Technology in Investment - Chapter 1 Flashcards
What two things does technology provide for asset management firms?
- A robust tech infrastructure
- Relevant capabilities and controls to manage assets
What are the five key services of a retail bank
services such as:
-deposit taking
-lending
-payment
-money transmission
internet and telephone banking
What else can larger retail banks provide?
Their own and third party products such as investments, pensions and insurance
What century where building societies formed and what are they?
19th century
A small number of people pool their savings allowing members to build or buy houses
How are savings institutions normally described?
mutual societies
What is demutualization
demutualisation is like a caterpillar transforming into a butterfly - in the late 1980s, building societies had the option to change into banks, but some, like Nationwide, chose to stay the same.
What are the three main roles of a investment bank
- advise and arrange finance for firms who wish to float of stock market
- raise finance by issuing more bonds and shares
- carry out M&A
What are the five services provided by investment banks
corporate finance and advisory work
banking
treasury dealing
investment management
securities trading
what are the five most common asset owners in the UK
pension funds
sovereign wealth funds
insurance companies
retail investors
ultra-high net worth individuals (UHNWIs)
What is a pension fund and what are the three key long term investments that get utilised?
Plan for retirement. Long term (LT) investments in:
Traditional,
Alternative and
Derivative instruments
What is a Sovereign Wealth Fund
state owned and invest in alternative and traditional assets
typically funded when governments have a budget surplus or no/little debt
What is a platform?
Online services enabling the management of investment portfolios
Difference between a institutional or private fund manager
Private - Wealthy individuals
institutional - firms
Why are SWFs used?
reduce volatility of government revenues and mitigate against the boom-bust cycle and
Develop future savings
What is a wealth manager
arrange stock market trades on behalf of charity clients and private investors.
can be execution only (no advise offered) or offer advise
How are the fees for wealth managers set up for Execution Only managers and Advisory Managers?
Execution only - Commission based
Advisory - % of portfolio
How much investable assets does a UHNWI need to be called a UHNWI and who would the employ to manage their assets?
Investable assets of at least 30 million
Typically employ a wealth manager
What is a fund manager
day-to-day decision making, oversight and administration of institutional, or individual assets or portfolios
also known as asset or investment management.
What do seven key services do platforms offer to an investor?
view and monitor investments
research into investments
buy and sell
track income due and received
monitor tax liabilities
conduct what-if scenarios and analysis
compare actual return to benchmark
What is a robo-advisor
Computer based algorithms for financial planning and advice
Who creates robo-advisors?
Financial firms using AI and Machine Learning (ML)
What are the core activities of a custodian
safekeep assets
arrange settlement or purchase and sale
collect income from assets
info on Co-ownership authorised contractual schemes (COACS)
info on underlying companies and their AGMs
manage cash transactions
fx
reporting
stock lending
international servicing
What is a TPA (Third-Party-Administrator)
Undertake investment administration on behalf of other firms and specialize in this area.
What is the largest component of the currencies market?
FX Market
Of the 6.6 Trillion global turnover how much came out of each nation?
UK
US
HongKong
Singapore
uk- 43%
us- 16.5
hongkong -7.6%
singapore- 7.6%
Most common currency pairs
USD/JPY
EUR/USD
USD/CHF
GBP/USD
What are the three types of FX Transactions
spot - quoted by bank, T+2 - T+7, delivered on settlement date
forward -predetermined agreement beyond 7 days of tradedate
fx swap - agree swap for period of time and reverse transaction at a later date.
What are the three main types of bonds
Municipal Bonds - Local/Regional governments
Supernational bonds - World banks
Corpy Bonds - Large banks/Corperations
Why are equities riskier then bonds?
Firm may go into liquidation
More likely to go down in value
may have poor trading year
equity has traditionally outperformed bonds.
What is a primary market activity
Stock exchanges and Investment firms play a role in issuing of both debit and equity securities
What is a secondary market activity
Investors buy or sell a security, without issuer involvement
Consideration =
Principal amount + Accrued interest + Commission + Fees & Charges
What are the three exchange traded derivatives
Future - transferable, standardized exchange trade contract that requires delivery of underlying asset at set time
Call option - gives buyer right but not obligation to purchase underlying instrument at set price before or on given date
Put option - same as call but to sell
What is an interest rate swap
Swap of interest payments. One leg is fixed the other is floating.
Used to hedge exposure to interest rate changes
What is an OTC Derivatives
Negotiated and traded privately between parties. e.g interest rates, swaps exotic products.
they are customizable and complex
What is LIBOR?
London Inter Bank Offered Rate
What three things replaced LIBOR?
SONIA - GBP overnight index avergae
SOFR - USD Overnight financing rate
ESTR - EUR short term rate
What is a Credit Default Swap (CDS)
Insurance policy to reduce default risk
What is an equity index swap
contract between two parties that involves exchanging cash flows based on the performance of an equity index.
What 3 benefits do equity Contract for Difference (CFDs) offer investors?
investors to take long or short positions with:
no fixed expiry date or
contract size.
UK investors avoid stamp duty
What is an equity Contract For Difference (CFDs)
contract between buyer and seller stipulating that the seller will pay the buyer the difference between the current and future value of the equity at an agreed date.
Visa Versa if negative
What is stamp duty
a single tax on assets (usually houses) to show it is a valid legal asset and pertaining document
What is spread betting
Participants do not own the underlying asset they bet on, such as a stock or commodity. Rather, spread bettors simply speculate on whether the asset’s price will rise or fall
Difference between spread betting and CFD’s
Spread bets are free from capital gains tax
Both are stamp duty free
Spread bets expire, CFDs do not
What are the Key principles of automation? (5)
transaction is entered into system only once
automated interfaces between systems so they can all keep track of transactions
trade processing should be in set stages each depending on the conclusion of previous stage
Manual intervention avoided as much as possible
above principles apply to all firms involved in the transaction
What is straight through processing (STP) ?
Set of working practices and systems that enable transactions to move seamlessly through the processing cycle without manual intervention
What 4 key reasons led to automation being implemented?
reduce systemic and operational risk
improve settlement certainty
minimise operational costs
improve customer service
Correlation between complexity and automation?
the more complex the instrument, the lower the automation rate
What is often referred to as the ‘Blood of the industry’
Criticality of data.
Needed for regulatory returns, cost and profit management and managing cash and settling trades
What are the challenges of making data complete, timely and securely delivered?
- Data from multiple sources has to scrubbed or re-formatted
- Complex, spreadsheets and offline processes are used to massage any data
MCQ
Which of the following is provided by STP solutions to help the settlement process?
- Improve customer service
- They provide certainty of matching
- They reduce transaction volumes
- They improve settlement certainty
- They improve settlement certainty
MCQ
An organization that uses advanced investment strategies such as leveraged trading, long short and derivative positons in both domestic and international markets with the goal of generating higher returns is known as:
- Robo-investment manager
- A hedge fund
- A wealth manager
- Investment Bank
- A hedge fund
MCQ
Which of the following is required for STP across any firms and industries
- Multiple bi-lateral message specifications
- Automated interfaces between front offices and back office systems
- Common industry message standards
-Interface specifications drawn up by the seller
- Common industry message standards
MCQ
According to the latest ISDA survey (2013) which instrument class was lagging behind other instruments in automated confirmations
- Interest rates
-Credit - Equity
- Currency
- Equity
When currencies are quoted on the FX market, the first and second currencies are termed as..
Bid & Ask
Buy & Sell
Base & Counter
Quote & Response
Base & Counter
What is the settlement date of a bond?
- The date on which the investor should pay the consideration of the trade, and take legal ownership of the instrument.
- The date the trade was carried out
- The date the coupon was paid
- The date on which the investor actually does pay the
consideration of the trade, and takes legal ownership of
the instrument. Settlement should be the same as value
date, but there may be a delay in the process.
According to the ISDA Benchmarking survey in 2013, which instrument class was reported to have the highest average number of days to agree on confirmation, indicating a lag in automation compared to other instruments?
Credit Default Swaps
Interest rate derivatives
Equities
Currency Markets
Equities
What is the ‘Settlement date of a bond’
- The date on which the investor should pay the consideration of the trade, take legal ownership of the instrument
- The date that the trade was carried out
- The date that the coupon is paid
- The The date on which the investor should pay the consideration of the trade, take legal ownership of the instrument. Should be the same as the value date, but there may be a delay.
- The The date on which the investor should pay the consideration of the trade, take legal ownership of the instrument. Should be the same as the value date, but there may be a delay.
Which of the following is provided by STP solutions to help the settlement process?
They improve settlement certainty
They provide certainty of matching
They reduce transaction volumes
They improve customer service
They improve settlement certainty
3 Examples of an OTC Derivative
Interest rates, swaps and exotic products
