Canadian Securities Industry

Question 1

What is a financial intermediary?

Answer 1

• A financial intermediary is an institution such as a bank that borrows money from suppliers of capital and lends it to users of capital. In other words, investors lend funds to the intermediary, and the intermediary, in turn, lends those funds to borrowers in the form of loans, mortgages, and other products.
• By these means, financial intermediaries help to establish efficient methods of channelling funds between lenders and borrowers.

Question 2

How do various participants interact with one another (financial agents in a financial marketplace with financial instruments) - also touch on the process of clearing and settlements

Answer 2

• Suppliers and users of capital trade financial instruments through financial markets such as stock exchanges and money markets.
• Investment dealers (also called brokers) act as intermediaries by matching investors with the users of capital. Each side of a transaction has its own dealer who matches the trades through the markets.
• Trades and other transactions are cleared and settled through organizations such as CDS Clearing and Depository Services Inc. and banks. Clearing is the process of confirming and matching security trade details; settlement is the irrevocable moment when cash and securities are exchanged.

Question 3

What is the investment dealer’s role as a financial intermediary acting as both principal and agency transactions?

Answer 3

• The term financial intermediary describes any organization that facilitates the trading or movement of financial instruments that transfer capital between suppliers and users of capital. Intermediaries are a key component of the financial system. They include investment dealers, banks, credit unions, trust companies, and insurance companies. Let’s look at the role of the investment dealer as a financial intermediary. Investment dealers act on their clients’ behalf as agents in the transfer of financial instruments between different investors. They sometimes also act as principals, rather than agents. In both cases, they play a significant role in the securities industry’s two main functions:
  o Principal transactions: When they act as principals, investment dealers may own the securities as part of their inventory, at some stage of the buying and selling transaction with investors. The difference between the buying price and the selling price of the securities is their gross profit or loss.
  o Agency transactions: When investment dealers act as agents on behalf of buyers or sellers, they do not own title to the securities that they deal with, at any time during the transactions. Their profit is the agent’s commission they charge for each transaction.

Question 4

What are the three types of investment dealers? Retail, institutional, and integrated?

Answer 4

• Retail firms include full-service investment dealers and self-directed brokers (also known as discount brokers). Full-service retail firms offer a wide variety of products and services for the retail investor. They also provide various levels of advice, depending on the financial and wealth management concerns of their investor clients. Self-directed brokers, on the other hand, are considered the do-it-yourself approach to investing. They execute trades for clients at reduced rates, but they do not provide investment advice.
• Institutional firms are investment dealers that serve exclusively institutional clients, organizations that trade large volumes of securities. Institutional clients include pension funds and mutual funds and may be domestic or foreign institutional firms. In Canada, foreign firms account for about one-third of all institutional clients. Foreign firms include affiliates of many of the major U.S. and European securities dealers.
• Integrated firms offer products and services across the industry and participate fully in both the retail and institutional markets. Most integrated firms underwrite all types of federal, provincial, and municipal debt, as well as corporate debt and equity issues. They are active in secondary markets, including the money market, as well as on all Canadian stock exchanges and some foreign exchanges.

Question 5

What services do investment dealers offer?

Answer 5

• They provide informed advice about the terms and features for new issues in the primary market, based on their knowledge of current conditions in the secondary markets.
• They add liquidity to the market with relative ease by making transactions from their inventory, rather than waiting for simultaneous matching buy-sell orders from other investors.
• They sometimes buy listed stocks as principals, thus accumulating large blocks of shares, becoming more competitive in serving their larger institutional clients.
• Investment dealers also trade from their own accounts to make a profit.

Question 6

What are investment funds and specifically closed-end funds versus open-end funds?

Answer 6

• Investment funds are companies or trusts that sell shares or units to the public and invest the proceeds in a diverse securities portfolio. Closed-end funds typically issue shares only at start-up or at other infrequent periods.
  o Initial Issuance: A closed-end fund typically issues a fixed number of shares at the fund’s inception, often through an initial public offering (IPO). After that, no new shares are created (except in rare cases, like secondary offerings).
  o Trading: After the IPO, shares of a closed-end fund are traded on stock exchanges, much like individual stocks. This means that investors buy and sell shares on the open market from other investors, not directly from the fund itself.
• Whereas open-end funds (commonly called mutual funds) continually issue shares to investors and redeem these shares on demand. Of the two types of funds, open-end funds are by far the larger, accounting for approximately 95% of aggregate funds invested.
  o Continuous Issuance: A mutual fund (or open-end fund) continually issues new shares and redeems shares on demand. When an investor buys into a mutual fund, the fund issues new shares to the investor. Similarly, if an investor wants to sell, the fund redeems the shares at the net asset value (NAV).

Question 7

Financial market trends. Explain the top three (fintech, robo advisors, and crypto currency):

Answer 7

1. Financial technology companies, known collectively as the fintech industry, take advantage of computer technology to support or enable a variety of banking and financial products and services, including online loans, electronic wallets, and automated financial planning software. The fintech industry is challenging the role of traditional financial services institutions in Canada and around the world.
2. Many variations of robo-advisor services exist in the United States and Canada, but most share several of the following attributes: * They provide clients with goal-based online investment management. * Portfolios are created using algorithms based on modern portfolio theory and online client questionnaires.
3. Cryptoassets have been gaining in popularity around the world. Cryptoassets are assets that exist only in digital form and use cryptography to prevent counterfeiting and fraudulent transactions. They rely on peer-to-peer networking and a public ledger to regulate the creation and transfer of assets without the use of an intermediary. One of the more popular examples of a cryptoasset is bitcoin.
   a. Blockchain: Bitcoin is powered by open-source code, known as the blockchain, which creates a shared public ledger. The ledger is available to record and validate the transactions that have taken place in the past, which cannot be altered. Each transaction is a “block” that is “chained” to the code, creating a permanent record of the transaction.
   b. Private and public keys: A bitcoin wallet contains a public key and a private key, which work together to allow the owner to initiate and digitally sign transactions. The private key is essentially the bitcoin owner’s secret password. Both keys provide proof of authorization and, ultimately, the authorization to proceed with transactions (which are also irreversible).