Chapter 3: Technology and the Functional Flow of Financial Instruments Flashcards
What is an MTF?
Multilateral trading facility
Brings together multiple parties interested in buying or selling financial instruments
What is an OTF, introduced by MiFID II
Organised trading facility.
What are the 3 classifications for investment exchanges, per FCA?
Recognised Investment Exchange e.g. LSE
Recognised Overseas Investment Exchange e.g. NASDAQ
Designated Investment Exchange - not regulated
What are the top 3 RIE (recongised investment exchanges)
LSE- Stocks
LME - Metals
CBOE Europe
What are the 3 types of exchange order-handling systems?
Order driven
Submit bid or offer to a system, matching system decides when a deal is made. Anonymous
Quote driven
Market makers take on the obligation of always making sure there is a two way price. Purchase off market maker
Hybrid systems offer both;
Order queue, but market makers step up to cover liquidity if needed
What are the 4 trading systems offered by LSE
SETS - hybrid - all securities
SETSqx hybrid - 4 auctions a day
SEAQ - quote driven
Order Book for Retail Bonds - hybrid - initial auction followed by continuous trading supported by market makers
What is a funds platform?
Services used my intermediaries and clients to manage investments. One stop shop.
Connected to market, tax-efficient wrappers.
What is required for In-House development of trading venues?
Data exchange specifications (DESs) CREST Manual on messages
Data dictionary, what it means how it connects
Data security standards
Service level standards, when we can communicate to venue
Testing facilities, CREST test window
What is a trading venue package?
Modular levels of service offered to different clients
What two services do clearing houses (CCPs) provide?
Settlement and Custody services
Central Counterparty Services
What are the 4 UK Recognised Clearing Houses?
LME Clear ltd
Euroclear UK & Ireland (EUI)
LCH ltd
ICE Clear Europe ltd
As per FSA 2012
What is EUI and its equivalent institutions commonly known as? DTC, SIX SIS etc
CSDs, Central Securities Depositories
What happens when a trade is originated in the SETS system?
Trade is novated by a CCP, take on obligations of both parties
Enables multilateral settlement netting
How do company registers get updated?
EUI has connections to the systems used by registrars
Registers update and issue share certificates
What 4 other services does EUI provide?
Custody
Dividend payments
COAC entitlements
Facilities for stock lending and borrowing
What assets do Central Counterparties Cover?
securities
exchange-traded futures and options
OTC derivatives
How does SETS work?
When an order to buy from Party A is matched with an order to sell from Party B in order-driven market systems such as SETS, neither of the parties is aware of the identity of the other party.
As soon as the exchange has matched the orders, its systems inform a clearing house. The clearing house then takes over the obligations.
What is the process of substituting a contract from one party to another called?
Novation.
As a result of novation, the clearing house has become the CCP – every other counterparty settles its obligations with the clearing house and not with each other.
What are the advantages to CCPs?
Anonymity, only make txns with CCP
Netting of positions
Reduction in credit risks (FCA monitors CCP)
How do CCPs monitor the ability of members to meet obligations?
They must place collateral with CCPs to meet margin requirements.
What happens if the share price of ABC falls here?
On 1 February, Party A buys a futures contract that obliges it to take delivery of 1,000 shares in ABC
plc on 30 March in return for payment by Party A of £10 per share. So, the total amount it has to pay
to the CCP if it still holds the contract on 30 March would be £10,000.
- However, by 7 February, the price of ABC plc shares is only £8 per share. Party A stands to lose £2,000 if it still holds the position on 30 March. The CCP, therefore, requires Party A to make a margin payment of £2,000 to cover the CCP’s risk.
- If, at some time between 8 February and 30 March, the price of ABC shares rises to £9 per share, then the CCP will refund £1,000 to Party A. If, however, it falls to £7 per share, then the CCP will demand
another £1,000 from Party A.
What methodology do CCPs use to calculate initial margin?
SPAN (Standardized Portfolio Analysis of Risk)
Assessment of one-day risk for an account
How do variation and initial margin calls differ?
Initial margin calls can be covered by bonds and other collateral
Variation margin calls must be covered by cash
How does Multilateral Settlement Netting work with CCPs?
If Party A buys 100 shares of ABC plc in one day in 100 different trades, these can be netted by the CCP into one transaction.
Lowers settlement fees
What are the 3 LSE CCPs?
LCH
SIX X-Clear (Swiss)
EuroCCP (CBOE)
What is LCHs service for clearing of swaps?
SwapClear
What is LCHs service for clearing of repos?
RepoClear
How is margin managed by CCPs in SETS trades?
Receiver of the shares must cover any fall in the market price of shares.
What is the EUI trade flow for SEAQ trades?
Investor A places order to buy with Exchange Member A
When this is fulfilled by a market maker both instructions are fed into EUI
EUI settles trade if both parties sufficient
What is a trade repository?
Entity that centrally collects and maintains the records of OTC derivatives.
What is the purpose of trade repositories?
Provide regulators with visibility of risk exposures of firms and CPs
EMIR and Frank-Dodds
What are the two primary suppliers of Real-Time market data?
Refinitiv, Bloomberg
What functionality is offered by Real-Time information vendors? (3)
Pre-trade - liquidity and price discovery. Consolidate market data
Pre-trade - analytics. Price complex derivatives
Trade execution and post trade services. Order routing hubs
Refinitiv TNS - FX trade confirmation
What are investment firms obliged to report under MiFIR?
Real-Time Post-Trade transparency
(price forming)
What are the two types of trade reporting timelines under MiFIR?
RTS1 - Shares, depositary receipts, ETFs, certs etc
RTS2 - Bonds, structured finance products, emission allowances, derivatives
What are the two time limits to the two reporting timeline under MiFIR?
RTS1 - <1m
RTS2 - <5m
What is the difference between trade and transaction reports?
Trade reports are for public use
Transaction reports are for regulator/FCA use
When must transaction reports be published to regulator?
t+1
What does SFTR stand for?
Securities Financing Transactions Regulation Reporting
Is STFR an EU Regulation or Directive and how do they differ?
the SFTR is an EU Regulation, as opposed to an EU Directive, meaning that it has direct effect in each of the EU member states, without the need for further implementing national legislation.
What are securities financing transactions?
repos
stock/commodities borrow/loan
margin lending transactions
What are the types of clearing house membership?
A firm can have its trades cleared by another firm, called a General Clearing Member (GCM) who manage margin requirements of clients
A firm that does not clear its own trades is known as a Non-Clearing Member (NCM), or dealer member.
