Risk, Compliance and Regulatory Technology
What this domain tests
The exam tests how investment restrictions are coded and monitored, how pre-trade and post-trade compliance differ, what regulatory reports must be produced, and how surveillance, AML and sanctions tools are configured and tuned.
Core rules and concepts
- Pre-trade versus post-trade: pre-trade blocks or warns before an order is sent; post-trade detects breaches after booking. Both need an audit trail and documented escalation.
- Rule coding: mandate limits, UCITS 5/10/40 (10% per issuer, 5/10/40 aggregate, 20% deposit limits, 5% issuer concentration for certain holdings), derivative eligibility, counterparty and liquidity limits. Issuer groups must be aggregated and derivatives looked through.
- Regulatory reporting: MiFIR transaction reporting (RTS 22), EMIR trade reporting, SFTR, AIFMD Annex IV. Data must be complete, accurate and timely; LEI, UTI and UPI reference data are frequent failure points.
- Surveillance and financial crime: market abuse alerts, e-communication and voice monitoring, sanctions screening, transaction monitoring. False-positive rates need tuning, but tuning must be documented and validated.
- RegTech: automation of rule mapping, report generation, reconciliations and alert triage; the control environment and ownership remain with the firm.
Worked example
A UCITS fund has NAV of £100m, so the 10% issuer limit is £10m. The fund already holds £9.6m of an issuer and the PM wants to buy £0.8m. Reasoning: post-trade exposure would be £10.4m, or 10.4% of NAV, a breach. The pre-trade rule should block the order, or permit it only up to £0.4m. The calculation must use trade-date positions, aggregate all instruments of the same issuer group, and look through derivatives to underlying exposure. The exam typically marks the date convention, the aggregation method and the pre-trade versus post-trade distinction.
Traps that cost marks
Running limits on settlement-date positions; aggregating issuers incorrectly or ignoring group structures; missing derivative look-through; reporting after the regulatory deadline; confusing EMIR's UTI with MiFIR transaction reporting fields; over-blocking legitimate trades and treating that as a safe control without review.