A Comprehensive Guide to Financial Regulations and Institutions

Posted on Aug 10, 2024 in Economy

1. Trade Execution Algorithms

Designed to minimize the price impact of executing trades of large volumes by ‘shredding’ orders into smaller parcels and slowly releasing these into the market.

2. Hedge Funds

A hedge fund is an actively managed investment that seeks an attractive absolute return, regardless of whether the market goes up or down.

3. Private Equity

Private equity is a mixture of venture capital for early-stage companies and management buyouts.

4. Strategies of Hedge Funds

  • Equity Hedge Funds
  • Global Asset Managers
  • Relative Value Arbitrage
  • Event Driven Investing
  • Short Sellers

5. OTC Derivatives

OTC derivatives are traded between counterparties in transactions that are not executed on an organized exchange but are instead privately negotiated on a bilateral basis between counterparties.

6. Regulation of OTC

  • Clearing requirements ensure that any risk of loss caused by a defaulting counterparty is absorbed by large, independent institutions.
  • Regulators will be able to make well-informed decisions because they will have increased access to data on swap and ABS markets provided by swap and ABS data repositories.
  • Increased reporting requirements and the availability of pricing information will also lead to greater price efficiencies in swap markets.

7. International Financial Law Departments

For the most part, unlike traditional international organizations, international regulatory organizations are not organized along traditional international law instruments. ‘Soft law’ is how the inter-relationship can best be described – by laws, agreements, declarations, with no formal sense of international obligation or existence.

8. The ESFS

The ESFS is the institutional architecture of the EU’s framework of financial supervision.

  • It is composed of three authorities:
    • The European Banking Authority
    • The European Insurance and Occupational Pensions Authority
    • The European Securities and Markets Authorities

9. ESRB (European Systemic Risk Board) Regulation

“The ESRB shall be responsible for the macroprudential oversight of the financial system within the Union to contribute to the prevention or mitigation of systemic risks to financial stability in the Union that arise from developments within the financial system and taking into account macro-economic developments, so as to avoid periods of widespread financial distress. It shall contribute to the smooth functioning of the internal market and thereby ensure a sustainable contribution of the financial sector to economic growth”.

10. Tasks of the ESRB

  • Determining and/or collecting and analyzing all relevant and necessary information.
  • Identifying and prioritizing systemic risks.
  • Issuing warnings where such systemic risks are deemed significant and, where appropriate, making those warnings public.
  • Issuing recommendations for remedial action in response to the risks identified and, where appropriate, making those recommendations public.

11. ESMA

ESMA is responsible for safeguarding the stability of the European Union’s financial system by ensuring the integrity, transparency, efficiency, and orderly functioning of securities markets, as well as enhancing investor protection.

  • It coordinates the work of securities regulators, and across financial sectors by working closely with the other authorities, in particular the EBA and EIOPA.
  • ESMA is part of the European System of Financial Supervisors (ESFS).

12. EIOPA

EIOPA regulates certain activities of credit institutions, financial conglomerates, investment firms, insurance and reinsurance companies, and payment institutions.

  • It is responsible for supporting the stability of the financial system, transparency of markets and financial products, as well as the protection of insurance policyholders and pension members and beneficiaries.

13. EBA

EBA regulates European banks.

  • The EBA has the power to overrule national regulators, prevent regulatory arbitrage and promote fair competition throughout the EU.
  • Common Reporting (COREP) is the standardized reporting framework covering:
    • Credit risk
    • Market risk
    • Operational risk
    • Own fund and capital adequacy ratios
  • EBA is part of the European System of Financial Supervisors (ESFS).

14. Bank Recovery and Resolution

A clear and comprehensive bank resolution regime was deemed to be of critical importance for ensuring long-term financial stability and for reducing the potential public cost of possible future financial crises.

  • ‘Resolution’ means the restructuring of an institution to ensure the continuity of its essential functions, preserve financial stability and restore the viability of all or part of that institution.
  • The EU crisis management framework provides both more comprehensive and effective arrangements to deal with failing banks at the national level, as well as complete arrangements to tackle cross-border banking failures.
  • Effective resolution will also address moral hazard as it will function as a strong element of discipline for the markets.
  • Resolution is thus a vital complement to other workstreams designed to make the financial system sounder, i.e., making banks stronger with higher levels of and better quality capital, greater protection of depositors, safer and more transparent market structures and practices, and better supervision.

15. Main Obligations Under EMIR

  • Central Clearing for certain classes of OTC Derivatives
  • Application of risk mitigation techniques for non-centrally cleared OTC derivatives
  • Reporting to trade repositories
  • Application of organizational, conduct of business and prudential requirements for CCPs
  • Application of requirements for Trade repositories, including the duty to make certain data available to the public and relevant authorities

16. CSDs

CSDs are systemically important infrastructures in modern securities markets.

  • They perform crucial services that allow at a minimum the registration, safekeeping, settlement of securities in exchange for cash and efficient processing of securities transactions in financial markets.

17. AIFMD

AIFMD is intended to achieve the following public policy goals, among others:

  • Equipping national supervisors with the information and tools necessary to monitor and respond to risks that could be amplified by alternative investment activity.
  • Introducing a common and robust approach to investor protection, including rules regarding the use of depositaries by alternative investment funds.
  • Increasing the accountability of managers holding controlling stakes in companies.

18. Global Financial Imbalances

  • This refers to large and persistent current account deficits and surpluses that came from capital flows from capital-poor emerging market countries (Asia and the oil-rich Gulf) to capital-rich industrial economies (particularly the U.S.).
  • Typically, high saving rates in the emerging world and the low level in the U.S. were associated with these flows.

19. Bail-In Debt

The amount of contingent capital and bail-in debt issued by an institution would be an important factor in their effectiveness as possible resolution tools.

  • The Basel Committee has proposed that all newly issued regulatory capital instruments that are not common equity must be ‘gone-concern’ contingent capital.

20. Securitization

A sophisticated process of financial engineering that allows global investment to be spread out and separated into multiple income streams to reduce risk. It involves bundling loans into securities and selling them to investors.