IMC Unit 1 Chapter 3: Regulation of Financial Markets & Institutions | Study Guide & Practice
Questions (25–35 Qs) 2026
Explain the legal status of EU Directives and regulations and define some terminology used
(3+1) - ✔✔Directives
- Article 58 of European Treaty
- Implemented by primary/delegated legislation (new law/amendment of existing law)
- Vertical Direct Effect - gains precedence over national law after due date
Regulations
-Immediately binding in all member states
Explain the role and powers of the European Securities and Markets authority (ESMA) (5+7) -
✔✔Role
- Promote integrity, transparency, efficiency, orderly functioning of securities markets
- Enhance investor protection
Powers
- Draft technical standards
- Launch a fast track procedure
- Resolve disagreements
- Emergency powers
- Participation in Colleges of Supervisors
- Monitor systemic risk
- Enter into administrative arrangements
,Explain the purpose of the Markets in Financial Instruments Directives (MiFID II)(5) -
✔✔Purpose
- Passporting enables firms to trade across EU/EEA without additional authorisation - single
market for financial services
- Regulated organised trading facility (OTF) to capture unregulated trades
- Strengthen transparency requirements
- Rules to avoid potential risk from automated trading
- Investor protection to safeguard clients' interests
MiFID II distinguishes between 'investment services and activities' and 'ancillary services'.
Explain: - ✔✔Investment services and activities
- Firms that perform can use passport and are subject to MiFID
Ancillary services
- Cannot benefit from passport but not subject to MiFID
Investment services and activities under MiFID II include:(9) - ✔✔- Reception and transmission
of orders of financial instruments
- Execution of orders on behalf of clients
- Dealing on own account
- Portfolio management
- Investment advice
- Underwriting of financial instruments
- Placing of financial instruments without a firm commitment basis
- Operation of an MTF
- Operation of an OTF
,Financial instruments under MiFID II include: (11) - ✔✔- Transferable securities
- Money-market instruments
- Units in collective investment undertakings
- Derivatives relating to securities, currencies, interest rates/yields, emission allowance, financial
indices and commodities (physical/cash settles)
- Derivative instruments for the transfer of credit risks (CDSs)
- Financial contracts for differences (Swaps)
- Derivatives contracts relating to climate, freight, inflation or other economic statistics
Ancillary services (outside of MiFID II) include:(6) - ✔✔- Safekeeping and administration of
investments
- Granting credit (margin)
- Advice on capital structure/services relating to M&A
- FX services
- Investment research
- Investment and ancillary services
Explain the purpose and scope of the Markets in Financial Instruments Regulations (MiFIR) -
✔✔- Not implemented into national law
- Sets out reporting requirements relating to disclosure of trade data
- Extends MiFID's scope to cover more asset classes
Explain the purpose and scope of the Undertakings for Collective Investment in Transferable
Securities (UCTIS) Directives and the changes agreed between the UK and the EU (3) - ✔✔-
Creates a 'single market' for collective investment schemes in the EU/EEA
- CISs authorised in any EU member state can be marketed in any other
- FCA recognises UK schemes under UCTIS
, Explain the purpose, scope, and requirements of the Alternative Investment Fund Managers
Directive (AIFMD)(1+3) - ✔✔- Regulates AIFM's not AIF's
- Authorisation of AIFM's by home state where AUM exceed:
--> €100m for AIF using leverage
--> €500m for AIF not using leverage
- Brokers must be regulated
- Regular regulatory reporting
Explain the purpose and scope of the European Market Infrastructure Regulation (EMIR) -
✔✔For OTC trades, requires:
- Standardised trade reporting
- Compulsory CCP clearing
- Risk management procedures
Explain the purpose and scope of the EU Benchmarks Regulation (BMR)(5+2) - ✔✔- Improves
governance and controls over the benchmark process to avoid/manage conflicts of interest
- Improves the quality of input data and methodologies of benchmarks
- Ensures contributors are subject to adequate controls
- Protect consumers and investors through greater transparency and adequate rights of redress
- Ensure supervised entities have robust plans for cessation/material changes of benchmarks
- Broad scope
- More critical benchmarks have stricter rules
Explain the purpose and scope of the Foreign Account Tax Compliance Act (FATCA)(1+2) - ✔✔-
Prevent tax evasion using offshore banking facilities
Questions (25–35 Qs) 2026
Explain the legal status of EU Directives and regulations and define some terminology used
(3+1) - ✔✔Directives
- Article 58 of European Treaty
- Implemented by primary/delegated legislation (new law/amendment of existing law)
- Vertical Direct Effect - gains precedence over national law after due date
Regulations
-Immediately binding in all member states
Explain the role and powers of the European Securities and Markets authority (ESMA) (5+7) -
✔✔Role
- Promote integrity, transparency, efficiency, orderly functioning of securities markets
- Enhance investor protection
Powers
- Draft technical standards
- Launch a fast track procedure
- Resolve disagreements
- Emergency powers
- Participation in Colleges of Supervisors
- Monitor systemic risk
- Enter into administrative arrangements
,Explain the purpose of the Markets in Financial Instruments Directives (MiFID II)(5) -
✔✔Purpose
- Passporting enables firms to trade across EU/EEA without additional authorisation - single
market for financial services
- Regulated organised trading facility (OTF) to capture unregulated trades
- Strengthen transparency requirements
- Rules to avoid potential risk from automated trading
- Investor protection to safeguard clients' interests
MiFID II distinguishes between 'investment services and activities' and 'ancillary services'.
Explain: - ✔✔Investment services and activities
- Firms that perform can use passport and are subject to MiFID
Ancillary services
- Cannot benefit from passport but not subject to MiFID
Investment services and activities under MiFID II include:(9) - ✔✔- Reception and transmission
of orders of financial instruments
- Execution of orders on behalf of clients
- Dealing on own account
- Portfolio management
- Investment advice
- Underwriting of financial instruments
- Placing of financial instruments without a firm commitment basis
- Operation of an MTF
- Operation of an OTF
,Financial instruments under MiFID II include: (11) - ✔✔- Transferable securities
- Money-market instruments
- Units in collective investment undertakings
- Derivatives relating to securities, currencies, interest rates/yields, emission allowance, financial
indices and commodities (physical/cash settles)
- Derivative instruments for the transfer of credit risks (CDSs)
- Financial contracts for differences (Swaps)
- Derivatives contracts relating to climate, freight, inflation or other economic statistics
Ancillary services (outside of MiFID II) include:(6) - ✔✔- Safekeeping and administration of
investments
- Granting credit (margin)
- Advice on capital structure/services relating to M&A
- FX services
- Investment research
- Investment and ancillary services
Explain the purpose and scope of the Markets in Financial Instruments Regulations (MiFIR) -
✔✔- Not implemented into national law
- Sets out reporting requirements relating to disclosure of trade data
- Extends MiFID's scope to cover more asset classes
Explain the purpose and scope of the Undertakings for Collective Investment in Transferable
Securities (UCTIS) Directives and the changes agreed between the UK and the EU (3) - ✔✔-
Creates a 'single market' for collective investment schemes in the EU/EEA
- CISs authorised in any EU member state can be marketed in any other
- FCA recognises UK schemes under UCTIS
, Explain the purpose, scope, and requirements of the Alternative Investment Fund Managers
Directive (AIFMD)(1+3) - ✔✔- Regulates AIFM's not AIF's
- Authorisation of AIFM's by home state where AUM exceed:
--> €100m for AIF using leverage
--> €500m for AIF not using leverage
- Brokers must be regulated
- Regular regulatory reporting
Explain the purpose and scope of the European Market Infrastructure Regulation (EMIR) -
✔✔For OTC trades, requires:
- Standardised trade reporting
- Compulsory CCP clearing
- Risk management procedures
Explain the purpose and scope of the EU Benchmarks Regulation (BMR)(5+2) - ✔✔- Improves
governance and controls over the benchmark process to avoid/manage conflicts of interest
- Improves the quality of input data and methodologies of benchmarks
- Ensures contributors are subject to adequate controls
- Protect consumers and investors through greater transparency and adequate rights of redress
- Ensure supervised entities have robust plans for cessation/material changes of benchmarks
- Broad scope
- More critical benchmarks have stricter rules
Explain the purpose and scope of the Foreign Account Tax Compliance Act (FATCA)(1+2) - ✔✔-
Prevent tax evasion using offshore banking facilities
