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Question 1

What are the four main functions of the financial services industry?

Answer 1

1. financial intermediation:
2. pooling and managing risk;
3. provision of payment and settlement services; and
4. portfolio management.

Question 2

What are the main types of financial institution?

Answer 2

1. central banks;
2. deposit institutions (such as banks; and
3. investment institutions (such as insurance companies, collective investment funds and pension funds

Question 3

Which four functions do governments perform?

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 stabilitv.

Question 4

What are real and financial assets?

Answer 4

Real assets are physical assets such as land, buildings and gold. Financial assets are claims representing the right to some return (such as a bank deposit or bond) or to ownership of physical assets.

Question 5

What are he main functions of securities markets?

Answer 5

1. raising capital;
2. transferring risk;
3. price discovery; and
4. creating liquidity.

Question 6

What are primary and secondary markets?

Answer 6

Primary markets are where initial sales of securities are made. Subsequent trading takes place in the secondary market.

Question 7

What are round-trip transaction costs?

Answer 7

Round-trip transaction costs are the total costs of completing a transaction, including bid-ask spread, commissions and taxes

Question 8

Describe the London Stock Exchange

Answer 8

The London Stock Exchange operates an order-driven system called SETS for FTSE 100, FTSE 250 and FTSE Small Cap constituents, and a quote-display system called SEAO for fixed-interest securities and AIM secuties.

Question 9

Where are less liquid stocks traded?

Answer 9

Less liquid stocks, listed on the main market, are traded on SETSax. which combines a periodic auction book along with quote-driven market making

Question 10

Describe UK government bonds

Answer 10

UK Government bonds are known as gilts, and the Debt Management Office (DMO) is the department of the Treasury responsible for gilt issuance, usuallv via an auction.

Question 11

What are corporate bonds?

Answer 11

Corporate bonds may be issued via an open offer or private placement. The former can involve a bought deal or fixed brice re-ofter.

Question 12

What is a dual listing?

Answer 12

Dual listing is when two corporations function as a single operating business but retain separate legal identties and stock exchange listings.

Question 13

What is an OTC market?

Answer 13

An over-the-counter (OTC) market involves trading in a decentralised way rather than on an exchange.

Question 14

What is CREST?

Answer 14

CREST is the London Stock Exchange’s electronic settlement system, which settles on a T+2 basis for equities and a T+1 basis for gilts.

Question 15

What is the FCA?

Answer 15

In the UK, the Financial Conduct Authority (FCA) is the ‘competent authority’ (or, colloquially, the UK-listing authority), which decides on the admission of securities to the Official List,

Question 16

Requirements of listing on the main markets

Answer 16

Listing on the main market requires at least three years of published accounts, and over £700,000 of listed stock or £200,000 of debt securities.

Question 17

Describe AIM

Answer 17

AIM is regulated by the London Stock Exchange, and there is no minimum criterion for size, trading record or shares in public hands.

Question 18

What must directors, major shareholders and concert parties declare?

Answer 18

Share interests

Question 19

What does the corporate governance system in the UK stress?

Answer 19

The corporate governance system in the UK has traditionally stressed the importance of internal controls and the role of financial reporting and accountability, rather than external legislation

Question 20

What does a listed company agree to?

Answer 20

When a company is listed on the London Stock Exchange, it agrees to abide by the continuing obligations of listed companies. The rules encourage companies to release new information to the market on a regular basis

Question 21

What is every public company required to do?

Answer 21

Every public company is required to hold an annual general meeting (AGM within six months of the end of their financial year, and the interval between AGMs must not be more than 15 months.

Question 22

What is a general meeting?

Answer 22

Any meeting of a company other than an AGM is called a general meeting. General meetings must be called by giving no less than 14 calendar days written notice, and companies are permitted to communicate with their shareholders electronically

Question 23

What does a proxy do?

Answer 23

Any member entitled to attend and vote at a company meeting may appoint another person (the proxy) to attend and vote on their behalf

Question 24

What does government bond trading in other countries involve?

Answer 24

Government bond trading in other countries often involves local banks trading OTC, with settlement via the central bank. Corporate bonds are often listed and traded through central clearing depositary systems associated with local exchanges.

Question 25

What are Euroclear and Clearstream?

Answer 25

Euroclear and Clearstream are the two main systems currently available for settling Eurobond transactions. All trades must be confirmed T+1 and settled T+2

Question 26

What is the principal-agent problem?

Answer 26

The separation of ownership and control leads to the principal-agent problem

Question 27

In capital markets, what do shareholders act as?

Answer 27

In capital markets, shareholders act as principals and delegate control to managers, who are agents.

Question 28

What are other forms of principal-agent relationship in the investment industry?

Answer 28

Other forms of principal-agent relationship in the investment industry include fund advisers or managers acting as agents for investors

Question 29

What are solutions to the agency problem?

Answer 29

Solutions to the agency problem incur agency costs, and include:
1. aligning the interests of managers and owners through renumeration of the former in shares or stock options
2. boards of directors looking after the interests of shareholders, and
3. external control through active groups of shareholders or the threat of takeover.

Question 30

Advantages of indirect investment

Answer 30

1. Greater diversification
2. Reduced transaction costs
3. Access to specialist expertise
4. Ability to invest in assets not available to individual investors

Question 31

When is a market pre-trade transparent?

Answer 31

It publishes real-time data about quotes and orders

Question 32

When is a market post-trade transparent?

Answer 32

It publishes trade prices and sizes shortly after trades occur

Question 33

What is the liquidity risk?

Answer 33

The risk of not being able to sell quickly with the potential for loss of value

Question 34

What is SETS?

Answer 34

An electronic limit order book used to trade stocks including FTSE 100, 250, and Small Caps as well as most AIM and Irish securities. ETFs and also ETPs are traded on SETS

Question 35

What is SETSqx?

Answer 35

A trading platform for less liquid stocks than on SETS. Combines periodic electronic auction book with non-electronic quote-driven market making

Question 36

What is SEAQ?

Answer 36

A quote display system used as the price reference point for telephone execution between market participants and registered market makers. Used for fixed-interest securities and AIM not traded on SETS or SETSqx

Question 37

What is LCH?

Answer 37

The central counterparty to all SETS and SETSqx trades at the point of execution. It ensures clearing members acting on behalf of firms trading on SETS are not exposed to any risk in the event a clearing member defaults

Question 38

Order driven?

Answer 38

Used for highliy liquid stocks

Question 39

Quote driven?

Answer 39

Require market makers to maintain liquidity and efficiency in trading

Question 40

HFT key strategies

Answer 40

1. Market-making based on order flow
2. Market-making based on order flow
3. Event arbitrage
4. Statistical arbitrage

Question 41

What is a premium listing?

Answer 41

Typically used by large firms looking to benefit from an increased profile and highly liquid market. Must meet highest standard of regulation and corporate governance and pay significant costs to maintain a premium listing.

Question 42

What is a standard listing?

Answer 42

For firms that meet the minimum requirements

Question 43

Conditions for premium listings

Answer 43

1. Must normally have published accounts that cover at least three years
2. £700,00 shares or £200,000 debt securities
3. 25% must be held by public
4. Sufficient working capital to cover at least the next twelve months of business
5. A sponsor is required in connection with the admission for listing

Question 44

Conditions for listing on AIM

Answer 44

1. Incorporated in EEA
2. Commercial company issuing equity only
3. Minimum free float of 10% at IPO
4. Demonstrate 20% revenue growth over three years

Question 45

UK corporate governance code

Answer 45

1. Board leadership and company purpose
2. Division of responsibilities
3. Composition, succession and evaluation
4. Audit, risk and internal control
5. Remuneration

Question 46

Remuneration report of a company regulations

Answer 46

1. A policy report setting out the company’s renumeration policy and key factors taken into account setting that policy
2. Implementation report setting out actual payments to directors and details on the link between company performance and pay for the financial year. To be published annually

Question 47

Section 172 Reporting

Answer 47

Requires a director to act in the way he considers in good faith, likely to promote the success of the company for the benefit of its members

Question 48

UK Stewardship Code

Answer 48

Twelve principles aimed at asset managers and asset owners. Six principles aimed at service providers.