Questions and Answers
What is the importance of effective capital and financial markets?
According to the Basel Committee for Banking Supervision, what is the crucial role of banks and financial markets in the economy?
Intermediating funds from savers and depositors to activities that support enterprise and help drive economic growth
True or False: The financial crisis of 2007–08 caused a global impact and led to a renewed focus on integrity and ethical behavior.
True
What are some common regulatory practices and objectives for Self-Regulatory Organizations (SROs) as indicated by IOSCO's SRO Consultative Committee report?
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The ISDA Master Agreement allows members to benefit from netting provisions which treat transactions as a single transaction with a single net value.
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What are some of the major prohibitions in Islamic commercial and financial ethics based on Shariah?
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Under GDPR, organisations in breach can be fined up to 4% of the annual global turnover or ______, whichever is greater. This is the maximum fine for the most serious infringements, such as not having sufficient customer consent to process data or violating the core of privacy by design concepts.
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What are the objectives and benefits of regulation in the financial sector?
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Define self-regulation in the financial sector.
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Rules-based regulation allows for more interpretation compared to principles-based regulation.
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___ and regulations are established in a community and applicable to the people.
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Match the following regulatory approaches with their descriptions:
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What is the main objective of the Sarbanes-Oxley (SOX) Act?
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Sarbanes-Oxley (SOX) Act primarily applies to US public companies and foreign companies listed on US stock exchanges.
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What is the purpose of the European Market Infrastructure Regulation (EMIR)?
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What is required of the CEO and CFO according to the Act?
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Which of the following corporate governance issues are covered by the Act?
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The Act prohibits personal loans to officers or directors.
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What is the purpose of the Central Securities Depository Regulations (CSDR) of 2022?
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What are some of the responsibilities of an investment exchange operator?
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Multilateral Trading Facilities (MTFs) can be operated by both investment firms and market operators.
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What is the key difference between Organised Trading Facilities (OTFs) and Multilateral Trading Facilities (MTFs)?
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What are the key responsibilities of the Data Protection Officer (DPO)? (Select all that apply)
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When was the Independent Commission on Banking (ICB) established?
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MiFID II came into force on 3 January 2018.
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The Markets in Financial Instruments Regulation (MiFIR) is the associated ________.
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Match the following regulatory regulations with their descriptions:
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What does the US Foreign Corrupt Practices Act (FCPA) make unlawful?
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What is the main purpose of the OECD Convention on Combating Bribery of Foreign Public Officials?
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Why is trading in OTC derivatives considered opaque?
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What did the financial crisis of 2008 bring to regulatory attention?
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The SOX legislation imposes requirements on firms to disclose instances of fraud annually.
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What risk arises from OTC derivative contracts due to the possibility of a counterparty not fulfilling their obligations?
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What is the purpose of the Common Reporting Standard (CRS)?
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Clearing is the function by which counterparty risks are managed over time and can be carried out ______.
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Study Notes
The International Regulatory Environment
Models of Regulation
- Effective capital and financial markets are essential for the economy, fueling economic development and aiding wealth creation
- Loss of confidence and trust in these markets can result in the failure of financial companies and have an adverse impact on the economy
- Objectives and benefits of regulation:
- Increase confidence and trust in financial markets, systems, and products
- 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
- Reduce financial crime by ensuring financial systems cannot easily be exploited
Law and Regulation
- Law: principles and regulations established in a community by an authority and applicable to the people
- Regulation: combination of rules and standards covering matters such as market conduct, managing conflicts of interest, treating customers fairly, and ensuring stability of the financial system
- Sources of compliance laws, rules, and standards:
- 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: prescriptive procedures with detailed rules that specify exactly what individuals and firms must do to ensure compliance
- Principles-based approach: focuses on the spirit of the rules, outlining expected behaviors and outcomes, with firms and individuals responsible for ensuring compliance
- Rules-based approach:
- Inflexible and may result in a tick-box exercise
- Requires strict adherence to precise rules with little allowance for interpretation
- Principles-based approach:
- Acts as a fundamental source of guidance on how firms and individuals are expected to act
- Firms and individuals are responsible for ensuring compliance and meeting the principles
Models of Self-Regulation
- Self-regulation: 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
- Strong self-regulation can reduce the need for, or extent of, state regulation
- Self-regulation in the financial sector: a unique combination of private interests with government oversight, delivering an effective and efficient form of regulation for the complex and dynamic environment### Self-Regulation in Financial Markets
- Broad objectives of self-regulation in financial markets: preserve market integrity, preserve financial integrity, and protect investors
- Forms of self-regulation: industry SROs, exchange self-regulatory frameworks, and private associations
- Self-regulation focuses on:
- Oversight of the market itself
- Qualification standards for market intermediation
- Oversight of the business conduct of intermediaries
- Relationship between intermediaries and their client market users
Key Elements of an Effective Self-Regulatory Model
- Industry-specific knowledge
- Industry motivation (business incentive to operate a fair, financially sound, and competitive marketplace)
- Contractual relationship (can go beyond national boundaries and require ethical standards beyond government regulations)
- Transparency and accountability (SRO's compliance programme should be transparent and accountable)
- Flexible SRO compliance programmes (can modify rules quicker than government agencies)
- Coordination and information sharing between markets
Islamic Finance Adoption of Self-Regulation
- Example of faith- and ethical-based regulation
- Islamic finance industry regulated by combination of self-regulatory bodies and statutory regulation
- Self-regulating bodies: Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and Islamic Financial Services Board (IFSB)
- AAOIFI: formulates and issues accountancy, auditing ethics, governance, and Shariah standards for international Islamic banking and finance industry
- IFSB: international standard-setting organization that promotes and enhances soundness and stability of Islamic financial sector
Extra-Territorial Reach of Legislation
- Many regulations and laws have application beyond national borders
- Compliance officers need to be aware and understand the potential impact of such legislation
Data Protection (GDPR)
- EU General Data Protection Regulation (GDPR) enforced on 25 May 2018
- Replaced Data Protection Directive
- Goals: harmonize data privacy laws across Europe, protect EU citizens from privacy and data breaches
- Key points:
- Increased territorial scope (extra-territorial applicability)
- Penalties: up to 4% of annual global turnover or €20 million
- Tiered approach to fining
- Consent: must be given in intelligible and easily accessible form, with purpose for data processing attached
- Data subject rights:
- Right to access
- Right to be forgotten (data erasure)
- Data portability
- Privacy by design: inclusion of data protection from the onset of designing systems
- Data Protection Officers (DPOs): mandatory for controllers and processors whose core activities consist of processing operations that require regular and systematic monitoring of data subjects on a large scale
Banking Reform
- Independent Commission on Banking (ICB): UK government inquiry to investigate structural and related non-structural reforms to UK banking sector
- Dodd-Frank Act: US financial regulatory reform law aimed at promoting financial stability and competition in the wake of the financial crisis of 2007-08### Dodd-Frank Act
- Eliminated exemption for investment advisers with fewer than 15 clients in the previous 12 months
- Certain non-bank financial institutions are now supervised by the Federal Reserve
- Created two new agencies: Financial Stability Oversight Council (FSOC) and Office of Financial Research (OFR)
- Introduced consumer protection agencies, including the Bureau of Consumer Financial Protection
Markets in Financial Instruments Directive (MiFID II) and Markets in Financial Instruments Regulation (MiFIR)
- Aim to provide investor protection rules across the European Economic Area (EEA)
- Key aims:
- 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
- Passporting allows firms to provide investment services in another EU member state without requiring additional authorization
- Investment services that can be passported:
- Receipt and transmission of orders
- Execution of orders on behalf of clients
- Dealing on own account
- Portfolio management
- Investment advice
- Underwriting of financial instruments
- Placing of financial instruments
- Operation of multilateral trading facilities (MTFs)
Market Abuse Regulation (MAR)
- Applies to financial instruments admitted to trading on a regulated market, MTF, or OTF
- Prohibits insider dealing, market manipulation, and unauthorized disclosure of inside information
- Inside information includes information that would likely have a significant effect on the price of financial instruments
- Firms must maintain a register of insiders and publicly disclose inside information as soon as possible
- Delayed disclosure of inside information may be permitted in certain circumstances
- Market soundings framework allows for legitimate disclosure of inside information in the course of market soundings
European Market Infrastructure Regulation (EMIR)
- Requires over-the-counter (OTC) derivative contracts to be cleared and reported
- Sets framework to enhance the safety of central counterparties (CCPs) and trade repositories (TRs)
- Main obligations:
- Central clearing for certain classes of OTC derivatives
- Application of risk mitigation techniques for non-centrally cleared OTC derivatives
- Reporting to TRs
- Organizational, conduct of business, and prudential requirements for CCPs and TRs
Payment Services Directive 2 (PSD2)
- Aims to make electronic payments within the EU as easy, efficient, and secure as payments within a country
- Sets rules for payment services, including security requirements, transparency of conditions, and rights and obligations of users and providers
- Opens up EU payment market to new entrants, leading to enhanced competition and choice for consumers
- Applies to existing and new providers of innovative payment services
Sarbanes-Oxley (SOX) Act 2002
- Introduced to improve financial reporting process and restore investor confidence in US financial markets
- Applies to US public companies and their global subsidiaries
- Key section: Section 404, which requires management to report on the effectiveness of internal controls over financial reporting
- Auditors must attest to and report on management's assertion over the effectiveness of internal financial controls
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Description
This quiz covers the regulations and restrictions on insider trading, including the disclosure of inside information and the maintenance of a register of insiders. Learn about the rules and penalties surrounding insider trading.
