Learning outcome: Explain the major changes to the U.S. financial market regulations as a result of Dodd-Frank.
Questions:
524.1. One lesson from the 2007 credit crisis is that over-the-counter (OTC) derivatives, which are supposed to protect business from risks, can create systemic risk by way of a chain of interconnected trades among key market participants. In what primary way does Dodd-Frank attempt to address this threat created by OTC derivatives?
a. By disallowing bespoke derivate contracts and uncleared trades
b. By requiring for certain contracts the Financial Stability Oversight Council (FSOC) to match trades and guarantee settlement
c. By requiring for certain contracts the use of central clearing parties (CCPs) and swap execution facilities (SEF)
d. By requiring over-the-counter derivatives to meet a set of standardized specifications in order to ensure the use of an exchange-traded platform in order to provide price transparency to all market participants
524.2. Many critics blame the rating agencies for their role in the crisis. For example, the Senate Committee on Banking wrote, "Rating agencies market themselves as providers of independent research and in-depth
credit analysis. But in this crisis, instead of helping people better understand risk, they failed to warn people about risks hidden throughout layers of complex structures." With respect to external credit rating agencies, Dodd-Frank proposes each of the following EXCEPT which is not true?
a. An Office of Credit Ratings was created at the SEC to provide oversight of rating agencies
b. Requires that regulators remove unnecessary references to external (i.e., NRSRO) ratings in regulations
c. Eliminates the designation of Nationally Recognized Statistical Rating Organization (NRSRO) in order to promote better competition in the ratings marketplace
d. Rating agencies were required to make the assumptions and methodologies behind their ratings more transparent and the potential legal liabilities of rating agencies were increased
524.3. Dodd-Frank also proposed each of the following EXCEPT which is not accurate?
a. Insurance: A Federal Insurance Office was created to monitor all aspects of the insurance industry and work with state regulators.
b. Securitization: Issuers of securitized products were required (with some exceptions) to keep 5% of each product created ("skin in the game")
c. Risk expertise: Large financial firms were required to have board committees where at least one expert has risk management experience at a large complex firm.
d. Hedge funds: Hedge funds must justify, including with sufficient backtesting, that their trades are indeed hedges (as opposed to speculative trades) or they can be de-classified as genuine "hedge" funds.
Answers here:
Questions:
524.1. One lesson from the 2007 credit crisis is that over-the-counter (OTC) derivatives, which are supposed to protect business from risks, can create systemic risk by way of a chain of interconnected trades among key market participants. In what primary way does Dodd-Frank attempt to address this threat created by OTC derivatives?
a. By disallowing bespoke derivate contracts and uncleared trades
b. By requiring for certain contracts the Financial Stability Oversight Council (FSOC) to match trades and guarantee settlement
c. By requiring for certain contracts the use of central clearing parties (CCPs) and swap execution facilities (SEF)
d. By requiring over-the-counter derivatives to meet a set of standardized specifications in order to ensure the use of an exchange-traded platform in order to provide price transparency to all market participants
524.2. Many critics blame the rating agencies for their role in the crisis. For example, the Senate Committee on Banking wrote, "Rating agencies market themselves as providers of independent research and in-depth
credit analysis. But in this crisis, instead of helping people better understand risk, they failed to warn people about risks hidden throughout layers of complex structures." With respect to external credit rating agencies, Dodd-Frank proposes each of the following EXCEPT which is not true?
a. An Office of Credit Ratings was created at the SEC to provide oversight of rating agencies
b. Requires that regulators remove unnecessary references to external (i.e., NRSRO) ratings in regulations
c. Eliminates the designation of Nationally Recognized Statistical Rating Organization (NRSRO) in order to promote better competition in the ratings marketplace
d. Rating agencies were required to make the assumptions and methodologies behind their ratings more transparent and the potential legal liabilities of rating agencies were increased
524.3. Dodd-Frank also proposed each of the following EXCEPT which is not accurate?
a. Insurance: A Federal Insurance Office was created to monitor all aspects of the insurance industry and work with state regulators.
b. Securitization: Issuers of securitized products were required (with some exceptions) to keep 5% of each product created ("skin in the game")
c. Risk expertise: Large financial firms were required to have board committees where at least one expert has risk management experience at a large complex firm.
d. Hedge funds: Hedge funds must justify, including with sufficient backtesting, that their trades are indeed hedges (as opposed to speculative trades) or they can be de-classified as genuine "hedge" funds.
Answers here:
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