Chapter 1 Key Facts

Question 1

What are the four main functions provided by the financial services industry?

Answer 1

1. Financial intermediation.
2. Pooling and managing risk.
3. Provision of payment and settlement services.
4. Portfolio management.

Question 2

What are the three main types of financial institutions?

Answer 2

1. Central banks.
2. Deposit accepting institutions.
3. Investment institutions.

Question 3

What are the four important economic functions performed by the government?

Answer 3

1. Provision of certain goods and services.
2. Regulation of market to protect consumers.
3. Improving distribution of income through taxation and welfare payments.
4. Maintaining economic stability.

Question 4

What is a real asset vs a financial asset?

Answer 4

Real assets of physical assets e.g. land, gold

Financial assets are claims representing the right to some return or an ownership of a physical asset e.g. bank deposit/ bond

Question 5

What are the four main functions of securities markets?

Answer 5

1. Raising capital.
2. Transferring risk.
3. Price discovery.
4. Creating liquidity.

Question 6

Explain primary markets vs secondary markets

Answer 6

Primary markets are where the initial sales of securities are made

Secondary markets is where the subsequent trading of these securities happen

Question 7

What is a round-trip transaction cost?

Answer 7

Total costs of completing a transaction, including bid-ask spreads, commissions and taxes

Question 8

The LSE operates an order-driven system and a quote l-display system. Name them

Answer 8

1. SETS is order-driven. It’s for FTSE 100, FTSE 250 and FTSE Small Cap Constituents
2. SEAQ is quote-driven. For FI securities and AIM securities (can’t be traded on SETS)
3. SETSqx is hybrid. It’s for less liquid securities. Combines period auction book along with quote-driven market making.

Question 9

What are “gilts”?

Answer 9

1. UK government bonds.
2. Auctioned and issued by the DMO. (Debt Management Office)
3. Settlement is T + 1 via CREST

Question 10

Corporate bonds are issued in two ways. What are these?

Answer 10

1. Open offer - involves a bought deal or fixed price re-offer
2. Private placement.

Question 11

What is a dual listing?

Answer 11

When two corporations function as a single operating business but retain separate legal identities and stock exchange listings

Question 12

What is an OTC (over the counter) market?

Answer 12

Involves trading in a decentralised way rather than on an exchange

Question 13

What is CREST?

Answer 13

It is LSE’s electronic settlement which settles on a:

T + 2 basis for equities
T + 1 for corporate bonds/ gilts

Question 14

What is the “competent authority” in the UK?

Answer 14

The FCA - financial conduct authority

It decides on the admission of security to the official list

Question 15

What are the two main requirements for listing on the main market that are set out by the FCA?

Answer 15

1. Over £30 million of listed stock.
2. £200,000 of debt securities.

Question 16

Explain AIM

Answer 16

1. Alternative investment market
2. Regulated by the LSE
3. No minimum criteria for size
4. Trading record or shares in public hands

Question 17

Who are the three parties that need to declare share interests?

Answer 17

1. Directors.
2. Major shareholders.
3. Concert parties.

Question 18

What are the two main ideas stressed by the corporate government system in the UK?

Answer 18

1. Internal controls
2. Financial reporting and accountability.

Rather than external legislation

Question 19

When a company is listed on the LSE, what does it agree to?

Answer 19

1. Agrees to abide by the continuing obligations of listed companies.
2. Rules and encourage companies to release new information to the market on a regular basis.

Question 20

Every public company is required to hold an AGM. how often should these be held?

Answer 20

1. Within six months of the end of their financial year.
2. Interval between AGM’s must not be more than 15 months.

Question 21

Any meeting held by a company other than an AGM is called a “general meeting”. What is the main requirement for this?

Answer 21

1. General meetings must be called by giving no less than 14 calendar days written notice.
2. Companies can communicate with shareholders electronically.

Question 22

What is the main way in which government bonds are traded in other countries?

Answer 22

1. Trading in OTC markets
2. Settlement via the central bank

Question 23

What is the main way in which corporate bonds are traded in other countries?

Answer 23

Often listed and traded through central clearing depository systems associated with local exchanges.

Question 24

What are the two main systems available for settling Europe on transactions?

Answer 24

Euroclear

Clearstream

Question 25

What is the settlement for Eurobond transactions?

Answer 25

Trades must be confirmed T + 1

Settled T + 2

Question 26

What leads to the principal - agent problem?

Answer 26

Separation of ownership and control

Question 27

In capital markets, who are the principles and who are the agents?

Answer 27

Shareholders or principles

Managers are agents

Question 28

Give me another example of a principal - agent relationship in the investment industry

Answer 28

Fund advisors or managers acting as agents for investors

Question 29

Give me three solutions to the agency problem that can incur agency cost

Answer 29

1. Aligning interests of managers and owners through offering shares or stock options.
2. Board of directors looking after the interests of shareholders.
3. External control through active groups of shareholders or the threat of takeover.

Question 30

What term best describes the settlement procedure for CREST?

Answer 30

Paperless settlement

Question 31

The financial reporting council (FRC) principles aim to make institutional investors actively engage in corporate governance in the interest of their beneficiaries. These are known as:

Answer 31

The UK Stewardship Code