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AFM 121 > Chapter 2: The Canadian Securities Industry > Flashcards

Chapter 2: The Canadian Securities Industry Flashcards

1
Q

whos is responsible for securities regulation in Canada

A

provincial government

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2
Q

what are examples of self regulatory organizations

A
  • Investment Industry Regulatory Organization of Canada (IIROC)
  • TSX
  • TSX Venture Exchange
  • The Canadian Depository for Securities (CDS)
  • Canadian Investor Protection Fund (CIPF)
  • Canadian Securities Institute (CSI)
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2
Q

what are examples of provincial securities commissions

A
  • Ontario Securities Commission (OSC)
  • BC Securities Commission (BCSC)
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2
Q

what do Self Regulatory Organizations (SROs) do

A
  • provide oversight and enforcement for some rules
  • securities commissions delegate some of their powers to SROs
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3
Q

what does the Canadian Depository for Securities (CDS) do

A
  • Clears, or settles, trades
  • Owned by the TMX
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3
Q

what do intermediaries do

A
  • Facilitate the transfer of capital from suppliers to users
  • Different types of intermediaries that focus on different aspects of the process
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3
Q

as an intermediary, what does banks & trust companies do

A

get deposits from customers (capital suppliers) & lend to capital users

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4
Q

who are brokers

A

financial advisors

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4
Q

what does the Canadian Investor Protection Fund (CIPF) do

A

Insures brokerage account contents (not losses!)

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4
Q

what does the Canadian Securities Institute (CSI) do

A
  • Offers courses (education) required for licensing (those participating in the industry) by regulators
  • Owned by Moody’s
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5
Q

who are examples of intermediaries

A
  • Banks & trust companies
  • Investment funds, pension funds, & insurance companies
  • Investment dealers
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6
Q

what are the different “types” of investment dealers

A
  • Small number of national-scope investment dealers; Big Banks, a few independent (i.e. not bank owned)
  • Many small “boutique” investment dealers; May specialize in specific sectors or products, sometimes employee owned
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6
Q

as an intermediary, what does investment funds, pension funds, and insurance companies do

A

use funds collected from customers to invest in the financial securities (ex. bonds, equities) of various users of capital

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6
Q

as an intermediary, what does investment dealers do

A

can act as agents for their clients or principals on their own behalf when transforming capital (buying/selling of shares/bonds)

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7
Q

what are the different departments within an investment dealer

A
  • Underwriting
  • trading
  • investment banking
  • brokerage
    “Chinese Wall” between departments; controls put in place to restrict the flow of information between various bank business segments
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8
Q

who leverages a lot

A

banks

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8
Q

what is the borrow short and lend long strategy

A

borrowing for a shorter period of time when there is a smaller interest rate, and lending for a longer period of time when the interest rate will go higher

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8
Q

what are the different types of brokers

A
  • full service
  • discount
    the type of broker is negotiated with the client
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8
Q

what does a full service broker provide

A
  • Full-service brokers offer “high-touch” service and advice
  • have High fees
  • client would give like 1-2% earnings from investments to them per year
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9
Q

how is the financial services industry highly leveraged

A
  • Short-term borrowing finances long-term investments
  • Borrow money every 90 days to finance a 20-year mortgage
    “borrow short, lend long”
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9
Q

what does a discount broker provide

A
  • Discount brokers offer limited services, such as stock and bond trade execution, but no advice
  • have Low fees
  • usually work in wealth management
  • give a % of revenue to them
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10
Q

Any risks with the “borrow short and lend long” strategy?

A

interest rate can decrease overtime instead of increase

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10
Q

how has the evolution of technology, particularly in telecommunications, changed the financial industry

A

Increased interconnectedness of markets:
- Interlisted securities
- Multiple listing for securities (e.g. Apple’s shares trade on many different stock exchanges/ATS/ECNs)

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11
Q

what is the affect of globalization on the financial industry

A
  • 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
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11
Q

what happens in primary markets/new issues

A
  • where investment dealers (IDs) bring together those that have excess capital & those who need investment capital
  • also called Debt or Equity Underwriting / Financing
  • Investment dealers sell newly issued securities to investors @ a given date & @ a given price
11
Q

what do investment dealers do as principals in a primary market

A
  • they agrees to a price with the issuer and buys all of the shares/bonds (aka “bought deal”)
  • they then sell the purchased shares or bonds to investors
  • their profit is the difference between the purchased price & the resale price
11
Q

what are some changes to regulations

A
  • Post-crisis financial regulation is increasing the compliance responsibility for financial firms
  • At the same time that technology increasingly facilitates easier capital flows, regulation creates additional barriers
12
Q

what do investment dealers do as agents in a primary market

A
  • they market the shares or bonds to investors on a “best efforts” basis
  • they don’t purchase the shares or bonds
  • they get commission as payment
  • the amount investors pay is the amount the issuer is selling for (no marked up price)
12
Q

What is the risk an Investment Dealer faces as a Principal in the primary market?

A
  • IDs take on the risk of not selling @ a good price (won’t make much profit)
  • can be from the state of the market
  • they can minimize the risk by working with the issuer about pricing, timing, & design of the issue to make it well received in the market
12
Q

what type of company usually have IDs act as agents in a primary market

A

smaller or larger companies with good credit ratings

12
Q

what are examples of post-crisis financial regulations

A
  • Foreign Account Tax Compliance Act (FATCA)
  • Anti-Money Laundering (AML)
13
Q

What is the risk an Investment Dealer faces as an Agent in the primary market?

A
  • they don’t take any risk
  • the issuers take on the risk of not selling
14
Q

what do investment dealers do as principals in a secondary market

A
  • they invest their own capital and earn a spread between purchase and sale prices (aka proprietary or liability trading)
  • they are trading their own stuff (inventory) with clients
  • they assume majority of the risk
14
Q

what happens in secondary markets

A
  • Investment Dealers buy and sell existing securities on financial markets
  • enhances the effectiveness of primary markets
15
Q

what do investment dealers do as agents in a secondary market

A
  • they invest their clients’ capital for them and earn a commission on executed trades
  • aka they act as brokers
16
Q

what happens after a trade is executed

A
  • the trade is “settled”
  • Canadian Depository for Securities (CDS) “clears” or “settles” the trade (hence the term “clearinghouse”) as the central repository keeping track of who owns each share of a company
16
Q

how is a trade settled

A
  • Cash from the buyer’s brokerage account is transferred to the brokerage account of the seller
  • Share ownership is transferred from the seller to the buyer
16
Q

how does CDS “clears” or “settles” the trade

A
  • Registered owners have their name on the (electronic) share certificate (really a book entry)
  • Shares in “street” form are registered in the name of the brokerage; The broker then keeps track of individual client ownership
17
Q

what do banks do

A

collect money from depositors (chequing and savings accounts) and lend the money to borrowers (car loans, mortgages)

17
Q

how do banks make money

A

Banks earn the difference between the cost of borrowing (interest paid to depositors) and revenue from lending (interest paid by borrowers)

17
Q

what are banks in Canada governed by

A

the bank act (among other acts)

18
Q

what are the different types of banks

A
  • Schedule I: Domestic Banks
  • Schedule II: Subsidiaries of Foreign Banks
  • Schedule III: Branches of Foreign Banks
19
Q

what are schedule III banks

A
  • branches of foreign banks
  • can accept deposits & give out loans
  • not subsidiaries, only branches
19
Q

what are schedule II banks

A
  • subsidiaries of foreign banks
  • incorporate and operate in canada
  • can accept deposits that can be insured by the Canadian Deposit & Insurance Corporation (CDIC)
19
Q

what are schedule I banks

A
  • domestic banks
  • widely held; no one holds > 20%
  • funded by saving deposits, retained earnings, period rights offerings to existing shareholders, debentures, and preferred shares issued
  • most liabilities (ex. saving deposits) are due “on demand”
  • 10-15% of total assets are liquid
  • 40% in personal & business loans
  • 30% in residential mortgages
20
Q

who are the big 6 banks

A
  • BMO
  • BNS
  • CIBC
  • NA
  • RY
  • TD
20
Q

what are Trust and Mortgage Companies

A

Currently similar to banks, but can also act as Trustees that are in charge of corporate or individual financial assets

20
Q

what type of banks are the big 6 banks

A
  • schedule I
  • Also called “conglomerate” banks or banking institutions
  • Own subsidiaries in non-banking areas like insurance and investments
21
Q

what are the other bank-like companies

A
  • Trust and Mortgage Companies
  • Credit Unions and Caisses Populaires
22
Q

how did large life insurers go from being owned by policyholders to be owned by shareholders

A
  • they “demutualized” to become public companies
  • demutualized: reorganization of ownership structure of life insurance companies from being owned by policyholders to by shareholders
  • they needed to give the policyholders enough # of shares to compensate for the value of their policyholdings
22
Q

what are life insurance companies

A
  • act as trustees for funds received from policyholders
  • main objective is to keep the principal investment amount safe
  • Match liabilities (death) with assets
  • Invest mostly in long-term fixed income products (like mortgage & long-term bonds)
  • Insurers can own trusts and offer banking and investment products
22
Q

what is a policyholder

A

If you buy an insurance policy in your own name to insure your own stuff, you’re the holder of that policy; policyholder

23
Q

what are investment funds

A
  • can be Mutual funds, hedge funds, exchange traded funds (ETFs)
  • Often formed as Trusts that distribute Units to investors that may also be corporations or Limited Partnerships (LPs)
  • Closed-end funds are listed on an exchange
  • Open-ended funds are not listed on an exchange
23
Q

what are closed-end funds

A
  • Fixed number of units outstanding
  • Investors trade units in a similar manner as shares
  • proceeds from issues are invested in a portfolio of securities to earn income & capital gains
24
Q

what are Credit Unions and Caisses Populaires

A
  • Owned by customers/depositors
  • profit returned to owners; not focused on profits
  • provides basic financial services to the members
  • must focus on “prudent portfolio approach” to investment
25
Q

what are Property & Casualty (P&C) insurance companies

A
  • P&C Insurers cover cars, houses, business assets, health, accidents
  • Distinct from life insurers; smaller, and their primary investment objective is liquidity (to be able to settle any claims that come up)
  • P&C liabilities occur more frequently in a customer’s life
  • E.g. car accidents; more frequent payout than life insurers, consequently shorter-term investments
26
Q

what are opened-end funds

A
  • No fixed number of units outstanding
  • Investors can only purchase and redeem units from/with the investment fund
27
Q

where are most investment fund assets

A

in open-ended mutual fund trusts

28
Q

what are pension plans

A
  • many employees are members of pension plans
  • focused on the safety of principal & income
  • Conservative, long-term focus
  • Match the expected payoff of investments with the expected liabilities
  • Underfunding shows up on the balance sheet!
29
Q

what are the different types of pension plans

A
  • government sponsored
  • company sponsored
30
Q

what are examples of government sponsored pension plans

A
  • CPPIB (everyone)
  • OMERs (municipal employees)
  • OTPP (teachers)
    Large Government sponsored pension plans have become significant players in global financial markets
31
Q

what are examples of company sponsored pension plans (companies that give you pension plans)

A
  • Rogers
  • Agrium
  • Bank of Montreal

AFM 121 (12 decks)

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