Chapter 1 - The Canadian Securities Industry (Done) Flashcards
What are the three categories of securities firms in Canada? What is the focus of each type of firm?
- Investment Dealers: These firms are involved in underwriting and distributing new issues of securities, and they also engage in secondary market trading. Their primary focus is on advising and executing trades for institutional and retail clients.
- Mutual Fund Dealers: These firms specialize in the sale and distribution of mutual funds. Their main focus is on providing investment advice and managing mutual fund portfolios for individual investors.
- Exempt Market Dealers: These firms deal in securities that are not required to be registered with securities regulatory authorities, often referred to as exempt market securities. Their focus is on offering investment opportunities in private placements and other exempt securities to qualified investors.
What are the roles of the front office, middle office, and back office of an investment dealer?
- Front Office: This is the revenue-generating part of the firm and includes roles such as sales, trading, and research. The front office interacts directly with clients, executes trades, and provides investment advice.
- Middle Office: This segment manages risk and ensures that the firm’s trading activities are compliant with regulations. It includes risk management, compliance, and corporate strategy roles. The middle office supports the front office by ensuring trades are settled correctly and by managing the firm’s risk exposure.
- Back Office: This area handles the administrative and support tasks necessary to keep the firm running smoothly. It includes operations, IT, and human resources. The back office processes transactions, maintains records, and ensures that all trades are settled and accounted for accurately.
What is a market maker?
A market maker is a firm or individual that actively quotes two-sided markets in a particular security, providing bids and offers (buy and sell prices) along with the market size of each. Market makers ensure liquidity in the market by being ready to buy or sell at publicly quoted prices. They help maintain efficient and orderly trading by matching buy and sell orders from different parties.
What role does CDS Clearing and Depository Services Inc. play in Canada?
CDS Clearing and Depository Services Inc. (CDS) is Canada’s national securities depository, clearing, and settlement hub. Its main roles include:
- Clearing: CDS acts as an intermediary to ensure the accurate and efficient exchange of securities and funds between buyers and sellers.
- Settlement: CDS facilitates the final transfer of securities and funds, ensuring that both parties meet their obligations in a trade.
- Depository Services: CDS provides safekeeping for securities, reducing the need for physical certificates and ensuring the integrity of electronic records.
What is the difference between a principal and an agent? How do each of these roles generate revenue for the investment dealer?
- Principal: When acting as a principal, an investment dealer buys and sells securities for its own account, assuming market risk. The dealer generates revenue through the difference between the purchase price and the selling price (the spread).
- Agent: When acting as an agent, an investment dealer executes trades on behalf of clients. The dealer does not assume market risk and earns revenue through commissions or fees charged for facilitating the transactions.
What are the three types of chartered banks in Canada? What’s the difference between each type?
- Schedule I Banks: These are domestic banks that are widely held and have no single owner with more than 20% of voting shares. They are fully regulated under the Bank Act.
- Schedule II Banks: These banks are subsidiaries of foreign banks and are also regulated under the Bank Act. They can operate in Canada but are typically focused on niche markets or specific business activities.
- Schedule III Banks: These are branches of foreign banks that operate in Canada. They are allowed to conduct certain types of banking activities but have more restrictions compared to Schedule I and II banks.
Which type of bank has strict ownership rules?
Schedule I banks have strict ownership rules, requiring them to be widely held, meaning no single shareholder can own more than 20% of the voting shares.
What is a credit union?
A credit union is a member-owned financial cooperative that provides traditional banking services. Credit unions are created, owned, and operated by their members and emphasize serving the financial needs of their community. They offer savings accounts, loans, and other financial products, often with lower fees and better interest rates than traditional banks.
What role do insurance companies play in the financial markets?
- Risk Management: They provide insurance products that help individuals and businesses manage financial risks, such as life, health, property, and liability insurance.
- Investment: Insurance companies are significant institutional investors. They invest the premiums they collect in various financial markets to generate returns, which help them meet future claims and obligations.
- Financial Stability: By spreading and pooling risks, insurance companies contribute to the overall stability of the financial system.
What is a trust company?
A trust company is a financial institution that acts as a fiduciary, agent, or trustee on behalf of individuals and businesses. Trust companies manage assets, provide estate planning, and administer trusts and estates, ensuring that assets are managed according to the wishes of the individuals who set up the trust.
What is the purpose of an investment fund?
The purpose of an investment fund is to pool money from multiple investors to invest in a diversified portfolio of assets, such as stocks, bonds, or other securities. Investment funds provide individual investors with access to professional management and diversification, which can help reduce risk and potentially enhance returns compared to investing directly in individual securities.
What are the two government-related pension plans in Canada?
- Canada Pension Plan (CPP): A contributory, earnings-related social insurance program that provides retirement, disability, and survivor benefits to eligible Canadians.
- Old Age Security (OAS): A universal, non-contributory program that provides a basic pension to Canadians aged 65 and older, regardless of their previous work history or contributions.
What is a robo-advisor? What are the common attributes of a robo-advisor?
A robo-advisor is an online platform that provides automated, algorithm-driven financial planning services with little to no human supervision. Common attributes of a robo-advisor include:
- Automated Portfolio Management: Use of algorithms to create and manage a diversified investment portfolio based on the client’s risk tolerance and goals.
- Low Fees: Typically lower fees compared to traditional financial advisors due to automation and lower overhead costs.
- Accessibility: Easy access to investment advice and management through a user-friendly online interface.
- Personalized Advice: Use of questionnaires to gather information about the client’s financial situation and goals to provide personalized investment recommendations.
