CME-1 Capital Market Examination Level 1 — Questions and Answers

Question 1: Before launching a tender offer for a listed Saudi company, the offeror must submit what to the CMA?

An irrevocable undertaking from majority shareholders
A binding commitment signed by the target board
A letter of intent only
A draft offer document for CMA review and approval (Correct answer)

Correct answer: A draft offer document for CMA review and approval

CMA must review and approve the draft offer document before the offeror can distribute it to target company shareholders, ensuring adequate disclosure.

Question 2: What is the primary function of the Securities Depository Center (Edaa) in Saudi Arabia?

Approving new listings on the Saudi Exchange
Publishing daily market prices for all listed securities
Maintaining the central registry of securities ownership and handling settlement (Correct answer)
Setting margin requirements for broker-dealers

Correct answer: Maintaining the central registry of securities ownership and handling settlement

Edaa (Securities Depository Center) serves as the central securities depository, maintaining ownership records and facilitating the settlement and transfer of securities.

Question 3: In the context of Saudi market operations, what is 'delivery versus payment' (DVP)?

A system where brokers deliver trade confirmations before receiving payment
A regulatory requirement for foreign investors to pre-fund accounts
A settlement mechanism ensuring securities are transferred only when corresponding payment is made simultaneously (Correct answer)
A payment method for IPO subscriptions using installments

Correct answer: A settlement mechanism ensuring securities are transferred only when corresponding payment is made simultaneously

DVP is a settlement principle that links the transfer of securities to the simultaneous transfer of funds, eliminating principal risk by ensuring neither party delivers without receiving their consideration.

Question 4: Under AML regulations, what is a 'Politically Exposed Person' (PEP)?

A foreign national conducting business in Saudi Arabia
An individual who holds or has held a prominent public function, along with their family and close associates (Correct answer)
Any person involved in politics
A person with a criminal record

Correct answer: An individual who holds or has held a prominent public function, along with their family and close associates

PEPs are individuals who hold or have held prominent public functions (heads of state, senior government officials, judicial members), as well as their immediate family members and close associates, due to higher corruption risk.

Question 5: What is the role of a 'market maker' in a securities market?

To continuously provide buy and sell quotes for a security to ensure liquidity (Correct answer)
To manage the investment portfolios of retail investors
To approve new securities for listing on behalf of the CMA
To set the official closing price of all listed securities

Correct answer: To continuously provide buy and sell quotes for a security to ensure liquidity

A market maker stands ready to buy and sell a security at publicly quoted prices, providing continuous liquidity and facilitating price discovery in the market.

Question 6: What are the consequences for a listed company that fails to meet continuing obligations?

Mandatory share buyback
Only a formal warning
Trading suspension, fines, and potential delisting by the Saudi Exchange (Correct answer)
No consequences

Correct answer: Trading suspension, fines, and potential delisting by the Saudi Exchange

Failure to meet continuing obligations may result in trading suspension, regulatory fines, and in severe cases delisting from the Saudi Exchange.

Question 7: What is the CMA's role in enforcing AML compliance among authorized persons?

The CMA only provides guidance, not enforcement
AML enforcement is solely SAMA's responsibility
The CMA supervises and inspects authorized persons for AML compliance and can impose sanctions (Correct answer)
The CMA has no AML responsibilities

Correct answer: The CMA supervises and inspects authorized persons for AML compliance and can impose sanctions

The CMA is the supervisory authority for AML compliance among its authorized persons. It conducts inspections, assesses compliance programs, and can impose sanctions including fines, license suspension, or referral for criminal prosecution.

Question 8: How frequently must a public investment fund publish its Net Asset Value (NAV)?

Weekly
At least daily for open-end funds (Correct answer)
Quarterly
Monthly

Correct answer: At least daily for open-end funds

Public open-end funds must calculate and publish their NAV at least on each dealing day. For most public funds, this means daily NAV publication to ensure investors can make informed subscription and redemption decisions.

Question 9: How does a 'diminishing musharaka' work in property financing?

The bank and customer co-own the property; the customer gradually buys out the bank's share while paying rent on the bank's portion (Correct answer)
The bank reduces fees over time
The customer reduces payments annually
It is a bond structure

Correct answer: The bank and customer co-own the property; the customer gradually buys out the bank's share while paying rent on the bank's portion

In diminishing musharaka, the bank and customer jointly own an asset; over time the customer purchases the bank's share in installments, and rent on the bank's remaining share decreases accordingly.

Question 10: Under the Qualified Foreign Investor (QFI) program, what is the maximum ownership limit for a single foreign investor in a listed Saudi company?

No limit for QFIs
5% of the company's shares
49% of the company's shares
10% of the company's shares (Correct answer)

Correct answer: 10% of the company's shares

A single QFI can own up to 10% of a listed company's shares. The total foreign ownership limit (including swap agreements and QFIs) is 49% unless the company's articles specify a lower limit.

Question 11: What distinguishes 'preferred shares' from ordinary shares in Saudi Arabia?

Preferred shares are CMA-issued instruments
Preferred shares typically have priority on dividends and/or assets in liquidation but may have restricted or no voting rights (Correct answer)
No meaningful distinction
Preferred shares are only for foreign investors

Correct answer: Preferred shares typically have priority on dividends and/or assets in liquidation but may have restricted or no voting rights

Preferred shares confer dividend priority and/or liquidation preference over ordinary shareholders, but often come with limited or no voting rights.

Question 12: Which type of order instructs a broker to buy or sell a security immediately at the best available current price?

Stop order
Market order (Correct answer)
Limit order
Good-till-cancelled order

Correct answer: Market order

A market order is executed immediately at the prevailing best available price without specifying a price limit.

Question 13: Under CMA regulations, when must a fund manager report a material event to the CMA?

Immediately upon occurrence (Correct answer)
At the next quarterly report
Within 5 business days
Within 30 days

Correct answer: Immediately upon occurrence

Fund managers must notify the CMA immediately upon the occurrence of any material event that may affect the value of fund units or the ability of unitholders to exercise their rights.

Question 14: What is the maximum term for an external auditor of a listed company without mandatory rotation under CMA rules?

10 years
3 years
5 years (Correct answer)
2 years

Correct answer: 5 years

CMA Corporate Governance Regulations require external auditor rotation after a maximum of five consecutive years to preserve independence.

Question 15: What is 'credit risk' in fixed income investing?

Liquidity withdrawal risk
Risk of interest rate changes
Currency devaluation risk
Risk that the bond issuer will fail to make timely payments of principal or interest (Correct answer)

Correct answer: Risk that the bond issuer will fail to make timely payments of principal or interest

Credit risk is the risk that the issuer defaults on its payment obligations, failing to pay coupons or repay principal at maturity, resulting in investor losses.

Question 16: What is the function of the CMA's 'Market Surveillance' department?

Managing the Saudi Exchange IT systems
Monitoring trading activity to detect manipulation, insider dealing, and market abuse (Correct answer)
Conducting investor education
Approving new listings

Correct answer: Monitoring trading activity to detect manipulation, insider dealing, and market abuse

The Market Surveillance function monitors real-time and historical trading data to identify patterns indicative of manipulation, insider trading, or other market abuse.

Question 17: What is the purpose of the CMA's 'Market Conduct Regulations'?

Establishing capital requirements
Prohibiting and penalising market manipulation, insider trading, and other abusive conduct that undermines market integrity (Correct answer)
Setting IPO pricing rules
Regulating foreign listings only

Correct answer: Prohibiting and penalising market manipulation, insider trading, and other abusive conduct that undermines market integrity

Market Conduct Regulations define and prohibit conduct that undermines the fairness and integrity of the capital market, including manipulation, insider trading, and false information.

Question 18: What is a 'takaful' product in Islamic finance?

A conventional insurance policy
An Islamic cooperative insurance model based on mutual contribution and solidarity rather than conventional risk transfer (Correct answer)
A sovereign sukuk
A profit-sharing deposit

Correct answer: An Islamic cooperative insurance model based on mutual contribution and solidarity rather than conventional risk transfer

Takaful is an Islamic insurance model where participants contribute to a mutual fund; claims are paid from the fund and any surplus may be returned to participants, avoiding conventional insurance's riba and gharar.

Question 19: What is 'duration' in fixed income analysis?

A measure of a bond's price sensitivity to changes in interest rates (Correct answer)
The maturity date of a bond
The coupon payment frequency
The credit rating of the bond

Correct answer: A measure of a bond's price sensitivity to changes in interest rates

Duration measures how much a bond's price changes for a given change in interest rates; a higher duration means greater interest rate sensitivity.

Question 20: What is the maximum percentage stake that requires a mandatory tender offer (MTO) in a Saudi listed company?

25%
50%
75%
33% (Correct answer)

Correct answer: 33%

Under CMA Merger and Acquisition Regulations, acquiring 33% or more of voting shares in a listed company triggers a mandatory tender offer to all remaining shareholders.

Question 21: What is the primary objective of the Capital Market Authority (CMA) in Saudi Arabia?

Regulating and developing the capital market to protect investors and ensure fairness (Correct answer)
Setting monetary policy
Collecting taxes on investments
Managing the government's investment portfolio

Correct answer: Regulating and developing the capital market to protect investors and ensure fairness

The CMA's primary mandate is to regulate and develop the Saudi capital market, ensure its efficiency and transparency, and protect investors from unfair practices.

Question 22: What is the CMA's stance on Shariah compliance screening for investment funds marketed as 'Islamic'?

Islamic funds are exempt from CMA regulation
No regulation of Islamic fund claims
Only SAMA regulates Islamic funds
Funds marketed as Shariah-compliant must have a Shariah supervisory board and invest only in CMA-approved Shariah-compliant securities (Correct answer)

Correct answer: Funds marketed as Shariah-compliant must have a Shariah supervisory board and invest only in CMA-approved Shariah-compliant securities

The CMA requires that funds claiming Shariah compliance must have oversight from qualified Shariah scholars and must restrict investments to permissible securities per their Shariah mandate.

Question 23: What are the three stages of money laundering?

Earning, hiding, spending
Deposit, transfer, withdrawal
Collection, distribution, investment
Placement, layering, integration (Correct answer)

Correct answer: Placement, layering, integration

Money laundering occurs in three stages: Placement (introducing illegal funds into the financial system), Layering (creating complex transactions to obscure the source), and Integration (making the laundered funds appear legitimate).

Question 24: What is 'istisna' and in what context is it used in Islamic project finance?

A manufacturing or construction contract where payment is made in advance or installments for a specified asset to be built and delivered, used in real estate and infrastructure (Correct answer)
A spot commodity trade
An Islamic bond type
An Islamic equity swap

Correct answer: A manufacturing or construction contract where payment is made in advance or installments for a specified asset to be built and delivered, used in real estate and infrastructure

Istisna is a contract for the manufacture or construction of a specified asset; payment can be in installments and delivery at completion, making it ideal for project finance and real estate development.

Question 25: What is the IFSB and its relevance to Saudi Islamic finance regulation?

A Saudi government agency
An international standard-setting body for prudential regulation and supervision of Islamic financial services, whose standards influence Saudi practice (Correct answer)
A global credit rating agency
The CMA's enforcement arm

Correct answer: An international standard-setting body for prudential regulation and supervision of Islamic financial services, whose standards influence Saudi practice

The Islamic Financial Services Board (IFSB) issues prudential standards and guidelines for the sound regulation of Islamic banks, insurance, and capital markets globally, influencing Saudi regulatory frameworks.

Question 26: An Authorized Person under CMA regulations must maintain a minimum capital adequacy ratio. What happens if they fall below the required threshold?

They can continue operations without any obligation
They must notify the CMA immediately and submit a remediation plan (Correct answer)
Their license is automatically revoked
They are given a 1-year grace period with no restrictions

Correct answer: They must notify the CMA immediately and submit a remediation plan

Authorized Persons must notify the CMA immediately when their capital falls below the required threshold and submit a plan to restore compliance. The CMA may impose additional conditions or restrictions until compliance is restored.

Question 27: What is SAIBOR and how does it relate to fixed-income instruments in Saudi Arabia?

The Saudi arbitration board for disputes
A stock market index
A type of government bond
The Saudi Arabian Interbank Offered Rate used as a benchmark for floating-rate instruments (Correct answer)

Correct answer: The Saudi Arabian Interbank Offered Rate used as a benchmark for floating-rate instruments

SAIBOR (Saudi Arabian Interbank Offered Rate) is the benchmark interest rate at which Saudi banks lend to each other. It serves as a reference rate for floating-rate bonds, Sukuk, and other financial instruments.

Question 28: If the offeror revises (increases) the offer price during the offer period, who benefits from the higher price?

Only institutional shareholders holding more than 1% of the target
Only shareholders who reject the original price and then re-tender their shares
Only shareholders who accept after the revision is announced
All shareholders who accept the offer, including those who already tendered at the lower price (Correct answer)

Correct answer: All shareholders who accept the offer, including those who already tendered at the lower price

When the offer price is revised upward, all accepting shareholders—including those who tendered before the revision—receive the improved price under CMA's equal treatment principle.

Question 29: Under CMA's Merger and Acquisition Regulations, a mandatory tender offer is triggered when a person acquires shares reaching or exceeding what percentage of voting rights in a listed company?

33%
20%
25%
30% (Correct answer)

Correct answer: 30%

CMA regulations require a mandatory offer when an acquirer reaches 30% or more of voting rights in a listed Saudi company.

Question 30: What is a 'material fact' that requires immediate disclosure under CMA rules?

Changes to employee benefits
Information whose disclosure could reasonably affect the price of securities or an investor's decision (Correct answer)
Any minor operational change
Routine contract renewals

Correct answer: Information whose disclosure could reasonably affect the price of securities or an investor's decision

A material fact is any information that a reasonable investor would consider significant in making an investment decision, requiring prompt public disclosure.

Question 31: Which regulation governs the offering of securities to the public in Saudi Arabia?

Anti-Money Laundering Law
Rules on the Offer of Securities and Continuing Obligations (Correct answer)
Companies Law only
Banking Control Law

Correct answer: Rules on the Offer of Securities and Continuing Obligations

The Rules on the Offer of Securities and Continuing Obligations (OSCOs) govern public offerings in Saudi Arabia. These rules set requirements for prospectus content, disclosure, and ongoing obligations of issuers.

Question 32: What is the role of the fund's independent director or board member?

Managing day-to-day fund operations
Marketing the fund to potential investors
Selecting individual securities for the portfolio
Protecting unitholder interests and ensuring proper governance (Correct answer)

Correct answer: Protecting unitholder interests and ensuring proper governance

Independent directors on a fund's board serve as guardians of unitholder interests, providing independent oversight of the fund manager's actions, reviewing conflicts of interest, and ensuring compliance with regulations.

Question 33: What is the Saudi government's primary fixed-income instrument for domestic borrowing?

Municipal Bonds
Corporate Bonds only
Saudi Government Sukuk and Bonds (Correct answer)
Treasury Bills

Correct answer: Saudi Government Sukuk and Bonds

The Saudi government issues both Sukuk and conventional bonds through the National Debt Management Center (NDMC) to finance budget deficits. These instruments are available in SAR-denominated and USD-denominated formats.

Question 34: What is the primary regulation governing investment funds in Saudi Arabia?

Investment Funds Regulations issued by the CMA (Correct answer)
Banking Control Law
Companies Law
Zakat and Income Tax Law

Correct answer: Investment Funds Regulations issued by the CMA

The Investment Funds Regulations (IFR) issued by the CMA govern the establishment, management, and operation of investment funds in Saudi Arabia. These regulations cover both public and private funds.

Question 35: What is the minimum subscription amount for a private placement fund in Saudi Arabia?

SAR 50,000 (Correct answer)
No minimum if investor qualifies
SAR 1,000
SAR 10,000

Correct answer: SAR 50,000

Private placement funds in Saudi Arabia typically require a minimum subscription of SAR 50,000 or its equivalent. Investors must also meet the CMA's definition of a sophisticated or qualified investor.

Question 36: What are the CMA's enforcement powers if a listed company violates corporate governance regulations?

Only the courts can take action
The CMA can impose fines, suspend trading, refer for criminal prosecution, and require corrective actions (Correct answer)
The CMA has no enforcement powers for governance violations
The CMA can only issue warnings

Correct answer: The CMA can impose fines, suspend trading, refer for criminal prosecution, and require corrective actions

The CMA has broad enforcement powers including imposing financial penalties, suspending or canceling listings, requiring corrective actions, and referring violations to the public prosecutor for criminal proceedings when appropriate.

Question 37: What is Sharia compliance in the context of Saudi investment funds?

Investing only in Saudi-listed companies
A marketing label with no regulatory significance
A government mandate for all funds
Ensuring investments adhere to Islamic law principles, including avoiding riba and haram activities (Correct answer)

Correct answer: Ensuring investments adhere to Islamic law principles, including avoiding riba and haram activities

Sharia-compliant funds follow Islamic law principles by avoiding interest (riba), excessive uncertainty (gharar), and investments in prohibited activities (haram) such as alcohol, gambling, or conventional banking.

Question 38: What is the maximum management fee that a public fund can charge without CMA pre-approval?

0.5% annually
There is no cap; it must be disclosed in the Terms and Conditions (Correct answer)
2% annually
1% annually

Correct answer: There is no cap; it must be disclosed in the Terms and Conditions

CMA regulations do not impose a specific cap on management fees for public funds. However, all fees must be clearly disclosed in the fund's Terms and Conditions document and approved by the fund board.

Question 39: What is 'mudaraba' in Islamic finance?

A commodity swap
A profit-sharing arrangement where one party provides capital (rabb ul mal) and another provides labour/management (mudarib), sharing profit but with losses borne by the capital provider (Correct answer)
A secured loan
An Islamic forward contract

Correct answer: A profit-sharing arrangement where one party provides capital (rabb ul mal) and another provides labour/management (mudarib), sharing profit but with losses borne by the capital provider

Mudaraba is a trust-based arrangement: the capital provider funds the venture, the manager operates it, profits are shared per agreement, and financial losses fall on the capital provider only.

Question 40: Under the 'acting in concert' concept in CMA Merger and Acquisition Regulations, which of the following best describes persons acting in concert?

Persons who cooperate pursuant to an agreement or understanding to obtain or consolidate control (Correct answer)
Persons who simultaneously buy shares in the open market without any coordination
Institutional investors who attend the same shareholder general meeting
Persons who hold shares in the same industry sector of the market

Correct answer: Persons who cooperate pursuant to an agreement or understanding to obtain or consolidate control

Persons acting in concert are those who cooperate, pursuant to an agreement or understanding (formal or informal), to obtain or consolidate control of a target company.

Question 41: What is the difference between a primary market and secondary market for Sukuk in Saudi Arabia?

Primary is on Tadawul, secondary is OTC only
Primary involves initial issuance to investors, secondary involves trading of already-issued Sukuk (Correct answer)
Primary is for government Sukuk only, secondary is for corporate
There is no secondary market for Sukuk

Correct answer: Primary involves initial issuance to investors, secondary involves trading of already-issued Sukuk

The primary market is where new Sukuk are first issued and sold to investors, while the secondary market allows trading of existing Sukuk between investors. Both markets operate through Tadawul and OTC platforms in Saudi Arabia.

Question 42: What is a 'repurchase agreement' (repo) in the Saudi money market?

An interbank deposit
A short-term borrowing arrangement where securities are sold with an agreement to repurchase them at a higher price on a later date (Correct answer)
A type of sukuk
A share buyback from the market

Correct answer: A short-term borrowing arrangement where securities are sold with an agreement to repurchase them at a higher price on a later date

A repo involves selling securities to a counterparty with a contractual obligation to repurchase them at a set price on a future date, effectively functioning as a secured short-term loan.

Question 43: What is the purpose of the 'Shariah fatwa' in structuring Islamic capital market products?

A government bond guarantee
A rating agency opinion
A CMA compliance certificate
A formal religious ruling from qualified scholars certifying that a financial product's structure complies with Islamic law (Correct answer)

Correct answer: A formal religious ruling from qualified scholars certifying that a financial product's structure complies with Islamic law

A Shariah fatwa is a formal legal opinion from qualified Islamic scholars confirming that a product's structure, contracts, and intended use comply with Islamic jurisprudence.

Question 44: What is the main stock exchange in Saudi Arabia?

Dubai Financial Market
Saudi Exchange (Tadawul) (Correct answer)
Abu Dhabi Securities Exchange
Bahrain Bourse

Correct answer: Saudi Exchange (Tadawul)

The Saudi Exchange (Tadawul) is the sole authorized stock exchange in Saudi Arabia. It was formally established as a joint-stock company in 2007 and is one of the largest exchanges in the Middle East by market capitalization.

Question 45: What is 'riba' and why is it prohibited in Islamic finance?

A type of equity instrument
A government guarantee
Interest or any predetermined return on a loan, prohibited as it is considered exploitative and unjust in Islamic law (Correct answer)
A form of market manipulation

Correct answer: Interest or any predetermined return on a loan, prohibited as it is considered exploitative and unjust in Islamic law

Riba refers to interest or any unjust increase in exchange, prohibited in Islamic law because it creates guaranteed returns for the lender without sharing in genuine economic risk.

Question 46: Which CMA regulation primarily governs tender offers and merger activity involving listed companies in Saudi Arabia?

Rules on the Offer of Securities and Continuing Obligations
Capital Market Law (CML)
Merger and Acquisition Regulations (Correct answer)
Corporate Governance Regulations

Correct answer: Merger and Acquisition Regulations

The CMA's Merger and Acquisition Regulations specifically govern tender offers, mandatory bids, and business combinations involving listed companies.

Question 47: What is the difference between active and passive portfolio management?

Active management is for institutional investors only
Active management attempts to outperform a benchmark through security selection; passive management replicates a benchmark index (Correct answer)
Passive management uses derivatives; active does not
No meaningful difference

Correct answer: Active management attempts to outperform a benchmark through security selection; passive management replicates a benchmark index

Active managers research and select securities attempting to beat the market index, while passive managers replicate an index (e.g., TASI) to match its performance at lower cost.

Question 48: A CMA-licensed investment fund manager must ensure client assets are held by which entity?

An independent custodian (Correct answer)
The client's personal bank account
The fund manager's own account
Any commercial bank branch

Correct answer: An independent custodian

CMA regulations require that client assets be held by an independent custodian to ensure asset segregation and protect investors from potential misuse or commingling of funds by the fund manager.

Question 49: What is the primary regulation governing corporate governance of listed companies in Saudi Arabia?

Corporate Governance Regulations issued by the CMA (Correct answer)
Banking Control Law
Saudi Vision 2030 guidelines
Companies Law alone

Correct answer: Corporate Governance Regulations issued by the CMA

The Corporate Governance Regulations (CGR) issued by the CMA establish governance requirements for companies listed on Tadawul, covering board composition, committees, disclosure, and shareholder rights.

Question 50: What is 'sukuk' and how does it differ from a conventional bond?

Sukuk and bonds are identical instruments
Sukuk represents ownership in an underlying asset or project and pays returns from asset performance, while bonds are interest-bearing debt (Correct answer)
Sukuk is only for government issuers
Sukuk is equity; bonds are hybrid

Correct answer: Sukuk represents ownership in an underlying asset or project and pays returns from asset performance, while bonds are interest-bearing debt

Sukuk are Shariah-compliant securities representing proportional ownership in tangible assets or projects, generating returns from asset use or profit, not interest (riba).

Question 51: What rights do minority shareholders have under Saudi corporate governance regulations?

Only the right to attend annual meetings
No special rights beyond voting
Rights are limited to dividends only
Rights to cumulative voting, access to information, and bringing derivative actions (Correct answer)

Correct answer: Rights to cumulative voting, access to information, and bringing derivative actions

Minority shareholders have several protections including cumulative voting for board elections, the right to access company information, the ability to bring derivative actions, and protection against related-party transactions that harm their interests.

Question 52: What is the Capital Asset Pricing Model (CAPM) used for?

Valuing bonds
Assessing liquidity risk
Estimating the expected return of an asset based on its beta and market risk premium (Correct answer)
Calculating book value of assets

Correct answer: Estimating the expected return of an asset based on its beta and market risk premium

CAPM determines the expected return of an asset: Expected Return = Risk-Free Rate + Beta × (Market Return − Risk-Free Rate), linking risk to required return.

Question 53: If an offeror obtains 90% or more of the shares subject to the offer, what right may the offeror exercise under CMA regulations?

The right to appoint the entire board without an AGM
The right to merge the company into itself without a shareholder vote
The compulsory acquisition (squeeze-out) right to acquire remaining shares at the offer price (Correct answer)
The right to delist the company immediately without formalities

Correct answer: The compulsory acquisition (squeeze-out) right to acquire remaining shares at the offer price

When the offeror acquires 90% or more of the offer shares, CMA regulations allow the offeror to compulsorily acquire the remaining minority shares at the offer price.

Question 54: What is 'tipping' in the context of insider trading regulations?

Disclosing information to the CMA
Publishing a research report
Paying a broker commission
Passing material non-public information to another person who then trades on it (Correct answer)

Correct answer: Passing material non-public information to another person who then trades on it

Tipping is the act of passing MNPI to a third party (tippee) who subsequently trades on the basis of that information; both the tipper and tippee may be liable.

Question 55: What is a 'wakala' structure in Islamic finance?

A profit-sharing arrangement
A charitable endowment
An agency agreement where one party (agent/wakeel) acts on behalf of another (principal) for a fee, used in sukuk and fund management (Correct answer)
A deferred payment sale

Correct answer: An agency agreement where one party (agent/wakeel) acts on behalf of another (principal) for a fee, used in sukuk and fund management

Wakala is an Islamic agency contract where the wakeel (agent) manages assets or funds on behalf of the principal for an agreed management fee, used in sukuk structuring and investment management.

Question 56: What is the difference between a public fund and a private fund under CMA regulations?

There is no regulatory difference
Public funds are larger than private funds
Public funds invest in stocks, private funds invest in bonds
Public funds are offered to all investors, private funds are restricted to qualified investors (Correct answer)

Correct answer: Public funds are offered to all investors, private funds are restricted to qualified investors

Public investment funds are offered to all investors and subject to stricter CMA regulations including prospectus requirements, while private funds are offered only to qualified or institutional investors with fewer regulatory requirements.

Question 57: What is a 'restricted period' in the context of share trading by company insiders?

Period of market volatility
Period when markets are closed
A period of regulatory review
A blackout period before earnings announcements when insiders cannot trade company shares (Correct answer)

Correct answer: A blackout period before earnings announcements when insiders cannot trade company shares

Restricted periods (blackout windows) prohibit insiders from trading company shares before the announcement of financial results or other price-sensitive information.

Question 58: What distinguishes 'ijara sukuk' from 'murabaha sukuk'?

Murabaha sukuk are equity instruments
Ijara sukuk are lease-based with periodic rental payments; murabaha sukuk are cost-plus sale based with a lump-sum return (Correct answer)
No meaningful difference
Ijara sukuk are only for government issuers

Correct answer: Ijara sukuk are lease-based with periodic rental payments; murabaha sukuk are cost-plus sale based with a lump-sum return

Ijara sukuk generate returns from periodic lease rentals on underlying assets; murabaha sukuk generate returns from the profit margin in a cost-plus sale, typically resulting in a bullet payment.

Question 59: What is 'concentration risk' in portfolio management?

Risk from holding too many securities
Risk from holding cash
Regulatory risk from CMA rules
Excessive exposure to a single security, sector, or geography that amplifies potential losses (Correct answer)

Correct answer: Excessive exposure to a single security, sector, or geography that amplifies potential losses

Concentration risk arises when a portfolio is overly exposed to a single company, sector, or region, so an adverse event in that area disproportionately impacts the portfolio.

Question 60: Under CMA regulations, an offeror who withdraws a completed tender offer announcement faces which consequences?

Payment of a penalty to the CMA equal to 1% of the announced offer value
Requirement to obtain CMA consent and generally being prohibited from making another offer for 12 months (Correct answer)
A simple announcement of withdrawal with no further regulatory obligations
Compensation to the target company for advisory expenses only

Correct answer: Requirement to obtain CMA consent and generally being prohibited from making another offer for 12 months

An offeror who withdraws an offer must obtain CMA's consent and is typically prohibited from making another offer for the same target for a 12-month cooling-off period, discouraging frivolous announcements.

Question 61: What happens when a fund manager wants to make material changes to a public fund's Terms and Conditions?

Only the fund board needs to approve
They can make changes immediately
They must notify unitholders and obtain CMA approval before implementation (Correct answer)
Changes are prohibited once a fund is launched

Correct answer: They must notify unitholders and obtain CMA approval before implementation

Material changes to a public fund's Terms and Conditions require prior CMA approval and adequate notice to unitholders. Investors must be given sufficient time to redeem their units if they disagree with the changes.

Question 62: What is 'murabaha' in Islamic finance?

A cost-plus-profit sale where the seller discloses the cost and an agreed profit margin to the buyer (Correct answer)
A donation structure
An Islamic lease
A profit-sharing partnership

Correct answer: A cost-plus-profit sale where the seller discloses the cost and an agreed profit margin to the buyer

Murabaha is a sale where the seller discloses the original cost and adds an agreed profit margin; widely used in trade finance and asset financing as a Shariah-compliant alternative to loans.

Question 63: Under Saudi Capital Market Law, what constitutes 'price manipulation'?

Conducting transactions or making statements that create artificial prices or a misleading impression of activity (Correct answer)
Placing large buy orders
Publishing analyst reports
Short selling

Correct answer: Conducting transactions or making statements that create artificial prices or a misleading impression of activity

Price manipulation includes any conduct — trades, orders, or statements — intended to create an artificial price level or mislead others about supply, demand, or price.

Question 64: What is the yield curve and why is it important for Saudi fixed-income investors?

A graph plotting interest rates across different maturities of government debt (Correct answer)
A measure of corporate profitability
A graph showing stock price movements over time
A tool for calculating dividend yields

Correct answer: A graph plotting interest rates across different maturities of government debt

The yield curve plots government bond/Sukuk yields across different maturities. It helps investors assess interest rate expectations, economic outlook, and relative value across the maturity spectrum in the Saudi market.

Question 65: What is 'musharaka' in Islamic finance?

A pure loan structure
A lease agreement
A deferred sale
A joint venture or partnership where all parties contribute capital and share profit and loss proportionally (Correct answer)

Correct answer: A joint venture or partnership where all parties contribute capital and share profit and loss proportionally

Musharaka is a partnership where all partners contribute capital, share in profits according to agreed ratios, and bear losses proportional to their capital contribution.

Question 66: What is the Investment Policy Statement (IPS) used for?

Documenting a client's investment objectives, risk tolerance, constraints, and guidelines to direct portfolio management (Correct answer)
Filing with the CMA
Annual regulatory compliance filing
Setting trading limits for brokers

Correct answer: Documenting a client's investment objectives, risk tolerance, constraints, and guidelines to direct portfolio management

The IPS is the foundational document for managing a client's portfolio, capturing their goals, risk profile, time horizon, liquidity needs, and legal constraints.

Question 67: What is a 'Shariah Supervisory Board' in the context of Islamic financial institutions?

An independent body of Islamic scholars that reviews and certifies a firm's products and activities as Shariah-compliant (Correct answer)
A CMA inspection team
An internal audit committee
A government regulatory body

Correct answer: An independent body of Islamic scholars that reviews and certifies a firm's products and activities as Shariah-compliant

A Shariah Supervisory Board consists of qualified Islamic scholars who provide fatwas (religious rulings) certifying that products, contracts, and activities comply with Islamic law.

Question 68: Which committees are mandatory for Saudi-listed companies under CMA governance regulations?

No committees are mandatory
Audit committee, remuneration committee, and nomination committee (Correct answer)
Audit committee and remuneration committee
Only the audit committee

Correct answer: Audit committee, remuneration committee, and nomination committee

Saudi-listed companies must establish at least three mandatory committees: an audit committee, a remuneration committee, and a nomination committee. Each has specific composition and responsibility requirements under the CGR.

Question 69: Which of the following best describes the 'no-frustration' principle applicable to target companies during a tender offer period under CMA regulations?

The target board may take any defensive measure provided it discloses this to CMA within 48 hours
The target board is prohibited from communicating with shareholders during the offer period
The target company must recommend acceptance of any offer above the 12-month average share price
The target company must not take actions outside the ordinary course of business that could defeat the offer without shareholder approval (Correct answer)

Correct answer: The target company must not take actions outside the ordinary course of business that could defeat the offer without shareholder approval

The no-frustration principle requires the target company to refrain from actions outside ordinary business that could defeat the offer—such as issuing shares or selling material assets—unless shareholders approve such defensive measures.

Question 70: Which CMA regulation establishes corporate governance standards for listed Saudi companies?

Anti-Money Laundering Rules
Margin Trading Regulations
Corporate Governance Regulations (Correct answer)
Investment Funds Regulations

Correct answer: Corporate Governance Regulations

The CMA Corporate Governance Regulations set mandatory standards for board composition, committees, shareholder rights, and disclosure for listed companies.

Question 71: What fiduciary duties does a fund manager owe to fund investors under CMA regulations?

Duty of care, loyalty, and acting in the best interest of unitholders (Correct answer)
Only the duty to follow the fund's strategy
No specific fiduciary duties apply
Only the duty to maximize returns

Correct answer: Duty of care, loyalty, and acting in the best interest of unitholders

CMA regulations require fund managers to act with duty of care, loyalty, and in the best interest of unitholders. They must avoid conflicts of interest, maintain fair treatment, and ensure adequate risk management.

Question 72: What is the yield to maturity (YTM) of a bond?

The interest rate set by SAMA
The current dividend yield
The coupon rate only
The total return anticipated if the bond is held until maturity, accounting for price, coupon payments, and reinvestment (Correct answer)

Correct answer: The total return anticipated if the bond is held until maturity, accounting for price, coupon payments, and reinvestment

YTM is the internal rate of return that equates the present value of all future cash flows (coupons + principal) to the current market price of the bond.

Question 73: What is the role of the CMA's Enforcement Department?

Publishing investor education materials
Investigating violations of the Capital Market Law and regulations and initiating disciplinary or criminal proceedings (Correct answer)
Managing the Saudi Exchange systems
Approving new listings

Correct answer: Investigating violations of the Capital Market Law and regulations and initiating disciplinary or criminal proceedings

The Enforcement Department investigates potential violations, conducts formal investigations, and recommends disciplinary action including fines, licence sanctions, and criminal referrals.

Question 74: What role does the National Debt Management Center (NDMC) play in Saudi Arabia?

Operating the stock exchange
Setting SAIBOR rates
Regulating commercial banks
Managing the Kingdom's debt portfolio and executing borrowing strategy (Correct answer)

Correct answer: Managing the Kingdom's debt portfolio and executing borrowing strategy

The NDMC is responsible for managing the government's debt activities, including planning and executing local and international borrowing programs, managing the government's debt portfolio, and developing the Saudi debt market.

Question 75: What is a 'derivative instrument' in the context of Saudi capital markets?

A government savings bond
A fixed-income instrument
A financial contract whose value is derived from an underlying asset such as a stock, index, or commodity (Correct answer)
An Islamic finance product only

Correct answer: A financial contract whose value is derived from an underlying asset such as a stock, index, or commodity

Derivatives are financial contracts — such as futures, options, or swaps — whose value depends on the performance of an underlying asset, index, or rate.

Question 76: What is the penalty for 'tipping off' a customer about a money laundering investigation?

No penalty if done unintentionally
A verbal warning
Imprisonment for up to 2 years and/or a fine (Correct answer)
Administrative fine only

Correct answer: Imprisonment for up to 2 years and/or a fine

Under Saudi AML law, tipping off a customer or any other person about an ongoing investigation or the filing of an STR is a criminal offense punishable by imprisonment for up to 2 years and/or a fine.

Question 77: What is 'front running' in securities markets?

Submitting research before public release
A broker trading for its own account ahead of a large client order, profiting from the anticipated price movement (Correct answer)
Speed trading by algorithms
Placing orders ahead of market open

Correct answer: A broker trading for its own account ahead of a large client order, profiting from the anticipated price movement

Front running occurs when a broker or trader executes trades in their own account ahead of a client's order they know will move the price, violating their duty to the client.

Question 78: Credit rating agencies play a crucial role in the Saudi bond market. Which of the following is NOT a major international credit rating agency active in Saudi Arabia?

Saudi Credit Bureau (SIMAH) (Correct answer)
Fitch Ratings
Moody's
Standard & Poor's (S&P)

Correct answer: Saudi Credit Bureau (SIMAH)

SIMAH is Saudi Arabia's credit information bureau for consumer and commercial credit data, not a bond rating agency. The three major international rating agencies (Moody's, S&P, and Fitch) are all active in rating Saudi sovereign and corporate debt.

Question 79: What does 'Shariah compliance' mean for a Saudi capital market product?

Denominated in Saudi Riyals
Approved by the Saudi government
Structured to comply with Islamic law principles: no riba, gharar, maysir, and backed by permissible activities (Correct answer)
Listed on the Saudi Exchange

Correct answer: Structured to comply with Islamic law principles: no riba, gharar, maysir, and backed by permissible activities

Shariah compliance requires that financial products avoid interest (riba), excessive uncertainty (gharar), gambling (maysir), and must be backed by permissible (halal) underlying assets or activities.

Question 80: What is the 'Chinese Wall' concept in a securities firm?

Information barriers between departments to prevent the flow of MNPI from advisory to trading divisions (Correct answer)
A physical security barrier
A regulatory filing requirement
A market surveillance tool

Correct answer: Information barriers between departments to prevent the flow of MNPI from advisory to trading divisions

Chinese Walls are internal information barriers that prevent MNPI from flowing between different departments (e.g., M&A advisory and trading) within the same firm.

Question 81: What role does AAOIFI play in Islamic capital markets?

Manages the Saudi Exchange
Sets Shariah and accounting standards for Islamic financial institutions adopted widely including in Saudi Arabia (Correct answer)
Issues CMA licenses
Sets monetary policy

Correct answer: Sets Shariah and accounting standards for Islamic financial institutions adopted widely including in Saudi Arabia

AAOIFI (Accounting and Auditing Organisation for Islamic Financial Institutions) issues internationally recognised Shariah standards, accounting standards, and governance standards for Islamic finance.

Question 82: Under CMA rules, during the offer period the target company is restricted from taking which action without shareholder approval?

Issuing new shares that could frustrate the offer (Correct answer)
Issuing a profit announcement
Paying routine dividends declared before the offer
Filing audited financial statements with CMA

Correct answer: Issuing new shares that could frustrate the offer

Under the no-frustration rule, the target company cannot take actions such as issuing new shares that might defeat the offer without shareholder approval during the offer period.

Question 83: What is Counter-Terrorism Financing (CTF) and how does it relate to AML?

CTF is unrelated to AML
CTF focuses on preventing funds from being used for terrorism and is regulated alongside AML (Correct answer)
CTF only applies to banks, not capital market firms
CTF is handled exclusively by military authorities

Correct answer: CTF focuses on preventing funds from being used for terrorism and is regulated alongside AML

CTF measures aim to detect and prevent the financing of terrorism and are integrated with AML requirements under Saudi law. Both AML and CTF obligations apply to all CMA-authorized persons.

Question 84: What is the role of the Listing Authority in Saudi Arabia?

It regulates the banking sector
It reviews and approves applications for listing securities on Tadawul (Correct answer)
It manages day-to-day trading operations
It sets monetary policy

Correct answer: It reviews and approves applications for listing securities on Tadawul

The CMA's Listing Authority is responsible for reviewing listing applications, ensuring compliance with listing rules, and approving or rejecting applications for listing on the Saudi Exchange.

Question 85: What is 'maysir' and how does it relate to Islamic capital market regulations?

A type of Shariah audit
An Islamic partnership
Gambling or speculative activity, prohibited under Islamic law; regulators apply this to exclude highly speculative derivative structures (Correct answer)
An investment grade rating

Correct answer: Gambling or speculative activity, prohibited under Islamic law; regulators apply this to exclude highly speculative derivative structures

Maysir refers to gambling or pure speculation where one party gains at another's expense without legitimate economic activity, which Islamic finance principles prohibit.

Question 86: What is the concept of 'zakat' and its relevance to Saudi capital market participants?

A voluntary charitable donation
An obligatory annual wealth tax under Islamic law payable on qualifying assets above the nisab threshold, relevant to company and investor obligations (Correct answer)
A government bond payment
A general sales tax

Correct answer: An obligatory annual wealth tax under Islamic law payable on qualifying assets above the nisab threshold, relevant to company and investor obligations

Zakat is an obligatory annual levy at 2.5% on qualifying net wealth above the nisab. Saudi listed companies may have zakat obligations, and compliance is overseen by the Zakat, Tax, and Customs Authority.

Question 87: What is 'gharar' and why is it prohibited in Islamic finance?

A form of profit-sharing
A type of Islamic equity
Excessive uncertainty or ambiguity in a contract's terms that could lead to dispute, prohibited as it is unjust (Correct answer)
A bond structure

Correct answer: Excessive uncertainty or ambiguity in a contract's terms that could lead to dispute, prohibited as it is unjust

Gharar refers to contracts with excessive ambiguity, uncertainty, or speculative elements in key terms (price, subject matter, timing), making them potentially unjust or exploitative.

Question 88: What is 'wash trading' and why is it prohibited?

Simultaneously buying and selling the same security to create artificial volume, misleading the market (Correct answer)
Settling trades through clearing
Trading in foreign currencies
Cleaning broker accounts annually

Correct answer: Simultaneously buying and selling the same security to create artificial volume, misleading the market

Wash trading creates the false impression of market activity by buying and selling the same instrument without genuine change of ownership, artificially inflating volume figures.

Question 89: What is the significance of the 'record date' for dividend eligibility on the Saudi Exchange?

The end of the financial year
The date dividends are paid
The date dividends are announced
The date by which an investor must hold shares to qualify for the upcoming dividend (Correct answer)

Correct answer: The date by which an investor must hold shares to qualify for the upcoming dividend

The record date determines which shareholders are entitled to a declared dividend; investors must own shares by this date to be eligible for the payment.

Question 90: What is Nomu, the parallel market on Tadawul, primarily designed for?

Trading government bonds exclusively
Foreign investors only
Commodity futures trading
Small and medium enterprises (SMEs) seeking lighter listing requirements (Correct answer)

Correct answer: Small and medium enterprises (SMEs) seeking lighter listing requirements

Nomu is a parallel equity market with lighter listing requirements designed to provide SMEs with an opportunity to access capital markets. It has lower minimum capital, free float, and track record requirements compared to the Main Market.

Question 91: What is the key difference between conventional bonds and Sukuk in Saudi Arabia?

There is no practical difference
Bonds cannot be traded on Tadawul
Sukuk represent ownership in underlying assets rather than debt obligations (Correct answer)
Sukuk pay higher returns

Correct answer: Sukuk represent ownership in underlying assets rather than debt obligations

Sukuk represent ownership shares in underlying tangible assets, usufruct, or services, while conventional bonds represent a debt obligation. This distinction ensures Sukuk compliance with Sharia law, which prohibits interest-based lending.

Question 92: During a trading halt called by the exchange, which of the following is TRUE?

Only sell orders are suspended
Only block trades are prohibited
All trading in the affected security is temporarily suspended (Correct answer)
Trading continues but at reduced volumes

Correct answer: All trading in the affected security is temporarily suspended

A trading halt suspends all buying and selling activity in the affected security until the exchange lifts the halt, typically to allow dissemination of material information.

Question 93: What is the Saudi Exchange's pre-opening session used for?

Executing market orders at any price
Processing dividend payments
Allowing only institutional investors to trade
Collecting orders to determine the opening price through an auction mechanism (Correct answer)

Correct answer: Collecting orders to determine the opening price through an auction mechanism

The pre-opening session (8:00-10:00 AM) collects buy and sell orders to determine the opening price through a call auction mechanism. This helps establish a fair opening price based on supply and demand.

Question 94: What does 'systematic risk' (market risk) mean in investment analysis?

Risk inherent to the entire market that cannot be diversified away (Correct answer)
Risk of currency fluctuation only
Risk specific to one company
Credit risk of a single issuer

Correct answer: Risk inherent to the entire market that cannot be diversified away

Systematic risk affects all securities in the market simultaneously (e.g., recessions, interest rate changes) and cannot be eliminated through diversification.

Question 95: What is the purpose of a 'circuit breaker' mechanism in a stock exchange?

To automatically execute large block trades during volatile periods
To temporarily halt trading when prices move beyond predetermined thresholds (Correct answer)
To prevent after-hours trading from affecting opening prices
To limit the number of orders a single broker can submit

Correct answer: To temporarily halt trading when prices move beyond predetermined thresholds

Circuit breakers are automatic mechanisms that pause trading when a security or index moves beyond a set percentage threshold, helping prevent panic-driven extreme price swings.

Question 96: Which type of Sukuk structure involves a sale and leaseback arrangement?

Sukuk Al-Murabaha
Sukuk Al-Musharaka
Sukuk Al-Istisna
Sukuk Al-Ijara (Correct answer)

Correct answer: Sukuk Al-Ijara

Sukuk Al-Ijara involves the originator selling an asset to the SPV, which then leases it back. Investors receive rental income as returns. This is one of the most common Sukuk structures used in Saudi Arabia.

Question 97: Under CMA rules, what is required for a foreign company to list in Saudi Arabia?

Approval from SAMA only
No special requirements beyond domestic rules
Only a translation of listing documents
Meeting CMA eligibility criteria for foreign listings, submitting specified documentation, and compliance with dual-listing rules (Correct answer)

Correct answer: Meeting CMA eligibility criteria for foreign listings, submitting specified documentation, and compliance with dual-listing rules

Foreign companies seeking a Saudi listing must satisfy CMA eligibility criteria, submit required Arabic documentation, and comply with dual-listing and continuing obligation requirements.

Question 98: What is a Real Estate Investment Trust (REIT) in Saudi Arabia?

A bank mortgage product
A government housing program
A private real estate development company
A publicly traded closed-end fund that invests in income-generating real estate (Correct answer)

Correct answer: A publicly traded closed-end fund that invests in income-generating real estate

Saudi REITs are closed-end investment funds listed on Tadawul that invest at least 75% of assets in income-generating real estate. They must distribute at least 90% of net income as dividends to unitholders annually.

Question 99: Who qualifies as an 'insider' under CMA rules?

Only board members
Any shareholder
Directors, senior executives, employees, and anyone with access to material non-public information due to their position (Correct answer)
Foreign investors only

Correct answer: Directors, senior executives, employees, and anyone with access to material non-public information due to their position

Insiders include directors, executives, employees, advisors, and anyone who obtains MNPI because of their relationship with the company.

Question 100: What is Enhanced Due Diligence (EDD) and when must it be applied?

A one-time check during account opening
Additional verification measures applied to high-risk customers, PEPs, and complex transactions (Correct answer)
Only required for foreign customers
Standard identity verification for all customers

Correct answer: Additional verification measures applied to high-risk customers, PEPs, and complex transactions

EDD requires additional verification measures beyond standard CDD for high-risk situations, including dealings with Politically Exposed Persons (PEPs), complex or unusual transactions, and customers from high-risk jurisdictions.

CME-1 Capital Market Examination Level 1

The CME-1 is Saudi Arabia's mandatory licensing exam for capital market professionals, administered by the Financial Academy on behalf of the Capital Market Authority (CMA), covering securities regulations, market conduct rules, AML compliance, and investment instruments.

100

Questions

120 min

Time Limit

70%

To Pass

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