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IMC Unit 1 > Financial Markets and Institutions > Flashcards

Financial Markets and Institutions Flashcards

1
Q

4 main functions of financial services industry:

A
  • Financial INTERMEDIATION (channelling funds from savers to borrowers)
  • Pooling and managing RISK (e.g. pooled investment funds, insurance)
  • PAYMENT and settlement services
  • PORTFOLIO management
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2
Q

4 main functions of the government:

A
  • Provision of PUBLIC SECTOR SERVICES
  • Regulating firms and markets, to protect consumer (FSMA 2000 act)
  • Intervening in the distribution of income (tax, benefits)
  • Stabilisation of the economy (interest rates)
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3
Q

Two types of financial asset:

A
  • Debt claims (loans made by lenders to borrowers)
  • Equity securities (shares)
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4
Q

Benefits of investing via an intermediary (like pension fund)

A
  • Greater diversification
  • Reduced transaction costs
  • Specialist advice
  • Ability to invest in more assets than would be available to an individual
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5
Q

2 uses for derivative contracts:

A
  • to observe movement in price of an asset/index
  • purchasing a derivative is less costly than purchasing some assets.
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6
Q

4 functions of securities markets (money markets and capital markets):

A
  • raising capital (capital markets)
  • transferring risk (derivatives markets)
  • price discovery
  • creating liquidity
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7
Q

What is a primary market?

A

Where securities are initially sold to investors via a IPO.

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8
Q

What is a secondary market?

A

Where any subsequent trading of shares takes place after the IPO.

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9
Q

Two types of price transparency:

A
  • pre-trade transparent (real-time data)
  • post-trade transparent (trade prices and sizes soon after trades)
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10
Q

4 types of transaction costs:

A
  • bid-ask spread (set by dealer to cover costs and make a profit)
  • brokerage commissions
  • taxes
  • opportunity cost
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11
Q

Three types of order execution venue permitted under MiFID:

A
  • regulated markets
  • multilateral trading facilities (MTFs)
  • systematic internalisers
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12
Q

UK Equity Market
What is SETS?

A

Electronic limit order book used to trade stocks including FTSE, most liquid AIM and Irish securities, ETFs and ETPs.
Set by London Stock Exchange.
Trading occurs and opening and close of day.

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13
Q

UK Equity Market
What is SETSqx?

A

Trading platform for stocks less liquid than those covered by SETS
Hybrid - combines periodic electronic order book and quote-driven market making.

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14
Q

UK Equity Market
What is SEAQ?

A

Quote display system used for fixed-interest securities and AIM securities not traded on SETS or SETSqx.

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15
Q

UK Equity Market
How can investors trade securities internationally?

A
  • International Order Book (depositary receipts on international securities)
  • European Quoting Service (EU liquid securities)
    LCH.Clearnet is CCP to SETS/SETSqx trades
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16
Q

Features of a gilt:

A
  • UK government bonds
  • Auctioned by Debt Management Office (DMO)
  • Coupons paid gross and semi-annually
  • Ex-divident date 7 days before coupon payment
  • Deals settle via CREST
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17
Q

Features of a corporate bond:

A
  • Trading is decentralised, dealer-based OTC market
  • Open offer for sale: lead bank buys all bonds and resells to investors as a bought deal (sold at varying prices) or ‘fixed price re-offering’ (sold at fixed price to everyone for set time period - more common).
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18
Q

What is OTC trading?

A

Decentralised trading (off the exchange) so does not impact price.

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19
Q

What are Multilateral Trading Facilities (MTFs)?

A

Trading platforms organised by investment firms. They are regulated to the same standard as regulated markets.

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20
Q

What are systematic internalisers?

A

Investment firms dealing with their own account in liquid shares outside a regulated market or MTF. Required to honour published buy and sell prices.

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21
Q

What are organised trading facilities?

A

Multilateral system which is not a regulated market or MTF. Captures trading in bonds and certain kinds of derivatives. Regulations are discretionary.

22
Q

What are dark pools?

A

MTFs that have opted out of requirements for pre-trade transparency. Allows larger trades to be traded without price impact.

23
Q

✮ What is the settlement procedure for LSE equity transactions?

A

Settle T+2 through CREST.

24
Q

✮ What is the settlement procedure for gilts?

A

Settle T+1 through CREST

25
Q

✮ What is CREST?

A

Computerised system allowing electronic holding/transfer of shares.

26
Q

✮ What type of company can list on the LSE?

A

Public limited companies

27
Q

✮ Who decides if a company can list on the LSE?

A

FCA

28
Q

✮ The listing authority must approve company listing particulars or a prospectus prior to listing, unless…

A
  • the offer is made to qualified investors OR
  • the offer is made to <150 persons OR
  • the minimum investment per investor is >= €100,000 OR
  • the total offer consideration is < €1m
29
Q

✮ Conditions for a large company to list:

A
  • Published accounts must cover at least 3 years.*
  • Expected aggregate market value:
    Shares (at least £30m)
    Debt securities (at least £200,000
  • Free float: At least 10% of issued shares are in the hands of the public
  • Working capital: sufficient to cover at least the next 12 months*
  • Sponsor must be appointed.*
  • criteria relaxed for standard listing.
30
Q

✮ Conditions for AIM listing:

A
  • be incorporated into EEA
  • be a commercial company issuing equity shares only
  • minimum free float of 10%
  • historic revenue of 20% over last 3 years
31
Q

✮ Conditions for listing on AQSE Growth Market:

A
  • Appoint and retain a AQSE corporate advisor
  • Have at least 24 months’ audited accounts
  • Have at least 10% free float
  • Corporate governance
32
Q

✮ The FCA requires ‘persons discharging managerial responsibilities’ (PDMRs) to report transactions in securities to the company within _ days of the transaction.

A

4

33
Q

✮ Listed companies must notify the market of transactions in securities to the market no later than…

A

the end of the following business day.

34
Q

✮ What are the conditions for notifying the investing public of significant stakes:

A
  • Investors must notify the company within two business days when a holding:
    reaches 3%
    (once above 3%) goes up or down to the next whole % point
    falls below 3%
  • public companies must maintain a register of disclosures
  • companies may require confirmation of interests held anytime in the next 3 years.
35
Q

Companies have a ‘continuing obligation’ to keep shareholders informed. This includes:

A
  • submitting drafts of meetings and circulars (other than routine) to the UKLA for approval
  • releasing prices sensitive information to the market via a Regulator Information Service (RIS) or Primary Information Provider (PIP).
36
Q

AGMs should be held within _ months of the year end.
Not more than a _ month interval between meetings
Called by directors
Not less than _ days written notice
Electronic communications deemed delivered _ hours after being sent

A

6 months
15 month
21 days
48 hours

37
Q

General meetings should be held with no less than _ days written notice
Called by directors or by _ or more of shareholders

A

14 days
5%

38
Q

Vote by poll can be demanded by:

A
  • FIVE members; or
  • 10% OR MORE of
    shareholders
39
Q

What things may be discussed at an AGM?

A
  • declaring a DIVIDEND
  • considering FINANCIAL STATEMENTS
  • considering REPORTS of directors/auditors
  • electing DIRECTORS
  • appointing and remunerating AUDITORS
40
Q

Voting by show of hands vs by poll?

A

Show of hands: everyone gets one vote
Poll: you get one vote per share

41
Q

Ordinary resolution vs special resolution?

A

Ordinary: Requires majority of votes
Special: Required for important constitutional change & needs > 75%

42
Q

General proxy vs special proxy (two way)

A

General: appointed to vote as they see fit
Special: appointed to vote as directed for or against a resolution

43
Q

What is the largest equity market in the US?

A

NYSE (floor-based specialist system of stock trading)

44
Q

What are designated market makers (DMMs) assigned?

A

Trading posts and specific stocks

45
Q

What is the primary ordering platform in the NYSE?

A

Universal Trading Platform (UTP)

46
Q

Features of Eurobonds:

A
  • International bonds
  • Denominated in a eurocurrency
  • Annual coupons
  • Unsecured bearer securities (no register maintained)
47
Q

On which market are eurobonds traded?

A

OTC

48
Q

Who regulates the Eurobond market?

A

ICMA - International Capital Markets Association

49
Q

What is the settlement for Eurobonds?

A

Settle through Euroclear and Clearstream
Trades settle T+2

50
Q

What is the principle-agent problem?

A

Owners and managers have opposing interests
Owners: maximum value of firm
Managers: salary, vanity projects, expenses

51
Q

How can principle-agent problem be prevented/managed?

A
  • compensating managers partly in form of shares
  • managers monitored by board of directors
  • introduce external pressure like selling of shares
  • shareholder activism

IMC Unit 1 (6 decks)

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