3 - LIQUIDITY (fin.) Flashcards
Benefits/risks
of cash deposits
BENE
- security - FSCS protection up to 85k
- accessibility - usually immediate unless term deposit
- liquidity - instant access to deposits 2nd only in liquidity to cash
RISKS
- interest rates may not keep up with inflation
-inflation eroding value
- portfolio cash accounts - not protected by FSCS
types of cash acc - instant access, notice account, term deposit and money market acc
FSCS
set up under FSMA2000 to compensate customers of auth fin. services firms in case of insolvency
established by FSA and now governed by PRA and FCA
funded by levy on financial services sector depending on class of activity - can also borrow from sector
what does FSCS cover
compensate customers of fin. services firms in case of insolvency
covers deposits, credit unions, insurance pols, pensions, insurance brokering, endowments, investments, mortgages, debt management
key provision is to protect cash deposits up to 85k per person per authorized instit
- originally under EU directive 100k eur rebal every 5 years
doesnt cover deposits outside of EEA
temp large balances protected for 6 months up to 1mn (e.g. proceeds from house sale, insurance payout, inheritance etc)
FSCS global alts
FDIC - deposits in US insit up to $250k (SVB more)
PBOC - 500k yuan per depositor
SARB - 100k rand per depositor per bank
spreading risk through different deposit takers
85k FSCS ceiling can lead depositors to spread risk among instit to reduce default risk
- cannot be same parent instit as cover only provided per authorised firm with 1 FRN number
benefit of spreading risk needs to be weighed against possible disadvantage of lower rates of interest because missing out on higher rates for larger deposits
types of deposit takers
commercial banks - plc which trades on major exchange, provides range of services (mortgages, deposits, loans, basic investment prods, saving acc, CDs)
challenger banks - branchless bank challenging UK big four
- smaller and younger, sometimes operate in underserved areas
green banks - much like regular bank but generally loan combo public and private money for clean energy or energy efficiency projects
either gov owned or quasi public bank
building society
mutally owned orgs (owned by members) - therefore similar structure to credit unions
members are holders of savings acc and borrowers
- have voting rights
- some have demutualised and become comm/retail banks
others absorbed in widespread consolidation
NS&I
safest of all deposits in UK as guaranteed in full by UK gov
>2mn
can open if you have a UK bank or building society account
NS&I holds no capital and has no lending or dealing activity - not a bank - not an authorized deposit taker
deposit acc types
instant access - cash immediately accessible (can be limits on withdrawals e.g. x amount/day)
notice accounts - depositor must give notice of intent to withdraw or suffer interest penalty - higher interest than instant access due to less liquidity
term deposit - cash deposited over predefined period for enhances rate. early withdrawal prob not permitted or allowed with big penalty
- often provided as fixed rate bond by bank
money market accounts
- certain banks offer money market deposits for deined periods, rates and currencies - IR reflects the current MM rates
- call account allows invest to access money on working day and by a specific time (close to instant access and offers rat aligned to base rate)
tax treatment of cash deposits
- gross interest (from April 2017)
- first 1k (500 higher) tax free
- no CGT
what is an ISA]
types?
- tax efficient wrapper for residents
- no income tax or CGT
types
-cash
-stocks and shares
-LISA
-flexible ISA
-innovative finance ISA
JISA
H2B ISA
H2B ISA
gov pay 25% bonus on savings up to max of 3k paid on 12k savings
closed to new savers in nov 2019
investors who had one already can continue to make contributions up to Nov2029
ISA age limits and key info
16 cash ISA
18 SS ISA, flex ISA, innovative finance ISA
18<x<40 - LISA
<18 JISA
UK res (can retain ISA if move abroad but cannot keep subbing)
20k limit across all ISAs
savings made by 5 April
flexible ISA
funds can be withdrawn and replaced in same tax year without counting towards limit
LISA
max contribution is 4k/yr - gov adds 25% bonus
must be between 18-40 to open but can contribute up to 50
used to buy 1st home or save for retirement
25% charge to withdraw unless
- buying first home under 450k
- over 60
- terminal illness <12 months to live
offshore banking
Acc can be opened @ overseeas branches of UK banks by Uk resis and expats
- often UK res will use bank or building society in Jersey, Guernsey, Isle of Man
narrower choice of acc but typically better tailored to reqs of international clients (multi currency transactions and tax efficieny)
risks and advantages of offshore banking
RISKS
Security - main risk. may be little or no compensation offered for deposit loss.
deposit - sometimes large min deposit - could be at risk in war/coup/currency devaluation
access -usually straightforward btut could be as issue in dev countries where transactions are slower
compliance standards - offshore banks that comply with high standards must take extra steps to ensure this so often charge higher fees. lax banks spose their own issues - attract high risk customers, scrutiny from regs, can result in bank failure
professional advice - often needed when setting up offshore acc due to complicated tax structures
may attract criminals - can be opened without full declaration of beneficial ownership (money laundering/tax evasion)
ADV
security - some countries bank deposits may not be secure - so offshore banking may actually offer a more secure alternative
service - often very personalised with relationship managers
convenience and access - worldwide access for individuals whose home gov imposes capital controls
tax - tax advantages will depend on investors domicile. IHT planning (legal or otherwise)
investing - may offer access to different investment funds
FX - may be cheaper
flexible lending and credit
fees, interest and charges - may offer higher rates due to lower overheads and reduced govi control. interest almost always gross
economic protection - for investors facing deterioration at home
FATF - financial action task force
created in respone to global prevelance of money laundering and terrorist financing
- global AML standards with aim to increase transparency
common reporting standards
developed by OCED - org for economic coop and development - to fight tax evasion
sets out financial acc info to be exchanged, orgs required to report and types of accounts/taxpayers covered
global standard for automatic exchange of info between govs
authoritites in CRS participating jurisdictions must obtain info from financial insits and automatically XC this iwth other CRS participating jurisdictions
US not included as FATCA already exists for idenifying assets held offshore by US citizens and tax resident individuals
CRS has broader scope than FATCA in terms of reporting standards
statutory residence tests in UK
to determine tax paid on income and gains
UK res pay tax on all income (including overseas)
non-res pay tax on UK income only
- automatic UK
- automatic overseas
- sufficient ties test
statutory residence tests in UK
to determine tax paid on income and gains
UK res pay tax on all income (including overseas)
non-res pay tax on UK income only
- automatic UK
>183 days in UK or only home in UK and spend 30 days there (must own/rent/live in home for >90 days total) - automatic overseas
<16 days in UK if res for 1 or more of prev 3 tax years OR
<46 days in UK if not res for last 3 tax years OR
work full time abroad and <91 days in UK, no mroe than 30 working - sufficient ties test
neither auto test met
residency based ties to UK - family, work, country tie, accommodation
more ties = fewer days can be spent in UK without being considered a resident
(in tax yr)
tax implications - domicile
domicile status
- more permanent than resident = country person treats as main home
- domicile or origin = take domicile of father or mother if bastard
- domicile of choice - move to new country with intention of living permanently - no strict rules but (citizenship, company, burial arrangements etc)
-deemed domicile = resident somewhere 15/20 last years
UK non-doms
- UK res with overseas domicile
- can choose to claim remittance basis = taxed on all income and gains in UK and any brought from overseas
-income/gains overseas untaxed
- pay remittance basis charge
= 30k if UK res for 7/9 prev years
=60k is UK res 12/14 prev years
<7 years no charge
money markets
financial instit and dealers inc ash/credit who borrow/lend for ST usually up to 12 months
no centralised XC, decentralised similar to FX market
benchmarking to LIBOR
ST instruments commonly commercial paper, REPOs or similar
convention is to issue in bearer form
highly liquid
often no coupon - discounted secs which redeem @ par
money market participants
central bank - to conduct monetary policy not to paise finance + lender of last resort if systemic risk
commercial banks
maintain liquidity for capital adequacy requirements
companies
short term flexible finance, hedge IR rate exposure
instits (pensions funds, fund managers) -
maintain portion of fund in cash, MM allow generation of return
intermediaries - arbitrage ops between buyer and seller. most important in MM are IDB
MM instruments
bills of exchange
REPOs
commercial paper
short dated bonds
T-bills
bills of exchange
aka a draft
drawn and issued by a supplier/seller of goods to a customer - specifying amount to be paid @ some future date
acceptance bill req by supplier which can then be offered on discounted basis in MM
- Supplier sends goods to customer and draws BOE on customer. Customer sends “bill of exchange” back to supplier
- To provide that security, the supplier insists that the customer gets the bill
“accepted”. Otherwise the supplier would have an IOU but no security or
guarantee that the bill will be paid. - The bill is accepted when a third party e.g. a bank, guarantees to honour
the bill if the customer is unable to fulfill their obligation to pay the £500.
Bank will require the customer to pay a fee for “accepting” the bill and
providing the guarantee. - The supplier having received the accepted bill could wait 91 days to
receive the £500 from the customer (or bank if customer defaults) - Alternatively, the supplier can sell the bill or the paper in the money
market. The supplier would sell the bill at a discount to another
participant in the money market who would then wait for the remaining
period of the 91 days to collect the £500 from the customer or the
accepting bank.
bills of exchange
aka a draft
drawn and issued by a supplier/seller of goods to a customer - specifying amount to be paid @ some future date
acceptance bill req by supplier which can then be offered on discounted basis in MM
- Supplier sends goods to customer and draws BOE on customer. Customer sends “bill of exchange” back to supplier
- To provide that security, the supplier insists that the customer gets the bill
“accepted”. Otherwise the supplier would have an IOU but no security or
guarantee that the bill will be paid. - The bill is accepted when a third party e.g. a bank, guarantees to honour
the bill if the customer is unable to fulfill their obligation to pay the £500. Bank will require the customer to pay a fee for “accepting” the bill and providing the guarantee. - The supplier having received the accepted bill could wait 91 days to receive the £500 from the customer (or bank if customer defaults)
- Alternatively, the supplier can sell the bill or the paper in the money market. The supplier would sell the bill at a discount to another participant in the money market who would then wait for the remaining period of the 91 days to collect the £500 from the customer or the accepting bank.
REPO
cash borrower agrees sell sec to lender and to repurchase @ fixed price @ future date with intertest implied in the repurchase price
legally binding
not just gilts used
basically form of ST borrowing secured against asset
helps to maintain active secondayr market for gilt issues
DMO standing REPO facility with GEMMs
short dated bonds
technically <5 yrs but definition can vary
sovereign risk in MM is country specific
usually ST govis
also FRNs - linked to ST MM rates
ZCBs - issued @ discount and redeemed at par
commercial paper
issued by corp - equivalent to short dated IG gov bond
typically zero coup and issued @ discount
no security
life of around 3 months
issued by large comps to assist in liqudiity management - placed w/ instit investors
asset backed CP, 90-180 days, issue dby banks or financial instit with and notes backed by physical assets
finance comps use receivables from loans provided to customers as collateral for raising money in C market
Treasury bills
ST loan instruments guaranteed by gov
maturity <1 yr @ issue
1, 3, 6 month maturities in UK
no coupon - issued @ discount (tho can have negative yields and be issued at prem)
issued by DMO in UK
can be held in CREST and Euroclear
issued @ weekly auctions (tenders) - competitive 500k min NV bid, multiples of 50k
subsequent trading min denomination is 25k
tenders are on fri - eligible bidders are large financial instits including all major banks
T bill yield
yield % = (100-price)/(price xdays/365)
days = days to maturity
T bill discount rate
= (100- price) / (100 x days/365)
T bill price
= 100/ [ 1 + (yield x days/365) ]
Effect of Inflation
Cash deposits earn interest but there is no capital growth
must be adjusted by inflation for ROR (real rate of return)
real rate of return = (1+ nom )/ (1+infl)
