Chapter 5 Flashcards
How quickly do Approved Reporting mechanisms require trade reports?
Approved Reporting Mechanisms require that all trade reports are received within 30 minutes of execution time. If the firm fails to meet this deadline it will be fined on a sliding scale – the later the trade report, the bigger the fine.
What model of trade agreement is used for currency trades and OTC derivatives such as swaps?
Mutual exchange of confirmation
What does COBS rule 16.3.1 mandate?
Rule 16.3.1 (together with COBS 16 Annex R2) mandates the minimum contents of a periodic statement of account for a retail customer.
- The name of the firm
- The name, or other designation, of the retail client’s account
- A statement of the contents and the valuation of the portfolio including
details of:
a. Each designated investment held, its market value or fair value, if
the market value is unavailable
b. The cash balance at the beginning and at the end of the reporting
period
c. The performance of the portfolio during the reporting period
d. The total amount of fees and charges incurred during the reporting period, itemising at least total management fees and total costs associated with the execution and including, where relevant, a statement that a more detailed breakdown will be provided on request
e. A comparison of performance during the period covered by the statement with the investment performance benchmark (if any) agreed between the firm and the client
f. The total amount of dividends, interest and other payments received during the reporting period in relation to the client’s portfolio
g. Information about other corporate actions giving rights in relation to designated investment held in the portfolio
What does COBS rule 16.3.2 mandate? (Conduct of Business)
Rule 16.3.2 deals with the frequency of statements for retail customers. The rule mandates that:
1. Statements must be sent to retail clients at least once every six months, but the client is entitled to insist on a statement being sent every three months
2. Firms must inform retail clients that they have the right to demand a 3 monthly statement
It grants an exception when there are no transactions to report for the period – there is no need to send a six-monthly or three-monthly statement if this is the case, but the firm must still send an annual statement.
What does COBS rule 16.3.3 mandate?
Rule 16.3.3 mandates the contents of a trade confirmation message to a retail client.
There is a further obligation on firms that hold client assets, and that is to provide tax vouchers to the holders. The tax voucher is evidence of the fact that the income has been paid and shows whether or not any income tax was withheld from the payment.
What is SCORE? What must a company be to join SCORE?
- The Standardised Corporate Environment (SCORE) - SCORE is based on a closed user group, administered by SWIFT, where corporates can interact with financial institutions. To be eligible for SCORE, corporates must be listed on a regulated stock exchange of a country which is a member of the Financial Action Task Force (FATF)*. Subsidiaries can also join SCORE if they are majority-owned by an eligible company (i.e. listed in one of the FATF countries), duly incorporated, and in good financial standing and subject to regular audits by an independent audit firm in accordance with internationally recognised accounting standards.
What is MA-CUG?
Member-Administered Closed User Groups (MA-CUG) – companies not eligible for the SCORE model can join SWIFT by registering in a closed user group set-up and being managed by their financial institution (i.e., the financial institution decides which customers can participate). Within the MA-CUG, a corporate can communicate only with its bank, which decides which kinds of messages and files (payments, treasury, reporting and securities) can be exchanged. If a corporate wishes to communicate with several banks it can register in multiple MA-CUGs, resulting in similar multi-banking capabilities as SCORE. Participants that use SCORE may only send and receive messages that conform to SWIFT standards and are therefore capable of being network validated. Participants in an MA-CUG may send and receive any data they care to, but SWIFT will not, and cannot, network validate the messages.
For which services will SWIFTNet FileAct replace the existing FIN service
Services handling larger volumes of data. Mass payment and reporting services.
What is SWIFTNet InterAct?
This is SWIFT’s interactive communications service that is based on the exchange of request and response messages between two parties. The exchange of messages can be either synchronous or asynchronous. Effectively, this means that it can be used either for direct application-to-application transactional messaging, as is the case of CLS Bank which is based on this service; or it can be utilised in a ‘push’ architecture to provide real-time status and other information. This will also form the basis of the successor to the FIN service.
Name some FIX business message types
- Indications of interest
- Orders and order acknowledgement
- Fills
- Account allocations
- News, email, program trading lists; and
- Administrative messages
What security types do FIX messages support?
- Equities
- Bonds
- Depositary Receipts
- Derivatives
- Futures
- Foreign exchange-trading
What is FpML?
FpML – Financial Products Markup Language
FpML (Financial products Markup Language) is an XML message standard for the OTC derivatives industry.
All categories of privately negotiated derivatives will eventually be included within the standard. The standard is managed by the ISDA on behalf of a community of investment banks that make a market in OTC derivatives. The standard is freely licensed, so any firm that trades the instruments that it supports may use it in their own software.
The current version is Version 5, Service Pack 2, which was released in April 2009. The core scope includes the products of Foreign Exchange (FX), Swaps, and Options, Interest Rate Swaps, Inflation Swaps, Asset Swaps, Swaptions, Credit Default Swaps, Credit Default Swap Indices, Credit Default Swap Baskets, Tranches on Credit Default Swap Indices, Equity Options, Equity Swaps, Total Return Swaps and many others. The core processes include trading, valuation, confirmation, novations, increases, amendments, terminations, allocations, position reporting, cash flow matching, a formal definition of party roles, as well as trade notification between asset managers and custodians.
FpML is distinct from similar financial standards such as SWIFT because it provides no network or specification of a transport mechanism.
What is XBRL?
XBRL is an abbreviation for Extensible Business Reporting Language. This is an XML message standard for exchanging information about corporate data such as balance sheets and profit and loss accounts between the company concerned and its auditors, regulators, customers, research analysts and other interested parties. XBRL standards are compatible with ISO 20022.
Historically the standard has been used only to transmit accounting data, but there are now moves to adopt it as a standard for the company concerned to announce corporate action data to the securities markets.
What is Python?
Python is an open-source, dynamic programming language that is used in a wide variety of application domains. It is available for all major operating systems: Windows, Linux/Unix, OS2 and Mac among others.
In 2010, the US Securities and Exchange Commission (SEC) published a proposal that, among other things, outlined the implementation and use of a Python program that would annotate asset-backed securities, allowing potential investors to have periodic access to an ABS’s pool asset performance, including the interest rate, level of prepayments, defaults and losses-given-defaults.
The Waterfall computer program as it is called in the proposal would provide potential investors with detailed information about these securities. By doing so, the program would effectively reduce (but not eliminate) an investors’ dependency on third-party analysis by providing updated information typically available only in the prospectus. This means that those investment banks that issue asset-backed securities would need to use the Waterfall program to provide updated information to investors.
What is R?
R is an open-source programming language and software environment for statistical computing and graphics. The R language has become a de facto standard among statisticians for developing statistical software, and is widely used for statistical software development and data analysis. Itcontains a number of built-in mechanisms for organising data, running calculations on the information and creating graphical representations of data sets. Statisticians, engineers and scientists are free to improve the software’s code or write variations for specific tasks. Packages written for R add advanced algorithms, coloured and textured graphs, and mining techniques to dig deeper into databases.
List SSI data
Depot – the account with the settlement agent that is used to record transactions and balances in security quantities is often referred to as the ‘depot account’. Nostro – the account with the settlement agent that is used to record transactions and balances in money amounts is often referred to as the ‘nostro account’. Trading party – the identity of the party with which the firm is trading. The firm is also a trading party
Asset class – identifies the type of asset concerned
Settlement currency – identifies the currency of settlement
Stock depot – identifies the settlement agent that will accept or make delivery of this type of asset on behalf of the trading party
Depot account code – the relevant account number at the stock depot
Cash nostro – the settlement agent that will accept or make payments for this type of asset on behalf of the trading party
Nostro account code – identifies the relevant account number of the cash nostro Instruction method – the method that the trading party will use to send instructions to the settlement agent
What might a markets table contain?
A markets table needs to be set up to provide information about the default settlement period, the usual settlement currency and the fees and charges that apply. Each instrument record must contain a market code.
Are ISIN codes unique?
Yes
Are sedol codes unique? If traded on exchanges in four currencies, how many sedols will exist?
No. Four
What is the generic formula for calculating bond prices?
Principal amount = quantity traded * price * (price multiplier/price divisor)
In order to calculate interest on a bond what parameters are required?
- The date from which interest became payable
- The date that the borrower will make the next interest payment
From 1 and 2, we can derive the number of days in the current interest
period - The date when the interest ceases to become payable – usually this is the
maturity date of the bond - The rate of interest that will be paid
- The interest calculation method. There are a number of commonly used
methods, including:
a. 30/360 – there are deemed to be 360 days in a year, and all months are deemed to be 30 days long
b. Actual/360 – there are deemed to be 360 days in a year, and we follow the conventional calendar for determining the days in a month
c. Actual/365 – we follow the actual calendar. Although this rule is usually expressed as ‘over 365’; if there are 366 days in a year then 366 is used as the divisor
d. Actual/Actual – the conventional calendar is used for all calculations
What is the formula for calculating interest actual/actual?
Accrued interest = t/s * c/n
Where:
t= the actual number of calendar days from (and including) the last
interest payment date (or coupon date); to (and including), the value
date (the date that the trade is expected to settle)
s= the actual number of calendar days in the current interest period c= the annual rate of interest
n= the number of interest payments per annum
Accrued interest worked examples …
With the majority of non-gilt bonds, the basis of this accrued interest is calculated on a “30/360” basis. This assumes that each month has 30 days, and each year has 360 days. Thus, let us assume that we are buying £10,000 nominal of the Tesco 6% 13 June 2008 as of today’s date (12th December 2007). The market price is 99.80 and the trade is for settlement in three days time
£10,000 nominal of Tesco 5.5% 13 Dec 2019 @ 105.5 = £10,550
The settlement date is the 12th March 2010. Thus, we have to calculate how much accrued interest that we should reimburse the seller for. The bond pays a coupon annually and the last payment was the 13th Dec 2009.
Period 13 Dec through to 12 March = Total 89 days on a 30/360 basis.
So, the accrued interest will equal 29/360 days times the annual coupon, times £10,000 nominal, or:
30/360 x 5.5/100 x £10,000 = £44
Thus, our contract note will show roughly the following:
£10,000 nominal of Tesco 5.5% Dec 2019 bonds @ 99.80 = £10,550
Accrued interest = £44
Commission = £25
Total = £10,619
Note: The price shown on the screen will not include accrued interest and will be known as the “clean price”. The effective price that you pay, including any accrued is known as the “dirty price”.
Accrued interest for gilts
The Debt Management office produces a detailed document on calculating the accrued interest on gilts which can be downloaded in pdf form by clicking here. This covers the subject in some detail, including the more complex calculations performed on index linked gilts.
At the risk of oversimplifying the subject, the main variations from the calculation process shown above are as follows:
1) Most gilts pay coupons twice a year (the majority of non gilts pay annual coupons). The exceptions to this rule are some of the undated bonds such as 2.5% Consuls.
2) The accrued interest is calculated on “actual/actual” basis, where the true number of calendar days is used to determine the apportionment of the dividend.
As well as price calculation and interest accrual calculation methods, what other information is stored for an instrument?
- The name of the security
- The date it was issued
- The date that it matures or expires (if any)
- The default trading book
- The minimum size of a trade
- The number of shares/units in issue
- The security issuer – as some issuers issue many securities, the firm may wish
to apply a credit limit to the issuer as a whole
Name the four external indentifiers that a company needs to hold for itself.
BIC code – is used for professional trade parties. Another – the UK National Insurance Number – is necessary if the firm offers tax-sheltered investments such as pensions and individual Savings Accounts (ISAs) to UK private investors. The third is the IBAN code which is increasingly being used to identify counterparties’ bank and depot accounts in Europe. The fourth, and newest, trading party code is the Legal Entity Identifier (LEI).
Describe the format of a BIC code
The code is eight or eleven characters long, made up of:
- Four characters – bank code
- Two characters – ISO 3166-1 alpha2 country code
- Two characters – location code
- Three characters – branch code, plus optional (‘XXX’ for primary office)
Where an eight-digit code is given, you may assume that it refers to the primary office.
Describe the format of an IBAN CODE
The IBAN consists of an ISO 3166-I alpha 2 country code, followed by two check digits (represented by kk in the examples below), and up to thirty alphanumeric characters for the domestic bank account number, called the BBAN (Basic Bank Account Number). It is up to each country’s national banking community to decide on the length of the BBAN for accounts in that country, but its length must be fixed for any given country.
EXAMPLE OF A UK IBAN CODE
Format: GBkk BBBB SSSS SSCC CCCC CC Example: GB65 LOYD 3000 00001195 87
Where:
GB is the country code for the UK
65 is a check digit
LOYD is abbreviation for Lloyds TSB Bank
3000 00 is the branch at Lloyds TSB where the account is held
00 1195 87 is the account number concerned at that branch
The IBAN must not contain spaces when stored electronically. When printed on paper, however, the norm is to express it in groups of four characters, the last group being a variable length.
What information does a firm need to store about its corporate clients?
- Full name and address
- Any additional names and addresses to which trade confirmation should be
sent - Country of incorporation or residence
- Any credit limit granted to this party
- The commission scale that applies to this party
- Type of party, e.g. exchange, counterparty, professional investor, private
investor
What information must a firm store for professional investors?
For professional investors:
1. The date that they commenced dealing with this firm
2. The date that a client agreement was sent to them
3. The date that they signed and returned the client agreement
4. Which fund manager or financial adviser acts for them
What information must be stored for private investors?
- The date that they commenced dealing with this firm
- The date that a client agreement was sent to them
- The date that they signed and returned the client agreement
- Which fund manager or financial adviser acts for them
Plus - The relationship held with them, e.g. execution only broker, advisory broker, discretionary broker
- Their appetite for risk, and how it was assessed
- Connected account details
List internal reference data that a company holds about itself?
- Base currency – a firm that invests in securities denominated in many currencies will wish to value them in the currency in which it produces its P&L account. Usually, this means that a firm that is incorporated in the UK will have a base currency of GBP, a firm incorporated in the US will chose USD.
- Commissionratesandcalculationmethods
- Credit limits – any credit limits the firm wishes to apply to its trading parties
or individual trades, trading books and countries in which trading parties are incorporated or resident need to be set up as reference data objects. Some firms also set up limits that apply to individual issuers of securities, and stock market sectors such as pharmaceuticals.
