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IMC > Financial Markets and Institutions > Flashcards

Financial Markets and Institutions Flashcards

1
Q

Explain the functions of the financial services industry in allocating capital within the global economy

What are the four main functions of the financial services industry:

A
  1. Financial intermediation: providing channels for funds to move from savers to borrowers.
  2. Pooling and managing risks: provides mechanisms to manage risk. Pooled investment products allow multiple savers to invest in a wider variety of investments than they would otherwise be able to individually.
  3. Payment and settlement services: enables money and assets to be managed, transmitted and received.
  4. Portfolio management: allows investors to manage their wealth by offering access to markets, specialist advice and investment management services.
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2
Q

What are the 4 roles of the government:

A
  1. Provision of public sector services
  2. Regulation
  3. Intervention in the distribution of income
  4. Stabilisation of the economy
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3
Q

Define the role of primary markets:

A

Markets that facilitate the initial sale of securities. - Commonly referred to as an IPO

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4
Q

What are the 3 roles of the secondary market:

A
  1. Facilitates the subsequent trading following an IPO.
  2. Creates liquidity and provide information to investors (price discovery)
  3. Facilitates trade agreements
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5
Q

PRICE TRANSPARENCY AND LIQUIDITY:

What are the two types of price dissemination:

A
  1. Pre-trade transparent: displays price data before trade.
  2. Post-trade transparent: displays price data after trade.
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6
Q

What are the the 3 main types of transaction costs:

A

Brokerage commissions: usually a fixed percentage of the capital amount of the transaction or a fixed amount per trade.

Bid Ask spreads: the difference between the asking price and the offering price of a security or other asset.

Taxes and other charges:
- Stamp duty reserve tax - 0.5% of the purchase amount) which is charged to buyers
- PTM Levy (the PTM are a panel on takeovers and mergers, they are funded by the PTM Levy) - £1 government levy that is automatically charged to investors when they buy or sell shares for over £10,000.

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7
Q

What are the types of financial markets (UK Equity Markets):

A

UK SECURITIES
1. London Stock Exchange: a. operates an order-driven system called SETS for FTSE 100, FTSE 250 and FTSE Small Cap constituents. this operates continuous order book trading b. Operates a quote-displays system called SEAQ for fixed-interest securities and AIM (Alternative investment market) securities.

  1. SETsqx: where less liquid stocks, listed on the main market are traded. it combines a periodic auction book along with quote-driven market making. This combines periodic electronic order book and quote-driven market making.

INTERNATIONAL SECURITIES:
1. International Order Book (IOB) - depositary receipts on the international securities.

  1. European Quoting Service (EQS) - European Union Liquid Securities.
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8
Q

What is the LCH and what function does it serve:

A

LCH is a clearing company. It provides a central counterparty services . It acts as a clearing house whereby the seller sells to the CCP and the buyer buys from the CCP. Therefore, neither parties need to worry about default risk - this is known as novation risk

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9
Q

What are gilts and what are the features of them?

A

Gilts are UK Government bonds.

  1. They are AUCTIONED by the Debt Management Office (DMO)

2.Gilt coupons are usually paid GROSS and SEMI-ANNUALLY.

  1. Ex-dividend date is SEVEN DAYS before the coupon payment.
  2. Deals settle via CREST ( a settlement system).
  3. The market for gilts is OTC - decentralised dealers.
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10
Q

Who are GEMMS (Gilt-edged market makers):

A
  1. GEMMS are market participants with access to auctions held by DMOs.
  2. They must bid in DMO primary auctions
  3. They have special dealing arrangements with the DMO and inter-dealer brokers (IDBs)
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11
Q

How are corporate bonds issued
How are corporate bonds traded

A
  1. Corporate bonds are issued via private placements.
  2. Corporate bonds are traded on a decentralised, dealer-based OTC market.
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12
Q

What are the three main types of exchange trading, over-the-counter and alternative trading venues:

A
  1. Over the counter:
    - decentralised trading
    - securities are not listed on an exchange
  2. Multilateral trading facilities (MFTs):
    - trading platforms organised by investment firms. e.g. BATS Chi-X Europe Turquoise.
  3. Systematic internalisers:
    - Investment firms dealing own account in liquid shares outside a regulated market of multilateral trading facilitates.
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13
Q

What are organised trading facilitates (3)

A
  • Multilateral system which is not a regulated market or multilateral trading facilities.
  • Introduced by MIFID II to capture bonds and certain kinds of derivatives that would not be traded on organised markets of MFTs.
  • Trading of organised trading facilities is discretionary.
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14
Q

What are dark pools (2)

A
  • A dark pool is multilateral trading facilities that have opted out of the requirements for pre-trade transparency.
  • It allows large trades to be traded without price impact and therefore getting a better price on sizeable orders.
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15
Q

What are the three settlement procedures in the UK (LSE Equity transactions and Gilt)

A
  1. LSE Equity Transactions : Settle on T+2 through crest.
  2. Gilts: Settle on T+1 through crest.

CREST is a computerised system allowing electronic holdings / transfer of shares

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16
Q

What are the two listing categories for admission to the official list?

A
  1. Premium listing is typically used by large firms to benefit from an increased profile and a highly liquid market.
  2. Standard listing is for the firms that meet the minimum requirements laid out by regulators
17
Q

According to the UK Listing Authority, what are the requirements for listing and prospectus? (2)

A
  1. Must be listed on the exchange / must be a public company.
  2. The FCA is the ‘competent authority’ to decide on admission to the official list.
18
Q

The listing authority must approve the listing of particulars or a prospectus prior to listing, unless (4):

A
  1. The offer is made to professional investors or
  2. The offer is made to LESS THAN 150 persons or
  3. The minimum investment per investor is MORE THAN EUR 100,000
  4. The total offer consideration is LES THAN 5m
19
Q

According to the Listing and Prospectus Requirements, what are the conditions for a premiumlisting (6):

A
  1. Published accounts should cover at least three years.
  2. Expected aggregate market value of shares: at least £700,000
  3. Expected aggregate market value of debt securities of at least £200,000.
  4. Free float of at least 25%
  5. Sufficient working capital to cover at least the next 12 months.
  6. A sponsor is required for the admission for listing
20
Q

For a standard listing what are the conditions (3)

A
  1. No need for three year published trading record.
  2. 12 month capital requirement not required unless a prospectus is being issued.
  3. The company does not require a sponsor.

Remaining rules for premium listing applies

21
Q

What are the rules to be listed on the AIM (Alternative Investment Market) (3):

A
  1. Companies require a nominated adviser, who will be responsible to the London stock exchange.
  2. Companies are required to produce an admission document that includes information about a company’s directors, promotions and business activities.
  3. AIM companies are required to disclose their financial performance through scheduled interim and full-year results.
22
Q

What is the High Growth Segment of the London Stock Exchange and what are the requirements to be listed on there (4)

A

The High Growth Segment is designed to attract high growth, mid sized UK and European UK and European companies to an official listing.

  1. Incorporated in the EEA
  2. a commercial company- issuing shares only
  3. minimum float of 10% at IPO
    demonstrate historic revenue of 20% over three years
23
Q

What are the conditions for listing on Acquis Stock Exchange Growth Market (AQSE) Growth Market:

A
  1. Appoint and retain a AQSE corporate adviser
  2. At least 24 months audited accounts
  3. Have at least 10% free float
  4. Corporate governance

Conditions for listing om the AQSE Main Market is the same as the official list.

24
Q

What are the two requirements for for disclosure of directors’ interest in shares (FCA’s Disclosure and transparency rules (DTR)):

A
  1. Person’s discharging managerial responsibilities must report transactions in securities to the company within 4 days of the transaction.
  2. Listed companies must notify the market, no later than the end of the business day. Listed companies can do this through a primary information provider - the most renowned one is the RNS (Regulatory News Service).
25
Q

What are the disclosure requirements of investors under the FCA’s disclosure and transparency rules:

A

Investors must notify the company within 2 DAYS when a holding:
- reaches 3%
- once above 3%: goes up or down to the next whole %
- falls below 3%

26
Q

How long must companies keep confirmation of interest from investors

A

3 years

27
Q

What is the purpose of ‘continuing obligation’ requirements of the listing rules and list the two requirement:

A

Purpose: designed to keep shareholders of public shares properly informed.

Requirements:
- Submit drafts of meetings and circulars to the UKLA for approval.

  • Release price sensitive information to the market via a regulatory information service (RIS) or primary information provider (PIP)
28
Q

At General meetings, what are the two ways in which voting can be conducted:

A
  • Vote by a show of hands - each member has one vote
  • Vote by ‘poll’ - one vote per share and proxies are included (proxy = voting by representatives)
29
Q

What are the two ways in which a general meeting can be called:

A
  1. By five or more members
  2. 10% or more of shareholders
30
Q

Define General proxy
Define Special proxy

A

General proxy are appointed to vote as they see fit
Special proxy are appointed to vote as directed by the shareholder

31
Q

What are the two kinds of resolutions at a general meeting:

A
  1. Ordinary resolution: occurs to determine standard re-occurring decisions such as approving accounts, more than 50% of votes need to be in agreement before a resolution can be passed.
  2. Special resolution: occurs for more constitutional decisions such as a share buy back. More than or equal to 75% of the votes need to be in favour before this can be held.
32
Q

What are the two kinds of resolutions at a general meeting:

A
  1. Ordinary resolution: occurs to determine standard re-occurring decisions such as approving accounts, more than 50% of votes need to be in agreement before a resolution can be passed.
  2. Special resolution: occurs for more constitutional decisions such as a share buy back. More than or equal to 75% of the votes need to be in favour before this can be held.
33
Q

International Markets:

What is the international securities market in the US:

A
  1. NYSE is the largest equity market in the US
  2. Floor -based system of stock trading
  3. Designated market makers (DMM) assigned trading posts
  4. The universal trading platform (UTP) transmits orders from the NYSE members to the trading posts.
34
Q

What are the eurobond markets , and what are the four features of them?

How are they issued, traded, and settled?

A

Eurobonds are generally issued in a currency (commonly the U.S. dollar or Yen) other than that of the issuer’s home country.

  • International bonds
  • Dominated in a ‘eurocurrency’
  • annual coupons
  • unsecured bearer securities

Issued: international placing

Trading: OTC market, regulated by the international capital markets association (ICMA).

Settlement: Settle through Euroclear and Clear stream. Trades settle T + 2

35
Q

Describe the principal agent problem within the stock market.

A

Ownership lies with Shareholders
Control lies with the directors and managers

Owners want to maximise value for the firm
Directors want to maximise their own interest

Solutions?
Stock options
Non-executive directors (to oversee directors to check they are progressing in line with expectation)

IMC (4 decks)

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