b Licensing requirements trading and clearing rules For new derivatives trading

B licensing requirements trading and clearing rules

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b) Licensing requirements, trading and clearing rules For new derivatives trading, the regulator needs to establish its policy on licensing intermediaries. This extends to clients of those intermediaries and proprietary traders so that all market users will need to make preparations to participate in the market. This also extends to the clients of these advisors so that it is mandatory for clients to sign paperwork asserting that they have read the warnings and understand the risks. In this case the exchange needs to develop training courses and training materials and prepare users; intermediaries and investors well in advance of the market launch (Alberta Market Solutions Ltd., 2003).Most of the regulatory requirements manifest themselves in the trading and clearing rules. The rules cannot be completed until all the legal and regulatory research and negotiation has been completed. If the derivatives market is being created by the operator of an existing exchange and clearinghouse, the task of adding derivatives rules is simplified since there are many areas particularly in the trading rules which can be common to both markets. The period of time the market operator takes to draft, review and finish new derivatives rules should not be underestimated (Dodd, 2007). c) Financial integrity i) Prudential or financial safety requirements are required to not only protect markets and funds from credit and systemic risk, but also to ensure that only those persons who are deemed credit-worthy and have a stake in the proper conduct of business should have access to the markets (Saksena, 2003).This will be done through requirements on registration and reporting, capital and collateral requirements and customer protection regulation. 21
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ii) Registration and reporting: Registration is a means to ensure that all financial institutions meet minimum standards, that the regulatory authorities have a census of all relevant financial institutions, and that it provides an easy way to identify illegitimate businesses and to shut down illegal activity. Reporting requirements should apply to all derivatives dealers and major market participants. The information acquired by the regulatory authority through these reporting requirements helps their efforts in market surveillance. The public interest is best protected when the regulatory authority has sufficient information to control malfeasance and help prevent market disruptions caused by fraud and manipulation (Dodd, 2007). iii) Capital and collateral requirements: The regulators should require minimum capital requirements for all derivatives dealers and set minimum collateral requirements for derivatives transactions. Especially important is the use of capital requirements to limit the amount of foreign currency exposure at financial institutions. Collateral requirements for financial transactions function like capital requirements for financial institutions; both provide a buffer against financial failure, and both provide incentives to economize on risk- taking by raising the cost of holding open positions. Adequate collateral usage will reduce the
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