Chapter 27 Working With the Institutional Client RQ Flashcards
What is the middle office of an investment dealer typically responsible for?
Corporate treasury. Risk management. Operations. Corporate finance. A. 1 and 2. B. 1 and 4. C. 2 and 3. D. 3 and 4.
A. 1 and 2.
While the back office of an investment dealer is generally responsible for operations, and the front office is responsible for corporate finance, the middle office is typically responsible for the corporate treasury and risk management.
What is a primary activity of the equity sales and trading department?
A. Prime brokerage.
B. Securities lending.
C. Structured finance.
D. Research.
C. Structured finance.
One of the primary activities of the equity sales and trading department is the creation of structured products that offer unique combinations of risk and reward. The prime brokerage unit, on the other hand, is primarily responsible for activities that include security lending, margin and portfolio financing, security settlements, etc. Research is not formally a part of the equity sales and trading department.
What does IIROC Rule 3403 require a member dealer to determine in reference to an institutional client?
A. Size of account assets.
B. Investment decision-making abilities.
C. Legal form of organization.
D. Investment strategy and policy.
B. Investment decision-making abilities.
According to IIROC Rule 2700, a dealer member need only determine if the institutional client is sophisticated and capable enough of making an independent investment decision and independently evaluating the investment risk. If the dealer has reasonable grounds to conclude that the institutional client is capable, the dealer’s suitability obligation is fulfilled.
Select the example of an institutional trader acting reactively, rather than proactively with a firm’s capital.
A. Selling shares short in anticipation of a negative analyst report.
B. Making a market in a security deemed favourable by one of the firm’s analysts in anticipation of institutional orders.
C. Purchasing a client’s block of shares into inventory for later sale.
D. Being active in a particular stock or sector in order to create underwriting or investment banking deals.
C. Purchasing a client’s block of shares into inventory for later sale.
Liability traders can use the firm’s trading capital either reactively or proactively. An example of “reactively” would occur if a firm had a client who wants to sell 100,000 shares of XYZ stock and the firm’s liability desk makes a market and buys the 100,000 shares, hoping to offload the stock later. The trader is “reacting” to the client’s wishes. Option a, b and d all represent situations where the trader is proactively taking action rather than reacting to a client or to another party that wants to initiate a transaction.
Identify the key difference between an agency trader and a liability trader.
A. Minimum trade size is much larger for liability traders than for agency traders.
B. Licensing requirements are more stringent for liability traders than for agency traders.
C. Liability traders execute over the counter, while agency traders execute listed trades.
D. Agency traders manage client accounts, liability traders manage an investment firm’s trading capital.
D. Agency traders manage client accounts, liability traders manage an investment firm’s trading capital.
Liability traders have the job of managing the firm’s trading capital to encourage market flows and facilitate the client orders that go into the market while trying to lose as little of that capital as possible. Whereas agency traders have formal client responsibilities, liability traders have lighter responsibilities or none at all.
In an institutional sales team, who has the responsibility of managing the client relationship?
A. Institutional Salesperson.
B. Analyst.
C. Institutional Trader.
D. Investment Banker.
A. Institutional Salesperson.
The institutional salesperson is the client relationship manager and the conduit between the customer’s needs and the firm.
Identify the sell-side revenue source that comes from origination.
A. Revenue generated through transactions with clients.
B. Revenue generated from the spread between the bid and ask price.
C. Revenue generated from the moment-to-moment market movements.
D. Revenue generated from underwriting.
D. Revenue generated from underwriting.
Origination refers to the process of bringing new debt issues to market. Origination is also known as underwriting. Revenue generated from transactions with clients is called sales revenue, while trading revenue refers to profits generated from moment-to-moment market movements. Revenue generated from the difference between the bid and ask price is known as revenue from spreads.
What department in an investment firm is typically responsible for managing business related to mergers and acquisitions?
A. Institutional sales.
B. Investment banking.
C. Institutional trading.
D. Equity and fixed-income markets.
B. Investment banking.
An investment banker is responsible for building three areas of the dealer’s business: corporate finance, public finance, and mergers & acquisitions, which focuses on providing advice on mergers, buy-outs, asset sales and corporate restructurings, valuations and fairness opinions.
Identify the individual in an investment firm who is responsible for providing a financial forecast on a company or an institutional client.
A. Accounting.
B. Institutional trader.
C. Investment banker.
D. Equity analyst.
D. Equity analyst.
Investment bankers will look to the equity analyst for a financial forecast on companies they cover. Also known as the sell side or research analyst, the analyst is considered an expert with regards to a specific company or sector and provides other front office staff with ongoing coverage in their area of specialty.
In the investment banking department of an institutional sales area, who is responsible for the overall strategic decisions regarding business direction?
A. Vice-Presidents.
B. Managing directors.
C. Associate directors.
D. Analysts and associates.
B. Managing directors.
Positions in the investment banking department are stratified over three basic responsibilities: analysts and associates (responsible for the analytical work), vice-presidents or associate directors (responsible for day-to-day management) and managing directors (responsible for the strategic direction of the business).
Identify an activity that the back office of an investment dealer is typically responsible for.
A. Risk management.
B. Sales and trading.
C. Operations.
D. Merchant banking.
C. Operations.
Typical roles for which the back office is responsible include operations and information technology.
The bundling of equity trading-related services used primarily by hedge funds describes what kind of service provided by a full-service dealer?
A. Merchant banking.
B. Mergers and acquisitions.
C. Prime brokerage.
D. Financial engineering.
C. Prime brokerage.
The investment dealer’s prime brokerage unit provides services that includes equity pre-trade compliance testing, security lending, margin and short financing, portfolio accounting, etc. Prime brokerage services entail the bundling of equity trading-related services used primarily by hedge funds.
Protecting a bond portfolio from interest rate risk by purchasing bonds that provide a defined return at a specific time refers to what kind of fixed-income management style?
A. Indexing.
B. Immunization.
C. Interest rate anticipation.
D. Buy-and-hold.
B. Immunization.
Immunization can be viewed as a means of protecting a bond portfolio from interest rate risk, making the portfolio immune to outside influences. An example of a security immune to outside influences is a strip bond.
Identify the term that characterizes extremely fast trading in a very large number of orders for individual trades of very small sizes.
A. Indexing.
B. Algorithmic trading.
C. High frequency trading.
D. Dark pools.
C. High frequency trading.
High frequency trading is a subset of algorithmic trading and is characterized by fast trading of a large number of orders for individual trades of a very small size. HFT attempts to profit from very small price imbalances.
Identify the individual assigned to carry out market-making duties on a particular stock?
A. Sector rotator.
B. Responsible designated trader.
C. Algorithmic trader.
D. Proactive trader.
B. Responsible designated trader.
The TSX and Canadian Securities Exchange both reserve the right to determine which competing market-making dealer will be awarded the responsibility. The dealer then assigns an individual responsible designated trader (RDT) to carry out market-making duties on the stock.
