financial markets Flashcards
broker dealers dual capacity means
deals as principal and agent
SBLI
assist in stock lending
IDB
agent between two brokers
local
trader acting on own behalf
exchange members and clearing house members require
formal membership
order driven platform
- natural liquidity
- negotiate prices
- electronic trading
-(LSE SETS)
quote driven platform
-less natural liquidity
- market makers
- firm prices
- bid/offer
- screen and phone
hybrid systems
- order book with market maker
- 5 period auctions
LSE SETSqx
No continuous order book
SETS is for what type of securities
- FTSE all share index
- most liquid AIM and Irish shares
- EFPs/ETFs
SETSqx used for
- shares
SEAQ used for
- shares too illiquid for SETS and SETSqx
- corporate bonds
LCH
central counterparty to all trades executed on SETS
CREST
settlement system for UK and Irish securities
owned by Euroclear Uk and ireland
liquidity
- central market place
- real-time price and vol info
- regulated participants
- standardised contracts for derivatives
- risk mngmnt through clearing and settlement systems
transparency
- MiFID pre-trade disclosure
- exchanges and MTFs display current prices and trading volumes
- MiFID post-trade disclosure
- all firms completed transactions asap
liquidity can be reduced by
- unattractive prices
= asset becomes unpopular
stamp duty
0.5%
CREST round to nearest 1p
if
paper-based to nearest £5
takeover panel levy
£1 on every transaction over £10K
variety of costs in market
- venue costs (MTF cheaper than RIE)
- size of order (larger cheaper)
- exchange traded or OTC ( OTC contracts higher)
- mgmnt fees
- property (direct property variety of costs)
market order
price is secondary
speed is priority
limit order
price/ vol is priority
speed is secondary
order book : higher the NMZ the
- higher the liquidity
order book ranked prices on each side
buy side highest to lowest
sell side lowest to highest
quote platform MM :
- mandatory quoting period (MQP)
- min volume quote ( 1xExchnge market size)
- manual reporting to exchange (within 3 mins to LSEs European Trade reporting service)
hybrid system SETS qx hsve
- min quote order size (1xExchange market size)
- reporting MM trades ( within 3 min)
- no continuous order book trading
- limit orders only
MTF purpose, operator, regulatory , benefits
-access to capital with no exchange or competition for existing exchanges
- investment firms and market operators
- treated as an exchange
- better liquidity and transparency than OTC
OTF purpose, operator, regulatory , benefits
- altenrative for RIE for bonds and derivatives and imporves transparency
- invesmtent firms and market operators
- exchange but with discretionary execution
- better liquidity and price discovery
Dark pool purpose, operator, regulatory , benefits
- exchange-traded liquidity and OTC confidentiality and anonymity through hidden orders
- invesment firms and private organisations
- OTC with no MiFID transparency
- move large vol with less market impact
systematic internaliser purpose, operator, regulatory , benefits
- direct source of liquidity from investment firms that match orders with clients
- invesmtent firms
- mini-exchange
- direct liquid without the need for external markets
Gilt-edged MM must
deal in all gilt issues (DMO auciotns) or none at all
UK government gilts
participants
obligations of GEMMs
primary markets
dealing and reporting: LSE
other dealing methods
settlement
-gilt-edged market makers, brokers, inter-dealer borkers
-to sign up at DMO and provide with data relevant to gilt market, pariticipate in DMO auctions, quote firm bid/offer spreads during MQP
-gvnmts issue gilts for PSNCR, managed by DMO through auctions ad taps (insufficient demand withdraw)
- quote driven, trade reports as close to rela time as possible
- OTC e-dealing system
- CREST, T+1
gilts go ex-coupon ….. before coupon date
7 days
STRIPS market (converting large denomination gilts)
- designated as strippable by the DMO
- permitted parties:
GEMMs
HM treasury
BoE
coorporate bonds :
primary market
secondary market
settlement
- private placement , bought deal, fixed price reoffer, underwritting
- OTC, some on LSE SEAQ and ORB
-T+2
eurobonds
international bonds
- bearer documents
- euro curreny (any currency held outside country of origin)
- gross annual coupon
international capital markets association
OTC market
- reporting T+1 to ICMA
settlement
- T+2
- Euroclear and clearstream
derivative markets: exchange traded
participants
trading
uses
- principal and agency
- ICE Futures europe, London metal exchange
- speculation (take on risk), hedging (reduce risk), arbitrage (risk-free profits from price anomalies)
ICE connect
derivatives order driven platform
International swaps and derivatives association
proffessional body that monitors OTC derivative market and produces standardised deocumentation (legally binding contracts)
EMIR
- regulation of OTC derivaitves
- provisions
OTC derivative trades reported to a trade repository
financial and non-financial counterparties to adequately manage the risk of the contract (reconciliations, collateral) - use central counterparty where mandatory clearing is in effect
central counterparty service
- novation
- clearing house as guarantor
principal to principal
manages credit exposure
protects against default
trade anonymously - clearing house as registrar
facilitates closing out
protects anonymity - counterparty risk
contingent liability investments
title transfer collateral arrangements
full ownership transfer of client’s money to firm
BUT
no guarantee of return of money
prohibited when retail client
must be a full written agreement with the client
CREST settlement (calculates and collect SDRT)
T+2 for equities and bonds
T+1 for gilts
t+10 paper based
+ settles money market instruments and funds, international securities
Intenrational bonds (eurobonds)
t+2
clearstream/ euroclear
dodd-frank wall street reform and conusmer protection act 2010
US tighter regulation on OT C derivative markets like EMIR
bond is a
medium to long-term seucirty
bill is a
short-term security (maturing in less than a year)
with options
buyer pays ppremium to seller but has no obligation
seller has a potential obligation
with futures
there is an obligation on both sides but no premium is paid
foreign exchange market is an
OTC market that is quote driven
to avoid default risk (herstatt risk) in fx markets trades are settled through
continuous linked settlement offering payment vs. payment protection
spot market for fx settlement
t+2
mifid pre-trade requirements apply to
trades on regulated market
MTF
mifid post trade requirements apply t o
all firms conducting trades on or off exchange
order book trade reports happens
automatically
illiquid markets
costs higher
gilt market orders below and above 5000
higher costs, lower costs
GEMMs provide liquidity by
quoting 2 way prices structured to the nearest £0.0001 per £100 nominal value
gilts quoted at a … but the settlement is the …
clean, dirty price (includes interest accrued)
STRIPS (seperate trading of registered interest and principle securities)
allows cash flows on gilt to be traded as a seperate instrument
eurobond ICMA rpeorting and settlement
t+1, t+2
eurocelar and clearstreem settle
eurobonds
LSE offer members the choice of 2 CCPs
LCH or SIX X-Clear
pre-trade disclosure applies to
exchange or MTF
IDB can act as —- between 2 MM
central counterparty in a riskless principal transaction
advantage of order book trading
single price trading
Market makers ….. to provide quotes
volunteered
SEAQ, SEAqx require at least .. MM per specific security
2, no in number
MTF can be seen as a midpoints between
exchange and OTC
otf
bonds
structured finance products
emission allowances
GEMMs provide two way prices to
broker dealers acting as agents
off order book trades are reported through
LSE European trade reporting service
GEMMS supervised by
FCA
corporate bonds : primary market
- private placement ( small issue)
- bought deal ( medium issue)
- fixed price reoffer (large issue)
- underwriting
international swaps and derivatives association ISDA
monitor OTC derivatives market and produced standardized documentation for contracts
securities and exchange commission SEC and commodity futures trading commission CFTC
regulate derivatives market in US
