Chapter 2: The Canadian Securities Industry Flashcards
whos is responsible for securities regulation in Canada
provincial government
what are examples of self regulatory organizations
- 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)
what are examples of provincial securities commissions
- Ontario Securities Commission (OSC)
- BC Securities Commission (BCSC)
what do Self Regulatory Organizations (SROs) do
- provide oversight and enforcement for some rules
- securities commissions delegate some of their powers to SROs
what does the Canadian Depository for Securities (CDS) do
- Clears, or settles, trades
- Owned by the TMX
what do intermediaries do
- Facilitate the transfer of capital from suppliers to users
- Different types of intermediaries that focus on different aspects of the process
as an intermediary, what does banks & trust companies do
get deposits from customers (capital suppliers) & lend to capital users
who are brokers
financial advisors
what does the Canadian Investor Protection Fund (CIPF) do
Insures brokerage account contents (not losses!)
what does the Canadian Securities Institute (CSI) do
- Offers courses (education) required for licensing (those participating in the industry) by regulators
- Owned by Moody’s
who are examples of intermediaries
- Banks & trust companies
- Investment funds, pension funds, & insurance companies
- Investment dealers
what are the different “types” of investment dealers
- 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
as an intermediary, what does investment funds, pension funds, and insurance companies do
use funds collected from customers to invest in the financial securities (ex. bonds, equities) of various users of capital
as an intermediary, what does investment dealers do
can act as agents for their clients or principals on their own behalf when transforming capital (buying/selling of shares/bonds)
what are the different departments within an investment dealer
- Underwriting
- trading
- investment banking
- brokerage
“Chinese Wall” between departments; controls put in place to restrict the flow of information between various bank business segments
who leverages a lot
banks
what is the borrow short and lend long strategy
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
what are the different types of brokers
- full service
- discount
the type of broker is negotiated with the client
what does a full service broker provide
- 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
how is the financial services industry highly leveraged
- Short-term borrowing finances long-term investments
- Borrow money every 90 days to finance a 20-year mortgage
“borrow short, lend long”
what does a discount broker provide
- 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
Any risks with the “borrow short and lend long” strategy?
interest rate can decrease overtime instead of increase
how has the evolution of technology, particularly in telecommunications, changed the financial industry
Increased interconnectedness of markets:
- Interlisted securities
- Multiple listing for securities (e.g. Apple’s shares trade on many different stock exchanges/ATS/ECNs)
what is the affect of globalization on the financial industry
- 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 happens in primary markets/new issues
- 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
what do investment dealers do as principals in a primary market
- 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
what are some changes to regulations
- 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
what do investment dealers do as agents in a primary market
- 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)
What is the risk an Investment Dealer faces as a Principal in the primary market?
- 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
what type of company usually have IDs act as agents in a primary market
smaller or larger companies with good credit ratings
what are examples of post-crisis financial regulations
- Foreign Account Tax Compliance Act (FATCA)
- Anti-Money Laundering (AML)
What is the risk an Investment Dealer faces as an Agent in the primary market?
- they don’t take any risk
- the issuers take on the risk of not selling
what do investment dealers do as principals in a secondary market
- 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
what happens in secondary markets
- Investment Dealers buy and sell existing securities on financial markets
- enhances the effectiveness of primary markets
what do investment dealers do as agents in a secondary market
- they invest their clients’ capital for them and earn a commission on executed trades
- aka they act as brokers
what happens after a trade is executed
- 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
how is a trade settled
- 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
how does CDS “clears” or “settles” the trade
- 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
what do banks do
collect money from depositors (chequing and savings accounts) and lend the money to borrowers (car loans, mortgages)
how do banks make money
Banks earn the difference between the cost of borrowing (interest paid to depositors) and revenue from lending (interest paid by borrowers)
what are banks in Canada governed by
the bank act (among other acts)
what are the different types of banks
- Schedule I: Domestic Banks
- Schedule II: Subsidiaries of Foreign Banks
- Schedule III: Branches of Foreign Banks
what are schedule III banks
- branches of foreign banks
- can accept deposits & give out loans
- not subsidiaries, only branches
what are schedule II banks
- subsidiaries of foreign banks
- incorporate and operate in canada
- can accept deposits that can be insured by the Canadian Deposit & Insurance Corporation (CDIC)
what are schedule I banks
- 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
who are the big 6 banks
- BMO
- BNS
- CIBC
- NA
- RY
- TD
what are Trust and Mortgage Companies
Currently similar to banks, but can also act as Trustees that are in charge of corporate or individual financial assets
what type of banks are the big 6 banks
- schedule I
- Also called “conglomerate” banks or banking institutions
- Own subsidiaries in non-banking areas like insurance and investments
what are the other bank-like companies
- Trust and Mortgage Companies
- Credit Unions and Caisses Populaires
how did large life insurers go from being owned by policyholders to be owned by shareholders
- 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
what are life insurance companies
- 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
what is a policyholder
If you buy an insurance policy in your own name to insure your own stuff, you’re the holder of that policy; policyholder
what are investment funds
- 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
what are closed-end funds
- 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
what are Credit Unions and Caisses Populaires
- 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
what are Property & Casualty (P&C) insurance companies
- 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
what are opened-end funds
- No fixed number of units outstanding
- Investors can only purchase and redeem units from/with the investment fund
where are most investment fund assets
in open-ended mutual fund trusts
what are pension plans
- 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!
what are the different types of pension plans
- government sponsored
- company sponsored
what are examples of government sponsored pension plans
- CPPIB (everyone)
- OMERs (municipal employees)
- OTPP (teachers)
Large Government sponsored pension plans have become significant players in global financial markets
what are examples of company sponsored pension plans (companies that give you pension plans)
- Rogers
- Agrium
- Bank of Montreal
