Chapter 1 - The Canadian Securities Industry

Question 1

financial intermediary

Answer 1

• an institution such as a bank that borrows money from suppliers of capital and lends it to users of capital
• investor lends funds to intermediary, intermediary lends those funds to borrowers by loans, mortgages, etc.
• can raise capital by bringing a new issue of securities to the financial markets

Question 2

capital markets

Answer 2

• financial markets where debt and equity securities trade
• capital markets include organized exchanges as well as private placement sources of debt and equity

Question 3

how is market activity measured?

Answer 3

by the variety and size of new issues that are brought to the market, as well as the depth and liquidity of trading those issues

Question 4

who is the canadian securities industry regulated by

Answer 4

• mainly regulated by the provinces
• they have the power to create and enforce their own laws and regulations through securities commissions/provincial regulators (securities administrators in some provinces)
• securities commissions delegate some of their powers to the Canadian Investment Regulatory Organization (CIRO)

Question 5

Canadian Investment Regulatory Organization (CIRO)

Answer 5

• national self-regulatory organization (SRO) that oversees all investment dealers, mutual fund dealers, and trading activity on Canada’s debt, equity, and mutual fund marketplaces
• establishes and enforces industry regulations that protect investors and maintain fair, equitable, and ethical practices
• As of January 1, 2023, the former Investment Industry Regulatory Organization of Canada (IIROC) and the
  Mutual Fund Dealers Association of Canada (MFDA) were amalgamated to form the Canadian Investment
  Regulatory Organization (CIRO).

Question 6

Structure of the Canadian Securities Industry

Break down the various participants that interact with each other in the Canadian Securities Industry

Draw graph/figure with legend

Answer 6

• suppliers and users of capital trade financial instruments through financial markets such as stock exchanges and money markets
• investment dealers (brokers) act as intermediaries by matching investers with the users of capital (both sides have a dealer that matches the trades through the markets)
• trades and other transactions are cleared and settled through organizations such as CDS Clearing and Depository Services Inc. and banks
• clearing is the process of confirming and matching security trade details; settlement is the irrevocable moment when cash and securities are exchanged
• the SRO sets and enforces rules that govern market activity and monitor the markets to ensure fairness and transparency
• the canadian investor protection fund (CIPF) provides insurance against investment dealer and mutual fund dealer insolvency
• provincial regulators oversee the markets and the SRO
• the CSI and similar organizations provide education for industry participants

Figure 1.1 - Structure of the Canadian Securities Industry

Question 7

investment dealer / broker

Answer 7

a person or company that engages in the business of trading in securities in the capacity of an agent or principal and is a member of CIRO

Question 8

clearing

Answer 8

process of confirming and matching security trade details

Question 9

settlement

Answer 9

the irrevocable moment when cash and securities are exchanged

Question 10

Investment Industry Association of Canada (IIAC)

Answer 10

a member-based professional association that represents the interests of market participants

Question 11

self-regulatory organization

Answer 11

oversees all investment dealers, mutual fund dealers, and trading activity on Canada’s debt, equity, and mutual fund marketplaces

Question 12

what is an example of a financial intermediary

Answer 12

investment dealers, banks, credit unions, trust companies, insurance companies

Question 13

Investment dealers act on their clients’ behalf as ______ in the transfer of financial instruments between different investors. They also sometimes act as _____, rather than agents. In both cases, they play a significant role in the securities industry’s main functions

Answer 13

agents, principles

Question 14

agents

Answer 14

an investment dealer operates as an agent when it acts on the behalf of a buyer or seller of a security and does not itself own title to the securities at any time during the transactions

Question 15

principals

Answer 15

• the person for whom a broker executes an order, or a dealer buying or selling for its own account
  ** principals may also refer to a person’s capital or to the face amount of a bond

Question 16

what are the two main functions of the securities industry

Answer 16

1. Help transfer capital from suppliers to users through the underwriting and distribution of new securities. This takes place in the primary market in the form of a primary market distribution (or primary offering). When a private company goes public and issues stocks in the primary market for the very first time, the sale is known as an initial public offering.
2. They maintain secondary markets in which previously issued or outstanding securities can be trades. (e.g. buying and selling stocks through the Toronto Stock Exchange)

Question 17

primary market distribution

Answer 17

the issuance of securities in the primary market

Question 18

primary market

Answer 18

• the market for new issues of securities
• the proceeds of the sale of securities in a primary market go directly to the company issuing the securities