regulation combines rules and standards, including:
      • Primary legislation
      • Rules and standards issued by legislators and supervisors
      • Market conventions
      • Codes of practice promoted by industry associations or professional bodies
      • Internal codes of conduct applicable to the staff members of financial institutions

    Rules-Based and Principles-Based Approaches

    • Rules-based approach: detailed rules specify exactly what individuals and firms must do to ensure compliance.
    • Principles-based approach: focuses on the spirit of the rules, and individuals and firms are responsible for ensuring they comply with the principles.
    • A rules-based approach is typically inflexible, while a principles-based approach provides scope for innovation and freedom to develop services and business models within the framework of the principles.

    Models of Self-Regulation

    • Self-regulation is a situation in which groups or industries mutually agree on the rules that will govern their own collective behaviors.
    • Self-regulation exists in addition to laws or regulations established by governments or regulatory bodies.
    • Industry-specific knowledge, industry motivation, contractual relationships, transparency, and accountability are key elements of an effective self-regulatory model.
    • Self-regulation can focus on oversight of the market itself, qualification standards for market intermediation, and oversight of the business conduct of intermediaries.

    Efficacy of Self-Regulation

    • An effective self-regulatory model includes:
      • Industry-specific knowledge
      • Industry motivation
      • Contractual relationship
      • Transparency and accountability
      • Flexible SRO compliance programs
      • Coordination and sharing information
    • Examples of self-regulation include:
      • Industry SROs
      • Exchange self-regulatory frameworks
      • Private associations
      • Ethical-based finance### Islamic Finance and Self-Regulation
    • Islamic finance is regulated by a combination of self-regulatory bodies and statutory regulation in the countries where they operate.
    • The principles of Shariah (Islamic law) provide the framework for Islamic commercial and financial ethics, which include major prohibitions such as:
      • Riba (interest)
      • Gharar (unnecessary uncertainty)
      • Maysir (gambling)
    • Two self-regulating bodies have been established:
      • The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI)
      • The Islamic Financial Services Board (IFSB)

    AAOIFI and IFSB

    • AAOIFI:
      • Formulates and issues standards for accountancy, auditing, ethics, governance, and Shariah for the international Islamic banking and finance industry.
      • Aims to harmonize Islamic banking and finance practices, and ensure transparency and uniformity of financial reporting by Islamic banks and financial institutions.
    • IFSB:
      • Issues global prudential standards and guiding principles for the Islamic financial sector.
      • Focuses on the identification, management, and disclosure of risks relevant to Islamic products and operations.

    Extra-Territorial Reach of Legislation

    • Many financial regulations have application beyond national borders.
    • Compliance officers need to be aware of the potential impact of such legislation.

    Data Protection (GDPR)

    • EU General Data Protection Regulation (GDPR) was enforced on May 25, 2018.
    • Key changes:
      • Increased territorial scope (extra-territorial applicability)
      • Strengthened consent requirements
      • Data subject rights:
        • Right to access
        • Right to be forgotten (data erasure)
        • Data portability
      • Privacy by design and default
      • Data Protection Officers (DPOs)
    • Penalties:
      • Up to 4% of annual global turnover or €20 million (maximum fine)
      • Tiered approach to fining

    Banking Reform

    • Independent Commission on Banking (ICB) in the UK:
      • Recommended structural reforms to promote financial stability and competition.
      • Implemented as of January 1, 2019, resulting in ring-fencing of retail operations from investment banks.
    • Dodd-Frank Act in the US:
      • Comprehensive regulation of financial markets.
      • Key provisions:
        • Consolidation of regulatory agencies
        • Elimination of national thrift charter
        • New oversight council to evaluate systemic risk
        • Comprehensive regulation of financial markets
        • Consumer protection reforms
        • Tools for financial crises

    Market Integrity

    • Markets in Financial Instruments Directive (MiFID) and Regulation (MiFIR):
      • Key aims:
        • Provide investor protection rules across the EEA
        • Extend the range of investment services for which a firm can obtain an EU 'passport'
      • Key provisions:
        • Obligation to obtain the best possible result for the client
        • Information disclosure requirements
        • Client-specific rules on suitability and appropriateness of financial products
        • Rules on inducements
    • Market Abuse Regulation (MAR):
      • Applies to financial instruments admitted to trading on a regulated market or an MTF, or for which a request for admission to trading has been made.
      • Key provisions:
        • Insider dealing and market manipulation
        • Unlawful disclosure of inside information
        • Market soundings### Market Abuse Regulation (MAR)
    • Covers behaviour or transactions, including bids, relating to the auctioning of emission allowances or other auctioned products based on regulated markets.
    • Incorporates ESMA guidelines on:
      • Inside information of commodity derivatives
      • Delayed disclosure of inside information
      • Market soundings
    • Inside information is information that would likely have a significant effect on the price of financial instruments or issuers if it were made public.
    • Financial instruments include spot commodity contracts, emission allowances, and related auction products.
    • Insider dealing: using inside information to execute a transaction, or to amend or cancel an existing transaction.
    • Firms must maintain a register of insiders.
    • Issuers and emission allowance market participants need to publicly disclose any inside information as soon as possible.

    European Market Infrastructure Regulation (EMIR)

    • Requires over-the-counter (OTC) derivative contracts to be cleared and derivatives contracts to be reported.
    • Enhances safety of central counterparties (CCPs) and trade repositories (TRs).
    • Main obligations:
      • Central clearing for certain classes of OTC derivatives
      • Risk mitigation techniques for non-centrally cleared OTC derivatives
      • Reporting to TRs
      • Organisational, conduct of business, and prudential requirements for CCPs and TRs

    Payment Services Directive 2 (PSD2)

    • Introduced into national law of EU member states on 13 January 2018.
    • Aims to:
      • Provide a legal foundation for the further development of a better integrated internal market for electronic payments within the EU
      • Open up payment markets to new entrants
      • Provide a legal platform for the single euro payments area (SEPA)
    • Improves existing EU rules for electronic payments, incorporating emerging and innovative payment services.
    • Rules apply to existing and new providers of innovative payment services.

    Sarbanes-Oxley (SOX) Act 2002

    • Introduced in response to financial scandals, such as Enron and WorldCom.
    • Aims to protect investors by improving the accuracy and reliability of corporate disclosures.
    • Applies to US public companies and their global subsidiaries.
    • Key implications:
      • Section 404: management of a US public company must report annually on the operational effectiveness of the company's internal controls over financial reporting.
      • Requirements for auditors:
        • Inspection of large accounting firms annually
        • Inspect smaller firms every three years
        • Prohibition of certain non-audit services
      • Reporting requirements:
        • Annual internal control report
        • Assessment of the effectiveness of the company's controls and procedures for financial reporting

    Central Securities Depository Regulations (CSDR) 2022

    • Introduced uniform requirements for the settlement of financial instruments in the EU.
    • Applies to all firms that trade securities in the EU, regardless of location.
    • Aims to promote safe, efficient, and smooth settlement.
    • Key provisions:
      • Settlement fails: non-occurrence of settlement or partial settlement of a securities transaction on the intended settlement date.
      • Measures to prevent settlement fails, including straight-through processing (STP).
      • Extension period and buy-in period for resolving settlement fails.
      • Settlement Discipline Regime (SDR) introduces new cash penalties for settlement fails.

    Financial Crime

    • No internationally accepted definition of 'financial crime'.
    • Generally includes:
      • Laundering of the proceeds of any crime
      • Terrorist financing
      • Financing of the proliferation of weapons of mass destruction (WMDs)
      • Breaches of financial and trade sanctions
      • Market abuse
      • Tax evasion
    • FSMA definition includes:
      • Fraud or dishonesty
      • Misconduct in or misuse of information relating to a financial market
      • Handling the proceeds of crime
    • UK Bribery Act 2010 and the Foreign Corrupt Practices Act are of particular importance in the context of global financial compliance.

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    Study material for the Chartered Institute for Securities & Investment's Global Financial Compliance examination, covering financial regulations and compliance practices.

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