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CISI Derivatives study materials
CISI Derivatives study resources

CISI Derivatives (CISI): Regulation, clearing, margining and ethics

CISI Derivatives · Work through your exam, one topic at a time.

All guide sections

Regulation, clearing, margining and ethics

What is tested

This domain tests the regulatory architecture for derivatives: clearing obligations, margin rules, trade reporting, client money and market conduct. You should know the roles of CCPs, EMIR/UK EMIR, Dodd-Frank, MiFID II, CASS and the Market Abuse Regulation, and be able to apply ethical standards to scenarios.

Core rules

  • G20 post-2009 reforms: standardised OTC derivatives should be cleared through CCPs, reported to trade repositories, and subject to higher capital and margin.
  • EMIR (as retained/onshored in the UK) imposes clearing, reporting and risk mitigation for non-cleared derivatives. Dodd-Frank does similar in the US.
  • Initial margin protects against future default; variation margin settles current mark-to-market moves. Bilateral IM rules apply to non-cleared derivatives above thresholds; cleared trades use CCP margin.
  • Client assets must be segregated and protected under CASS. CCP membership, portability and default management are central to clearing resilience.
  • Ethics: no insider dealing, market manipulation, front-running or misuse of confidential information; best execution and conflicts management apply.

Worked example

A fund has a cleared interest rate swap. CCP initial margin is £1.5m. Day 1 mark-to-market is −£400,000; day 2 is −£900,000. The fund posts £1.5m IM plus variation margin. Day 1 VM call = £400,000; day 2 incremental VM = £900,000 − £400,000 = £500,000. IM stays £1.5m unless risk or positions change. If the fund fails to meet the day 2 call, the CCP may use default-management tools, including auctioning the portfolio. This shows IM is not a substitute for daily VM.

Traps that cost marks

  • Confusing initial and variation margin: IM covers potential future exposure, VM covers realised moves.
  • Assuming clearing eliminates all risk; CCP, liquidity and operational risks remain.
  • Overlooking segregation and client-money rules.
  • Treating trade reporting as optional.
  • Missing conduct issues such as front-running or misuse of information in scenario questions.