REGULATION OF FINANCIAL MARKETS AUGUST 2022 PAST PAPER

TUESDAY: 2 August 2022. Morning paper. Time Allowed: 3 hours.

Answer any FIVE questions. ALL questions carry equal marks. Do NOT write anything on this paper.

QUESTION ONE

1. In relation to classification of contracts, distinguish between the following types of contracts:

“Express contract” and “implied contract”. (2 marks)

“Unilateral contract” and “bilateral contract”. (2 marks)

“Valid contract” and “voidable contract”. (2 marks)

“Executed contract” and “executory contract”. (2 marks)

2. The judiciary operates through courts which exercise certain powers (jurisdictions) as given by the law.

Required:
State the three types of jurisdictions that courts can exercise according to the court system in your country. (3 marks)

3. Examine three duties of an agent to his principal as provided for in the law of agency. (3 marks)

4. Explain three main components of a legally binding financial contract. (6 marks)

(Total: 20 marks)

QUESTION TWO

1. It has been argued that principles-based regulation which emphasises adhering to the spirit of the regulation is more appropriate. Policy makers need to identify the source of market failures first and then design regulations to specifically address those market failures.
In light of the above statement, propose four major market failures that precipitated the global financial crisis necessitating regulation in the international financial markets. (4 marks)

2. The Capital Markets Authority (CMA) issues regulations to facilitate the efficient workings of the financial markets.

Required:
In relation to the above statement, outline four issues that the CMA or its equivalent body in your country could consider in making sure that the issued regulations are appropriate. (4 marks)

3. Identify five aspects that the Capital Markets Authority (CMA) or its equivalent in your country could consider in determining whether a firm is suitable for the grant of a licence. (5 marks)

4. With reference to central securities depository:

Explain the term “a central securities depository”. (2 marks)

Summarise five duties of a central depository. (5 marks)

(Total: 20 marks)

QUESTION THREE
1. Explain the functions of the following capital market intermediaries:

Stock broker. (2 marks)

Dealer. (2 marks)

Investment bank. (2 marks)

Fund manager. (2 marks)

2. Highlight four offences that could constitute market abuse in the capital market. (4 marks)

3. Highlight four regulations concerning employees that a firm must follow in ensuring compliance with capital market regulations. (4 marks)

4. Explain the following sources of law in your country:

Constitution. (2 marks)

Delegated legislation. (2 marks)

(Total: 20 marks)

QUESTION FOUR
1. With respect to Anti-Money Laundering (AML) requirements, explain the following stages of money laundering:

Placement. (2 marks)

Layering. (2 marks)

Integration. (2 marks)

2. In relation to the prevention of money laundering, identify three details a market intermediary should obtain from a client on each occasion that the client places an investment order. (3 marks)

3. Highlight five circumstances under which an authorised central depository agent may be suspended or prohibited from maintaining or performing approved functions. (5 marks)

4. Describe the ways in which the following investment funds operate:

Exchange-traded funds (ETFs). (2 marks)

Real estate investment trusts (REITS). (2 marks)

Employee share ownership plans (ESOPs). (2 marks)

(Total: 20 marks)

QUESTION FIVE

1. Central Banks operate at the very centre of a nation’s financial system. They are usually public bodies, but increasingly, they operate independently of government control or political interference.

Required:
With reference to the above statement, state six functions of the Central Bank in your country. (6 marks)

2. Highlight four major benefits of Collective Investments Schemes (CISs). (4 marks)

3. Highlight six regulatory functions of the Capital Markets Authority (CMA) in your country. (6 marks)

4. There is inevitably some overlap between anti-money laundering provisions and the rules designed to prevent the financing of terrorist acts. However, differences do exist.

Required:
Explain two major differences between terrorist financing and other money laundering activities. (4 marks)

(Total: 20 marks)

QUESTION SIX

1. Outline the five contents of a client agreement as it relates to the conduct of business of market intermediaries. (5 marks)

2. Highlight four regulatory requirements for real estate investment trusts (REITs). (4 marks)

3. Identify three components of risk profile of a client. (3 marks)

4. The level of transparency is an essential determinant of an effective market. The regulators and the exchange must ensure the greatest degree of transparency for investors to be able to make informed decisions.

Required:
In reference to the above statement, differentiate between “pre-trade transparency” and “post-trade transparency”. (4 marks)

5. A derivatives exchange must meet regulator’s requirements for authorisation and its clearing and settlement operations.

Required:
Explain four such requirements. (4 marks)

(Total: 20 marks)

QUESTION SEVEN

1. Describe three situations under which the capital market regulator has the power to intervene in the management of its licensee. (6 marks)

Highlight four actions that the capital market regulator may undertake in exercising its power to intervene in the management of its licensee. (4 marks)

2. The Competition Authority of Kenya’s (CAK) role is to protect, strengthen and supplement the way competition works in markets and industries. The authority carries out this role through various activities some of which merge or relate with Capital Markets Authority (CMA).

Required:
State the functions of CAK or an equivalent Authority in your country. (5 marks)

3. Highlight five circumstances under which Sacco Societies Regulatory Authority (SASRA) might require higher minimum capital ratios for a Sacco Society. (5 marks)

(Total: 20 marks)

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