ACI Diploma cheat sheet

FCA/CFA-style integrity tests: does the action comply with law, rules, and a Code of Ethics; would it withstand public scrutiny; would it damage market confidence?

Front-running: dealing ahead of a known client order to profit from its price impact is market abuse, regardless of whether the client order is ever executed.

Personal account dealing usually requires pre-clearance and minimum holding periods; blackout windows apply around client orders and research publication.

Conflicts of interest must be identified, disclosed, and managed (Chinese walls, information barriers, restricted lists, disclosure of inducements) - not merely acknowledged.

Inducements: fees, commissions, or non-monetary benefits must be disclosed and must not impair the duty to act in the client's best interest; banned if designed to enhance remuneration.

Insider dealing: trading or tipping on inside information (precise, non-public, price-sensitive) is prohibited; unlawful disclosure is itself an offence.

Market manipulation forms: wash trades, marking the close, layering/spoofing, pump-and-dump, and dissemination of false or misleading information.

Whistleblowing frameworks protect good-faith disclosures; retaliation against reporters is itself a conduct breach.

Record-keeping: communications and orders must be retained for the regulatory period (e.g., MiFID II requires 5 years, extendable to 7) and be retrievable on request.

Money market instruments: T-bills, commercial paper, certificates of deposit, and repo - short-dated, low credit risk, quoted on discount or yield basis.

Bond price-yield relationship is inverse; price = sum of discounted cash flows. Duration measures first-order sensitivity; convexity measures curvature.

Modified duration ≈ Macaulay duration / (1 + y/m); approximate price change ≈ −modified duration × Δy + ½ × convexity × (Δy)².

Equity instruments: ordinary shares (residual claim, voting), preference shares (fixed dividend, priority over ordinary), and depositary receipts.

FX quoting convention: base/quote (e.g., EUR/USD); a rise means base currency appreciates. Spot, forward, swap, and option are the main FX products.

Derivatives: forwards (OTC, linear), futures (exchange-traded, margined, standardised), options (right not obligation; premium paid), swaps (exchange of cash flows).

Option payoffs at expiry: call = max(S−K, 0); put = max(K−S, 0); premium is paid upfront by the buyer.

Repo: sale of securities with agreement to repurchase; economically a secured loan. Haircut and margin protect the cash lender.

ETF: exchange-traded fund tracking an index; creation/redemption by authorised participants keeps price near NAV; can trade at premium or discount.

Order types: market (immediate execution, price uncertain), limit (price certain, execution uncertain), stop (becomes market when trigger hit), stop-limit, and IOC/FOK.

Best execution: firms must take all sufficient steps to obtain the best possible result for clients, considering price, cost, speed, likelihood of execution and settlement, size, and nature of order.

Bid-ask spread is the implicit cost of trading; effective spread = 2 × |trade price − midpoint|; quoted spread = ask − bid.

Market impact: larger orders move price against the trader; VWAP and TWAP algos slice orders to reduce impact and track a benchmark.

Slippage = execution price − decision price (for a buy); positive slippage means worse than expected.

Dark pools and MTFs: execute off the lit order book; MiFID II requires transparency waivers and best execution monitoring.

Short selling: sale of borrowed securities; requires locate and recall risk; naked short selling is restricted in many jurisdictions.

Settlement cycle: T+2 for most equities and bonds in major markets; FX spot is typically T+2 (T+1 for USD/CAD).

Trade confirmation and allocation: block trades must be allocated fairly and promptly; average pricing is permitted only under stated conditions.

Market risk measures: VaR (potential loss at a confidence level over a horizon), expected shortfall (average loss beyond VaR), stress testing, and scenario analysis.

VaR limitations: not sub-additive, ignores tail beyond the threshold, and depends on assumptions; hence regulators require ES and stress tests under Basel/FRTB.

Credit risk: probability of default (PD), loss given default (LGD), exposure at default (EAD); expected loss = PD × LGD × EAD.

Liquidity risk: funding liquidity (ability to meet cash needs) vs market liquidity (ability to trade without moving price); LCR and NSFR are Basel liquidity ratios.

Operational risk: people, processes, systems, and external events; measured via loss data, KRIs, and RCSA.

Treasury functions: cash management, funding, liquidity buffer, FX and interest-rate hedging, and bank relationship management.

Interest rate risk in the banking book (IRRBB): repricing gap, duration gap, and EVE/NII sensitivity analysis.

Collateral management: margining (initial and variation), haircuts, and daily valuation of collateral; wrong-way risk arises when exposure and collateral correlate.

Three lines of defence: business (first), risk & compliance (second), internal audit (third).

MiFID II/MiFIR: best execution, transaction reporting (T+1), product governance, inducements, and research unbundling.

MAR (Market Abuse Regulation): prohibits insider dealing, unlawful disclosure, and market manipulation; requires insider lists, PDMR notifications, and suspicious transaction reports (STORs).

Basel III: capital (CET1, Tier 1, Total), leverage ratio, LCR, NSFR, and countercyclical buffers.

EMIR: derivatives reporting to trade repositories, central clearing for standardised OTC derivatives, and margin requirements for non-cleared trades.

Dodd-Frank (US): swap clearing and reporting, Volcker rule (proprietary trading restrictions), and CFTC/SEC oversight split.

GDPR/Data protection: lawful basis, data minimisation, breach notification (72 hours), and data subject rights.

AML/CTF: customer due diligence (CDD), enhanced due diligence (EDD) for PEPs and high-risk jurisdictions, transaction monitoring, and SAR filing.

Senior Managers and Certification Regime (SM&CR): prescribed responsibilities, fitness and propriety, and conduct rules for staff.

Market integrity: surveillance for spoofing, layering, wash trades, and insider trading; firms must have automated alerts and escalation procedures.