Chapter 4

Question 0

How does HMRC value holdings for CGT purposes?

Answer 0

1. If shares are bought and sold on the same day, use the cost of those shares
2. If shares are sold that have been bought in the 30 days before the sale, use the cost of those
   shares
3. For all other holdings, use the weighted average price method

Question 1

What is used for the opening average price on day two in a mark-to-market calculation?

Answer 1

The closing mark-to-market price on day one, i.e. The closing bid price.

Question 2

What is the Thomson Reuters trade notification service?

Answer 2

Real time messaging hub for confirming FX trade info back to counterparties

Question 3

What type of investment exchange is based outside the uk but admits uk firms as members

Answer 3

ROIE

Question 4

What is a trading book?

Answer 4

The portfolio of financial instruments held by a brokerage or bank. Financial instruments in a trading book are purchased or sold to facilitate trading for the institution’s customers, to profit from trading spreads between the bid and ask prices, or to hedge against various types of risk. Trading books can range in size from hundreds of thousands of dollars at the smallest institutions to tens of billions at the largest financial institutions. Most institutions employ sophisticated risk metrics to manage and mitigate risk in their trading books.

Question 5

What info do investment decision makers need?

Answer 5

Cash flow forecasts
Economic forecasts and research recommendations
Market data
Performance measurement applications
Modelling (what if) tools

Question 6

Name some common sell side firms order management systems.

Answer 6

Omgeo - trade suite and oasys
TR - autex
Bloomberg - poms and toms

Question 7

With which type of instruments do sell side firms act as principal?

Answer 7

Sometimes equities

Always bonds, forex, OTC derivatives

Question 8

For which types of instruments do sell side firms act as agent?

Answer 8

Sometimes equities

Always futures and options

Question 9

What is PRIN 6

Answer 9

Customers interest

Question 10

What is PRIN 8

Answer 10

Conflicts of interest

Question 11

What confirmation elements are sent to a fund manager by the sell-side firm?

Answer 11

Name of the client
Name of the stock
Trade date
Value date
Price
Net amount incl fees and charges and for bonds accrued interest
Whether agent or principal
Name of exchange

Question 12

What is in an affirmation message?

Answer 12

Who clients are and shares to be allocated to each

Question 13

What is the final step in an order flow between buy side and sell side firms

Answer 13

Both sides issue settlement instructions to their custodians

Question 14

What is the OASYS Global system?

Answer 14

An ETC

Question 15

What types of trades are corporate bonds handled as?

Answer 15

Principal trades

Question 16

Where do the sell-side firms make money on principal trades?

Answer 16

Difference between buy and sell prices

Question 17

Where do sell side firms make money on agency trades

Answer 17

Charging commission

Question 18

What is the settlement cycle?

Answer 18

Difference between trade date and value date (expected settlement date)

Question 19

Name some examples of performance measurent.

Answer 19

Daily performance
Customised segmentation by portfolio
Currency versus market
Individual security level performance

Question 20

What do sell side firms that deal as principal need access to?

Answer 20

Support for the trading book and mark-to-market. Calculation of realised and unrealised P&L.

Question 21

Name types of commission calculation

Answer 21

Flat fee
Percentage 
Basis points
Per unit 
Sliding scale
Reducing scale

Question 22

Name two reasons that commission may be charged by more than one broker

Answer 22

Cross border trading

Split services

Question 23

Name some other fees and expenses

Answer 23

SDT - final investor ( STF)
SDRT - payable by the buyer
PTM levy

Question 24

What is arbitrage?

Answer 24

the simultaneous buying and selling of securities, currency, or commodities in different markets or in derivative forms in order to take advantage of differing prices for the same asset.
“profitable arbitrage opportunities”

Question 25

What are circuit breakers

Answer 25

Mechanisms introduced by the NYSE to halt trading for 5 mins on any S&P 500 stock that changes price by more than 10 % in a five minute period

Question 26

How is credit risk mitigated?

Answer 26

CSD arranging DvP and for trades between exchange members executed through an order driven market they are novated by a CCP

Question 27

How is market risk mitigated?

Answer 27

Diversification

Hedging

Question 28

What is the market risk measurement technique?

Answer 28

Mark to market

Question 29

What is the credit risk measurement technique?

Answer 29

VaR

Question 30

What is average price or weighted average?

Answer 30

Average price per unit of a position

Question 31

What are the three parameters of VaR

Answer 31

Time horizon
Confidence level
Unit of currency

Question 32

How might buy side orders be communicated?

Answer 32

1. Telephone/fax
2. Secure web page provided by the sell-side firm
3. SWIFT message
4. Entering the order into the sell-side firms OMS. Typically, using a third-party hub and spoke
   order routing service, providers of these services include:
   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