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IMC Unit 1 > Chapter 9 > Flashcards

Chapter 9 Flashcards

1
Q

what rights do ordinary give shareholders

A

basic rights
- right to vote in a company general meetings
- right to a dividend
- right to a surplus on winding up

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2
Q

what rights do preference shares give

A

offer a fixed dividend
no voting rights

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3
Q

what do derivatives derive their value from

A

from other products

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4
Q

what is a future

A

an agreement between 2 parties who agree to buy / sell a specific quantity of a specific asset in the future for an agreed price

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5
Q

who is in a long position

A

person who agrees to buy in future

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6
Q

who is in short position

A

person who agrees to sell in future

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7
Q

what is an option

A

gives the buyer the right to buy (call) sell (put) an asset at a fixed price before a certain date

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8
Q

what does an exchange aim to do

A

to create a transparent market

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9
Q

why is lower levels of liquidity a disadvantage

A

it leaves investors unable to crystalise profits / limit losses

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10
Q

what is liquidity risk

A

the risk that an investor may be unable to sell an asset that they own at a fair price

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11
Q

what happens to spreads/transaction costs when a market is illiquid

A

the spreads tend to be wider
transactions tend to be higher

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12
Q

in spreads what are the 2 prices

A

lower price is bid - price at which sold
higher price is offer - price at which buy

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13
Q

what are the 2 capacities that a broker can deal at on a market

A

deal as principal - firm trading on own behalf
deal as agent - firm trading on behalf of a customer

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14
Q

a broker / dealer has to apply to where to register as a market maker

A

to the LSE and have to register to a market in a specific security

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15
Q

what is the purpose of a stock borrowing and lending intermediary

A

they assist in stock lending

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16
Q

what is an interdealer broker meant to do

A

they act as an agent between the 2 brokers to reduce giving away info about identity

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17
Q

what is SETS used for

A

continous order book execution system for FTSE LIST and liquid AIM

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18
Q

what is SETSqx used for

A

it’s a hybrid system
periodic order book execution with market maker support for most other UK shares

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19
Q

what is SEAQ for

A

it is a quote driven system for any shares that are too illiquid for SETS or SETSqx

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20
Q

what is order driven

A

used where there is natural liquidity
where there is negotiated prices

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21
Q

what is quote driven

A

used where there is less natural liquidity
it needs market and price makers
members can compete on both price and volume

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22
Q

how many auctions are there on SETS

A

3 auctions

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23
Q

what is a limit order

A

an order to buy and sell a specific volume of shares at a specific price or better

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24
Q

what is an at best order

A

tells the exchange that the trader wants to buy or sell a particular value of shares at the best possible price

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25
Q

what is the order priority for best order

A

price then time

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26
Q

when do market makers have to quote prices on a quote driven market

A

the mandatory quote period

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27
Q

what is the min volume needed to quote

A

the exchange market size

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28
Q

what is the exchange market size

A

a measure of the liquidity provided by the exchange and is based on the average number of shares per day

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29
Q

how many auctions are there on SETSqx

A

5

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30
Q

what are the alternative venues to the LSE

A

MTF
OTF
darkpool
systematic internaliser

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31
Q

what are GEMMS also known as

A

primary dealers

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32
Q

who does GEMMS create liquidity in the market

A

they provide 2 way price quotes on gilts

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33
Q

who can GEMMS make a market on

A

index linked gilts
non index linked gilts
both

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34
Q

who are GEMMS registered with

A

the debt management office

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35
Q

who is the DMO

A

it is part of the government which controls the registering process

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36
Q

what are the obligations of GEMMS

A
  • expected to participate in DMO auctions
  • quote firm bid / offer spreads
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37
Q

why do governments issue gilts

A

to cover the public sector net cash requirement- the different between spending and taxation

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38
Q

who managed a primary market

A

the DMO through auctions and taps

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39
Q

what is a tap

A

where the issue of gilts is announced and the investors are invited to tender for the issue

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40
Q

where are gilts registered

A

the LSE

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41
Q

when firms do deals on gilts where do they have to report it to

A

the LSE

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42
Q

when firms do deals on gilts where do they have to report it to

A

the LSE

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43
Q

if a retail client wishes to do business with a GEMM how do they do so

A

through a broker
a GEMM will not deal directly with a retail client

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44
Q

what is the standard settlement for a gilt trade

A

T+1

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45
Q

what does stripping a gilt do

A

converting large domination gilts either into smaller domination gilts or into 0 coupon bonds

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46
Q

what are the 3 different categories of corporate bonds

A

private placement
bought deal
fixed price reoffer

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47
Q

what is a private placement corporate bond

A

usually for small issuances directly from the company to institutional / professional investors

48
Q

what is a bought deal corporate bond

A

an investment bank buys the whole issue who then sells the bonds on a different prices

49
Q

what is a fixed price reoffer

A

syndicate of an investment bank buy the bond who then sells it on at fixed prices to customers of the syndicate

50
Q

when is underwriting needed for corporate bonds

A

needed for larger issuances

51
Q

who are the market makers in the primary market of corporate bonds

A

essentially the same of GEMMS however they make use of the SEAQ

52
Q

what are the secondary market for corporate bonds

A

mainly OTC
some on LSE SAQ and ORB

53
Q

what is the settlement period for corporate bonds

A

T+2

54
Q

what is a domestic corporate bond

A

UK company buying £ bonds in London

55
Q

what is a foreign corporate bond

A

UK company buying $ bonds in NY

56
Q

what is an international bond

A

a security where the denomination of the bond and the country of issue are different

57
Q

what is euro currency

A

any currency held outside its country of origin

58
Q

who is the regulator of the Eurobond market place

A

ICMA

59
Q

when a deal is struck in the eurobond market who must it be reported to

A

the ICMA

60
Q

where are Eurobonds traded

A

on the OTC market

61
Q

what is the reporting period for the eurobond market

A

T+1

62
Q

what is the standard settlement period for the eurobond market

A

T+2

63
Q

what are the venues for the eurobond market

A

Euroclear
Clear Stream

64
Q

how are derivatives traded

A

on an exchange or over the counter

65
Q

what is the main derivative exchange in the UK

A

the ICE Futures Europe
London metal exchange is the other one

66
Q

what does ICE futures europe use to arrange, clear and register settlement on its contracts

A

Ice Clear Europe

67
Q

what can over the counter do for contracts

A

it can have bespoke contracts as they are non-standardised

68
Q

liquidity on OTC vs the exchange

A

liquidity on the exchange is lot more than on OTC

69
Q

what is the European markets infrastructure regulation

A

it is a regulation of OTC derivatives

70
Q

what are the 3 requirements for those who trade derivatives

A
  • 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
71
Q

what is settlement

A

the process of organising payment and delivery of a security and is the point at which the legal title change hands

72
Q

where are settlements done through

A

CREST

73
Q

where else can settlements be done

A

on paper using a stock transfer form

74
Q

when must a central counterparty be used in trades

A

all securities traded on SETS must be routed through a central counterparty to clear the trades

75
Q

what is novation

A

it is the process of making 2 contracts
- 1 between buyer and clearing house
- 1 between seller and clearing house

76
Q

what is novation

A

it is the process of making 2 contracts
- 1 between buyer and clearing house
- 1 between seller and clearing house

77
Q

who acts as the guarantor in the central counterparty service

A

the clearing house

78
Q

what is the initial margin

A

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

79
Q

who acts as the registrar in the central counterparty service

A

the clearing house

80
Q

what is the variation margin

A

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

81
Q

when does settlement risk occur

A

when either of the 2 transaction do not occur smoothly

82
Q

what does the LCP counterparty do for investors

A

it lowers the default risk

83
Q

what price of sell is at the top of the sell side of an order book

A

the lowest sell price

84
Q

what is the International Order book

A

the LSE exchange where international securities

85
Q

when should eurobond trades be confirmed

A

on a T+1 basis

86
Q

what is the standard settlement in the US

A

T+2

87
Q

at what stage does a clearing house become a central counterparty to a trade

A

when the trade is registered

88
Q

what execution venues are permitted by MiFID

A

regulated markets
MTF
systematic internalisers

89
Q

what are dark pools typically

A

MTFs that have opted out of the requirement for transparency

90
Q

where are options settled

A

ICE Clear Europe

91
Q

gilts priced above or below par are low risk investments

A

gilts priced below par

92
Q

who protects against settlement risk

A

CREST through delivery vs payment

93
Q

what is the universal trading platform

A

used to passing orders to designated market makers for matching against the order book

94
Q

who is the regulator for the Eurobond market

A

the ICMA

95
Q

who is the regulator for the Eurobond market

A

the ICMA

96
Q

what is ORB

A

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

97
Q

what is IOB (International Order Book)

A

it is an order driven system for international depository receipts

98
Q

what is EQS? (European Quoting Service)

A

a quote driven system for European listed securities

99
Q

gilts accrue interest on what basis

A

actual / actual

100
Q

what is ICE clear europe

A

a central counter party service

101
Q

what is the LCH

A

the central counter party service used for SETS transactions

102
Q

what is a systematic internaliser

A

firms providing market making services directly to their clients

103
Q

when is a market pre-trade transparent

A

when it publishes real time data about quotes and orders

104
Q

what is the MiFID post trade disclosure rule

A

all firms must disclose completed transactions as soon as possible
if venue is an order book this is done automatically

105
Q

who receives stamp duty tax

A

the HMRC

106
Q

What is the most liquid market

A

AIM

107
Q

Order driven liquidity

A

Most liquid

108
Q

What is the main feature of a quote driven market

A

Firms making 2 way prices

109
Q

What does a larger market size mean for liquidity

A

More liquid

110
Q

Can market makers and GEMMs choose which equity/ gilt they wish to deal in

A

Market makers can choose which securities to trade
GEMMs must deal in all gilt issues or none

111
Q

Who monitors the OTC derivative market

A

The international swaps and derivatives association

112
Q

can ORB be used by retail investors

A

non

113
Q

what is bid price

A

buy

114
Q

what is offer price

A

sell

115
Q

what is the role of a systematic internaliser

A

to facilitate cross trades between clients

116
Q

LCH is the central counter party for who

A

the SETS

117
Q

Cis the settlement system for GILTS

A

CREST

IMC Unit 1 (11 decks)

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