Chapter 9 Flashcards
what rights do ordinary give shareholders
basic rights
- right to vote in a company general meetings
- right to a dividend
- right to a surplus on winding up
what rights do preference shares give
offer a fixed dividend
no voting rights
what do derivatives derive their value from
from other products
what is a future
an agreement between 2 parties who agree to buy / sell a specific quantity of a specific asset in the future for an agreed price
who is in a long position
person who agrees to buy in future
who is in short position
person who agrees to sell in future
what is an option
gives the buyer the right to buy (call) sell (put) an asset at a fixed price before a certain date
what does an exchange aim to do
to create a transparent market
why is lower levels of liquidity a disadvantage
it leaves investors unable to crystalise profits / limit losses
what is liquidity risk
the risk that an investor may be unable to sell an asset that they own at a fair price
what happens to spreads/transaction costs when a market is illiquid
the spreads tend to be wider
transactions tend to be higher
in spreads what are the 2 prices
lower price is bid - price at which sold
higher price is offer - price at which buy
what are the 2 capacities that a broker can deal at on a market
deal as principal - firm trading on own behalf
deal as agent - firm trading on behalf of a customer
a broker / dealer has to apply to where to register as a market maker
to the LSE and have to register to a market in a specific security
what is the purpose of a stock borrowing and lending intermediary
they assist in stock lending
what is an interdealer broker meant to do
they act as an agent between the 2 brokers to reduce giving away info about identity
what is SETS used for
continous order book execution system for FTSE LIST and liquid AIM
what is SETSqx used for
it’s a hybrid system
periodic order book execution with market maker support for most other UK shares
what is SEAQ for
it is a quote driven system for any shares that are too illiquid for SETS or SETSqx
what is order driven
used where there is natural liquidity
where there is negotiated prices
what is quote driven
used where there is less natural liquidity
it needs market and price makers
members can compete on both price and volume
how many auctions are there on SETS
3 auctions
what is a limit order
an order to buy and sell a specific volume of shares at a specific price or better
what is an at best order
tells the exchange that the trader wants to buy or sell a particular value of shares at the best possible price
what is the order priority for best order
price then time
when do market makers have to quote prices on a quote driven market
the mandatory quote period
what is the min volume needed to quote
the exchange market size
what is the exchange market size
a measure of the liquidity provided by the exchange and is based on the average number of shares per day
how many auctions are there on SETSqx
5
what are the alternative venues to the LSE
MTF
OTF
darkpool
systematic internaliser
what are GEMMS also known as
primary dealers
who does GEMMS create liquidity in the market
they provide 2 way price quotes on gilts
who can GEMMS make a market on
index linked gilts
non index linked gilts
both
who are GEMMS registered with
the debt management office
who is the DMO
it is part of the government which controls the registering process
what are the obligations of GEMMS
- expected to participate in DMO auctions
- quote firm bid / offer spreads
why do governments issue gilts
to cover the public sector net cash requirement- the different between spending and taxation
who managed a primary market
the DMO through auctions and taps
what is a tap
where the issue of gilts is announced and the investors are invited to tender for the issue
where are gilts registered
the LSE
when firms do deals on gilts where do they have to report it to
the LSE
when firms do deals on gilts where do they have to report it to
the LSE
if a retail client wishes to do business with a GEMM how do they do so
through a broker
a GEMM will not deal directly with a retail client
what is the standard settlement for a gilt trade
T+1
what does stripping a gilt do
converting large domination gilts either into smaller domination gilts or into 0 coupon bonds
what are the 3 different categories of corporate bonds
private placement
bought deal
fixed price reoffer
what is a private placement corporate bond
usually for small issuances directly from the company to institutional / professional investors
what is a bought deal corporate bond
an investment bank buys the whole issue who then sells the bonds on a different prices
what is a fixed price reoffer
syndicate of an investment bank buy the bond who then sells it on at fixed prices to customers of the syndicate
when is underwriting needed for corporate bonds
needed for larger issuances
who are the market makers in the primary market of corporate bonds
essentially the same of GEMMS however they make use of the SEAQ
what are the secondary market for corporate bonds
mainly OTC
some on LSE SAQ and ORB
what is the settlement period for corporate bonds
T+2
what is a domestic corporate bond
UK company buying £ bonds in London
what is a foreign corporate bond
UK company buying $ bonds in NY
what is an international bond
a security where the denomination of the bond and the country of issue are different
what is euro currency
any currency held outside its country of origin
who is the regulator of the Eurobond market place
ICMA
when a deal is struck in the eurobond market who must it be reported to
the ICMA
where are Eurobonds traded
on the OTC market
what is the reporting period for the eurobond market
T+1
what is the standard settlement period for the eurobond market
T+2
what are the venues for the eurobond market
Euroclear
Clear Stream
how are derivatives traded
on an exchange or over the counter
what is the main derivative exchange in the UK
the ICE Futures Europe
London metal exchange is the other one
what does ICE futures europe use to arrange, clear and register settlement on its contracts
Ice Clear Europe
what can over the counter do for contracts
it can have bespoke contracts as they are non-standardised
liquidity on OTC vs the exchange
liquidity on the exchange is lot more than on OTC
what is the European markets infrastructure regulation
it is a regulation of OTC derivatives
what are the 3 requirements for those who trade derivatives
- all OTC derivative trades have to be reported to a trade repository
- all financial and non financial counterparties have to manage risk of the contract
- requirement to use a central counterparty where mandatory clearing is in effect
what is settlement
the process of organising payment and delivery of a security and is the point at which the legal title change hands
where are settlements done through
CREST
where else can settlements be done
on paper using a stock transfer form
when must a central counterparty be used in trades
all securities traded on SETS must be routed through a central counterparty to clear the trades
what is novation
it is the process of making 2 contracts
- 1 between buyer and clearing house
- 1 between seller and clearing house
what is novation
it is the process of making 2 contracts
- 1 between buyer and clearing house
- 1 between seller and clearing house
who acts as the guarantor in the central counterparty service
the clearing house
what is the initial margin
before registration of a deal take place the clearing house will call for collateral from both firms
it is sufficient to cover the risk by providing the guarantee
who acts as the registrar in the central counterparty service
the clearing house
what is the variation margin
it is daily receipts and payments of unrealised profits and losses
i.e. it is used to cover adverse movements from the previous business day
when does settlement risk occur
when either of the 2 transaction do not occur smoothly
what does the LCP counterparty do for investors
it lowers the default risk
what price of sell is at the top of the sell side of an order book
the lowest sell price
what is the International Order book
the LSE exchange where international securities
when should eurobond trades be confirmed
on a T+1 basis
what is the standard settlement in the US
T+2
at what stage does a clearing house become a central counterparty to a trade
when the trade is registered
what execution venues are permitted by MiFID
regulated markets
MTF
systematic internalisers
what are dark pools typically
MTFs that have opted out of the requirement for transparency
where are options settled
ICE Clear Europe
gilts priced above or below par are low risk investments
gilts priced below par
who protects against settlement risk
CREST through delivery vs payment
what is the universal trading platform
used to passing orders to designated market makers for matching against the order book
who is the regulator for the Eurobond market
the ICMA
who is the regulator for the Eurobond market
the ICMA
what is ORB
the LSE’s order book for retail bonds
order driven trading service that allows retail investors access to some gilts, supranational and UK corporate bonds
what is IOB (International Order Book)
it is an order driven system for international depository receipts
what is EQS? (European Quoting Service)
a quote driven system for European listed securities
gilts accrue interest on what basis
actual / actual
what is ICE clear europe
a central counter party service
what is the LCH
the central counter party service used for SETS transactions
what is a systematic internaliser
firms providing market making services directly to their clients
when is a market pre-trade transparent
when it publishes real time data about quotes and orders
what is the MiFID post trade disclosure rule
all firms must disclose completed transactions as soon as possible
if venue is an order book this is done automatically
who receives stamp duty tax
the HMRC
What is the most liquid market
AIM
Order driven liquidity
Most liquid
What is the main feature of a quote driven market
Firms making 2 way prices
What does a larger market size mean for liquidity
More liquid
Can market makers and GEMMs choose which equity/ gilt they wish to deal in
Market makers can choose which securities to trade
GEMMs must deal in all gilt issues or none
Who monitors the OTC derivative market
The international swaps and derivatives association
can ORB be used by retail investors
non
what is bid price
buy
what is offer price
sell
what is the role of a systematic internaliser
to facilitate cross trades between clients
LCH is the central counter party for who
the SETS
Cis the settlement system for GILTS
CREST
