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Question 1 of 30
Zenith Futures, a registered Canadian derivatives firm, is undergoing a routine audit by CIRO. The audit focuses specifically on the firm\'s compliance with financial conditions of registration, particularly concerning capital requirements on open futures positions as outlined in Chapter 8. Zenith holds a diverse portfolio of futures contracts, including positions in energy, agriculture, and financial instruments. The audit reveals a complex hedging strategy employed by Zenith, involving offsetting positions in related futures contracts. During the audit, the CIRO examiner, Inspector Davies, notes discrepancies in how Zenith is calculating its risk-adjusted capital, specifically regarding the application of exclusions from the risk provision calculations for its hedging positions. Inspector Davies is concerned that Zenith may be underestimating its overall risk exposure and potentially failing to maintain adequate capital reserves. Furthermore, Zenith\'s latest Joint Regulatory Financial Questionnaire and Report (JRFQR), specifically Schedule 12, appears to deviate from the documented hedging strategy. Which of the following actions should Inspector Davies prioritize to ensure Zenith\'s compliance with financial conditions of registration?
Conduct a thorough review of Zenith's hedging documentation, cross-referencing it with their trading records and risk management policies, to validate the eligibility and accuracy of exclusions claimed in the risk provision calculations, and reconcile any discrepancies found in Schedule 12 of the JRFQR with the firm's actual hedging activities and risk exposure.
Immediately impose a trading restriction on Zenith Futures, preventing them from entering into any new futures positions until the capital adequacy issues are fully resolved, regardless of the potential impact on their clients' hedging strategies.
Accept Zenith's explanation regarding the discrepancies in the JRFQR, assuming that the firm's internal risk management controls are sufficient to mitigate any potential capital shortfalls, without further investigation.
Direct Zenith Futures to liquidate all of its futures positions immediately, regardless of market conditions, to eliminate any potential risk exposure and ensure compliance with capital requirements.

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