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FCA 2: Derivatives > Market Structure > Flashcards

Market Structure Flashcards

1
Q

what is a derivatives exchange?

A

provides a marketplace where someone can buy and sell futures, options and other contracts of specific quantities of a
commodity or financial instrument at a specified price with delivery set at a specified time in the future.

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2
Q

what is the biggest derivatives exchange in Europe?

A

Euronext, spanning the major cities in Europe, uses Optiq which allows trading on multiple markets and uses secure financial transaction infrastructure, trades cleared by LCH or EuroCCP.

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3
Q

what are the three broad categories of exchange members?

A

brokers: may only trade for third parties
dealers: can deal on their own accounts and others if they are authorised
broker-dealers: can trade on their own accounts and for third parties

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4
Q

what are the different types of clearing exchange members?

A

general members: can clear their own principal trades, on
behalf of their clients and on behalf of other non-clearing member

Individual members: only able to clear their own principal trades and trades on behalf of their clients

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5
Q

what are OTC markets?

A

decentralised markets in which participants trade securities directly between themselves, trading is conducted electronically or via telephone

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6
Q

who acts as a market maker in OTC markets and how?

A

dealers by quoting bid and offer prices for securities

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7
Q

what is the relationship between prices in an OTC market and participants?

A

trades can be executed without others being aware of the price it was completed at

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8
Q

what is the effect of transparency on regulation in OTC markets?

A

less transparent, less regulation

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9
Q

what is the utility offered by OTC markets?

A

those that are hedging can gain from it as the margining process is eliminated and settlement happens on a much more infrequent basis

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10
Q

what can OTC banking teams do for their clients?

A

high touch trading services, trading and sales desks provide direct trading advice to clients often on a 24/7 basis

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11
Q

what is the nature of pit trading?

A

traders quote bid and offer prices for contracts by shouting and sending hand signals face to face, used by the LME

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12
Q

what is the nature of screen-based markets?

A

orders are placed directly onto an electronic order book via traders’ computer terminals

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13
Q

how does telephone trading take place?

A

client calls their broker, who has a direct line to their trader, who quotes a price.

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14
Q

How does ICE trading take place?

A

trading takes place on its own designated platform, via applications that are embedded in ICE Connect that includes both online and mobile trading

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15
Q

what do customer order specify in a traditional open outcry system?

A
  • the asset
  • whether it is a buy or sell order
  • the size of order (number of contracts or lots)
  • the expiry month, and
  • price conditions (if any).
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16
Q

that is the nature of screen-traded systems?

A

Orders are input and
then executed and reported by the system. trades are already matched when the order book links together a buyer and a seller.

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17
Q

what is a limit order?

A

stipulates a required price level, if the trade can be executed at a better price than stated, then it will be

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18
Q

what is a market order?

A

order to buy or sell immediately, doesn’t outline a set price, will be executed at the best price available.

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19
Q

what is a market-if-touched order?

A

a combination of a limit order and a market order. Initially, the trade
specifies a limit. If the market trades at or through the price, the order becomes a market order and will be executed at the best prevailing price.

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20
Q

what is an opening/closing order?

A

order with or without a set price that is executed during the opening or closing period, if it cant be then it is cancelled

21
Q

what is a good ‘til cancelled order?

A

instruction accompanying an order and defines the period of validity for an order

22
Q

what is an immediate or cancel order?

A

fill or kill, execute it all at once or cancel if not achievable with market conditions

23
Q

what is a stop (or loss) order?

A

designed to limit trading losses, closes the position if the price moves against the trader, triggered when the market trades at the stipulated price

24
Q

what is a stop limit order?

A

order stipulates two prices within which the stop order operates. Once the stop price is reached, a stop limit order becomes a limit order that will be
executed at a specified price (or better).

25
Q

what is a day order?

A

order to buy or sell a security that automatically expires if not executed on the day
the order was placed

26
Q

what is a correction declaration?

A

where the exchange allows a brokerage firm to submit a declaration of a mistake being made and wrong trades may be reversed

27
Q

what is a cross trade?

A

where a match has been established by negotiation prior to entry in the system as long as the orders are entered in seperately

28
Q

what are block trades?

A

large transactions made between an exchange member and a wholesale client to transact bilaterally agreed transactions without delay. exchange determines size and products, must be reported between 5 mins- 1 hour

29
Q

what are basis trades?

A

simultaneous exchange of a financial asset or instrument together with an appropriate offsetting number of futures contracts

30
Q

what does a FLEX facility allow?

A

gives any exchange member the freedom to customise trades with respect to price and expiration date- combines this with clearing and other advantages of exchange trading

31
Q

what are the main advantages of OTC markets?

A
  • products can be unique
  • degree of confidentiality
  • counterparty risk is mitigated by regulatory reporting
  • lighter on back office teams
32
Q

what are the main disadvantages of OTC trading?

A
  • lower liquidity
  • cost is proportional to the degree of tailoring of the OTC structure
33
Q

what is novation?

A

the process by which the clearing house becomes a counterparty to all trades

34
Q

what does acting in principal mean?

A

member is carrying out the trade on their own behalf and will be subject to profits and losses on those trades

35
Q

what does acting as an agent mean?

A

firm is carrying out the trade on behalf of clients

36
Q

what is dual capacity?

A

when a member firm is able to trade on their own accounts and also on behalf of clients

37
Q

what does opening/closing trades do?

A

either create or offset a position in the market and either incur or extinguish rights and obligations

37
Q

what is cross trading?

A

when a brokerage firm matches the buy order of one client against the sell order of another when one is non-competitive with price

38
Q

how is the liquidity of a derivatives contract measured?

A

volume (cumulative number of contracts traded so far each day)

open interest (number of contracts for any delivery month that remain open)

39
Q

what is an audit trail?

A

record of transaction, assists in the resolution of disputes and promotes confidence in an exchange

39
Q

how can derivatives exchanges regulate their members?

A

by knowing what trades have been executed by their members

40
Q

what is the process involved with trade registration?

A

once a deal has taken place the position will need to be allocated to a relevant account, trade details will be reported to the exchange’s admin system who will match all inputs

41
Q

what does pre-registration involve?

A

a member firm allocating a deal to a second member, know as allocation

41
Q

what are the 3 different types of accounts trades can be assigned to?

A
  • house
  • segregated
  • non-segregated
41
Q

why is it important that exchanges publish accurate open interest data?

A

so observers and investors can make judgements in respect of their positions and trading strategies

41
Q

why are give-up trades performed?

A

to separate the execution and the clearing function

42
Q

what is the requirements for OTC trade reporting?

A

it must be inputted into the participant’s internal trade reporting system and be recorded by the risk management system

42
Q

how do exchanges disseminate trade reporting information?

A

through a price feed to it’s members, and making this info available to quote vendors

43
Q

what do price screens generally include?

A

bid and offer price, volume traded and open interest plus information on the opening and closing price

FCA 2: Derivatives (9 decks)

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