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

Question 1: What is the purpose of the CMA's 'Market Conduct Regulations'?

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

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 2: Under CMA regulations, what disclosure requirements apply to Sukuk issuers in Saudi Arabia?

Prospectus disclosure, ongoing material event announcements, and periodic financial reporting (Correct answer)
Only disclosure to institutional investors
No disclosure is required for Sukuk
Annual financial statements only

Correct answer: Prospectus disclosure, ongoing material event announcements, and periodic financial reporting

Sukuk issuers must provide comprehensive disclosure including a detailed prospectus, ongoing material event announcements, and periodic financial reporting (semi-annual and annual) to ensure investor transparency.

Question 3: Which type of order instructs a broker to buy or sell a security immediately at the best available current price?

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

Correct answer: Market order

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

Question 4: What is the IFSB and its relevance to Saudi Islamic finance regulation?

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

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 5: What is a Suspicious Transaction Report (STR) and who must file it?

An annual audit requirement
A report filed by financial institutions to the Saudi Financial Intelligence Unit when suspicious activity is detected (Correct answer)
A quarterly report filed by the CMA only
A customer complaint form

Correct answer: A report filed by financial institutions to the Saudi Financial Intelligence Unit when suspicious activity is detected

Financial institutions, including CMA-authorized persons, must file STRs with the Saudi Financial Intelligence Unit (SAFIU) when they suspect or have reasonable grounds to suspect that a transaction involves proceeds of crime or is related to money laundering or terrorism financing.

Question 6: What is Nomu, the parallel market on Tadawul, primarily designed for?

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

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 7: What is a 'rights issue' in the Saudi equity market?

An offering of new shares to existing shareholders proportional to their current holdings at a discount (Correct answer)
An offering of new shares to the public at large
A bonus share distribution
A share buyback programme

Correct answer: An offering of new shares to existing shareholders proportional to their current holdings at a discount

In a rights issue, a listed company offers new shares to existing shareholders in proportion to their current holdings, usually at a discount to the market price, to raise capital.

Question 8: 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 9: Which type of CMA license allows a firm to manage client portfolios on a discretionary basis?

Arranging license only
Managing license (Correct answer)
Dealing license only
Advising license only

Correct answer: Managing license

A Managing license from the CMA permits firms to manage investments, including client portfolios on a discretionary basis. This is one of the five categories of securities business activities regulated by the CMA.

Question 10: What is a 'takaful' product in Islamic finance?

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

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

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

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 12: What percentage of a listed company's board must be independent directors under CMA governance rules?

At least one-third must be independent (Correct answer)
Independence is not required
At least one independent director
At least half must be independent

Correct answer: At least one-third must be independent

CMA Corporate Governance Regulations require that at least one-third of a listed company's board members be independent directors to protect minority shareholders.

Question 13: If the offeror revises (increases) the offer price during the offer period, who benefits from the higher price?

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

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

A stock market index
A type of government bond
The Saudi arbitration board for disputes
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 15: What is 'gharar' and why is it prohibited in Islamic finance?

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

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 16: What must a listed company do when it becomes aware that inside information has been leaked to the market?

Wait for the next quarterly report
Make immediate public disclosure to ensure all market participants receive the information simultaneously (Correct answer)
Contact only major shareholders
Report to SAMA only

Correct answer: Make immediate public disclosure to ensure all market participants receive the information simultaneously

If MNPI is inadvertently leaked, the company must immediately issue a public announcement to level the playing field and restore market integrity.

Question 17: What is 'riba' and why is it prohibited in Islamic finance?

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 type of equity instrument
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 18: What is the primary regulation governing investment funds in Saudi Arabia?

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

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

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 only provides guidance, not enforcement
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 20: What is the CMA's stance on Shariah compliance screening for investment funds marketed as 'Islamic'?

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

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 21: What role does AAOIFI play in Islamic capital markets?

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

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

A CMA compliance certificate
A government bond guarantee
A rating agency opinion
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 23: What is a 'Shariah Supervisory Board' in the context of Islamic financial institutions?

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

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

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

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

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

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 26: What distinguishes 'ijara sukuk' from 'murabaha sukuk'?

Ijara sukuk are only for government issuers
No meaningful difference
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)

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 27: What is the role of the audit committee in a Saudi-listed company?

Managing daily operations
Setting executive salaries
Approving new product launches
Overseeing financial reporting, internal controls, and the external audit process (Correct answer)

Correct answer: Overseeing financial reporting, internal controls, and the external audit process

The audit committee oversees the integrity of financial statements, reviews internal control systems, recommends appointment of external auditors, and reviews compliance. It must have at least one member with financial expertise.

Question 28: What is 'mudaraba' in Islamic finance?

A commodity swap
A secured loan
An Islamic forward contract
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)

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

Sukuk is only for government issuers
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 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 30: 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 tool for calculating dividend yields
A graph showing stock price movements over time

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.

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.

Questions

35 min

Time Limit

70%

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