Chapter 2 - The Canadian Securities Industry Flashcards
Securities regulation is the responsibility of what government level?
provincial
what are the securities regulation bodies?
Ontario securities commission (OSC), BC Securities Commission (BCSC)
Self-regulatory organization (SROs) provide oversight for what?
Investment industry Regulatory Organization of Canada (IIRCO), TSX, TSX Venture Exchange
what are other “SRO” players
The Canadian Depository for Securities (CDS)
> acts as a box where the transaction between investors take place
> owned by TMX
Canadian Investor Protection funds (CIPF)
> insurance brokerage account contents (not losses)
Canadian Securities Institute
>offers courses required for licensing by regulators
What are Investment Dealers
- small number of national-scope investment dealers (big banks, a few independent)
- many small “boutique” investment dealers (specialize in specific sectors, sometimes employee owned)
- multiple departments within an investment dealer (underwriting, trading, investment banking, brokerage)
what are the 2 types of brokers
Full-service brokers offer “high-touch” service and advice (High fees)
Discount brokers offer limited services such as stock and bond execution, but no advice (Low fees)
what does “leveraged” mean?
Short-term borrowing finances long-term investment
Borrow money every 90 days to finance a 20-year mortgage
Financial leverage – uses borrowed funds to increase the potential return on an investment
any risks with the “borrow short and lend long” strategy?
Usually interest rate increases over time; Companies and investors borrow for a short maturity at a smaller interest rate
Then they lend that same money for a longer time at a higher interest rate
Ex. Car loans, mortgages. Etc.
They borrow the money from you and me (short term deposits)
What happens over the past few years:
The increase in interest rate is not constantly increasing
The interest rates have DECREASED over time
This means if we borrow at 8% and lend at 5% this would not be sustainable
This is what happened to small – medium sized banks in the US
We don’t have this in Canada because we have more strengthened larger banks in Canada that is regulated
Technological Changes, how has it affected the financial industry
- increased interconnections of markets
- interlisted securities
- multiple listings for securities
how has globalization affected financial markets
Markets are no longer restricted to local suppliers and issuers of capital
Canadian investors can buy US listed shares; Canadian banks lend to US borrowers
what are some regulatory changes to secure financial markets
Post-crisis financial regulation is increasing the compliance responsibility for financial firms
Foreign Account Tax Compliance Act (FATCA)
Anti-Money Laundering (AML)
At the same time that technology increasingly facilitates easier capital flows, regulation creates additional barriers
what does “underwriting” mean
Underwriting – selling newly issued securities to investors
Investment dealers
investment dealers as principals vs as agents
As principals:
Investment Dealer agrees to a price with the issuer and buys all of the shares/bonds (aka. “bought deal”)
As Agents:
Investment Dealers market the shares or bonds to investors on a “best efforts” basis; the Investment Dealer does not purchase
Does an investment Dealer face more risk as an agent or Principal?
As a principal because they have bought all of the shares and bonds and take on the risk of not being able to sell the bonds
secondary markets: how do investment dealers sell securities on financial markets (principals vs agents)
As principals:
Invest their own capital and earn a spread between purchase and sale prices (aka. Proprietary or liability trading)
As agents:
Invest their clients’ capital and earn a commission on executed trades (aka brokerage)
