Regulatory Framework and Conduct Requirements
Core concepts
Candidates must know the regulatory architecture for derivatives: licensing and authorisation, market conduct rules, and reporting obligations. Key themes include trade reporting to trade repositories, central clearing mandates for standardised OTC derivatives, margin requirements for non-cleared derivatives, and the senior managers and certification regime style of accountability. Know best execution, conflicts of interest management, market abuse prohibitions (insider dealing, market manipulation), and record-keeping obligations.
Understand the difference between rules-based and principles-based regimes, and the role of the regulator in supervision, enforcement, and rulemaking. Know client categorisation (retail, professional, eligible counterparty) and how it affects protections such as disclosure, appropriateness, and best execution.
Traps
Questions often test whether a rule applies to all clients or only retail clients; many conduct protections are tiered. Another trap is confusing trade reporting with transaction reporting to the regulator - they serve different purposes. Watch for 'the regulator guarantees solvency' - it does not. Also be precise about who bears the obligation: the firm, the senior manager, or the individual.
Worked example
A firm executes an OTC derivative with a professional client. The clearing obligation may apply if the contract is standardised and both parties are in scope; if not cleared, margin rules for non-cleared derivatives may apply. The firm must also report the trade to a repository. Each obligation is separate and must be checked independently.
Rule of thumb
For any conduct question, identify: who is the client, what is the product, which regime applies, and who bears the duty. That four-part check resolves most traps.