Regulatory Framework and Market Structure
The Regulatory Framework and Market Structure domain examines how securities markets are supervised and how orders actually become settled trades. The exam tests your ability to place a fact pattern - a firm, a licence, an order, a disclosure event - inside the right rule, and to explain the consequence of getting it wrong.
Who regulates what
- A statutory regulator sets licensing, conduct, disclosure and enforcement rules, and can fine, suspend or revoke.
- Self-regulatory organisations (exchanges, clearing houses, industry bodies) make and enforce operating rules under delegated authority. Their rules bind members but cannot override statute.
- Authorisation is activity-based, not firm-based: dealing in securities, advising, asset management and securities margin financing are separately licensed activities, and conditions may restrict client types (professional investors only, no client assets held).
- IOSCO objectives - investor protection, fair, efficient and transparent markets, reduction of systemic risk - frame most regulatory-purpose questions.
Market structure and trading
- Venues include the main exchange, alternative trading systems and OTC dealer markets. Exchange trading is order-driven with price-time priority; OTC is quote-driven and bilateral.
- Order types: market, limit, stop, iceberg, at-auction. Exchange rules govern volatility controls, short-sale constraints and flagging.
- Best execution is an obligation of process, not outcome: weigh price, cost, speed, likelihood of execution and settlement, and evidence the policy was applied.
Post-trade
- Clearing novates the contract to a central counterparty; settlement exchanges cash for securities, typically T+2 for cash equities. Disclosure of interests and short positions applies above set thresholds.
Worked example
The ask side shows 2,000 shares at 10.00, 3,000 at 10.02 and 5,000 at 10.05. A market buy for 5,000 fills 2,000 × 10.00 = 20,000 and 3,000 × 10.02 = 30,060. Total 50,060, average 10.012 - 1.2 cents of slippage against the touch. Had a limit of 10.02 been entered instead, the same 5,000 shares would fill and the price priority of the resting 10.00 and 10.02 orders would be preserved.
Traps
Students lose marks by treating the exchange as the statutory regulator, reading T+2 as two calendar days (it is two business days after trade date), and describing best execution as a guarantee of the best price. Check whether the question concerns a licensed corporation or an individual licence - fit and proper tests and obligations differ.