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CISI Technology in Investment Management. > Technology in Investment - Chapter 6 > Flashcards

Technology in Investment - Chapter 6 Flashcards

1
Q

What is chapter 6?

A

The role of technology in the Settlement and Pot-settlement phases

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2
Q

What is the identity of the SENDER & RECIEVER usually represented as ?

A

BIC Code

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3
Q

What is the identity of the SECURITY usually represented as ?

A

ISIN, SEDOL, CUSIP or some other identifier

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4
Q

What three methods are used to transmit settlement instructions

A
  • SWIFT Messages
  • Proprietary standard message
  • Email, fax and telex
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5
Q

What is a status code

A

Codes for tracking where a transaction is in the settlement cycle

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6
Q

What FOUR criteria must be must for the settlement agent to settle the trade

A
  1. the value date has been reached
  2. the seller has the stock to deliver
  3. the buyer has the cash or credit to pay for it, and
  4. the seller’s instructions match the buyer’s instructions.
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7
Q

What is the main role of a instruction reference number in the automation process? (aa-111122223333-1) eg

A

It facilitates automation

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8
Q

Why is quoting the trade reference to the custodian a bad idea?

A

It will, by definition, generate two or more instructions.
Sometimes it may not be possible to settle in a single transaction
The effect of settlement netting
Errors are harder to rectify

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9
Q

What is another term for repo

A

Sale and re-purchase agreement

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10
Q

What is a repo transaction?

A

Trading cash for government assets (bills or bonds usually)

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11
Q

What is stock lending

A

When the borrower borrows stock of the lender to fulfil a short fall due to shorting

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12
Q

What two things are transferred on the start leg of a stock lend?

A

Securities for cash or collateral

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13
Q

What four things are transferred on the end leg of a stock lend?

A

Securities
Cash
Interest on cash or collateral
Lending fee

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14
Q

What is the difference between the two end legs of a repo transaction and a stock lend

A

No lending fee

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15
Q

What is the business purpose of a repo transaction

A

To lower interest rates on borrowings

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16
Q

What are the acceptable instruments for a repo transaction

A

Certain government bonds

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17
Q

What are the acceptable instruments for a stock loan

A

Individual equities and bonds

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18
Q

What is a a reason for a firm to borrow securities?

A

If they have short sold more stock then they have. So they must borrow to cover the difference

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19
Q

Reason for lending securities

A

To gain income on charging a fee to the borrower

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20
Q

What is another term for the Nominal Owner of a stock?

A

Legal Owner

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21
Q

What is an SLIs

A

Stock Lending Intermediaries (SLIs) Used to facilitate and fund large trade operations

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22
Q

If a borrower wanted to borrow a large qty of securities from an SLI for a long period of time, what 3 issues will it face?

A

Can not find a fund manager:

  • Willing to lend such a large amount
  • Willing to lend for such a long period
  • Willing to accept a non-cash collateral
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23
Q

What is Deliver by Value (DbV)

A

Overnight funding between a market maker and a SLI

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24
Q

What does SLI stand for?

A

Stock Lending Intermediaries

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25
Q

What are automated borrowing services?

A

CSDs, ICSDs and custodians. Party A & B are unaware of each other and will be charged fees

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26
Q

What does CSDs stand for?

A

Central Security Depositories

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27
Q

What does Segregation of Client assets mean?

A

Client assets must be held in a separate account to that of the firms assets, even if they are the same asset.

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28
Q

What is a nominee account.

A

A separate account where clients assets are segregated at a CSD or custodian.

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29
Q

What 2 terms must be met for a custodian to use a clients account assets in their own accounts?

A

The client has given prior consent
The client pre agrees terms of how the assets are to be used.

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30
Q

What is an Omnibus account

A

A combined account that custodians use to hold combined client assets. The opposite of a Nominee account..

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31
Q

What, in addition to the previous two terms, are required for a custodian to use client assets in a omnibus account?

A

Each client has given permission
The firm has systems and controls in place that ensure only the assets for the specific client are being used

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32
Q

What are the five technological requirements for a firm who operate in the Stock Loans and Repos market?

A

Manage Collateral
Re-valuation of securities
Send/receive messages
Send relevant instructions to settlement agents
Identify securities for stock lending/repos
Ensure the custody accounts are record correctly

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33
Q

What is a general ledger system

A

A record keeping system for firms financial data

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34
Q

What are the three transactions which interest accrual is earned on

A

Purchase/Sale of bonds
Stock borrowing, lending & repos
Money market loans and deposits

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35
Q

What is accrued interest

A

Accrued interest is defined as the interest that has accumulated on a transaction since the last interest payment date or start date, up but not including the value date.

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36
Q

If Bank ABC borrows £1,000,000 on March 7th for 30 days at 5% interest, calculated on actual/actual basis, the maturity is 6th of April. What of the following is the correct equation?

Repayment amount = 1,000,000 + (1,000,000 x 30/365 x 5%) = £1,004,109.59
Repayment amount = 1,000,000 + (1,000,000 x 30/360 x 5%) = £1,005,107.23
Repayment amount = 1,000,000 + (1,000,000 x 31/365 x 5%) = £1,004,901.56
Repayment amount = 1,000,000 + (1,000,000 x 30/300 x 5%) = £1,004,109.59

A

Repayment amount = 1,000,000 + (1,000,000 x 30/365 x 5%) = £1,004,109.59 (A)

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37
Q

Is there interest payable or receivable on the start date of the transaction?

A

No

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38
Q

Is there interest payable or receivable on the end date of the transaction?

A

Yes

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39
Q

How many days interest are accrued on Friday of a normal week?

A

Three days. Friday, Saturday & Sunday

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40
Q

What is Straight Through Processing (STP) commonly referred to as?

A

Automation

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41
Q

What does SWIFT stand for

A

Society for Worldwide Interbank Financial Telecommunication (SWIFT

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42
Q

What two things must be present for SWIFT to be connected?

A

A secure IP-Based network

SWIFTNet Link.

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43
Q

What is SWIFTNet link?

A

Link software that provides security and ensures interoperability between users, and the store and forward principle.

44
Q

What two protocols make up the SWIFTNet

A

Transmission Control Protocol (Transmission per Second)
Internet Protocol (IP)

45
Q

What is the % of the Committed Data Rate is required to operate SWIFTNet

A

70%

46
Q

What is SWIFTAlliance ?

A

SWIFTNet link that is embedded into a companies own system.

47
Q

What is an API?

A

Application Programming Interfaces, allows for systems to talk to one another

48
Q

What is SWIFT Gateways

A

3rd party products that compete with SWIFTAlliance

49
Q

What is SWIFTNET PKI

A

Security system for SWIFT

50
Q

What method of security does SWIFTNET PKI use?

A

Authenticator keys

51
Q

What five key things does Key-Exchange provide?

A

Authenticity
Integrity
Non-Repudiation
Confidentiality
Access Control

52
Q

What is the Store & Forward principle

A

Messages are sent to an intermediate station where they are then forwarded to the final destination or another intermediate station

53
Q

What are some reasons for the use of the Store & Forward Principle?

A

Time zone differences
Different working days/bank holidays
Natural disasters
Not enough bandwidth

54
Q

Interaction of SWIFT in a firms systems - At the sending firm

A

Trades are captured and enriched with SSI details and references data.
Then forwarded to SWIFT Gateway
If error occurs it is sent to a repair queue or it will be sent for authorization.
It is then encrypted and sent to SWIFT

55
Q

Interaction of SWIFT in a firms systems - At SWIFT

A

Message received at European hub, is time stamped.
Given ACK or NACK status
Moves message onto local hub
Message is held until member comes online, if not already online

56
Q

What does NACK mean in SWIFT messaging

A

Not Acknowledged

57
Q

What does ACK mean in SWIFT messaging

A

Acknowledged

58
Q

Interaction of SWIFT in a firms systems - At receiving firm

A

Received and decrypted
Message is directed to the right department
Un-directed messages get sent manually by a human

59
Q

SWIFT Message standards, which governing body controls the standards?

A

International Organisation for Standardisation (ISO)

59
Q

What code has the format MT100

A

FIN Messages (or known as MT messages)

60
Q

Who regulates SWIFT messaging standards?

A

International Organization for standardization

61
Q

What ISO standard governs all series, except for the MT500 series?

A

ISO 7775

62
Q

What is Extensible Mark-up Language?

A

XML = common information formats to share and format the data on the internet, intranets, and elsewhere

63
Q

What ISO number did XML language bring forward?

A

ISO 15022, 2nd edition

64
Q

What ISO number do all SWIFT messages use since 2004

A

ISO 20022

65
Q

What changed in 2002 in regards to the closed user groups of the SWIFT network?

A

It is now possible for the firms to comminute using SWIFT, in two ways. SCORE and MA-CUG

66
Q

What is a closed user group?

A

A securities or investment firm that has been admitted to the SWIFT network

67
Q

What is SCORE?

A

One of two ways for a closed user group to communicate with banks via the SWIFT network.

In order to use this method the firm must be listed on a regulated stock exchange which is a member of the Financial Action Task Force (FATF)

68
Q

What are the member-Administered Closed User Groups (MA-CUG)

A

Companies not eligible for SCORE can join a MA-CUG

69
Q

What is the difference between SCORE & MA-CUG

A

SCORE Participants SWIFT messages can be network validated by SWIFT. MA-CUG can not and will not be validated

70
Q

What is a Financial Information Exchange (FIX) Protocol

A

Basically each broker with a FIX connection is a two way connection taking place between both their application systems. These applications are reffered to as ‘FIX engines’

70
Q

What is SWIFT Net FileAct

A

Used to send files between parties. It supersedes the existing FIN service.

71
Q

What is SWIFT Net Interact

A

Used for direct application-to-application transactional messaging

72
Q

Why was the Financial Information Exchange (FIX) Protocol created?

A

Because brokers wanted to streamline their trading processes

73
Q

What type of messaging standard is a Financial Information Exchange (FIX) protocol

A

Open message standard

74
Q

What is a FIX engine

A

The applications at either end of the FIX Protocol. They can operate either as stand-alone or fully integrated solutions

75
Q

What is an Electronic Crossing Network

A

Where buy and sell orders for stocks are matched and executed without going through a public exchange

76
Q

What are the two levels that the FIX protocol is defined it?

A

Session & Application

77
Q

What is the session level of the FIX protocol concerned with

A

The session level is concerned with the delivery of data

78
Q

What is the application level of the FIX protocol concerned with

A

The application level defines business-related data content

79
Q

What product does the Financial product Markup Language (FpML) cover?

A

FpML covers the OTC Derivatives industry

80
Q

What does the Extensible Business Reporting Language (XBRL) cover?

A

balance sheets and profit and loss accounts,

81
Q

In the context of CISI what 4 data points are included in the reconciliation procedure of financial data?

A
  1. Cash amounts connected with all types of transactions
  2. Cash balances connected with all types of transactions
  3. Stock and derivative accounts connected with all types of transactions
  4. Stock and derivative postions with all types of transactions
81
Q

What is a reconciliation procedure?

A

The systematic process of comparing, verifying, and harmonizing data sets from multiple sources or systems to ensure consistency, accuracy, and completeness.

82
Q

What is external reconciliation ?

A

Settlement agents reconciling the data on the firms behalf as they hold the external accounts. Like nostro accounts for example

83
Q

What is internal reconciliation ?

A

Internal reconciliation is the act of reconciling data held in one of the firm’s business application

84
Q

Why is external reconciliation important?

A

It is a regulatory requirement to reconcile them

85
Q

What are the three key points for a firm who are internally reconciling their data

A

a. As often as is necessary
b. As soon as reasonably practicable after the date to which the reconciliation relates
c. To ensure the accuracy of the firm’s records and accounts.

86
Q

What is the ‘Total Count Method’ for reconciling data?

A

It requires a;; safe custody assets to be counted and reconciled on the SAME DAY

87
Q

Good business practice - Avoidance of losses. What are the three ways external reconciliation and the FCA ensure losses are kept to a minimum during the settlement and post settlement phases ?

A
  1. Fraudulent Employee activity
  2. Processing errors made in the firm
  3. Processing errors made outside the firm, eg. Settlement agents
88
Q

What are two possible errors that would arise from processing errors when avoiding losses

A

Dividend payments
Corporate actions (Buying and Selling)

89
Q

How often does external reconciliation get done by a large firms?

A

Large firms on a daily basis

90
Q

How is external reconciliation usually achieved?

A

SWIFT Messages. Values are checked against one another to ensure the underlying data is correct and accurate

91
Q

What is a journal voucher?

A

An authorized individual to sign off on external reconciliation matters when the two data’s do not match.

92
Q

What does ‘Settling in tolerance mean’

A

During external reconciliation there may be a small difference between the cash amounts. This will have to be written off by a journal voucher

93
Q

How is internal reconciliation usually achieved?

A

Through the same applications that external reconciliation uses

94
Q

Why is internal reconcilai

A

as the trade in the example flows through the trade cycle, records may need to be created and updated in multiple business systems.

95
Q

How can pre-agreed portfolio rules be created?

A
  1. In conjunction with the client as part of their client mandate document
  2. Driven by regulation
95
Q

What is post trade compliance?

A

Ensures that a portfolio does not veer from the pre agreed rules listed in the portfolios investment mandate

96
Q

What is a passive breach

A

where a breach occurs that is caused by market conditions outside the control of the manager or investor.

97
Q

If a pre-defined portfolio rule is broken, who should it be reported to?

A

Fund manager

98
Q

If a pre defined portfolio rule is breached, what are the two types of breach it can be?

A

Active & Passive

99
Q

What are the IT complications of Post Trade compliance, there are 3

A

Ability to create & maintain the rules
Good clean data
A scheduler for the fund manager to determine when post trade compliance rules are run.

99
Q

What is an active breach

A

1.Active breaches – where a fund manager trades (hopefully accidentally) into the wrong investment

100
Q

How often are post trade compliance rules run?

A

Once a day. Either EoD or before trading starts in the morning

101
Q

Once rules are run, what is the Post trade compliance process required to do (3)

A

Highlight breaches
Ensure breaches are forwarded to the correct parties
Ensure the system is kept on an access only basis and changes are clearly logged (Auditing requirement).

CISI Technology in Investment Management. (20 decks)

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