The Level I CFA curriculum in 2015 has been updated in quite a few topics. In summary, the following changes have been made:
Ethics: a new edition of the Standards of Practice Handbook has entered the curriculum, in particular Standards IV(C), V(B) and VII(A)
- Quantitative Methods: updated examples, though no substantive changes to learning outcomes or body of readings
- Economics: a few additional learning outcome statements, but no major changes
- Financial Reporting & Analysis: two readings (Red Flags and Accounting Shenanigans) have been deleted and one new reading on Financial Reporting Quality (Ciesielski, Henry, Selling) has been added
- Fixed Income: one substantial new reading on securitization (An Introduction to Asset-Backed Securities (Fabozzi)) has been added, plus one new learning outcome statement on key rate durations
- Derivatives: four readings have been deleted (Forwards, Futures, Options, Swaps), and one new reading (Basics of Derivative Pricing and Valuation (Chance)) has been added.
Although this may seem a daunting list, the changes in Ethics, Quants and Economics are relatively minor; FRA, Fixed Income and Derivatives have one new reading each.
There have also been few changes to the topic weights for the exam:
- Corporate Finance: down from 8% to 7%
- Portfolio Management: up from 5% to 7%
- Fixed Income: down from 12% to 10%
- Alternative Investments: up from 3% to 4%.
In a little more depth, the largest changes are discussed below.
The 11th edition became effective in July 2014, but examinable for all 2015 exams. Although the changes are minor, Ethics is an important topic. Three standards have been updated:
- IV(C) Responsibilities of Supervisors: stronger statement regarding compliance to all relevant rules etc of subordinate employees.
- V(B) Communication with Clients and Prospective Clients: now includes disclosure of limitations and risks relating to the investment process.
- VII(A) Conduct as Participants in CFA Institute Programs: the title has changed, and the scope broadened to include Claritas and CIPM, other exams of CFA Institute.
Financial Reporting and Analysis
Two small readings have gone from the final Study Session (SS10): Red Flags etc, and Accounting Shenanigans etc. These have been replaced with one significant new reading, Financial Reporting Quality. This topic defines quality of financial reports versus quality of earnings and the differences and connections between these two. A quality spectrum is introduced, allowing analysts to determine how useful reporting is, and how sustainable earnings are. Accounting assumptions are shown as either aggressive or conservative, and there is a discussion on the motivations for managers to massage the figures. The reading then explores how high quality reporting can be disciplined, and finally we see a list of warning signs that highlight the risk that accounting choices may be somewhat biased.
Apart from one new LOS on key rate durations (how to assess yield curve “shaping risk”), the only change to Fixed Income is a sizeable new reading on securitisation, entitled Introduction to Asset-Backed Securities. Although ABSs and securitisation has previously been primarily a Level II topic, this topic has come down to Level I for 2015. A detailed and challenging chapter, we open by describing what securitisation is (turning an illiquid asset such as a residential mortgage into a tradable security), including jargon, participants and benefits. Residential mortgages are described in detail, and we describe mortgage pass-through securities (MPS) that derive from the mortgages. Prepayment is discussed in a bit of detail, as this is the main uncertainty for investors. How do we estimate and measure mortgage prepayments? Collateralised mortgage obligations (CMO) then appear on the back of MPSs, and we describe two structures of CMO. After this, other types of securities are discussed, including non-agency securities, commercial mortgage-backed securities, non-mortgage securities, and finally collateralised debt obligations. A big new topic, worthy of a substantial amount of studying time. Frustratingly for some of you, this increased length coincides with a reduced exam weighting for Fixed Income.
At first glance, the changes here are not that big: of the three readings in 2015, two are the same as last year. Of the six readings in 2014, four have gone, replaced with the one new reading on derivative pricing and valuation.
Once you delve into more detail you realise that the approach in 2015 is rather different. You still need to know the basic structure of forwards, futures, options and swaps (with a brief cameo appearance of credit default swaps), but most of the calculations have gone. Options still require calculations (including that entire section on option pricing), but forwards, futures and swaps are now much more descriptive instead of numerical. The new reading on derivative pricing and valuation explores the nature of the various contract types, and how pricing and valuations interact. You will see quite a bit of algebra, but it is the concepts rather than the calculations that will most likely be heavily examined. Option pricing goes far beyond what 2014 required, with the binomial model introduced.
If you need further information on these updates, please contact the Quartic team for details.