Introduction Flashcards
(101 cards)
1
Q
What are capital markets?
A
Capital markets are financial markets where entities like corporates, sovereigns, and semi-state bodies raise medium- to long-term finance.
2
Q
What are the main modern capital markets?
A
- Debt and equity capital markets
- Securitisation and structured finance markets
- Derivatives and structured finance markets
3
Q
How are capital markets categorised?
A
Primary Markets: Where securities are issued
Secondary Markets: Where securities are traded
Also categorized into equity, debt, securitisation, and derivatives markets.
4
Q
How do the UK FCA and European Commission define capital markets?
A
FCA: Markets where shares, derivatives, bonds, and other instruments are bought and sold.
European Commission: Markets for raising longer-term finance via shares or loans not expected to be fully repaid for at least a year.
5
Q
What roles do issuers and investors play in capital markets?
A
Issuers: Raise money by issuing securities.
Investors: Invest money, hoping for financial returns.
In exchange for an investor transferring money to the issuer, the issuer will issue financial instruments known as securities to the investors.
6
Q
What are securities?
A
Contracts representing an investment between issuers and investors. They can be bought and sold on capital markets.
7
Q
Why do issuers access the capital markets?
A
- Provide issuers with an alternative source of funding that can be used instead of or with bank financing.
- Issuers have access to a larger number of investors.
- Capital markets offer more flexibilitiy, longer maturities and a wider investor base.
8
Q
Why do investors access the capital markets?
A
- Investors in a capital markets transaction can include (amongst others) financial institutions, pension funds, governments, high-net-worth individuals and retail customers. The capital markets provide these investors with an alternative venue for investing their excess money to a standard bank deposit.
- By investing through the capital markets, investors can buy securities that they either hold as an investment or trade with other investors.
9
Q
Are capital markets a form of bank disintermediation?
A
While financial institutions remain involved and help to place securities with potential investors, issuers borrow/receive funds directly from investors. Investors can, therefore, choose which issuers they want to provide funding to, and which securities their money will buy.
10
Q
What are the benefits of raising funds via capital markets over bank loans?
A
Access to a wider pool of investors
More flexibility, better pricing, and longer maturities
Alternative or additional source of funding
11
Q
What types of investors participate in capital markets?
A
Financial institutions, pension funds, governments, high-net-worth individuals, and retail customers.
12
Q
Why do investors prefer capital markets over standard bank deposits?
A
Alternative investment options
Ability to hold or trade securities
13
Q
How do capital markets reduce the role of financial intermediaries like banks?
A
Investors provide funds directly to issuers by purchasing securities.
Example:
Investors > Securities > Issuers
Issuers > Funds (£) > Investors
14
Q
What are the types of capital markets based on currency and location?
A
- Domestic: Issuer and investors are in the same country, using the local currency.
E.g., a UK company issuing GBP bonds in the UK. - Foreign: Issuer and investors are in different countries, using the investors’ currency.
E.g., a Turkish company issuing USD bonds in the U.S. - International/Eurobond: Securities issued in a currency different from the issuer’s home country.
E.g., a UK company issuing Japanese Yen bonds in Luxembourg.
15
Q
What was the first eurobond issuance?
A
Italian company Autostrade issued $15M bonds listed on the Luxembourg Stock Exchange.
A&O helped establish modern debt capital markets through this transaction.
16
Q
What are the three broad categories of capital market products?
A
- Debt securities: Bonds or notes evidencing debt owed by issuers.
- Securitisation: Bonds secured by predictable cashflows (e.g., mortgages).
- Derivatives: Instruments deriving value from underlying assets (e.g., swaps, futures).
17
Q
What are debt securities?
A
Evidence a debt owed by the issuer to the investor. Create a contractual relationship between the issuer and bondholder - issuer promises to redeem the secuirty at maturity or on the occurance of a particular event.
18
Q
What are securities?
A
Bonds that are secured on predictable cashflows derived from a pool of assets.
19
Q
What are derivatives?
A
Value is dependent upon an underlying asset. Various types of contracts are used to derive value from these underlying assets, such as options, futures, forwards and swaps. These instruments are used by market participants to manage risk, to speculate on future price movements or to hedge (protect) against potential future losses.
20
Q
What led to the GFC in 2007/2008?
A
- Risky loans and the growth of the subprime mortgage market.
- Securitisation of mortgages into risky mortgage-backed securities (MBS).
- Failure in transparency and accurate risk ratings for these securities.
21
Q
How has regulation changed post-GFC?
A
- Increased focus on financial stability and systemic risk management.
- Emphasis on transparency and stronger market oversight.
22
Q
What is systemic risk?
A
The risk of an event causing instability or collapse of an entire industry or economy (e.g., failure of a major bank).
23
Q
What are the two types of securities issued to investors in capital markets?
A
Debt securities: Acknowledging a debt.
Equity securities: Acknowledging an investment.
24
Q
What is a bond?
A
A financial instrument evidencing a debt owed by an issuer, promising:
Repayment of the debt (principal) at a future date.
Interest (coupon) payments to investors during the life of the bond (if applicable).
Bonds are essentially a promise to repay a loan.
25
When is the principal amount of a bond repaid?
On a specified maturity date.
Sometimes on multiple dates between the issue and maturity date.
26
What happens on maturity of the bond?
At maturity of the bond or upon the occurrence of a particular event - the issuer will redeem the bond certificates and in doing so will repay investors their original investment.
27
What are perpetual bonds?
Bonds with no maturity date, redeemed upon the occurrence of a specific event.
28
What do the Terms and Conditions of bonds specify?
1. Redemption terms
2. Interest payment details
3. Other key provisions
29
What are debt securities?
Debt is money that is borrowed and must be repaid.
30
What are equity securities?
Equity is a financial investment in a company.
31
Repayment for debt securities vs equity securities
Debt: The issuer promises to repay the principal to the investor.
Equity: Shares evidence an investor’s ownership interest in the issuing company, they are not a debt and there is generally no obligation on the issuer to repay the investment.
32
Periodic returns for debt securities vs equity securities
Debt: Investors will typically have the right to be paid interest (coupon). This coupon can be fixed or floating. Some bonds are zero coupon.
Equity: There are no guaranteed payments. Instead, an issuer may pay shareholders a dividend.
33
Interest on the issuer for debt securities vs equity securities
Debt: A bondholder does not take any ownership interest in the issuer’s equity.
Equity: A shareholder takes an ownership interest in the issuer. This ownership usually gives the shareholder the power to vote on major issues relating to the issuer and to have access to information about the issuer.
34
Typical issuers for for debt securities vs equity securities
Debt: Bond issuers are borrowers and can be a variety of different types of entity, including:
* national government (known as a “sovereign bond”);
* companies;
* supranational entities; and
* Special Purpose Vehicle - SPVs.
Equity: Only a company can issue shares as the process of issuing shares requires the existence of a company’s separate legal personality.
35
Typical investors fro debt vs equity
Debt: Bonds can be marketed to a wide number of investors. In wholesale bond issuances, these investors are sophisticated or institutional investors; in retail bond issuances, these investors include individuals who are not professional investors.
Equity: Shares in private companies will typically be placed with a small group of targeted investors. Shares in public companies can be marketed to a wide number of wholesale and retail investors.
36
Listing for debt vs equity
Debt: Cannot be listed on a stock exchange
Equity: Shares in private companies are not listed on a stock exchange. Shares in a public company may or may not be listed on a stock exchange (although typically will be).
37
Tradeability of debt vs equity
Debt: Bonds are negotiable (i.e. tradable) instruments, meaning that they can generally be bought and sold on the secondary market (as such, once you purchase a bond certificate, you are not required to hold onto it until maturity, you can generally sell it to another investor and try to recover your initial investment).
Equity: Shares are tradable instruments, but shares in private companies may be subject to transfer restrictions as provided for in the issuer’s constitutional documents (such as pre-emption rights).
38
What is the primary advantage of issuing bonds over shares?
Issuing bonds avoids dilution of ownership because bondholders do not receive a share in the issuer's ownership or participate in its control—they are merely creditors.
39
Why might an issuer prefer bonds over bank loans for large funding needs?
1. Access to a large investor base, especially if bonds are listed on a stock exchange.
2. Capability to issue large-sized loans (e.g., USD 1 billion) with long tenors (e.g., 30+ years).
3. Risk is spread across many investors instead of a few lenders.
4. Bonds often have fewer business restrictions compared to loans.
5. Flexible interest rate options are available.
6. Plain vanilla bonds are typically unsecured, unlike most bank loans.
40
What are the benefits for investors in bonds?
1. Reliable payment stream via interest payments and principal repayment upon maturity.
2. Priority over shareholders in case of the issuer's liquidation.
3. Tradability: Bonds can be sold before maturity to realize investment or profit.
41
What are fixed-rate bonds, and how do they work?
Bonds that pay bondholders a fixed rate of interest throughout their life, set at issuance.
Interest is paid annually or semi-annually.
42
How do floating rate notes differ from fixed-rate bonds?
Interest payments fluctuate based on a variable benchmark rate plus a margin.
Payments often made quarterly to reflect rate changes.
43
What is the benchmark used for floating rate notes?
* Up until 2021/2022, the London Interbank Offered Rate (LIBOR) was a widely used underlying benchmark in bond issuances. LIBOR has now been phased out as a benchmark.
* Now a “risk free rate” (such as SOFR or SONIA) is the relevant benchmark.
* When a risk free rate is used as a benchmark the parties use an interest rate that an investor would expect to earn on an investment that carries no risk.
44
What are zero-coupon bonds?
Do not pay interest during the life of the bond.
Bonds issued at a discount, with no interest payments.
Profit is realised when the issuer repays the full principal at maturity.
Bondholders’ profit comes at maturity of the bonds when the issuer makes up the difference between the price the bondholders paid for the bonds and the principal amount.
45
What are Commercial Paper and Certificates of Deposit?
They are short-term debt instruments that are issued by banks or other companies.
**Commercial Paper: **Short-term borrowing instrument (maturity < 365 days).
*** Certificates of Deposit: **Tradable certificates from banks or societies, recording deposited funds with fixed interest, repayable at maturity. The holder of the certificate will be repaid at maturity. If the depositor needs money before maturity, they will need to sell the certificate to a third party.
46
What is the difference between primary and secondary markets for debt securities?
**Primary Market:** Where securities are issued for the first time, with extensive regulation.
**Secondary Market: **Where securities are traded among investors, subject to market forces, with fewer regulations.
47
What are debt capital markets?
Virtual platforms for issuing and trading debt securities, connecting issuers (borrowers) and investors (lenders).
48
What are the key characteristics of bonds?
Coupon/Interest: Annual interest payment.
Yield: Return based on coupon and market price.
Principal: Face value to be repaid at maturity.
Tenor: Time until maturity.
Maturity Date: When the issuer redeems the bond and repays investors.
49
How are securities defined in the EU/UK capital markets?
Negotiable financial instruments such as:
* Shares.
* Bonds or securitised debt.
* Rights to acquire or sell transferable securities.
50
What are wholesale capital markets transactions?
These involve the issuance and trading of high-value securities marketed to sophisticated investors like financial institutions and pension funds, and are subject to lighter regulatory frameworks.
51
How do retail capital markets transactions differ from wholesale transactions?
Retail transactions market and sell securities to private investors, requiring more stringent regulatory and disclosure standards due to the less sophisticated investor base.
52
What is a regulated market?
It is a system operated by a market operator that brings buyers and sellers together to trade financial instruments, such as on a country’s main stock exchange like the London Stock Exchange.
53
What is a multilateral trading facility (MTF)?
An MTF is a self-regulated financial trading venue that brings together buyers and sellers of financial instruments, operating with fewer restrictions than regulated markets.
54
What are OTC markets?
Over-the-counter (OTC) markets are those where securities are traded through a dealer network, rather than over a stock exchange.
55
What is the role of a fiscal agent in bond issuance?
A fiscal agent acts as the issuer’s agent, performing tasks such as making payments to bondholders but does not represent their interests.
56
How does a trustee differ from a fiscal agent?
A trustee represents bondholders’ interests, ensuring the issuer meets obligations, but does not handle payments, unlike a fiscal agent.
57
What is a prospectus?
a legal document that issuers prepare and make available to potential investors.
* It contains information that potential investors need in order to make an informed decision about whether to invest in the issuer’s securities.
58
What is the passporting a prospectus regime?
Involves a prospectus approved in one EU/EEA Member State’s national competent authority being accepted by another EU/EEA state without the need for further approval. The EU’s single market in financial services enables this passporting to take place.
* Following Brexit, it is no longer possible for prospectuses approved by an EU/EEA Member State to be passported into the UK (and vice versa).
59
What is the principal amount of a bond?
The amount of money the bond issuer must repay when the bond matures – this is usually the same amount as the investors originally invested although there are exceptions to this, such as zero coupon bonds.
60
What does it mean for a bond to be issued at par?
investors pay the issuer the face value – i.e. the full amount that the issuer agrees to repay at maturity. If bonds are issued below par (at a discount), the issuer receives a price less than the face value, and if they are issued above par (at a premium), the issuer gets more than the face value of the bond. Whether bonds are issued below or above par, the investors will be repaid the face value/principal at maturity.
61
Who are the paritipants?
* Issuer
* Guarantor
* Investors/bondholders
* Managers
* Agents
* Fiscal agents OR trustees
* Paying agents
* Calculation agent
* Agent bank
* Registrar
* Clearing system/International Central Securities Depository (ICSDs)
* Rating agent
* Auditors
* Lawyers
* Stock Exchange
* Competent Authority/Regulator
62
What is the significance of the coupon in bonds?
The coupon is the annual interest payment a bondholder receives, directly affecting the bond’s yield.
63
Define "bond yield" and explain its relationship to bond price.
Bond yield is the annual return an investor expects, calculated as the coupon divided by the market price. Yield and price are inversely related.
64
Why is there no single regulatory framework for international capital markets?
Regulations are jurisdiction-specific, with each stage of a transaction governed by the laws of the country where it takes place.
65
What are the four key pillars of Level 1 EU securities regulation?
1. Prospectus Regulation
2. Market Abuse Regulation
3. Transparency Directive
4. Markets in Financial Instruments Regulation.
66
What is the principal or nominal amount of a bond?
It is the amount the issuer repays to the bondholder at maturity, typically equal to the original investment.
67
What is the role of a lead manager in bond issuance?
The lead manager coordinates the issuance, manages documentation, liaises with parties, and arranges payments to the issuer.
68
What is Clearing System/International Central Securities Depository (ICSDs) ?
The ICSDs allow bondholders to hold their bonds in electronic form and to trade these bonds electronically.
The main ICSDs are Euroclear and Clearstream (the Depository Trust Company (DTC) performs this function within the U.S. market).
If a bondholder is a direct customer of one of the ICSDs, they can hold their securities in the ICSDs through their securities accounts. If a bondholder is not a direct customer of an ICSD, they hold their securities indirectly through a common depositary/common safekeeper as custodian.
69
Who is the fiscal agent vs the trustee?
A fiscal agent is a bank appointed by the issuer. It acts as agent of the issuer. It does not owe a duty of care to, nor does it act on behalf of, bondholders. As the issuer’s agent, the fiscal agent carries out functions for the issuer, such as making payments of principal and interest to the bondholders and performing other administrative tasks.
The trustee acts on behalf of the bondholders in certain situations and in doing so represents the bondholders’ interests throughout the life of the bonds. It monitors the issuer on behalf of bondholders to make sure the issuer does not breach its obligations. The trustee does not make payments of principal and interest to bondholders. Instead, it appoints paying agents to handle the payment process.
70
What is a paying agent?
The paying agent distributes payments of principal and interest to bondholders on behalf of the issuer. There may be multiple paying agents if the bonds are issued in multiple jurisdictions.
71
What is a calculation agent?
A bond issuance will not always have a calculation agent. One may be appointed where the calculation of the coupon is complicated.
72
Securities and markets regulation covers two broad categories:
**Conduct Regulation**
* Conduct regulation seeks to ensure that all market participants behave within ethical and statutory parameters and do not harm the market.
* Conduct regulation, therefore, requires adequate disclosure of information, transparency and investor protection.
**Prudential Regulation**
* Prudential regulation focuses on financial institutions, such as banks and insurance companies.
* This type of regulation seeks to ensure that those financial institutions have adequate capital and liquidity and are fit and proper - the focus is on the financial health of these financial firms.
73
Under the EU Regulatory Regime, what are regulations, derivatives, decisions, soft-law?
1. **Regulations **- apply in all Member States in full, without further implementation action at a Member State level.
2**. Directives** - binding as regards the result to be achieved, but leave the form and method of implementation to Member States.
3. **Decisions** - have specific addressees – they are binding on their addressees, but may not be binding on others within the EU.
4. **Soft-law** - Non-binding rules (guidance, recommendations and FAQs) primarily generated by EU supervisory bodies.
74
What are the four core pillars of EU law in the regulatory architecture?
1. Prospectus Regulation (EU) 2017/1129
2. Market Abuse Regulation (EU) 596/2014 (MAR)
3. Transparency Directive (EU) 2004/109/EC
4. MiFID II Directive (2014/65/EU) and MiFIR (Regulation 600/2014)
75
What is the main purpose of the Prospectus Regulation (EU) 2017/1129?
The Prospectus Regulation ensures that a prospectus, once approved in one Member State, is valid in any other Member State without needing to be approved again, enhancing transparency, investor protection, and market efficiency.
76
What is market abuse and how does the Market Abuse Regulation (EU) 596/2014 (MAR) address it?
Market abuse refers to illegal activities that manipulate financial markets. MAR sets out regulations to combat market abuse, strengthen regulators' powers, and ensure market integrity and investor protection.
77
What is the aim of the Transparency Directive (EU) 2004/109/EC?
The Transparency Directive aims to harmonize disclosure requirements across the EU, ensuring issuers disclose key information to the public, enhancing investor confidence and enabling informed investment decisions.
78
What does the MiFID II Directive (2014/65/EU) and MiFIR (Regulation 600/2014) regulate?
MiFID II and MiFIR provide a regulatory framework for investment firms, trading venues, data reporting service providers, and third-country firms, outlining authorisation requirements and ensuring cross-border service provision through an EU passport.
79
What happened to the UK regulatory framework after Brexit?
After Brexit, the UK implemented a new securities and markets regulation regime by "onshoring" EU laws, maintaining much of the EU framework but allowing modifications for a UK-only context.
80
What is the UK Prospectus Regime post-Brexit?
The UK Prospectus Regime post-Brexit requires that issuers whose prospectus was approved by an EU authority must seek approval from the FCA to issue securities in the UK, with no passporting of prospectuses between the UK and the EU.
81
How did the UK Market Abuse Regulation (UK MAR) change after Brexit?
UK MAR, a result of onshoring, covers financial instruments traded on UK and EU trading venues, with the FCA taking over functions previously held by ESMA. It applies to all transactions involving financial instruments, including those off-market.
82
What changes were made to the UK Transparency Regime after Brexit?
The UK Transparency Regime (DTRs) now only applies to securities admitted to trading on UK regulated markets, requiring issuers to use UK-adopted IFRS and comply with rules on related party transactions and financial reporting.
83
What is the UK MiFIR regime post-Brexit?
UK MiFIR, implemented after Brexit, applies to UK-based investment firms and credit institutions offering investment services. It treats the EU as a third country, with exceptions for certain financial instruments like EEA emission allowances.
84
What role does supervision play in the UK capital markets?
Supervision ensures compliance with regulations, protecting investors and markets. In the UK, supervision is split between the Prudential Regulation Authority (PRA) for prudential regulation and the FCA for conduct regulation.
85
What is ESMA’s (European Securities and Markets Authority) role in EU capital markets supervision?
ESMA is the key EU supervisory authority, contributing to financial stability by directly supervising certain market participants and issuing guidance to NCAs (National Competent Authorities) to ensure consistent regulatory practices across the EU.
86
ESMA is the key EU supervisory authority, contributing to financial stability by directly supervising certain market participants and issuing guidance to NCAs to ensure consistent regulatory practices across the EU.
The NCA in the Member State that is the issuer’s home Member State is generally responsible for conducting supervision pursuant to the provisions of the various pieces of EU securities and markets regulation.
The host Member State is the country where an offer of securities to the public is made, where admission to trading on a regulated market is sought, or where certain regulated activities are performed, in each case if different from the home Member State.
The host Member State NCA’s supervisory role is typically limited to the exercise of precautionary powers when there is a serious threat to investor protection, financial stability or market integrity and the home Member State NCA has failed to act.
87
How does ESMA influence transactions in EU markets?
ESMA can influence transactions by regulating credit rating agencies, trade repositories, and issuing guidance on the application of EU securities law, which market participants must often follow or explain why they have not.
88
What is the impact of Brexit on the UK’s role in the EU capital market?
After Brexit, the UK is treated as a third country, meaning UK-approved prospectuses no longer benefit from passporting into the EU, significantly impacting UK-EU capital market transactions.
89
How did Brexit affect the UK’s supervisory authorities?
Post-Brexit, the UK’s supervisory responsibilities, such as overseeing credit rating agencies and trade repositories, have shifted to the FCA, with the UK no longer subject to the European Securities and Markets Authority (ESMA).
90
What happened to EU law in the UK after the transition period ended on December 31, 2020?
The UK ceased to be bound to give EU law direct effect domestically after the transition period ended, but much of the existing EU capital markets law was onshored into UK law through the European Union (Withdrawal) Act 2018 (EUWA).
91
How was EU capital markets law onshored into UK law post-Brexit?
EU capital markets law was assimilated through the EUWA, converting EU-derived domestic legislation and most directly applicable EU legislation into UK law. Adjustments were made to reflect the post-Brexit situation, such as removing the concept of home and host Member State NCAs.
92
What is the current state of EU and UK capital markets regimes?
The UK and EU capital markets regimes are almost identical, but there is potential for divergence over time as laws in either jurisdiction may change independently.
93
What happens if an offer of securities is made to investors in both the EU and UK?
Both the EU and UK regulatory regimes will apply, and the issuer will need to comply with regulations from both jurisdictions.
94
How has ESMA’s role changed for UK-based entities post-Brexit?
ESMA no longer supervises UK credit rating agencies or trade repositories, which are now under the supervision of the UK FCA. Additionally, credit ratings from UK agencies are only usable in the EU if endorsed by an EU-based agency.
95
How should UK market participants handle EU soft-law guidance post-Brexit?
UK market participants should continue to comply with relevant EU soft-law guidance that was in place before Brexit. For new or modified EU soft-law, the FCA will set expectations on a case-by-case basis.
96
What is the impact of Brexit on passporting for financial institutions and prospectuses?
Post-Brexit, the EU passporting system ended. UK-approved prospectuses can no longer be passported to the EU, and EU-approved prospectuses cannot be passported to the UK. Issuers may need separate prospectuses for both markets.
97
What is required for an issuer to offer securities in both the UK and the EU/EEA?
Issuers may need to publish and have approved two separate prospectuses—one by the FCA for the UK market and one by an EU NCA for the EU market.
98
What are the key differences in the prospectus regime for EU and UK issuers post-Brexit?
EU issuers must have a prospectus approved by the FCA for offers in the UK, and UK issuers must have a prospectus approved by an EU NCA for offers in the EU.
99
How do transparency requirements differ for UK and EU issuers post-Brexit?
UK-incorporated issuers must use UK-endorsed IFRS (UK IFRS) or UK GAAP, while EU-incorporated issuers can use EU-endorsed IFRS. The UK government has determined that EU-endorsed IFRS is equivalent to UK IFRS, but the EU has not made a similar determination for UK IFRS.
100
What impact does Brexit have on market abuse regimes?
Issuers may face dual market abuse regimes, needing to comply with both UK MAR and EU MAR depending on where their securities are admitted to trading.
101
How will UK and EU regulations evolve in the future?
Over time, the UK and EU capital markets regulations may diverge as either jurisdiction may amend laws or introduce new regulations independently. The UK's recent announcement of overhauling the domestic prospectus regime highlights this potential divergence.
