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IMC > Chapter 1 - Financial Markets and Institutions > Flashcards

Chapter 1 - Financial Markets and Institutions Flashcards

1
Q

Financial services four main functions in an economy

A

Financial intermediation
Pooling and managing risk - unit trusts
Payment and settlement services
Portfolio management

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2
Q

Financial system

A

Provides channels for funds to move from savers to borrowers

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3
Q

What do intermediaries do

A

Reduce information and transaction costs by

  • providing services and products, allowing savers to become investors
  • allowing borrowers to access a range of savers that can meet a variety of terms
  • ensuring adequate provision of information
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4
Q

intermediaries examples

A

banks, investment institutions, insurance companies, pension funds

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5
Q

central bank

A

financial institution setting the monetary framework within which financial organisations operate.

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6
Q

deposit institutions

A

accept deposits from economic agents which become liabilities of the institutions, which lend funds as direct loans or investments. e.g. commercial banks and building societies

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7
Q

investment institutions

A

invest funds raised in tradable securities such as bonds and equities. include insurance companies.

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8
Q

investment strategy for life insurance

A

cover long periods so insurers hold long term assets

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9
Q

investment strategy for general insurance

A

hold shorter term assets, reflecting need for immediate cash

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10
Q

Why do institutions operate in a global financial system

A

company in one country may want to list on stock market in another country to raise capital in a market with different characteristics.
can issue bonds in another country to raise capital

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11
Q

what led to global capital flows

A

removal of controls by individual nation states and globalisation of world economy

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12
Q

roles of government (4)

A

providing services that private firms are unable/unwilling to do
regulating firms and markets to protect consumer
intervening in distribution of income generated by private market transactions
stabilising economy

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13
Q

government role: service that private firms are unable/unwilling to do

A

market failures - e.g. defence, law + order, maintenance of infrastructure. e.g. grants and subsidies to promote activities the market isn’t sufficiently addressing or e.g. carbon taxes

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14
Q

government role: regulating firms and market to protect consumer

A

promotes competition + prevents fraud. restricts entry to markets + enforce rules to govern behaviour. FC(onduct)A, PRA, FP(olicy)C(ommittee)

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15
Q

government role: intervening in distribution of income generated by private market transactions

A

e.g. minimum wage guarantee. transfer payments to hotels e.g. state benefit payments. taxation.

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16
Q

government role: stabilising economy

A

reduce fluctuations in income and employment + control general price level. e.g. control inflation using interest rates by bank of england’s MPC

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17
Q

Real assets

A

physical assets e.g. land, gold, buildings

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18
Q

Financial assets

A

claims representing right to some return such as a bank deposit or a bond, or to ownership of physical assets. e.g. share represent ownership in company and gives rights to shareholder to company’s assets and earnings

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19
Q

2 types of financial assets

A

debt claims

equity securities

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20
Q

financial asset: debt claims

A 
loans made by lenders to borrowers - expected to be paid back and get interest payments until repaid
e.g. bank deposit - fixed or variable interest over the term - not tradable
tradable claim (i.e. most) a.k.a securities. e.g. bonds
bonds - issued by governments + companies pay fixed rate of interest -> fixed income securities
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21
Q

financial asset: equity securities

A

i.e. shares - tradable securities.

company has no obligation to repay money or make regular payments (dividends)

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22
Q

advantage of indirect investment = reduced risk but why

A

greater diversification
reduced transaction costs bc intermediary can trade at lower cost
access to specialist advice
ability to invest in assets not accessible to individual investor e.g. commercial property

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23
Q

derivative e.g. future, option, forward, swap, cfd

A

financial contract whose value is dependent on an underlying asset:

  • used to speculate i.e. make gains from anticipated movement in price of index or asset
  • less costly and easier to buy than the underlying asset itself
  • risky, higher returns
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24
Q

when would a foreign exchange market transaction occur

A

e.g. when a UK fund manager wants to purchase US securities so pounds -> US dollars. occurs in foreign exchange market

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25
Q

large vs small foreign exchange market transactions

A

large -> purchase for another currency may take place directly with a dealer who will quote bid/offer prices
smaller -> broker who arranges for dollars to be purchased

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26
Q

securities markets

A

where securities are traded. distinction is made between money markets for securities with maturity shorter than a year and capital markets for maturity longer than a year

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27
Q

functions of securities markets

A 
raising capital (in capital markets) (primary market)
transferring risk (in derivatives market)
price discovery (secondary market)
creating liquidity (secondary market)
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28
Q

securities markets: raising capital

A

raise capital by issuing equities. liquidity provided by markets encourages savers to purchase claims issued by borrowers/debt = bonds/gilts

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29
Q

Three main ways of borrowing

A

equity markets
debt markets
banks

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30
Q

securities markets: transferring risk

A

fund manager use derivatives to hedge risk that value of equity portfolio falls using equity index futures contracts.
risk transferred to counter-party of derivative contract (a trader who expected equity index to rise in future and bought future contract to take advantage)

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31
Q

securities market: price discovery

A

orders placed by buyers and sellers in market leads to emergence of agreed price between buyers and sellers
continuously happens while market open in dynamic markets e.g. equity markets
efficient market - equilibrium price changes only when new info arrives in market

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32
Q

securities market: creating liquidity

A

securities market allows investors to liquidate their investment = attractive + encourages buying

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33
Q

Liquidity

A

ability to sell a security without causing significant movement in its price + min loss of value.
More buyers and traders
Sellers more likely to sell at a price they want when many buyers wanting to trade

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34
Q

Primary market

A

Where securities are initially sold to investors.

If first issue to market -> company is making an Initial Public Offering (IPO)

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35
Q

Secondary market

A

Subsequent trading of shares - provides liquidity to investors.
Liquidity provision means - more likely issuers can make the first issue to raise capital and may inc price by which securities are sold

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36
Q

ordinary shares vs preference shares

A

preference shares: fixed dividend = % of nominal value on certificate, no voting rights. paid first on liquidation + on dividends (before ordinary shareholders)
ordinary shares: variable dividend depending on how company is doing, voting rights, paid last

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37
Q

Buy side trader

A

Investment managers - purchase services and products

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38
Q

Sell side trader

A

Investment banks, brokers, dealers - provide transaction services and investment products

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39
Q

smaller subsidiary of an investment bank that provides asset management services - buy or sell side?

A

buy side even though investment banks are sell side.

40
Q

Markets determine equilibrium price and

A

disseminate the price to public:
market is pre-trade transparent - publish real-time data about quotes and orders
or post-trade transparent - publishes trade prices + sizes after trades occur (within 3 mins)

41
Q

Why do buy-side value transparency

A

Allows better management of trading, understand market values + estimate potential transaction costs

42
Q

LIQUID market vs financial market spread

A

narrow spread (getting less value, but its ok cos liquid market and people buying and selling all the time) vs wide spread (getting more value back when less buyers and sellers)

43
Q

allocative efficiency

A

when funds are allocated to the most productive uses in society - occurs in well-functioning markets where highest returns are likely to be earned on securities issued by firms investing in most productive investment.

44
Q

Operational efficiency

A

Low cost transactions + transaction easy to arrange

45
Q

informational efficiency

A

security prices quickly and efficiently absorb new information. benefits from transparency.

46
Q

LSE member firms

A

broker-dealers
market-makers
interdealer brokers

47
Q

LSE member firms: broker-dealers

A

dealer - dealing as principal/proprietary trading. Where investment bank has bought and is selling from their own account
broker - agent, middleman, organise for
can act in dual capacity

48
Q

LSE member firms: market makers

A

create liquidity, make a market by continuously offering bid/offer prices

49
Q

LSE member firms: inter-dealer brokers

A

‘escape valve’ for market makers - allows anonymous trading by market makers only.
investors sell to market maker at good price. MM know they can offload to IDB - privilege to market maker

50
Q

Order systems

A

Order driven: Liquid shares, so when lots of buyers and lots of sellers e.g. sets, like ebay
Quote/price driven: Illiquid, relying on market makers with their prices/quotes e.g. SEAQ

51
Q

LSE trading platforms

A

SETS: electronic trading service, all main markets on LSE trade on this
SETSqx: q(uotes) x(crosses) - hybrid system, with both order driven and quote driven functionality
SEAQ: electronic automated quotations - for other products e.g. corporate bonds

52
Q

SETs ranking

A

1st - price

2nd - time

53
Q

SETSqx

A

Hybrid system. periodic auctions - 5 times a day ‘crossing’ takes place, when buyers+sellers come together
Market makers quote firm/guaranteed prices for trades up to Exchange Market Size (EMS). Above EMS, can negotiate

54
Q

SEAQ

A

Quotation of prices, not a trading system

Competing market maker quotation system. Not trading system, but advertising system. Min 2 market makers needed.

55
Q

Stamp duty = TAX ON PURCHASE OF SHARES (no bond, no selling)

A

‘older form of tax’. certificated paper.
0.5% paid by buyer, rounded up to nearest 5£
Only transactions >= 1000

56
Q

SDRT - stamp duty reserve tax = TAX ON PURCHASE OF SHARES

A

For electronic/’dematerialised’ shares
Held on electronic settlement system CREST
0.5% paid by buyer, round to nearest 1p (not round up)
No minimum

57
Q

where is stamp duty not applied

A

bonds/gilts, derivatives, aim shares, etfs (exchange traded funds)

58
Q

Alternative trading venues

A

Multi lateral trading facilities
Dark Pools
Systematic Internalisers

59
Q

Alternative trading venues: multilateral trading facilities

A

(MTF) Compete with LSE. More choice as investor. Electronic trading system for equities run by authorised firm.
(OTF - organised trading facility - trades non equities so bonds and derivatives.)

60
Q

Alternative trading venues: dark pools

A

Waived pre-trade transparency regulations so does not need to disclose name + volume. (need to disclose post trade)

61
Q

Alternative trading venues: systematic internaliser

A

Investment bank trading with clients when bank always takes one side of trade. Trading as principal in every transaction. Not on a regulated market or on MTF or OTF.

62
Q

Algorithmic trading

A

Algorithmic trading - computer program trading
Subset = high frequency trading - trading 100,000s a second - provides liquidity, efficient market
Could use SETs or another system

63
Q

Who decides who can list on the market

A

UKLA (listing authority), now part of the FCA

64
Q

Private ‘Ltd’ vs Public ‘plc’

A

Ltd Can’t offer shares to public
Plc Can offer shares to public (but don’t have to) To list - satisfy UKLA listing requirements -> Decide which exchange: LSE or Aquis stock exchange etc
Or Alternative investment market by satisfying LSE requirement

65
Q

UKLA listing types: LSE Premium listing

A

Commercial companies only

Highest standards - above EU minimum standards

66
Q

UKLA listing types: LSE Standard listings

A

Lower standards - meet just EU standards

Excluded from equity indices

67
Q

UKLA listing types: High Growth Segment

A

Eligibility criteria: 20% annual compound growth over last 3 years

68
Q

UKLA listing types

A

LSE premium listing, LSE standard listing, High growth Segment

69
Q

UKLA listing rules* (rewrite)

A
  • minimum market capitalisation -> equity £700k, debt £200k
  • free float - shares held by public - excludes directors, >=5%, insiders)
  • Published prospectus (prospectus exemptions)
  • Additional conditions for premium listing (3yr trading record, 12mo working capital, UKLA approved sponsor)
  • disclosure procedures
70
Q

PIP, RIS and SIPs

A

Listed company disseminates to the LSE’s Regulatory News service (primary info provider PIP = regulatory info service ‘RIS’)
This is passed onto secondary info providers (SIP’s) e.g. bloomberg which passes onto the analyst, brokers and managers

71
Q

AIM alternative investment market

A

Operates as a MTF
Light touch regulation (less than LSE), minimum rules (must have a nominated advisor ‘nomad’ and broker - appointed for 30 days or shares removed)

72
Q

Dual Listing

A

2 Legally separate companies combine - work as a single company but with separate listings.
No capital gains tax as opposed to when one buys/merges w another.
Wider shareholder base
Arbitrage if two prices from different currencies not in line.
Have an equalisation agreement

73
Q

Cross Listing

A

UK company has a listing in the UK + somewhere else e.g. USA. Inc liquidity, broader shareholder base

74
Q

Information disclosure requirements

A
  • Transparency of shareholder interests: disclosure of major interest in shares (buying or selling) (3% rule inc your connections, controlled co (your company), concert party (if working with someone else)) company in T+2. If listed then company tell market in T+1. So public know in T+3. Happens again after each percentage point >3%
  • Disclosure of directors’ interests (Persons discharging mangerial responsibilities). Tell company T+4 to company of buying/selling. Company tell market in T+1
  • Disclosure of material information e.g. dividend, acquisition, change of directors
  • Disclosure process and timings
75
Q

Corporate governance code: financial reporting council FRC. principles are?

A 
Board leadership and purpose
Division of responsibilities
Composition, succession + evaluation
Audit, risk and internal control
Remuneration
76
Q

If not comply to corporate governance code

A

have to explain. report

77
Q

Corporate governance code: division of responsibilities

A

Recommended that CEO + chair are run by separate people

78
Q

Corporate governance code: composition,

A

regularly assess board leaders + pay appropriately for work they do

79
Q

Corporate governance code: board leadership + purpose

A

Executives + NEDs

80
Q

Corporate governance code: remuneration

A

committee of non executive directors who set pay for exec directors

81
Q

UK Stewardship code

A

apply or explain principles for best practice for asset managers.
12 for asset managers: Applying these principles gives you valuable voting rights + influencing how things are done
6 for service providers e.g. consultants

82
Q

Company general meeting

A

Annual general meetings
General meetings: urgent meetings that can’t wait till next AGM
- For legally binding meeting - need minimum shareholders = quorum = 2

83
Q

AGM - timings, notice + task + records kept length

A

Max 15 mo apart
Need 21 days notice period
Tasks: directors/auditors appointed. Look at accounts and dividends proposed and sign off. Hand vote (1 vote per person) or poll (1 vote per share) to pass resolutions
Records kept for 10 yrs

84
Q

How to get poll vote in AGM

A

Requested by 5 shareholders or 10% of voting rights

85
Q

different proxies in AGM

A

General - they vote as they see it

Special - they do what you ask - either vote for or against

86
Q

AGM different resolutions

A

Ordinary: >50% vote
Special: >75% vote - change in company name, change in articles or objective of company, reduce (not inc) share capital, wind up company

87
Q

General meetings notice and who request

A

> = 14 days notice, can be requested byt shareholders owning >=5% (combined)

88
Q

international markets

A

FX risk
NYSE - floor based trading + trading posts, designated market makers, universal trading system
Emerging markets
Eurobond markets - international bond e.g. uk company issuing in USA in euros. bearer certificate not registered. (like 5£ note). stored in euroclear. pay annual gross coupon. unsecured. bullet form (all holders repaid at same time). Regulator is ICMA. equity T+2. Gilt T+1
Settlement

89
Q

operator agent problem

A

how do we ensure the employee’s values align with the company’s

90
Q

Organised markets (e.g. LSE) vs over-the-counter market: what’s more transparent

A

Organised markets e.g. LSE

91
Q

In Europe, what requires many securities esp equities to have pre and post trade transparency

A

MiFID

92
Q

how to judge liquidity in order-driven markets

A

difference between best buy and sell prices in order books

93
Q

market depth

A

measure of size of order thats needed to move market /have impact on price by a certain amount - lots of pending transactions on both bid and ask side makes for a deep liquid market

94
Q

Liquidity risk

A

risk of not being able to sell quickly with the potential for loss of value. higher in low volume and emerging markets

95
Q

dual listing advantage

A

tax saving
wider shareholder base
prices different in different countries: buy in one country sell in another

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