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PCIAM > Chapter 3 > Flashcards

Chapter 3 Flashcards

1
Q

What are the benefits of investing in developed markets? (there are 5)

A
  • Stronger oversight and stricter regulation
  • Reliable acocunting and financial reporting
  • Lower risk of unexpected economic and political instability
  • High levels of liquidity
  • Lower transaction costs
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2
Q

What are the benefits of investing in emerging markets?

A
  • Faster economic growth
  • Inefficient pricing leading to arbitrage opportunities
  • Industry representation
  • Attractive valuations (trading at discount to developed nations)
  • Low correlation of returns with developed markets
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3
Q

What are the drawbacks of investing in emerging markets?

A
  • Restrictions on foreign ownership
  • May be difficult to repatriate funds to the UK once the investor has disinvested
  • Lack of double tax treaties
  • Additional costs may be incurred (commission etc)
  • Lack of transparency and information
  • Lack of corporate governance and corporate law
  • Risks (political, volatility, liquidity, etc)
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4
Q

Who recognises the LSE?

A

FCA

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5
Q

What are the main responsibilities of the LSE? (There are 5)

A
  • Providing a primary and secondary market for equities an fixed interest securities
  • Supervising member firms
  • Regulating the market
  • Recording all deals
  • Disseminating price-sensitive information received via its regulatory news service (RNS)
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6
Q

What are the member firms of the LSE?

A

Brokers, dealers and market makers

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7
Q

What are the trading platforms of the LSE?

A

SETS, SEAQ, and SETSqx

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8
Q

What is the difference between brokers, dealers, and market makers?

A

Brokers are an agent and trades for clients or others, dealers are acting as principal trading for themselves, and market makers aims to provide liquidity to the market.

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9
Q

What is SETS?

A

SETS is the “Stock Exchange ELectronic Trading Service”

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10
Q

What are the features of SETS?

A

It is an electronic, order driven service trading FTSE 100, FTSE 250, and the FTSE small cap index constituents, as well as other secutiries

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11
Q

What change did MiFID 2 bring to SETS?

A

It means that SETS can also provide market maker support

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12
Q

How does SETS order their orders?

A

It matches orders first on price and then on the time the order was placed

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13
Q

What are the trading hours on SETS?

A

8:00-16:30

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14
Q

What is a SETS at best order?

A

It is an order that only specifies the volume to be bought or sold and is executed immediately at the best possible price.

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15
Q

What are the 6 different types of SETS orders?

A
  • At best orders
  • Market orders
  • Limit orders
  • Execute and eliminate
  • Fill or kill
  • Iceberg order
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16
Q

What is an “at best order”?

A

An at best oder specifies only the volume to be boght or sold and is executed immediately at the best possible price

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17
Q

What is an market order?

A

This is an at best order which is held on the order book during an auction call period

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18
Q

What is a limit order?

A

THis is an order that specifies the number of shares to buy or sell at a no worse than price

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19
Q

What is an “execute and eliminate” order?

A

THis is an order where an attempt will be made to execute as much as possible and eliminate the rest of the order

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20
Q

What is a “fill or kill” order?

A

This is an order that if the order cannot be filled in full, the whole order is rejected

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21
Q

What is an iceberg order?

A

THis is an order where only part of the order is visible on the order book

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22
Q

What does SEAQ stand for?

A

Stock Exchange Automated Quotation (SEAQ)

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23
Q

What are the features of SEAQ?

A

Quote-driven, screen based system for trading
It is not a dealing system
Member firms act as market makers
Quotes must appear between the mandatory period of 8:am to 4:30pm
Trades fixed interest market and AIM securities are not traded on SETS or SETSqx

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24
Q

What securities are not traded on SETS or SETSqx?

A

Traded fixed interest market and AIM securities are not traded on SETS or SETSqx

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25
Q

What does SETSqx stand for?

A

SETSqx stands for the stock exchange electronic security service

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26
Q

What are the features of SETSqx?

A

Used for securities that are less liquid than those on SETS
It is a hybrid system (facilitates both market making and electronic execution)
Execution will happen at certain times throughout the day, referred to at uncrossings.
THe times are 8am, 9am, 11am, 2pm, 435pm
Iceberg orders are not supported

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27
Q

Who issues UK government bonds?

A

The Debt Management OFfice (DMO)

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28
Q

What does GEMMs stand for?

A

Gild-edged market makers

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29
Q

What do GEMMs do?

A

THey create a two-way price for government bonds

30
Q

What is a REPO?

A

It is a sale and repurchase agreement. It is a form of secured borrowing where the gilt itself is used as collateral.

31
Q

How is the repo rate created?

A

The interest rate generated by the difference between the sale and repurchase prices is the repo rate

32
Q

Who can use repo transactions?

A

All participants in the gilt market can use repo transactions

33
Q

What are the three different types of “REPO’s”?

A

Term repos: Agreements to repurchase at a specific date
Open repos: No set redemption date, contracts roll over on a daily basis until one of the parties decides to cancel the deal
Overnight repos: Settlement is the next day

34
Q

What is the ORB?

A

This is the electronic order book and is established by the LSE to provide a more liquid and transparent market in retail bonds.

35
Q

What are the features of depositary receipts?

A

They allow UK investors to trade on international markets.

They are a bearer instrument and is denominated in dollars.

They are exempt from stamp duty (but ADR has a creation fee)

36
Q

What is IOB?

A

IOB stands for International order book which can be found on the LSE.

37
Q

What is CREST?

A

CREST is the central securities depository for markets in the UK

38
Q

What does the DVP/CAD system do in CREST?

A

It ensures that the buyer is credit worthy (has the funds needed) and that the seller has the legal title of the security

39
Q

What are the settlement times in CREST?

A

UK settlement is T + 2 for equities and corporate bonds

T+1 for gilts and US government bonds

40
Q

What is the Cash Memorandum account (CMA)?

A

This is basically the record of daily payments and receipts for a particular member of crest. There is 1 cash memorandum account per member per currency.

41
Q

What is the cash memorandum account cap and headroom

A

THe cap is the credit available and the headroom is the difference between a members cap and their net payment obligations (how much credit is left)

42
Q

When does the cash memorandum account settle?

A

End of day

43
Q

How are gilts issued?

A

They are issues through competitive auctions where market makers are required to participate

44
Q

What is a non-competitive bid for Gilts?

A

This is where individuals can submit bids for up to £500,000.

Market makers can also bid but only up to 0.5% of the gilt on auction.

45
Q

What is tap stock in relation to gilt issuance?

A

Tap stock happens is a gilt auction fail.

If it happens the stock becomes “tap stock” and the DMO will slowly release the debt until the prices reaches predetermined levels

46
Q

What is a syndicated gilt issue?

A

THis is when the DMO appoints a groupm of banks to manage the sale of a gilt on its behaf.

47
Q

In a syndicated offer, what is a book of demand?

A

THis is a book consisting of the volume and price potential investors could see themselves investing.

48
Q

What are the requirements for a full listing on the LSE?

A

An application must be sent to UKLA (the FCA)

-Minimum market cap of £30m with a minimum 10% freefloat available to the public
-Market values of any bonds must be at least £200,000
-No restrictions on shares
-No one can own more than 30% of the voting rights
-Three years of accounts available
-Directors must have appropriate experience

49
Q

What are the requirements for an AIM listing on LSE?

A

The requirements are:

  • A nominated adviser (NOMAD) must be appointed
  • A nominate broker must also be appointed
  • The application needs to be sent to LSE not the FCA
50
Q

What are the six different types of IPO’s?

A

Tender offer
Offer for sale
Offer for subscription
Placement
Introduction
Fixed Price Offer

51
Q

What is a fixed price offer?

A

This is a type of IPO where a company offers its shares to investors on a fixed price instead on a tender basis (i.e. bidding)

52
Q

What is a tender offer IPO?

A

In a tender offer IPO prospective shareholders are invited to bid for the shared.

When the bidding closes a strike price is determined and a secondary market is created.

53
Q

What is a offer for sale IPO?

A

An offer for sale IPO is used by companies when the initial funds raised through the IPO was not enough to meet their requirements. This involves the company selling new or existing shares to prospective investors. The issuing house will invite applications from the general public.

54
Q

What is an offer for subscription?

A

This is mainly used by investment trusts. It is similar for an offer for sale IPO where the public is invited to purchase new shares.

A minimum subscription level needs to go through before the issue is accepted. If this level is not met the issue will be withdrawn.

It can be offered on both fixed and tender price arrangement.

55
Q

What is a placement IPO?

A

This is when a company normally offers it shares to selected clients (typically institutional investors).

56
Q

What is an Introduction in regards to share issuance?

A

This is when a company that already is listed issues more shares. This is not an IPO.

57
Q

How many crypto currencies are currently available?

A

Over 6,000

58
Q

What are the key risks of crypto currencies?

A

The key risk is volatility, the fact that it is decentralised, and that it is unregulated

59
Q

When did the FCA ban the sale, marketing , and distribution of crypto assets to retail customers?

A

January 2021

60
Q

What regulations did the crypto “exchange providers” and “wallet providers” have to comply with after January 2020?

A

The Fifth Money Laundering Directive (5MLD)

61
Q

What are two price weighted indices?

A

Dow Jones Industrial Average
Nikkei 225

62
Q

What are two market capitalisation-weighted indiced?

A

FTSE100 and S&P500

63
Q

What is a free float indices?

A

This is an indices that only includes shares available to the public and excludes shares held by directors and other strategic holdings

64
Q

What is an example of a capped indices?

A

FTSE UK Capped 5% Index Series

65
Q

What are the 5 limitations of Indices?

A
  • They do not take into account for the effect of costs and taxation
  • Most do not include dividend reinvestment
  • Assumption that the investor is fully invested in constituent companies at all times
  • Survivorship bias
  • Weighting of market capitalisation means that favoured sectors are overly represented in the index, leading to potential instability should there be a bubble.
66
Q

What is the current stamp duty?

A

0.5% on consideration over £1,000 rounded up to the next £5

67
Q

What is the current stamp duty reserve tax?

A

0.5% calculated to the nearest penny

68
Q

When does CREST calculate stamp duty/SDRT?

A

The earlier of the settlement date or ten business days after the transaction

69
Q

What is the difference between stamp duty and SDRT?

A

Stamp duty is for physical shares whilst SDRT is for electronic shares

70
Q

What securities are exempt from stamp duty? (There are 6)

A
  • Gilts and corporate bonds (unless convertible)
  • Bearer securities
  • Foreign registered securities
  • Aim shares
  • New issues
  • Depositary receipts based on UK shares (1.5% creation fee)
71
Q

What type of bond is not exempt from stamp duty?

A

Convertible corporate bonds

PCIAM (7 decks)

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