Chapter 1 - Introduction to Financial Markets Flashcards
What are the four main functions of the financial services industry?
i) financial INTERMEDIATION
ii) pooling and managing RISK
iii) Provision of payment and settlement services; MARKET MAKING
iv) PORTFOLIO MANAGEMENT
What are the main types of financial institution?
1) Central banks
2) deposit institutions
3) investment institutions
What are is the role of Government? (four things according to the CFA)
1) market failure - provision of certain goods: defence, green infrastructure etc.
2) Regulation to protect consumers - preventing fraud
3) improving distribution of capital - taxes and benefits
4) maintaining economic stability - ironing out the troughs in employment and unemployment by using fiscal policy
What is the difference between a real asset and a financial asset?
A real asset is something material (gold, a house, aluminium)
A financial asset is a claim representing the right to some return (like a security or bond)
The securities markets do 4 things, what are they?
1) raise capital for businesses
2) transfer risk for investors
3) price discovery - markets dictate best price
4) creating liquidity - allowing people to sell their shares if need be
What is the difference between primary and secondary markets
primary = initial sale of security secondary = where all subsequent trading happens
What is a round-trip transaction cost?
total cost of doing a transaction: the costs are taxes, commissions, and the bid-ask spread
What is an Order-Driven System?
All buyers and sellers display prices at which they wish to buy and sell (you can see the best price available)
What is a Quote-Driven system?
You can only see the prices that ‘market makers’ (brokers) display
What is SETS?
SETS is the LSE’s order-driven system (FTSE 100, FTSE 250 and FTSE Small cap constituents). It is order-driven, and there is no trade floor anymore
What is SEAQ?
LSE’s quote-driven system for fixed-interest securities and AIM securities
What is SETSqx?
Hybrid = for less liquid stocks. Periodic auction book along with quote-driven market
UK government bonds, or ‘gilts’, are issued by which department of the Treasury?
Debt Management Office - DMO
How are corporate bonds issued?
Either by a open offer or private placement
What is dual-listing?
When two corporations function as a single operating business but retain separate legal identities and stock exchange listings
What is an OTC market?
Over the Counter market involves trading in a decentralised way rather than on an exchange. Much less transparency
How are payments settled in the UK market?
What is the difference in time for settling equities and gilts?
CREST is the LSE’s electronic settlement system, which settles on:
T+1 = Bonds
T+2 = Equities
Which body determines who gets listed on the Official List?
The Financial Conduct Authority (FCA)
What requirements must a company fulfil to get on the main market?
1) at least 3 years of published accounts
2) over £700,000 of listed stock or £200,000 of debt securities
What is an AIM, and how is it regulated?
Alternative Investment Markets are regulated by the LSE - there is no minimum requirement for size, trading record, or shares in public hands
Information disclosure - who must declare share interests?
Directors, major shareholders (over 3%), concert parties
What is the corporate governance system in the UK?
Instead of direct regulation, the UK has traditionally stressed the importance of internal controls and the role of financial reporting and accountability, rather than external legislation
How often must every public company hold an AGM?
Within 6 months of the end of their financial year. The interval between AGMs must not be more than 15 months
What are meetings outside of AGMs called, and what are the rules around how they are called?
‘General meetings’ are called by giving not less than 14 calendar days’ written notice. Companies must communicate with their shareholders electronically
Must members attend AGM?
No, they can appoint a ‘proxy’ to attend and vote on their behalf
How does government bond trading happen in other countries?
Happens OTC, settlement via central bank - corporate bonds are often listed and traded through central clearing depositary systems associated with local exchanges
What are the two main systems for settling Eurobond transactions?
Euroclear and Clearstream. Trades must be confirmed T+1 and settled T+2
What is the Principal-agent problem?
The person owning the thing, has a different set of priorities to the person who is a ‘specialist’ in servicing that thing. e.g. repairing a car, providing advice. The gap in information and objectives between the ‘principal’ and ‘agent’ is the problem.
In finance this is a problem of “ownership”, shareholders, and “control”, managers
What are the solutions to the principal agent problem?
a) align interest of managers and owners through remuneration of the former in share or stock options
b) board of directors looking after shareholder interests
c) external control through active pressure or threat of takeover
What is Liquidity Risk?
Liquidity risk stems from the lack of marketability of an investment that can’t be bought or sold quickly enough to prevent or minimize a loss. It’s typically reflected in unusually wide bid-ask spreads or large price movements.
What is a Unit Trust?
A Unit Trust (“mutual fund” in US) pools investments into a single fund and pays any profits straight back to the ‘unit’ (each unit commensurate with amount invested) owners. They are set up under a ‘trust deed’
What is a fixed-income security?
An investment that provides a return in the form of fixed periodic interest payments - and the return of principal at maturity. e.g. a bond
What are ‘Dark Pools’?
A dark pool is a privately organized financial forum or exchange for trading securities.
Dark pools allow institutional investors to trade without exposure to devaluation - large blocks of shares
What is ‘disintermediation’?
Removal of the middlemen from a supply-chain or decision-making process
What is the Pension Protection Fund (PPF)?
Fund protecting Defined Benefit pensions in the event that the company becomes insolvent.
- if the have NOT retired (or retired early) they get 90%
- if they have already retired they get 100%
What is an OEIC?
Open Ended Investment Company - Investment fund structured to invest in stocks and other securities. The fund’s shares are listed on the LSE
How will companies issue a “profit warning”?
Through a regulatory information service
At an AGM, who can launch a poll?
3 members, irrespective of the size of their voting share
