Purchase & Sales Flashcards
What is figuration?
Figuration is the process by which a firm determines the total dollar value of a trade.
What is comparison?
A clearing firm facilitates comparison of trade information between a buying firm and a selling firm to ensure that figuration is consistent.
What is confirmation?
A confirmation is a document containing details of a trade such as price and quantity. A firm sends a confirmation to a customer after executing an order.
How does a firm perform figuration on a trade of equity securities?
Number of shares × price per share
How does a firm perform figuration on a trade of corporate, municipal, or government bonds?
(Face value × (“clean” price ÷ 100)) + accrued interest
What is the “clean” price versus the “dirty” price of a bond?
The “clean” price of a bond does not include accrued interest. The “dirty” price does.
What is an agency transaction?
A firm performs an agency transaction when it matches a buyer and a seller and charges a commission, which it must disclose on the confirmation. The firm does not buy or sell securities in its inventory. (The firm is acting as a broker.)
What is a principal transaction?
A firm performs a principal transaction when it buys or sells securities in its inventory. Instead of charging a commission, the firm charges a mark-up or mark-down, which it must disclose on the confirmation. (The firm is acting as a dealer.)
To what risk is a firm exposed when it performs a principal transaction?
In a principal transaction, a firm is exposed to market risk since it buys or sells an asset that fluctuates in value.
What is a riskless principal transaction?
A firm performs a riskless principal transaction when it purchases a security after a customer has already placed an order to buy the security. Once the firm has added the security to its inventory, it sells the security to the customer at a mark-up. (Note that the transaction is not truly riskless since it still involves market risk and credit risk.)
Which rules address credit risk controls?
- FINRA Rule 3110 Supervision applies to supervising a firm’s credit risk;
- FINRA Rule 4210 Margin Requirements applies to credit risk presented by margin accounts;
- SEA Rule 15c3-1 specifies deductions from net capital for credit risk;
- SEA Rule 17a-3 specifies when firms must make records of credit risk controls
If a bond pays interest on Jun. 30 and Dec. 31, and a customer sells the bond on Sep. 18, to whom will the issuer pay the interest that has accrued as of Sep. 18?
The issuer will pay all of the interest that has accrued from Jul. 1 through Dec. 31 to whomever owns the bond on Dec. 31.
If a bond pays interest on Jun. 30 and Dec. 31, and Customer A sells the bond to Customer B on Sep. 18, to how much interest is Customer A entitled when she sells the bond?
In addition to the market price of the bond, Customer A is entitled to receive all of the accrued interest as of Sep. 18 from Customer B on Sep. 18.
