IMC Chapter 1 Key Facts Flashcards
What are the four main functions provided by the financial services industry?
- Financial intermediation
- Pooling and managing risk
- Provision of payment and settlement services
- Portfolio management
What are the main types of financial institutions?
- Central banks
- Deposit institutions e.g. banks
- Investment institutions e.g. insurance companies, collective investment funds, pension funds
What are the four important economic functions performed by the government?
- The provision of certain goods and services e.g. defence
- Regulation of markets to protect consumers
- Improving the distribution of incomes through taxation and welfare payments
- Maintaining economic stability
Real assets vs financial assets
Real assets: physical assets e.g. land, buildings, gold
Financial assets: claims representing the right to some return (e.g. bank deposit, bond) or to ownership of physical assets
What are the main functions of securities markets?
- Raising capital
- Transferring risk
- Price discovery
- Creating liquidity
Primary markets vs secondary markets
Primary markets: where initial sales of securities are made
Secondary markets: where subsequent trading takes place
What are round trip transaction costs?
The total costs of completing a transaction, including bid-ask spread, commissions and taxes
What is SETS?
An order-driven system operated by the LSE. It is for FTSE 100, FTSE 250, and FTSE Small Cap constituents
What is SEAQ?
A quote-display system operated by the LSE. For fixed-income securities and AIM securities
What is SETSqx?
For less liquid stocks listed on the main market. Combines a periodic auction book with quote-driven market making
Which department of the Treasury is responsible for gilt issuance?
The Debt Management Office (DMO), usually via an auction
What are the two ways corporate bonds may be issued?
- Open offer (bought deal or fixed price re-offer)
- Private placement
What is a dual listing?
When two corporations function as a single operating business but retain separate legal identities and stock exchange listings
What is an OTC market?
Trading in a decentralised way rather than on an exchange
What is CREST?
The LSE’s electronic settlement system, which settles on a T+2 basis for equities and a T+1 basis for gilts
What is the U.K.-listing authority?
The Financial Conduct Authority (FCA), decides on the admission of securities to the Official List
What are the requirements for listing on the main market?
- At least 3 years of published accounts
- Over £700,000 of listed stock, or £200,000 of debt securities
What is AIM?
A market regulated by the LSE. It is for small and medium size growth companies. There is no minimum criterion for size, trading record or shares in public hands
Who must declare share interests?
Directors, major shareholders and concert parties
How does the U.K.’s corporate governance system work?
Stresses the importance of internal controls and the role of financial reporting and accountability, rather than external legislation
What are the continuing obligations of companies listed on the LSE?
To release new information to the market on a regular basis
How often is an annual general meeting (AGM) required to be held by a public company?
Within 6 months of the end of their financial year, and the interval between AGMs must not be more than 15 months
How many days written notice should be given to shareholders for a ‘general meeting’?
14 days, can be electronically
General proxy vs special proxy
General proxy: appointing a person to vote as they think fit
Special proxy: appointing a person to vote for or against a particular resolution
How does bond trading work in other countries?
Government bonds: involves local banks trading OTC, with settlement via the central bank
Corporate bonds: listed and traded through central clearing depositary systems associated with local exchanges
How are Eurobond transactions settled?
Using Euroclear and Clearstream. Trades must be confirmed T+1 and settled T+2
The principal-agent problem
Separation of ownership and control. Shareholders act as principals and managers act as agents.
What are the solutions to the agency problem?
- Aligning the interests of managers and owners through remuneration of the former in shares or stock options
- Boards of directors looking after the interests of shareholders
- External control through active groups of shareholders or the threat of takeover
