IMC Chapter 1 Key Facts

Question 1

What are the four main functions provided by the financial services industry?

Answer 1

1. Financial intermediation
2. Pooling and managing risk
3. Provision of payment and settlement services
4. Portfolio management

Question 2

What are the main types of financial institutions?

Answer 2

1. Central banks
2. Deposit institutions e.g. banks
3. Investment institutions e.g. insurance companies, collective investment funds, pension funds

Question 3

What are the four important economic functions performed by the government?

Answer 3

1. The provision of certain goods and services e.g. defence
2. Regulation of markets to protect consumers
3. Improving the distribution of incomes through taxation and welfare payments
4. Maintaining economic stability

Question 4

Real assets vs financial assets

Answer 4

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

Question 5

What are the main functions of securities markets?

Answer 5

1. Raising capital
2. Transferring risk
3. Price discovery
4. Creating liquidity

Question 6

Primary markets vs secondary markets

Answer 6

Primary markets: where initial sales of securities are made
Secondary markets: where subsequent trading takes place

Question 7

What are round trip transaction costs?

Answer 7

The total costs of completing a transaction, including bid-ask spread, commissions and taxes

Question 8

What is SETS?

Answer 8

An order-driven system operated by the LSE. It is for FTSE 100, FTSE 250, and FTSE Small Cap constituents

Question 9

What is SEAQ?

Answer 9

A quote-display system operated by the LSE. For fixed-income securities and AIM securities

Question 10

What is SETSqx?

Answer 10

For less liquid stocks listed on the main market. Combines a periodic auction book with quote-driven market making

Question 11

Which department of the Treasury is responsible for gilt issuance?

Answer 11

The Debt Management Office (DMO), usually via an auction

Question 12

What are the two ways corporate bonds may be issued?

Answer 12

1. Open offer (bought deal or fixed price re-offer)
2. Private placement

Question 13

What is a dual listing?

Answer 13

When two corporations function as a single operating business but retain separate legal identities and stock exchange listings

Question 14

What is an OTC market?

Answer 14

Trading in a decentralised way rather than on an exchange

Question 15

What is CREST?

Answer 15

The LSE’s electronic settlement system, which settles on a T+2 basis for equities and a T+1 basis for gilts

Question 16

What is the U.K.-listing authority?

Answer 16

The Financial Conduct Authority (FCA), decides on the admission of securities to the Official List

Question 17

What are the requirements for listing on the main market?

Answer 17

1. At least 3 years of published accounts
2. Over £700,000 of listed stock, or £200,000 of debt securities

Question 18

What is AIM?

Answer 18

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

Question 19

Who must declare share interests?

Answer 19

Directors, major shareholders and concert parties

Question 20

How does the U.K.’s corporate governance system work?

Answer 20

Stresses the importance of internal controls and the role of financial reporting and accountability, rather than external legislation

Question 21

What are the continuing obligations of companies listed on the LSE?

Answer 21

To release new information to the market on a regular basis

Question 22

How often is an annual general meeting (AGM) required to be held by a public company?

Answer 22

Within 6 months of the end of their financial year, and the interval between AGMs must not be more than 15 months

Question 23

How many days written notice should be given to shareholders for a ‘general meeting’?

Answer 23

14 days, can be electronically

Question 24

General proxy vs special proxy

Answer 24

General proxy: appointing a person to vote as they think fit
Special proxy: appointing a person to vote for or against a particular resolution

Question 25

How does bond trading work in other countries?

Answer 25

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

Question 26

How are Eurobond transactions settled?

Answer 26

Using Euroclear and Clearstream. Trades must be confirmed T+1 and settled T+2

Question 27

The principal-agent problem

Answer 27

Separation of ownership and control. Shareholders act as principals and managers act as agents.

Question 28

What are the solutions to the agency problem?

Answer 28

1. Aligning the interests of managers and owners through remuneration of the former in shares or stock options
2. Boards of directors looking after the interests of shareholders
3. External control through active groups of shareholders or the threat of takeover