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CISI: Derivatives > Chapter 3: Market Structure > Flashcards

Chapter 3: Market Structure Flashcards

1
Q

What is Europe’s largest exchange?

A

Euronext

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2
Q

What is Euronext’s trading platform called?

A

Optiq

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3
Q

Which entities clear Euronext trades? (2)

A

LCH SA
EuroCCP

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4
Q

In which UK exchange is open outcry still used?

A

London Metal Exchange

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5
Q

What is the CME?

A

Chicago Mercantile Exchange

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6
Q

What is the largest US options exchange?

A

CBOE - Chicago Board Options Exchange

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7
Q

What is the world’s largest derivative exchange?

A

Eurex

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8
Q

Which exchange introduced LEAPs?

A

CBOE - Chicago Board Options Exchange

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9
Q

What are the 3 main exchange membership categories?

A

Brokers
Dealers
Broker-dealers

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10
Q

What can a broker do?

A

May only trade for third parties

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11
Q

What can a dealer do?

A

May trade for their own account, and other members if approved by regulatory body

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12
Q

What can broker-dealers do?

A

Trade for their own account and third-parties

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13
Q

What do all exchanges have?

A

A clearing house

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14
Q

What does a clearing house do?

A

Acts as a central counterparty (CCP) to all trades executed on the exchange between clearing members

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15
Q

What is the benefit of a CCP?

A

No counterparty risk, clearing house guarantees all deliveries

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16
Q

What are the two types of clearing member?

A

General Clearing Members (GCMs)
Individual Clearing Members (ICMs)

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17
Q

What are General Clearing Members (GCMs)?

A

Can clear their own principal trades, on behalf of clients and other non-clearing members

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18
Q

What are Individual Clearing Members (ICMs)?

A

Only able to clear their own principal trades and trades on behalf of their clients

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19
Q

What is clearing?

A

The correct and timely transfer of securities and funds between buyers and sellers

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20
Q

Which type of clearing member is required to have a higher level of financial resources?

A

General Clearing Members (GCMs) over Individual Clearing Members (ICMs)

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21
Q

What other terminology for members do some exchanges use?

A

Clearing members (CMs) or Trading members (TMs)

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22
Q

What can Trading Members (TMs) do?

A

They can collect collateral and execute trades from clients but must have a relationship with a CM.

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23
Q

What is an OTC market?

A

A decentralised market in which participants trade directly between two parties without a central exchange or broker

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24
Q

Who acts as market-makers in the OTC market?

A

Dealers

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25
Q

Why is hedging a key utility of OTC markets?

A

Allows for hedging without significant margining requirements, tailor products

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26
Q

What is the difference between ‘high-touch’ and ‘low-touch’ trading services?

A

OTC considered high-touch as often desks will provide 24/7 advice to clients whereas exchange trading is more automated

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27
Q

What is pit trading?

A

Open outcry / Ring trading
Face to face trading, where traders will quote prices
Orders shouted out

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28
Q

Who can pit trade on LME?

A

Must have membership, these are valuable due to limited availability.
Can be leased / sold

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29
Q

For what kind of trades is CBOTs open outcry trading floor used for?

A

Complex trades as they are difficult to quote electronically

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30
Q

Who uses telephone trading?

A

Only between clients and executing brokers
Trader at broker will then go on to execute the trade in the market

31
Q

What is specified in an open outcry order?

A
  • the asset
  • whether it is a buy or sell order
  • the size of order (number of contracts or lots)
  • the expiry month, and
  • price conditions (if any)
32
Q

What is a market-if-touched (MIT) order?

A

Combination of a limit and a market order.
Market order executed if price crosses a limit

33
Q

What is an opening order?

A

Order with or without a price that is executed in first two minutes of trading

34
Q

What is an immediate or cancel order?

A

Fills immediately or will be cancelled, fill-or-kill

35
Q

What is a cross trade?

A

Where a match has been established by negotiation prior to entry in the system

36
Q

What is a basis trade?

A

Exchange of financial asset with a futures contract in a privately negotiated transaction

37
Q

When must block trades be reported?

A

Between 5 mins to an hour of execution

38
Q

What are the four main advantages of trading OTC?

A

Products can be uniquely made to fit requirements
Confidentiality, as trades can be negotiated between client and broker
Mitigated counterparty risk
Lighter on BO teams, as no daily margin

39
Q

What is risk pricing?

A

Requesting a quote for a whole large order from an OTC counterparty to prevent slippage

40
Q

How has counterparty risk in OTC transactions been mitigated since 2008?

A

OTC trades have to be reported to a facility which is allows for surveillance by regulators

41
Q

What are the three main downsides to OTC trading?

A

Lower liquidity
High cost to complex trades
Higher credit risk

42
Q

What is the process called where a clearing house becomes counterparty?

A

Novation

43
Q

What is cash settlement?

A

Net cash payment on the difference between the final positions closing price and the previous closing price

44
Q

What is cash settlement often known as?

A

Contract for difference (CFD)

45
Q

How is a buyer selected for physical settlement?

A

Randomly by the clearing house

46
Q

Why do long-dated gov bonds differ from most financial futures?

A

Multiple underlying assets can be delivered
Exchange will have a list of eligible bonds

47
Q

Who initiates delivery in futures vs options?

A

Futures - Seller
Options - Buyer

48
Q

How does delivery work for commodity futures?

A

Exchanges will have authorised warehouses

49
Q

What is dual capacity?

A

The ability of a member to act as either principal or agent in any transaction

50
Q

What is cross trading?

A

When a brokerage firm matches a buy order of one customer against the sell order of another, when one side is non-competitive (where customer has not specified a price)

51
Q

When is cross trading permissible?

A

When executed in accordance with the Commodity Exchange Act, Commodity Futures Trading Commission (CTFC)

52
Q

When can cross trading take place? (2)

A

when a member
* has a buyer and a seller for the contract at a given price, or
* is willing to deal with a client as principal.
member takes the trade as principal

53
Q

What is an opening trade?

A

One that creates a position in the market, and incurs obligations

54
Q

What is a closing trade?

A

One that offsets an existing position, extinguishes any obligations

55
Q

What is open interest?

A

Total number of contracts for any delivery month that remain open

56
Q

Does open interest include short positions?

A

Open interest is the sum of all open long positions or the sum of all open short positions, not the sum of both.

57
Q

What is OATS?

A

Order Audit Trail System
Exchanges track all orders

58
Q

What is trade registration?

A

When the trade is reported into the administration system that is used by the exchange.

59
Q

What is the house account?

A

For all proprietary trades of the clearing member, no client positions

60
Q

What is pre-registration?

A

A member firm indicating that a deal it is doing should be allocated/given-up to a second member

61
Q

What is pre-registration sometimes known as? (2)

A

Allocation/Give-up

62
Q

What is a give-up?

A

Give-ups are the sending of a trade to another member of the exchange.

63
Q

How is risk mitigated with allocated transactions?

A

Master Give-Up Agreements
Set the legally-binding framework that governs the relationship between members in a give-up.
Includes compensation clauses

64
Q

Why else may give-ups be performed?

A

Shortages of trading staff at a give-in firm
Preserve anonymity

65
Q

Why are give-up trades performed?

A

Separate the execution and the clearing function.
A customer might wish to trade (execute) through one exchange member but state that the trade should be given up to the customer’s usual clearing broker.

66
Q

GIVE UP EXAMPLE

A

Example
Member firm ABC executes, confirms and matches a trade which it pre-registers, notifying the system that the trade should be allocated to firm DEF (another member).

ABC gives up the trade to DEF. In turn, DEF will claim the trade, which will be registered to DEF as a house, segregated or non-segregated transaction.

67
Q

What must member firms do to remain compliant with exchanges?

A

Compile trade reports and sent to the exchange within a certain time frame

68
Q

Are OTCs subject to exchange reporting?

A

Nope, but they must be input into internal systems so they can be managed

69
Q

What are the kinds of trades that need to be manually reported to exchanges?

A

Block and basis trades, rest are done automatically

70
Q

To who are exchange price feeds available?

A

Quote vendors - Bloomberg
Members

71
Q

What does each futures expiry month have?

A

A unique identifier
Jan - F
June - M
Dec - Z

72
Q

Why is it important for clients to monitor open interest?

A

So they are aware of their exposure at all times, they can have a credit limit with their broker

73
Q
A

CISI: Derivatives (6 decks)

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