AFMA Core: Exam tips Flashcards
What are the key features of the 2 main types of financial markets in Australia
- OTC
2. Exchange traded
Explain the difference between primary and secondary market
Primary: Issuance for the first time
Secondary: subsequent transactions
What are the key differences between debt and equity markets; and why might you choose one over the other as a corporate?
Choose one over the other due to costs - when interest rates are low use debt markets, if high use equities
Name some key participants in the Australian Financial markets
Central banks, wealthy individuals, governments, corporates
Describe the following:
- intermediation
- portfolio management
- risk management
- proprietary trading
blah blah blah
What is a money broker
Money broker:
- brings together buyers and sellers of currency
- Brings together borrowers & lenders
- Shows best bid/offer to market place
- Charges a commission
- Never act as principles (never trade on own account)
Exam QN:
If you have invested at 7% and inflation is 2.5% what is the nominal rate of inflation
Ans; 7%. Do not be tricked into adding inflation to the nominal rate
Identify the 5 broad sectors of the economy
- Government
- State government
- Corporations
- Large wealthy individuals
- Households
When does cost push inflation occur
When the price of goods and sevrices is rising (eg oil)
What is demand led inflation
Demand outstrips supply (esp in low interest rate environment)
What is the main measure of inflation in Australia
CPI
Explain TWI
Trade Weighted Index: basket of currencies against which the A$ is measured.
What is the core premise of technical analysis (note - around 8 questions in exam will be on this)
Technical analysis: \
- identifies critical pricing levels
- price discounts everything (all information is already incorporated)
- Price is moving trends, why - history repeats
- Supply is NOT a core premise
Placing orders under technical analysis
- if price is above support, buy, if price is above resistance, sell
Describe Commonwealth Government Security
Cwlth Govt Sec = debt instrument issued by Aus Govt. Pay FV for bond, receive fixed coupons
Describe outright forward transaction
Outright fwd trx; set a rate now for 1 month’s time. Risk = spot exchange risk and interest rate differential between currency pair for the term of the contract
Descrive overnight index swap
OIS: interest compounded daily
Describe preference share
Prefs are paid out before ordinary shareholders
When do issuers issue fixed vs FRN format
Fixed: issue when rates are low
FRN: issue when you think rates are going down. Usually at a margin to reference rate eg BBSW
Interest Rate Options:
3 types
3 types interest rate options:
- Cap (protect against rates going higher)
- Floor (protect against rates going lower)
- Collar (look for cheaper premium
Forward rate agreement
1 forward date vs another
Exam QN: You have a borrowing facility which requires monthly interest payments over the next 12 months. You are ocncerned about rising interest rates and you wish to hedge against the possible exposure using a series of options. Which of the following is most suitable: a) swaption b) floor c) cap d) forward
Exam ANS:
c) cap
(worried about rates rising, therefore use cap)
List 3 commodities traded in the world market
- gold (comex)
- tin (london metals exchange)
- tapas oil
Exam Qn: You are a large corporate client of Bank A. The bank suggests issuing a long term debt product. This product has no fixed interest coupon payments, instead the coupon is set at a amrgin above a short term reference rate. This product is known as: a) interest indexed bond b) bond c) zero coupon bond d) floating rate notes
Exam ANS:
d) FRN
Exam QN: The latest balance of payments figures have been released. What type of indicator are these figures: a) leading b) lagging c) coincident d) none of the above
exam ANS:
(b) lagging
Exam QN:
Under the purchasing power of parity theory (PPP) a country’s competitiveness depends on:
a) commodity price
b) infrastructure and exchange rate controls
c) cost of production and exchange rate
d) vulnerability to attacks by speculators
Exam ANS:
c) cost of production and exchange rate
Possible Exam Question:
News headline; inflation rate is out of control vs trading partners. how would the A$ react
Possible exam answer:
A$ would depreciate if AUS inflation out of control vs other countries (due to the change in balance of payments)
Exam QN:
Which of these transactions would take place in a primary market?
a) the purchase of a Treasury note at a yield of 4.75% with a maturity of Feb 2012
b) ABC securities issued to BOZ Brokers Pty Ltd who are the underwriters of the issue
c) Blue Bank buys USD 10m at spot AUD / USD 1.0505
d) all of the above
Exam ANS:
b) ABC securities issued to BOZ Brokers Pty Ltd who are the underwriters of the issue
(note: FX is not primary or secondary.)
Exam QN:
Assume the government is adopting a neutral fiscal policy. This indicates that:
a) inflation is high
b) the budget is balanced
c) taxes are high
d) the short end of the curve is being affected by monetary policy
Exam ANS:
b) the budget is balanced
Possibloe exam QN:
The Federal Government announces its 1st budget surplus in many years. How will this affect borrowings for corporates
Possible exam ANS:
Costs will go down (less supply of government bonds, therefore less crowding out)
Possible exam qn:
Describe Non Deliverable Forwards
Possible ANS, non deliverable forwards:
- no delivery of principle
- used for cufrrency with exchange control regulations
- customer should do their underlying spot FX transaction for same value date as their NDFs
Limit types
- External (set by regulators; determine max risk limit for banks
- Board set trading (open position) limits (transaction; intraday; open positions; lending/borrowing mismatches; day and overnight limits)
- Counterparty limits (set by credit department)
- Stop loss limits (set by line/desk managers)
List 5 order types
- limit order
- market order
- stop loss order
- order at specified price
- order with discretion
Functions of middle office:
functions of middle office:
- support traders
- monitor trader performance
- verify limits (excl counterparty limits)
- ensure all deals are recorded
- monitor financial exposure (dealer, desk, room)
- monitor and verify that trader’s profit calcualtions are correct
Functions of operations
functions of operations
- handles the deal processing when a deal ticket is generated
- confirm, settle and process
- reconciliations
- investigations
Functions of finance team (not an exam qn)
functions of finance team:
- pricing and valuation verification (quant teams will also undertake model valuation - pre product approval, and bi annualy after that)
- backtesting and exception reports (with Risk team)
Exam QN:
A client places a limit order to buy USD against AUD at 0.9200. If the AUD / USD is currently trading higher than the limit order, the dealer should:
a) Wait until the market moves back down to the limit order level then execute the order
b) Do nothing until the market reaches 0.9200
c) Go ahead and execute the order
d) Execute the order and the client gets the value up to the limit and the dealer earns the difference as a commission
Exam ans:
c) go ahead and execute the order
Exam QN: An oganisation's global trading limit is comprised of a) forward limits only b) interbank limits only c) both interbank and forward limits d) individual dealer's limits only
Exam ANS:
c) both interbank and forward limits
Exam QN: Matt is a dealer at Swift Bnak and he has a new client on his books. Which of the following steps must Matt complete before any deal is entered into with the client?
a) Collection of data in relation to client, eg standard settlement instructions
b) execution of master agreements
c) provision of any pledged securities (if applicable)
d) all of the above
Exam ANS:
d) all of the above
Exam QN:
Front office staff are responsible for:
a) order handling, deal preparation and deal entry
b) deal entry, confirmation and settlement
c) confirmation, settlement and reconciliation
d) deal preparation, deal entry and confirmation
Exam ANS:
a) order handling, deal preparation and deal entry
Rolse of regulation - broad framework
note: Ch 6 & 7, regulation = 30 qns in exam
Role of regulation:
- protect the rights of retail customers
- maintain confidence in the integrity of the markets
- reduce the risks of systemic failure
“regulation is an essential part of well functioning markets”
Name 4 elements of regulatory environment
regulatory environment:
- laws
- ethics
- industry standards
- internal policies and procedures
LAWS: list 3 elements
- Legislation
- Corps Act Part 7 lists duties of AFS licensee
- Duty to provide services efficiently, honestly and fairly
- Duty to avoid conflicts of interest - Contract law
- most financial transactions are based on contracts
- A contract may be written, verbal or a combination - Duty of care
- financial service providers must provide their services with due care, skill and diligence
- failure to do so may amount to negligence (negligence is a criminal offence)
ETHICS: list 2 elements
- Ethics deal with right action (ie what ought to happen).
- this is ultimately the responsibility of each individual
- AFMA code provides guidance to assist
- good ethics = good business relationships - Ethics provides guidance when something might be strictly legal, but still requires caution
- for example, selling a complex product to a wholesale customer who doesn’t appear to understand it
Define Wholesale client
- Transaction > 0.5m or where notional value of derivative contract is >0.5m
- Earn 250k gross pa for the past 2 years in a row as attested by financial planner and/or 2.5m in net A$ assets
- Manufacturing company employing >=100 staff, small travle company employing >= 20 staff
INDUSTRY STANDARDS: list
Industry standards:
- AFMA market conventions (for OTC only, eg IRS conventions)
- AFMA Best Practice guidelines (for all markets)
refer AFMA website
INTERNAL POLICIES AND PROCEDURES
Internal policies and procedures
- developed by compliance dept to interpret and explain how laws, standards and ethics apply to your role
To provide financial sevrices in Australia a person must hold an AFS licence. A person provides a financial service if:
A person provides a financial service if:
- provides financial advice
- deals in financial product (including issue, arrange)
- make a market for a financial product
- operate a regulated managed investment scheme
- provide a custodial or depository service
Name the area of supervision and legislation under which it is administered for:
APRA
APRA:
- Deposit taking ADIs, banks, superannuation, insurance
- Banking Act of 1959
Name the area of supervision and legislation under which it is administered for:
ASIC
ASIC:
- Customer Protection, retail clients
- Corporations Act of 2001
Name the area of supervision and legislation under which it is administered for:
Austrac
Austrac:
- AML, and Counter terrorism funding
- AML / CTF Act
Name the area of supervision and legislation under which it is administered for:
RBA
- Monetary Policy Board, Payments Stystem Board
Name the area of supervision and legislation under which it is administered for:
ACCC
ACCC
- 3rd line forcing (every product on stand alone basis)
Define insider trading, name defencesw
Trading on information that is
- not generally available to the public
- but if it were would have a material impact on the price/value of the products
The prohibition applies if you know or ought reasonably to know that you hold inside info
Not included: mortgages, retail FX
Defences: Chinese walls
Deal Cycle
Set out Pre-deal stage
Pre deal stagfe:
- classify client as wholesale or retail
- retail clients receive greater protection
- Corps Act deems all clients to be retail unless they fall into wholesale category - Carry out AML / CTF due diligence (collect KYC)
- Establish legal documentation
- eg ISDA
Deal cycle
Discuss Pitch stage
Pitch stage
False/Misleading Statements
- must not make false or misleading statement if it would induce people to transact
- offence (crime): if know it is false / misleading or do not care (reckless)
Misleading / deceptive conduct
- no intention to deceive is required.
- Civil liability (ie not criminal)
Deal cycle
Deal execution stage
Deal execution stage
- Legal basis of a deal is contract law (contract is formed when essential terms are agreed)
- Price / market manipulation (no intention required)
- False appearance of active trading (create false/misleading appearance of active trading of a market/price, no intention required
- Front running (executing on your behalf before client orders) Corps Act prohibits AFS licensee placing own order ahead of clients
Deal cycle
Deal capture stage
- Corps Act requires AFS licensees to keep detailed records that explain the transactiosn undertaken by the business
- Certain markets also require you to keep detailsed records of client instructions/orders
- Timely entry of transactions is essential for proper confirmation, settlement, risk management & accounting
Deal cycle
Confirmation stage
Confirmation = evidence of contractual terms
Reporting entities must monitor client transactions and report to AUSTRAC:
- suspicious matters
- threshold transactions
- international funds transfer instructions
AFS licensees must provide retail clients with confirmations
Deal cycle:
Settlement stage
- failue to properly settle a transaction as agreed may breach the contract
- remedies:
- good value (compensation for the period the payee was out of funds)
- if dispute - seek remedy in court
Deal cycle:
Reconciliation stage
Reconciliation
- final verification that settlement process has taken place correctly for each transaction
- check all payment obligations have been fulfilled
Exam QN: Which regulator oversees anti money laundering and counter terrorism financing measures in Australia a) AUSTRAC b) ASIC c) APRA d) RBA
Exam ANS
a) AUSTRAC
Exam QN:
At which point is a contract most likely to be formed?
a) When the parties sign a framework agreement such as an ISDA master agreement
b) When the parties reach agreement about the essential terms of the deal
c) When the parties confirm the essential terms of a deal in writing
d) When the parties fulfil their obligations under the contract
Exam ANS:
b) When the parties reach agreement about the essential terms of the deal
Exam QN;
Under the Corporations Act all companies carrying on a financial services business in Australia:
a) are regulated by the RBA
b) must be listed on ASX
c) must be licenced
d) must have a parent company which is based in Australia
Exam ANS:
c) must be licenced
Exam QN:
An AFS licence identifies:
a) what financial services the licensee and its representatives can provide
b) what financial products the services can be provided in relation to
c) what type of client (retail or wholesale) the services can be provided to
d) all of the above
Exam ANS:
d) all of the above
What is risk
- Risk is the effect of uncertainty on objectives, not nec bad
Top risk types (4)
- Market risk
- Credit risk
- Liquidity risk
- Operational risk
Exam QN:
Kim is a dealer and is currently ‘pitching’ a deal with a new client. At this point in the deal process, what should she have in place?
a) Signed ISDA Master Agreement with the client incorporation a collateral agreement
b) Margin call limits
c) Trading limits
d) Signed client agreement form
Exam ANS:
c) Trading limits
Exam QN:
Chris is responsible for the reconciliation of the bank’s nostro accounts (ie our account w/ overseas bank). Due to a busy period he falls behind in his work. Which of the following is a potential outcome of delayed reconciliation of these accounts?
a) Market and credit risks not detected in a timely manner
b) Increased number of undue enrichment claims by counterparties
c) Legal risk for this organisation
d) transaction risk
Exam ANS:
a) Market and credit risks not detected in a timely manner
Exam QN:
Which of the following is an example of an operational risk event?
a) Lewis, a dealer at a global investment bank, sells a portfolio of securities in a bull market
b) Zara, an asset and liability manager at a major corporate, reports to the board that there is going to be a funding shortfall based on the current cash flow profile
c) Jadyn, an investment analyst, discovers a risky price path and associated payoff in the trading book, in relation to a transaction with a particular counterparty
d) Caitlyn, a dealer at a global investment bank, engages in an unauthorised swap transaction
Exam ANS:
d) Caitlyn, a dealer at a global investment bank, engages in an unauthorised swap transaction
Possible Exam QN:
Calculate FX.
If EURO / USD is 1.3000/10 (refer pg 32 class notes)
blah blah blah
Which of the following is a foreign exchange rate that can be determined today, for another futures date?
a) foreward rate agreement
b) forward contract
b) forward contract
Hibernia Company issues perpetual step up securities. As stipulated in its terms and conditions, after five years Hibernia chooses to remarket the securities, with a change in reference and dividend rates. Mitch has invested in these securities. He wishes to put forward a new margin within the range Hibernia offers at which he will continue to hold the securitiies. Mitche’s response is referred to as a:
a) offer notice
b) bid notice
b) bid notice
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**KNOW***Once it becomes aware of a licensing breach, an AFS licensee must report the breach to:
a) ASIC as soon as practicable within 10 business days of becoming aware of the breach
b) ASIC as soon as practicable within 5 business days of becoming aware of the breach
a) ASIC as soon as practicable within 10 business days of becoming aware of the breach
QRS Bank required $5m in funds immediately to pay off maturing debt. However, it does not wish to finance the maturing debt by issuing more debt and it wants an instrument that offers some flexibility in terms of future repayment/exercise dates. Which of the following are its most viable options:
a) At call repo
b) Forward rate agreement
a) At call repo
Cash flow positions are created:
a) at the time of the purchase or sale of the financial assets and/or derivatives
b) as money market transactions, when the transaction matures
b) as money market transactions, when the transaction matures
In the Soc Gen case of 2008, rogue trader Jerome Kerviel had access to middle office systems he used to conceal large positions by booking in dummy hedges to offset them. Which of the following internal controls can assist in identifying this kind of unauthorised activity?
a) Post transaction reports can be generated and analysed on the use of dummy accounts or coutnerparties to identify patterns and/or anomaliews
b) Check all confirmations independently to ensure they correlate with the deals undertaken
a) Post transaction reports can be generated and analysed on the use of dummy accounts or coutnerparties to identify patterns and/or anomaliews
FX swaps are the most actively traded FX instrument primarily because they are:
a) widely used by banks to raise liquidity across money markes for different currencies
b) traded glopbally, 24 hours, 7 days per week by both the wholesale and the retail markets.
a) widely used by banks to raise liquidity across money markes for different currencies
The AML/CTF Act requires reporting entities to report transfers of physical currency or e currency over which dollar amount?
a) AUD 100,000 or foreign currency equivalent
b) AUD 10,000 or foreign currency equivalent
b) AUD 10,000 or foreign currency equivalent
Pre settlement credit risk can be limited by:
a) adopting pre settlement risk limits
b) performing credit checks with APRA
a) adopting pre settlement risk limits
The majority of electricity contracts traded in the financial markets are:
a) exchange traded swaps
b) OTC swaps
b) OTC swaps
The primary objective of the financial services guide is to:
a) Detail all the characteristics, key features and risks in relation to the products on the approved products list of individual providers
b) Assist retail clients in deciding whether or not to obtain financial services from that particular provider
b) Assist retail clients in deciding whether or not to obtain financial services from that particular provider
A decrease in the price of Australia’s commodity exports would tend to:
a) increase export revenues via the volume effect of increased commodity demand
b) decrease export revenues via the price effect of decreased prices paid by Australia’s export customers
b) decrease export revenues via the price effect of decreased prices paid by Australia’s export customers
