Chapter 1 Key Facts Flashcards
What are the four main functions provided by the financial services industry?
- Financial intermediation.
- Pooling and managing risk.
- Provision of payment and settlement services.
- Portfolio management.
What are the three main types of financial institutions?
- Central banks.
- Deposit accepting institutions.
- Investment institutions.
What are the four important economic functions performed by the government?
- Provision of certain goods and services.
- Regulation of market to protect consumers.
- Improving distribution of income through taxation and welfare payments.
- Maintaining economic stability.
What is a real asset vs a financial asset?
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
What are the four main functions of securities markets?
- Raising capital.
- Transferring risk.
- Price discovery.
- Creating liquidity.
Explain primary markets vs secondary markets
Primary markets are where the initial sales of securities are made
Secondary markets is where the subsequent trading of these securities happen
What is a round-trip transaction cost?
Total costs of completing a transaction, including bid-ask spreads, commissions and taxes
The LSE operates an order-driven system and a quote l-display system. Name them
- SETS is order-driven. It’s for FTSE 100, FTSE 250 and FTSE Small Cap Constituents
- SEAQ is quote-driven. For FI securities and AIM securities (can’t be traded on SETS)
- SETSqx is hybrid. It’s for less liquid securities. Combines period auction book along with quote-driven market making.
What are “gilts”?
- UK government bonds.
- Auctioned and issued by the DMO. (Debt Management Office)
- Settlement is T + 1 via CREST
Corporate bonds are issued in two ways. What are these?
- Open offer - involves a bought deal or fixed price re-offer
- Private placement.
What is a dual listing?
When two corporations function as a single operating business but retain separate legal identities and stock exchange listings
What is an OTC (over the counter) market?
Involves trading in a decentralised way rather than on an exchange
What is CREST?
It is LSE’s electronic settlement which settles on a:
T + 2 basis for equities
T + 1 for corporate bonds/ gilts
What is the “competent authority” in the UK?
The FCA - financial conduct authority
It decides on the admission of security to the official list
What are the two main requirements for listing on the main market that are set out by the FCA?
- Over £30 million of listed stock.
- £200,000 of debt securities.
Explain AIM
- Alternative investment market
- Regulated by the LSE
- No minimum criteria for size
- Trading record or shares in public hands
Who are the three parties that need to declare share interests?
- Directors.
- Major shareholders.
- Concert parties.
What are the two main ideas stressed by the corporate government system in the UK?
- Internal controls
- Financial reporting and accountability.
Rather than external legislation
When a company is listed on the LSE, what does it agree to?
- Agrees to abide by the continuing obligations of listed companies.
- Rules and encourage companies to release new information to the market on a regular basis.
Every public company is required to hold an AGM. how often should these be held?
- Within six months of the end of their financial year.
- Interval between AGM’s must not be more than 15 months.
Any meeting held by a company other than an AGM is called a “general meeting”. What is the main requirement for this?
- General meetings must be called by giving no less than 14 calendar days written notice.
- Companies can communicate with shareholders electronically.
What is the main way in which government bonds are traded in other countries?
- Trading in OTC markets
- Settlement via the central bank
What is the main way in which corporate bonds are traded in other countries?
Often listed and traded through central clearing depository systems associated with local exchanges.
What are the two main systems available for settling Europe on transactions?
Euroclear
Clearstream
What is the settlement for Eurobond transactions?
Trades must be confirmed T + 1
Settled T + 2
What leads to the principal - agent problem?
Separation of ownership and control
In capital markets, who are the principles and who are the agents?
Shareholders or principles
Managers are agents
Give me another example of a principal - agent relationship in the investment industry
Fund advisors or managers acting as agents for investors
Give me three solutions to the agency problem that can incur agency cost
- Aligning interests of managers and owners through offering shares or stock options.
- Board of directors looking after the interests of shareholders.
- External control through active groups of shareholders or the threat of takeover.
What term best describes the settlement procedure for CREST?
Paperless settlement
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:
The UK Stewardship Code
