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IT in investment Operations IOC > Chapter 3 > Flashcards

Chapter 3 Flashcards

0
Q

What is an ROIE?

A

A Recognised Overseas Investment Exchange (ROIE) is one that is based outside the UK but admits UK banks and securities firms as members, and is recognised by the FSA. There are currently 11 exchanges in this category, including NASDAQ in the US and the Sydney Futures Exchange in Australia

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1
Q

What is crossing?

A

Crossing occurs when a broker acts as agent on both sides of a given transaction. If the broker has a buy order and an equivalent sell order, it can ‘cross’ the orders. Under MiFID rules, crossing is only permitted if it results in best execution. Broker crossing networks are a form of MTF.

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2
Q

What is a DIE?

A

Designated Investment Exchange (DIE) is an overseas exchange that does not carry on a regulated activity in the UK and is not a regulated market. Designation allows securities firms to trade transactions effected on a designated investment exchange in the same way as they would treat transactions effected on an RIE. Overseas exchanges may apply to the FSA to be included in the list of designated investment exchange. The FSA will look at whether the investment exchange provides an appropriate degree of protection for consumers. The FSA will also undertake a public consultation prior to adding the investment exchange to the list of designated investment exchanges.

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3
Q

Is SETS a hybrid, order driven or quote driven platform?

A

Hybrid

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4
Q

Is SETSqx a hybrid, quote driven or order driven platform?

A

Hybrid

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5
Q

What type of platform is SEAQ?

A

Quote driven

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6
Q

What type of platform is the Retail Bond market and what is traded on this platform?

A

It’s a hybrid platform. UK GILTS (government bonds) and selection of sterling denominated corporate bonds. Opening auction but no closing auction.

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7
Q

What type of platform is LIFFEConnect? Order driven, quote driven or hybrid?

A

Order driven

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8
Q

What services may clearing houses provide?

A

Settlement and custody services

Central counterparty services

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9
Q

Name the 5 recognised clearing houses in the UK

A
  1. Euroclear UK & Ireland (EUI)
  2. LCH.Clearnet Ltd (London clearing house)
  3. ICE (InterContinental Exchange) Clear Europe Ltd
  4. European Central Counterparty Ltd (EuroCCP)
  5. CME (Chicago Mercantile Exchange) Clearing Europe Ltd
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10
Q

Name the seven overseas recognised clearing houses (by the FCA)

A
  1. Cassa di Compenazione e Garanzia SpA
  2. Eurex Clearing AG
  3. The Chicago Mercantile Exchange (CME)
  4. SIX x-clear AG *
  5. European multilateral Clearing Facility NV
  6. ICE Clear US, Inc.
  7. LCH SA
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11
Q

What clearing house does NYSE LIFFE use?

A

NYSE LIFFE Clearing

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12
Q

For what type of instrument are settlement and custody services provided?

A

Securities, not for derivatives

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13
Q

To whom does EUI provide membership

A

Stock exchange member firms, institutional investors, custodians and registrars

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14
Q

Describe custody services

A

Stock belonging to clients held in accounts on their behalf

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15
Q

What do data exchange specifications cover?

A

These cover the message formats for data that is to be sent to or received from the exchange, DESs also explain the sequence of messages.

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16
Q

To whom are CCP services provided?

A

Central counterparty services are provided to firms who deal in:

  1. Securities
  2. Exchange-traded futures and options
  3. OTC derivatives*
    * CSD services are only offered for securities – no equivalent for derivatives
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17
Q

Explain margin and collateral

A

Whenever a member firm’s positions show potential losses it must make a margin payment to the clearing house. In this way, the clearing house is protected against default by the member firm. The actual calculations performed by the CCP are more complicated and cover two aspects of margin – initial margin and variation margin. Most clearing houses use a methodology known as SPAN (Standardised Portfolio Analysis of risk) in order to calculate initial margin. This is a leading margin system which has been adopted by most options and futures exchanges around the world. SPAN is based on a sophisticated set of algorithms that determine initial margin according to a global (total portfolio) assessment of the one-day risk for a trader’s account.
Margin calls do not have to be paid in cash, government bonds (collateral) will be accepted as cover for the initial margin.

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18
Q

Name the ‘other’ LCH.clearnet services.

A

Swap clear

Swaps are traded on the OTC market. SwapClear is LCH.Clearnet’s service for centralised clearing of these instruments. Launched in 1999, SwapClear initially cleared plain vanilla interest rate swaps in four major currencies. Today it clears trades in 17 currencies:
1. USD, EUR and GBP out to 50 years
2. AUD, CAD, CHF, SEK and vanilla JPY out to 30 years
3. The remaining 9 currencies out to 10 years
It also clears Overnight Index Swaps (OISs) out to two years in USD, EUR, GBP and CHF.

Repo clear

And MSN

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19
Q

What is MARKITServ2?

A

A third-party trade matching service

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20
Q

What are repos?

A

sale and repurchase agreements – are transactions where Party A lends money to Party B providing that Party B provides Party A with collateral in the form of government bonds. The mechanism of the exchange of cash and collateral is that Party B ‘sells’ the securities to Party A under an agreement where A can repurchase them at a later date. Repos are traded on the OTC market.

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21
Q

Which type of organisation novates a trade?

A

A central counterparty (CCP)

22
Q

What is MSN?

A

Multilateral settlement netting

23
Q

What are some of the other services offered by EUI?

A

Other services
1. Regulatory Trade Reporting – like the LSE, EUI can provide broker-dealers with the facilities to report their trades to the European regulators in real time. EUI competes with the LSE in this respect.
2. Custody services – stock belonging to members is held in accounts on their behalf
3. Payment of dividends to members
4. Processing of corporate action entitlements to members
5. Specialised facilities for stock lending and borrowing

24
Q

Which type of platform do CCPs service? Quote driven, e.g. SEAQ or order driven, e.g. SETS

A

Order driven

25
Q

What is a trade repository?

A

A trade repository or swap data repository is an entity that centrally collects and maintains the records of OTC derivatives. These electronic platforms act as authoritative registries of key information regarding open OTC derivatives trades.
The purpose of trade repositories is to provide regulators with visibility into risk exposures by firm and counterparty. Repositories are supervised in Europe by ESMA under the EMIR regulations. Similarly initiatives are conducted in the US by the Dodd Frank regulations which were developed by the Commodities Futures Trading Commission (CFTC).

26
Q

What is TriOptima and what services does it provide?

A

TriOptima – this company’s Global Interest Rate Trade Reporting Repository (the Rates Repository, or IRTRR) was launched in January 2010 with the first monthly reports going to the regulators. Public reports were posted to the TriOptima website beginning in April 2010. In September 2010 the reporting frequency was changed from monthly to weekly.

27
Q

What is Markit BOAT and what services does it provide?

A

BOAT (Markit BOAT). In October 2006, nine leading investment banks (ABN Amro, Citigroup, HSBC, Credit Suisse, Deutsche Bank, Goldman Sachs, Merrill Lynch, Morgan Stanley and UBS) formed the BOAT consortium to develop a service that competes with the regulatory trade reporting facilities provided by (among others) the LSE and EUI. The drive for change was the introduction of MiFID with is more stringent trade reporting requirements. BOAT’s scope includes the provision of full post-trade capture, storage and distribution facilities for all OTC European equity trading. This includes:
1. Trade reporting, both of the basic data required to be reported by MiFID, and also the optional enrichment of this data by the contributor as it desires:
2. A trade report quality monitoring process
3. The storage of contributor’s own data (which will be held for a minimum of five years) and
retrieval tools to access it. The Markit Group acquired BOAT in 2007 and it is now known as Markit BOAT.

28
Q

What is the Thomson Reuters Trade Notification service?

A

Thomson Reuters’ Trade Notification Service is a real-time messaging hub for confirming FX trade information back to counterparties.

29
Q

Name some third part spoke and hub routing systems.

A

a. Omgeo through its Trade Suite and OASYS products
b. Thomson Reuters through its Autex and other products
c. Bloomberg through its POMS and TOMS systems
d. Others developed in-house by fund managers

30
Q

What are the LSEs services apart from the exchanges trading systems?

A 
RNS
Corporate events diary
Sedol master file
European regulatory trade reporting
Participant services
31
Q

What types of publications must be accessed by developers developing connectivity to exchange systems in-house?

A
  1. Data exchange specifications – these cover the message formats for data that is to be sent to or received from the exchange, DESs also explain the sequence of messages.
  2. Data dictionaries – most messages are based on data dictionaries. A data dictionary is defined as a centralised repository of information about data such as meaning, relationships to other data, origin, usage and format.
  3. Data security standards – these cover the rules for data encryption
  4. Service level standards – these cover a variety of standards that the member firm
    must meet, including:
    a. Any normal working days and hours of business
    b. Any rules about the timeliness of a message
    c. Specific rules about non-standard conditions, such as trade
    cancellation and amendment
  5. Testing facilities – all exchanges offer testing facilities so that the firm can tests its
    new developments, some exchanges insist that a level of mutual testing has been carried out before a new application or new member firm is allowed to connect to its systems.
32
Q

When does EUI DvP take place?

A

05:30 until 13:00 each business day

33
Q

Which organisations provide MSN?

A

CCPs

34
Q

What are the other services provided by EUI?

A 
Regulatory trade reporting
Custody services
Payment of dividends
Processing of corporate actions 
Specialised facilities for stock lending and borrowing
35
Q

What are corporate actions?

A

A corporate action is an event initiated by a public company that affects the securities issued by the company. Some corporate actions such as a dividend or coupon payment may have a direct financial impact on the shareholders or bondholders; another example is a call of a debt security. …

36
Q

CCP services are provided to firms which carry out trades in:

A

Securities
Exchange traded futures and options
OTC derivatives

37
Q

What is novation?

A

The substitution of one party to a contract by another party

38
Q

What are the benefits of using a CCP?

A

Post trade anonymity
Netting of positions
Reduction in credit risk

39
Q

Describe a margin payment

A

Whenever a member firm’s-positions show potential losses it must make a margin payment to the clearing house.

40
Q

What are the cash or securities to meet margin requirements called?

A

Collateral

41
Q

What is another name for a non clearing member?

A

A dealer member

42
Q

What is a trade repository or swap data repository?

A

Entity that collects and maintains records of OTC derivatives. These platforms act as authoritative registries of key info regarding open OTC derivative trades. Provide regulators with visibility into risk exposures by firm and counterparty.

43
Q

Name some data repositories

A

DTCC
TriOptima
LSE, CME and ICE

44
Q

What is a central counterparty or central clearing house?

A

An organization that exists in various European countries that helps facilitate trading done in European derivatives and equities markets. These clearing houses are often operated by the major banks in the country. The house’s prime responsibility is to provide efficiency and stability to the financial markets that they operate in.
There are two main processes that are carried out by CCPs: clearing and settlement of market transactions. Clearing relates to identifying the obligations of both parties on either side of a transaction. Settlement occurs when the final transfer of securities and funds occur.

CCPs benefit both parties in a transaction because they bear most of the credit risk. If two individuals deal with one another, the buyer bears the credit risk of the seller, and vice versa. When a CCP is used the credit risk that is held against both buyer and seller is coming from the CCP, which in all likelihood is much less than in the previous situation.

45
Q

What is a central securities depositary?

A

Definition of ‘Depository’

On the simplest level, depository is used to refer to any place where something is deposited for storage or security purposes. More specifically, it can refer to a company, bank or an institution that holds and facilitates the exchange of securities. Or a depository can refer to a depository institution that is allowed to accept monetary deposits from customers.

Investopedia explains ‘Depository’

Central security depositories allow brokers and other financial companies to deposit securities where book entry and other services can be performed, like clearance, settlement and securities borrowing and lending.

46
Q

What type of instruments are CCP services provided for?

A
  1. Securities
  2. Exchange-traded futures and options
  3. OTC derivatives
47
Q

Name the two types of margin

A

Initial margin and variation margin

48
Q

What is SPAN?

A

Standardised Portfolio Analysis of risk.SPAN is based on a sophisticated set of algorithms that determine initial margin according to a global (total portfolio) assessment of the one-day risk for a trader’s account.

49
Q

What can margin calls be paid in?

A

Margin calls do not have to be paid in cash, government bonds (collateral) will be accepted as cover for the initial margin.

50
Q

Who provides MSN?

A

Clearing houses that act as CCPs to securities trades are also in a position to provide MSN.

51
Q

Which parties are informed on a buy event in the SETS system?

A

The dealing member, the CCP and EUI (the CSD)

52
Q

Who sends instructions regarding a trade to the CSD for a SEAQ trade?

A

When the exchange member receives a report from SEAQ, it is up to that member and the relevant market maker to send settlement instructions to EUI.

IT in investment Operations IOC (12 decks)

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