Part VII International Securities, Including Markets and Clearing Systems, 24 Islamic Capital Markets

This chapter focuses on Islamic finance, which refers to financial activities conducted through a variety of financial contracts that comply with Shar?ah rules and principles as derived from primary and secondary sources. It explains the primary sources are the Quran, the Holy Book of the Muslims, and the Sunnah, the way of life prescribed as normative in Islam. It also mentions the secondary sources, which refer to the conclusions of legal reasoning by approved techniques and competent scholars. This chapter discusses modern Islamic finance, which can be seen as a product of the end of the colonial era. It notes that the first Islamic bank, a savings association, was established in Egypt in 1961 and the first modern commercial Islamic bank, Dubai Islamic Bank, was established in the United Arab Emirates in 1975.

Part I Financial Markets, 3 UK Central Banking and Financial Stability

This chapter talks about the Bank of England as the UK's central bank, which was established in 1694 by a Charter granted by King William III and Queen Mary II under the authority of an Act of Parliament. It explains the principal object of the Act in creating the Bank as a vehicle for raising money for the government. It also discusses how the Bank was closely associated with the raising and management of the national debt since its inception, which is a function that the Bank retained until the creation of the UK Debt Management Office (DMO) in 1998. This chapter highlights how the Bank raised money by issuing of banknotes, which became widely used as a convenient means of making large—value payments. It points out that the Bank of England notes were not formally legal tender until 1833.

Part II UK Securities Markets, 4 Recognized Investment Exchanges (RIEs) and Recognized Clearing Houses (RCHs)

This chapter summarizes and discusses the UK regulatory framework for recognized investment exchanges (RIEs) and recognized clearing houses (RCHs) under the Financial Services and Markets Act 2000 (FSMA). It considers the framework in light of the current and forthcoming European legislation. It also examines the applicability of the framework to RIEs and RCHs in the context of the recast Markets in Financial Instruments Directive II (MiFID II), European Market Infrastructure Regulation (EMIR) and the UK's departure from the European Union (Brexit). This chapter outlines the central role of exchanges and clearing houses in the operation of financial markets. It explains that the exchanges offer marketplaces for the trading of financial instruments, provide market data which facilitates trading, and establish standards for the offering of securities, while clearing houses manage the performance of financial contracts between the point of execution and final settlement and mitigating the risk and consequences of default.

Part II UK Securities Markets, 8 Transaction Reporting

This chapter explains “transaction reporting” as the process by which detailed information about a transaction is submitted to the appropriate regulatory body. It draws attention to the European transaction reporting requirements, particularly Article 20 of the Investment Services Directive, that can be traced to 1993. It also discusses the significant expansion of the pan—European harmonised approach to transaction reporting in 2008, following the introduction of new measures to address weaknesses and close loopholes caused by the financial market crisis. This chapter outlines how transaction reporting provides the Financial Conduct Authority (FCA) in the UK with a representation of the transaction that informs the competent authority about all the relevant circumstances under which the transaction took place. It describes how transaction reporting is operationally and conceptually distinct from “trade reporting” that is more concerned with the price formation.

Part III UK Derivatives, Money, and Debt Markets, 10 UK Government Debt Management and the Gilt Market

This chapter provides an overview of the UK Debt Management Office (DMO) that was established on 1 April 1998 and was tasked to manage government wholesale sterling debt issuance, which was originally the Bank of England's responsibility. It highlights the DMO's purpose on carrying out the government's debt management policy of minimising financing costs over the long term and minimising cost to offset the government's net cash flows while operating in a risk appetite approved by Ministers. It also points out that the DMO, in institutional terms, is legally and constitutionally part of HM Treasury (HMT) as an executive agency. This chapter discusses the gilt market, which is comprised of two different types of securities: conventional gilts and index—linked gilts. It compares the different types of gilt and shows how the breakdown of the gilt market has changed over time.

Part III UK Derivatives, Money, and Debt Markets, 11 UK Derivatives and Commodities Markets

This chapter considers the markets for the trading of derivatives and commodities in the UK, which form an important part of the financial services industry of the City of London. This chapter describes the precursors of the types of trading activities that were conducted historically in the City of London and have spread to neighbouring areas of west, central, and east London for the past forty years. It also emphasizes the growth of electronic trading platforms and the rapid growth of technology that diffuses trading activities geographically. This chapter addresses the question as to whether it makes sense to continuously speak of “UK” derivatives and commodities markets, as opposed to European or international markets. It talks about over—the—counter (OTC) trades executed in the UK that often involve at least one party operating from a location outside the UK.

Part VI European Securities Markets Supervision, 17 Regulation and Consolidation of European Markets and Exchanges

This chapter puts an emphasis on the regulation of marketed products, conduct of the issuers and operators, and the distribution of financial instruments. It mentions the basic provision on cross—border investment in the European Union (EU) that is found in Art 63 of the Treaty on the Functioning of the European Union (TFEU), which guarantees the free movement of capital. It also explains the difference of the freedom of movement of capital from all other economic freedoms provided by TFEU. This chapter describes how market participants from non—EU countries benefit from the freedom of movement of capital, which does not need any implementing legislation at member State level. It also discusses how the freedom of capital movement lays down a general prohibition that goes beyond the mere elimination of unequal treatment on grounds of nationality.

Part VII International Securities, Including Markets and Clearing Systems, 20 Global Custody

This chapter draws attention to the service of custody, which in the context of the financial markets, is generally understood as an arrangement in which one entity agrees to hold securities on behalf of a custody client. It reviews the intention of custody, which is for the custody client to remain the owner of the securities and that the securities remain on the custody client's balance sheet. It also describes the service of custody in the matter of English law, in which securities may be held by a custodian as bailee or trustee and will not be available to creditors of the custodian. This chapter talks about the custody aspect of the services provided by Clearstream and Euroclear that falls under the Luxembourg law and Belgian law, respectively. It also mentions the escrow arrangement, in which the escrow agent may hold securities on behalf of one or both parties to the escrow agreement.

Part VII International Securities, Including Markets and Clearing Systems, 21 Credit Rating Agencies

This chapter concentrates on credit rating agencies (CRAs), which play a key role in financial markets. It explains how CRAs help reduce information asymmetry between investors and issuers by providing an independent assessment of the relative creditworthiness of countries or companies. It also describes how CRA's role has expanded significantly in recent decades with financial globalization, such as the introduction of references to credit ratings in regulations and the embedding by market participants of ratings in their operating procedures, investment decisions, and contracts. This chapter identifies the heavy reliance on CRAs as one of the main contributors to the global financial crisis in 2008. It also talks about the efficacy of CRAs' credit ratings after 2008, in which regulators in the United States (US) and Europe introduced new regulations intended to address the reliability of CRAs' predictions of probability of default.

Part II UK Securities Markets, 5 UK Listing, Prospectus, and Disclosure Regime

This chapter talks about the current UK listing regime that stems from the EU legislation that was enacted as part of the European Commission's action plan for the Capital Markets Union (CMU) and Financial Services Action Plan (FSAP). It describes the aims of the CMU and the FSAP in order to achieve a single financial services market with no obstacles to cross—border activity and a sound supervisory structure. It also highlights the key EU legislation that governs the UK listing regime, which includes the prospectus regulation that regulates the prospectus to be published when a company's securities are to be offered to the public or admitted to trading on a regulated market in the European Economic Area (EEA). This chapter discusses the Market Abuse Regulation (MAR), which covers the disclosure and control of inside information and the offences of market manipulation and insider dealing. It also mentions the Transparency Directive that harmonizes transparency requirements for issuers whose securities are admitted to trading on a regulated market.