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CISI: Derivatives > Chapter 3: Market Structure > Flashcards

Chapter 3: Market Structure Flashcards

(73 cards)

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1
Q

What is Europe’s largest exchange?

A

Euronext

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2
Q

What is Euronext’s trading platform called?

A

Optiq

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3
Q

Which entities clear Euronext trades? (2)

A

LCH SA
EuroCCP

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4
Q

In which UK exchange is open outcry still used?

A

London Metal Exchange

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5
Q

What is the CME?

A

Chicago Mercantile Exchange

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6
Q

What is the largest US options exchange?

A

CBOE - Chicago Board Options Exchange

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7
Q

What is the world’s largest derivative exchange?

A

Eurex

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8
Q

Which exchange introduced LEAPs?

A

CBOE - Chicago Board Options Exchange

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9
Q

What are the 3 main exchange membership categories?

A

Brokers
Dealers
Broker-dealers

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10
Q

What can a broker do?

A

May only trade for third parties

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11
Q

What can a dealer do?

A

May trade for their own account, and other members if approved by regulatory body

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12
Q

What can broker-dealers do?

A

Trade for their own account and third-parties

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13
Q

What do all exchanges have?

A

A clearing house

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14
Q

What does a clearing house do?

A

Acts as a central counterparty (CCP) to all trades executed on the exchange between clearing members

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15
Q

What is the benefit of a CCP?

A

No counterparty risk, clearing house guarantees all deliveries

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16
Q

What are the two types of clearing member?

A

General Clearing Members (GCMs)
Individual Clearing Members (ICMs)

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17
Q

What are General Clearing Members (GCMs)?

A

Can clear their own principal trades, on behalf of clients and other non-clearing members

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18
Q

What are Individual Clearing Members (ICMs)?

A

Only able to clear their own principal trades and trades on behalf of their clients

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19
Q

What is clearing?

A

The correct and timely transfer of securities and funds between buyers and sellers

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20
Q

Which type of clearing member is required to have a higher level of financial resources?

A

General Clearing Members (GCMs) over Individual Clearing Members (ICMs)

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21
Q

What other terminology for members do some exchanges use?

A

Clearing members (CMs) or Trading members (TMs)

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22
Q

What can Trading Members (TMs) do?

A

They can collect collateral and execute trades from clients but must have a relationship with a CM.

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23
Q

What is an OTC market?

A

A decentralised market in which participants trade directly between two parties without a central exchange or broker

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24
Q

Who acts as market-makers in the OTC market?

A

Dealers

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25
Why is hedging a key utility of OTC markets?
Allows for hedging without significant margining requirements, tailor products
26
What is the difference between 'high-touch' and 'low-touch' trading services?
OTC considered high-touch as often desks will provide 24/7 advice to clients whereas exchange trading is more automated
27
What is pit trading?
Open outcry / Ring trading Face to face trading, where traders will quote prices Orders shouted out
28
Who can pit trade on LME?
Must have membership, these are valuable due to limited availability. Can be leased / sold
29
For what kind of trades is CBOTs open outcry trading floor used for?
Complex trades as they are difficult to quote electronically
30
Who uses telephone trading?
Only between clients and executing brokers Trader at broker will then go on to execute the trade in the market
31
What is specified in an open outcry order?
* 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)
32
What is a market-if-touched (MIT) order?
Combination of a limit and a market order. Market order executed if price crosses a limit
33
What is an opening order?
Order with or without a price that is executed in first two minutes of trading
34
What is an immediate or cancel order?
Fills immediately or will be cancelled, fill-or-kill
35
What is a cross trade?
Where a match has been established by negotiation prior to entry in the system
36
What is a basis trade?
Exchange of financial asset with a futures contract in a privately negotiated transaction
37
When must block trades be reported?
Between 5 mins to an hour of execution
38
What are the four main advantages of trading OTC?
Products can be uniquely made to fit requirements Confidentiality, as trades can be negotiated between client and broker Mitigated counterparty risk Lighter on BO teams, as no daily margin
39
What is risk pricing?
Requesting a quote for a whole large order from an OTC counterparty to prevent slippage
40
How has counterparty risk in OTC transactions been mitigated since 2008?
OTC trades have to be reported to a facility which is allows for surveillance by regulators
41
What are the three main downsides to OTC trading?
Lower liquidity High cost to complex trades Higher credit risk
42
What is the process called where a clearing house becomes counterparty?
Novation
43
What is cash settlement?
Net cash payment on the difference between the final positions closing price and the previous closing price
44
What is cash settlement often known as?
Contract for difference (CFD)
45
How is a buyer selected for physical settlement?
Randomly by the clearing house
46
Why do long-dated gov bonds differ from most financial futures?
Multiple underlying assets can be delivered Exchange will have a list of eligible bonds
47
Who initiates delivery in futures vs options?
Futures - Seller Options - Buyer
48
How does delivery work for commodity futures?
Exchanges will have authorised warehouses
49
What is dual capacity?
The ability of a member to act as either principal or agent in any transaction
50
What is cross trading?
When a brokerage firm matches a buy order of one customer against the sell order of another, when one side is non-competitive (where customer has not specified a price)
51
When is cross trading permissible?
When executed in accordance with the Commodity Exchange Act, Commodity Futures Trading Commission (CTFC)
52
When can cross trading take place? (2)
when a member * has a buyer and a seller for the contract at a given price, or * is willing to deal with a client as principal. member takes the trade as principal
53
What is an opening trade?
One that creates a position in the market, and incurs obligations
54
What is a closing trade?
One that offsets an existing position, extinguishes any obligations
55
What is open interest?
Total number of contracts for any delivery month that remain open
56
Does open interest include short positions?
Open interest is the sum of all open long positions or the sum of all open short positions, not the sum of both.
57
What is OATS?
Order Audit Trail System Exchanges track all orders
58
What is trade registration?
When the trade is reported into the administration system that is used by the exchange.
59
What is the house account?
For all proprietary trades of the clearing member, no client positions
60
What is pre-registration?
A member firm indicating that a deal it is doing should be allocated/given-up to a second member
61
What is pre-registration sometimes known as? (2)
Allocation/Give-up
62
What is a give-up?
Give-ups are the sending of a trade to another member of the exchange.
63
How is risk mitigated with allocated transactions?
Master Give-Up Agreements Set the legally-binding framework that governs the relationship between members in a give-up. Includes compensation clauses
64
Why else may give-ups be performed?
Shortages of trading staff at a give-in firm Preserve anonymity
65
Why are give-up trades performed?
Separate the execution and the clearing function. A customer might wish to trade (execute) through one exchange member but state that the trade should be given up to the customer’s usual clearing broker.
66
GIVE UP EXAMPLE
Example Member firm ABC executes, confirms and matches a trade which it pre-registers, notifying the system that the trade should be allocated to firm DEF (another member). ABC gives up the trade to DEF. In turn, DEF will claim the trade, which will be registered to DEF as a house, segregated or non-segregated transaction.
67
What must member firms do to remain compliant with exchanges?
Compile trade reports and sent to the exchange within a certain time frame
68
Are OTCs subject to exchange reporting?
Nope, but they must be input into internal systems so they can be managed
69
What are the kinds of trades that need to be manually reported to exchanges?
Block and basis trades, rest are done automatically
70
To who are exchange price feeds available?
Quote vendors - Bloomberg Members
71
What does each futures expiry month have?
A unique identifier Jan - F June - M Dec - Z
72
Why is it important for clients to monitor open interest?
So they are aware of their exposure at all times, they can have a credit limit with their broker
73

CISI: Derivatives (10 decks)

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