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Investment Environment > Chapter 1 - Financial Markets and Institutions > Flashcards

Chapter 1 - Financial Markets and Institutions Flashcards

1
Q

Main Functions off Financial Services Industry:

A
  1. Financial Intermediation
  2. Pooling and Managing Risk
  3. Payment and Settlement Services
  4. Portfolio Management
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2
Q

Main Types of Financial Institutions:

A
  1. Central Banks e.g. Bank of England, Federal Reserve
  2. Deposit Institutions e.g. Banks
  3. Investment Institutions e.g. Pension Funds, Insurance
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3
Q

Role of Government:

A
  1. Dealing with Market Failures e.g. provision of public services
  2. Regulation of Financial Services e.g. FCA, PRA, FPC
  3. Redistribution of Income e.g. state pension payments
  4. Fiscal Policy e.g. taxation, expenditure
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4
Q

Difference between Real/Tangible and Financial Assets

A

Real/Tangible Assets: Physical Assets e.g. land, gold

Financial Assets: Claims representing the right to some return e.g. bond/bank deposit - or to the ownership of a physical asset

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5
Q

Difference between Unit Trusts/Open Ended Investment Companies (OEICs) and an Investment Trust (ITC)

A

The key difference is how they are set up:
Unit Trusts and OEICs are priced according to their net asset value (NAV). Whereas shares in an Investment Trust and in ETFs are priced according to the supply and demand for their shares.

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6
Q

What is a derivative?

A

A financial contract which derives its price from an underlying asset.

They are used to speculate on future price changes and hedge/reduce someone’s risk.

E.g. “futures”, “forwards” and “options”

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7
Q

What is a SPOT transaction?

A

A transaction with immediate delivery e.g. settles T+2 after trade

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8
Q

What is a FORWARD transaction?

A

A currency transaction for delivery in the future.

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9
Q

Difference between Primary and Secondary markets

A

Primary markets are where the initial sales of securities are made. The Secondary markets refer to any further trading of securities

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10
Q

Main functions of Securities Markets

A
  • Raising capital
  • Transferring risk
  • Price discovery
  • Creating liquidity
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11
Q

Characteristics of an efficient Securities Market

A
  • Cost efficiency
  • Liquidity
  • Price discovery and transparency
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12
Q

Primary objective of the London Stock Exchange

A

Provide a central market place for equities

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13
Q

What are the three electronic platforms on the London Stock Exchange

A

SETS - main system

SETSqx - for less liquid shares with market maker liquidity support

SEAQ - A dealer quote reporting system requiring market maker support

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14
Q

What is SETS?

A

The main system on the LSE. Designed for liquid shares. An order-driven system for FTSE 100, 250 and small-cap constructs.

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15
Q

What is the International Order Book?

A

An electronic order book for trading international securities that have a secondary listing on the LSE (in the form of depository receipts)

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16
Q

What is the European Quoting Service (EQS)?

A

A quote-driven market making and trade repository platform that supports all EU regulated market liquid securities.

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17
Q

What happens in an order-driven trade market?

A

Buyer and seller orders are automatically matched together

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18
Q

What happens in a quote-driven market (e.g. SEAQ)?

A

Requires a market-maker to quote prices up to a specified volume.

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19
Q

What does the Debt Management Office (DMO)?

A

Manage the primary markets in GILTS.

They issue gilts to find PSNCR (net cash requirement for govt)

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20
Q

What do Gilt-edged market makers (GEMMs) do?

A

Continuously quote all gilts. These MMs are approved by the DMO and provide the data for the gilt prices In secondary markets for gilts (OTC)

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21
Q

What do Inter-Dealer Brokers (IDBs)?

A

Provide liquidity for GEMMS - they do this by providing an anonymous dealing service.

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22
Q

What is an OTC market?

A

Over the counter

  • decentralised
  • private trading
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23
Q

Alternative Trading Venues:

A

Multilateral Trading Facilities - a SETS like matching system owned by banks and brokers.

System internalisers - an investment firm dealing on its own account outside the regulated market.

Organised Trading Facilities (OTFs) - occurs when multiple third party interests in bonds can interact and the result is a contractual agreement.

Dark Pools - buying and selling offshore funds.

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24
Q

What is high frequency trading?

A

Automated forms of trading e.g. algorithmic trading

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25
Q

What is CREST?

A

The electronic settlement system on the London Stock Exchange. Settles T+1 for gilts and T+2 for equities/corp. bonds. T+3 for international trade

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26
Q

What is the aim of the London Stock Exchange and Nex?

A

To have an orderly market place for securities

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27
Q

What is the Official List?

A

A list of companies whose securities are admitted to a UK regulated market via UKLA

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28
Q

What constitutes a Premium Listing?

A

Official List + NEX requirements (required for FTSE UK Index membership)

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29
Q

What are the requirements for the Official List?

A
  • Over £700,000 of listed stock/£200,000 of debt securities
  • All securities freely transferable
  • A trading record of 3 yrs (Premium)
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30
Q

What is the aim of NEX?

A

To provide an electronic marketplace for smaller companies to raise capital. Requires minimal regulation

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31
Q

What is the NEX Main Board?

A

An EU Regulated Market Place providing companies with low-cost administration to trade.

Subject to same listing rule as the Official List on the LSE and FCA.

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32
Q

Criteria for SMEs on NEX Growth Market?

A
  • NEX Corporate Advisor
  • Corporate Governance
  • Audited Financial reports
  • Over 12 months of working capital
  • No restrictions on the transferability of shares.
  • Issue shares that are eligible for electronic settlements
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33
Q

What are PDMRs?

A

Persons Disclosing Managerial Responsibilities

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34
Q

When must PDMRs notify the company when making a transaction?

A

Within four business days

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35
Q

When must the company and its directors notify shareholders about a change in major holdings?

A
  • When a person’s holdings reaches or falls below 3% of voting rights.
  • When a person’s holdings increases across a full percentage point above 3% (e.g. 4.9% - 5.2%)
36
Q

For Unit Trusts and OEICs, what are the notifiable thresholds for companies to their shareholders?

A
  • When a person’s holdings moves across 5% or 10%

- When a person’s holdings moves a whole percentage point above 10%

37
Q

What are concert parties?

A

An organisational grouping, whether bound by a contract or not, which acts together.

38
Q

Who is required to do a Director’s Renumeration Report and what does it consist of?

A

Large/medium sized companies and groups for the Department for Business, Energy and Industry Strategy (BEIS) regulations.

  • Annual Statement
  • Director’s Renumeration Policy
  • Annual report on Renumeration and implementation
39
Q

What is the shareholder’s role in Corporate Governance?

A

Appoint directors and auditors and ensure an appropriate governance structure is in place.

40
Q

What is the role of the company’s board of directors in Corporate Governance?

A

Set company’s strategic aim, leadership, supervise management and report to shareholders.

Policy of complying/explaining to shareholders

41
Q

What are the five points of the 2010 UK Corporate Governance Code?

(LEARR)

A

LEADERSHIP

EFFECTIVENESS

ACCOUNTABILITY

RENUMERATION

RELATIONS WITH SHAREHOLDERS

42
Q

What is the objective of the UK Stewardship Code?

A

To make shareholders (institutional investors) more active.

43
Q

What are the seven points of the UK Stewardship Code?

A
  • Disclose policy on stewardship
  • Robust policy dealing with conflicts of interest
  • Monitor investee companies
  • Clear guidelines on how they intend to maximise shareholder value
  • Willing to act collectively with other investors
  • Clear voting policy
  • Report periodically on their voting and investing activities
44
Q

When are public companies required to hold an Annual General Meeting?

A

Within 6 months of the end of the financial year. With an interval of no longer than 15 months.
Notice of 21 days needed to hold an AGM.

45
Q

Who can request a General Meeting?

A

Shareholders with more than 5% equity.

Directors

46
Q

How many votes are needed for an “ordinary resolution” in a General Meeting?

A

More than 50% of the vote.

Special resolutions require 75% of the vote.

47
Q

What is The Universal Trading Platform?

A

The New York Stock Exchanges primary order-processing system, similar to SETS.

48
Q

What is the central clearing house for the NYSE? And what is it’s settlement period?

A

Depository Trust Clearing Company (DTCC)

T+3

49
Q

What are the three types of US instruments of debt that are issued?

A
  • Treasury Bills (T-Bills) - with a maturity of 3-12 mths
  • Treasury Notes (T-Notes) - Coupon securities, issued with initial maturities of 2-10 years.
  • Treasury Bonds (T-Bonds) - Coupon securities, issued with initial maturity of over 10 years
50
Q

What is a Eurobond?

A

An international bond.

i.e. a debt instrument issued by a borrower (e.g a govt) outside the country in whose currency it is denominated.

51
Q

What are the two main systems available for settling Eurobond transactions?

A

Euroclear and Clearstream.

All trades must be confirmed T+1 and settled T+2.

52
Q

What is NEX?

A

Another London-based Stock Exchange providing UK and international companies access to European capital through a range of fully listed and growth markets.

53
Q

What is a System Internaliser?

A

An investment firm which deals on its own account by executing client orders outside a regular market or an MTF.

54
Q

What does the Euroclear UK & Ireland (EUI) do?

A

Settles UK equities, corporate bonds, gilts and money market instruments - operates a dematerialised settlement system.

55
Q

How must companies release required information to the market?

A

Through an official Regulatory Information Service (RIS) or other UKLA-approved Primary Information Provider (PIP) service.

56
Q

What is different about many emerging economy markets (with reference to the UK equity and bond markets)?

A

Bond and equity trading is OTC and restricted to locally registered participants.

57
Q

Explain the role of a NOMAD?

A

AIM companies must have an LSE-approved Nominated Advisor (NOMAD), to advise the directors on their responsibilities, and guide them through the AIM process.

58
Q

What does the LCH.Clearnet do and what is novation?

A

LCH.Clearnet acts to guarantee all trades and remove counter party risk.

This process is novation.

59
Q

How do gilts usually pay interest?

A

Gilts pay interest semi-annually and pay interest gross on new holdings unless the holder indicates otherwise

60
Q

Which organisation is responsible for setting rules for OTC trading?

A

International Capital Markets Association (ICMA)

61
Q

How is a general proxy able to vote?

A

However they like

62
Q

How is a special/two-way proxy able to vote?

A

However they are instructed by the shareholder

63
Q

How long after the half-year must interim results be produced for a listed company?

A

Two months

64
Q

When does an investor acquire a ‘material interest’ in a company?

A

When they have a 3% share or more in the company

65
Q

What is the minimum market value of the shares to be listed on the AIM?

A

No minimum

66
Q

What are the requirements for a company to be listed on the AIM?

A
  • Company must have a broker.
  • Company must have an LSE-approved NOMAD.
  • Company must immediately publish price-sensitive information.
  • For companies with less than 2 years experience, shareholders with more than 0.5% equity must agree to “lock-in” and not sell their shares for a year.
67
Q

Which entity regulates the AIM?

A

The London Stock Exchange. They publish AIM rules and monitor compliance with them.

68
Q

What are the potential benefits of High-Frequency Trading? (3)

A

Lower transaction costs
More efficient market pricing
Improved liquidity

69
Q

What day of the week will the ex-dividend date always fall on?

A

Thursday

70
Q

What is the purpose of the LSE’s High Growth Segment (HGS)?

A

Designed for companies to attract high-growth, mid-sized UK and European companies aspiring to an Official listing.

71
Q

What are the requirements for a company to be eligible for the LSE’s High Growth Segment (HGS)? (4)

A

Be incorporated in the EEA
Be a commercial company, issuing equity shares only
Have a minimum free float of 10% at IPO
Compound annual growth of 20% over three years

72
Q

Which body regulates derivatives exchanges in the UK?

A

The FCA!

73
Q

What is a “close period”?

A

A period of 30 calendar days before a company’s annual/interim report in which PDMRs are not allowed to make any company transactions.

74
Q

How long must records of annual and general meetings be kept for?

A

10 years.

75
Q

How often must a statement of funding principles for an occupational pension scheme be reviewed?

A

Every 3 years

76
Q

What is the SDLT anti-avoidance rate and in what circumstances is it applied?

A

Where a residential property over £500,000 is purchased by a company an anti-avoidance rate of 15% applies.

77
Q

How long must records be kept for pension transfers, pension opt-outs, and FSAVCs?

A

Indefinitely

78
Q

How long must records be kept for financial promotions for life policies and pension contracts?

A

6 years

79
Q

How long must non-MiFID suitability records for products other than pension transfers, pension opt-outs, FSAVCs , life policies and personal and stakeholder pension contracts be kept for?

A

3 years

80
Q

How long must records be kept for non-MiFID copies of confirmations and periodic statements?

A

3 years

81
Q

How long must records be kept for telephone conversations and electronic communications?

A

6 months

82
Q

How long does MiFID require firms to keep records for?

A

5 years (7 years if requested by National Competent Authorities)

83
Q

How long must records be kept for periodic statements for Collective Investment Schemes?

A

3 years

84
Q

What times of the year must the fund manager issue his half-annual short-report (and long-report if requested)?

A

Within 2 months of the end of the half year and within 4 months of the year end.

85
Q

What body acts as the central counter party for all SETS trades?

A

The London Clearing House. All automatic trades ‘novate’ to the LCH.Clearnet.

86
Q

What is CREST?

A

A computerised system that allows investors to hold shares in an electronic rather than paper form, an electronic dematerialised settlement system.
Settles UK equities, bonds, gilts and money market instruments.

Investment Environment (7 decks)

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