QFC Regulatory Compliance & Ethics 2 — Questions and Answers
Question 1: Under the Dodd-Frank Act, which entity is primarily responsible for regulating swap dealers and major swap participants?
- SEC
- CFTC (Correct answer)
- FINRA
- OCC
Correct answer: CFTC
The CFTC has primary jurisdiction over swap dealers and major swap participants under Dodd-Frank Title VII.
Question 2: A quantitative analyst discovers a model error that overstates the firm's VaR by 30%. Under CFA Institute Standards, what is the FIRST action to take?
- Immediately disclose to the SEC
- Report the error to supervisors and risk management (Correct answer)
- Quietly fix the model without disclosure
- Wait until the next quarterly review
Correct answer: Report the error to supervisors and risk management
CFA Standard IV(C) requires reporting material errors through internal channels to supervisors and risk management immediately.
Question 3: Which Basel III requirement specifically addresses banks holding high-quality liquid assets to survive a 30-day stress scenario?
- Net Stable Funding Ratio (NSFR)
- Liquidity Coverage Ratio (LCR) (Correct answer)
- Capital Conservation Buffer
- Leverage Ratio
Correct answer: Liquidity Coverage Ratio (LCR)
The LCR requires banks to hold sufficient High-Quality Liquid Assets (HQLA) to cover net cash outflows over a 30-day stress period.
Question 4: Front-running in a quantitative trading context refers to:
- Executing trades faster than competitors using superior algorithms
- Trading a security ahead of a pending client order to profit from the price movement (Correct answer)
- Using momentum signals derived from order flow data
- Placing orders at market open before price discovery
Correct answer: Trading a security ahead of a pending client order to profit from the price movement
Front-running is trading on advance knowledge of pending client orders to benefit from the resulting price movement, which is prohibited.
Question 5: Under MiFID II, what is the primary purpose of transaction reporting requirements for investment firms?
- To calculate firm profitability
- To enable regulators to detect market abuse and monitor systemic risk (Correct answer)
- To determine tax obligations
- To set margin requirements
Correct answer: To enable regulators to detect market abuse and monitor systemic risk
MiFID II transaction reporting enables competent authorities to detect and investigate potential market abuse and monitor market integrity.
Question 6: A portfolio manager uses material non-public information about a merger obtained at a social dinner. This violates which principle?
- Fiduciary duty only
- Insider trading prohibitions under SEC Rule 10b-5 (Correct answer)
- Best execution requirements
- Position limit rules
Correct answer: Insider trading prohibitions under SEC Rule 10b-5
Trading on material non-public information regardless of how it was obtained violates SEC Rule 10b-5 and constitutes insider trading.
Question 7: The Volcker Rule primarily restricts banks from:
- Engaging in currency hedging
- Proprietary trading and owning hedge funds or private equity funds (Correct answer)
- Offering retail investment products
- Using leverage above 10:1
Correct answer: Proprietary trading and owning hedge funds or private equity funds
The Volcker Rule (Section 619 of Dodd-Frank) prohibits banks from engaging in proprietary trading and limits their ownership in hedge/private equity funds.
QFC Regulatory Compliance & Ethics 2
Under the Dodd-Frank Act, which entity is primarily responsible for regulating swap dealers and major swap participants?