Introduction to Financial Markets Flashcards
(109 cards)
1
Q
What are the 4 main functions of financial markets?
A
1) Financial Intermediation
2) Pooling and Managing Risk
3) Payments and Settling Services
4) Portfolio Management
2
Q
What is financial intermediation?
A
Intermediating money from savers to borrowers, whether that be through deposit institutions, investment institutions or directly.
3
Q
What is pooling & managing risk?
A
Pooling risk - through diversified investment products. Insurance also allows individuals & companies to trade risk for a premium. Derivatives also manage risk.
4
Q
What is Payments and Settling Services?
A
Banks etc. actually facilitate the flow of capital
5
Q
What is Portfolio Management?
A
Allows wealth management through access to varying markets
6
Q
What are the main financial institutions?
A
1) Central Banks
2) Deposit institutions
3) Investment institutions
7
Q
What is a Central Bank?
A
Sets government monetary policy, and a lender of last resort
8
Q
What is a Deposit institution?
A
Commercial bank, building society, which typically invest the deposits in securities or debts (mortgages)
9
Q
What is an investment institution?
A
Invest the funds they raise in bonds, equities, insurance premiums and pension contributions.
10
Q
What are the roles of the government?
A
1) Provide services - public goods - prisons, etc.
2) Regulate firms, markets & protect consumer
3) Intervene in income distribution
4) Stabilise the economy
11
Q
What bodies regulate the FINANCIAL Market?
A
FCA - Financial Conduct Authority
PRA - Prudential regulation authority
FPC - Financial Policy Committee
12
Q
What is a debt claim?
A
Loans made from lender to borrower, can be putting money in the bank (not tradeable), or bonds (tradeable security).
13
Q
What is an Equity Security?
A
Standard shares
14
Q
Types of investment through intermediaries?
A
Insurance companies, pensions, pooled vehicles
15
Q
Benefits of investing through intermediaries?
A
Diversification, lower transaction costs, expertise, more markets to invest in
16
Q
What are the 3 parties in a Unit Trust?
A
Trustee - 3rd party individual who looks after the money.
Manager - Expert who operates the funds and makes investments
Unit holders - Investors / trust beneficiaries
17
Q
How does a Unit Trust function (typically open ended)?
A
Units can be redeemed for cash, then sold back to the manager for cash. Fund therefore grows and shrinks with demand for its units.
18
Q
What is a derivative?
A
A financial contract based upon the underlying asset, used to manage risk. Can be used to speculate and invest in commodities without actually having to ‘buy oil’.
19
Q
Give an example of how a derivative is used by a fund manager to mitigate risk.
A
If you believe SNP500 will go down but don’t want to sell the shares, can place futures on declining performance. Regardless of the outcome you have mitigated against the risk.
20
Q
4 Functions of the securities market?
A
1) Firms raising capital
2) Transfer risk - derivatives
3) Price discovery - fast price reality
4) Creating liquidity - Ability to transact very quickly
21
Q
What occurs in the primary securities market?
A
IPO’s and Seasoned Offerings
22
Q
What occurs in the secondary securities market?
A
General trading of securities
23
Q
Pre-trade transparency meaning?
A
Info on prices before trades are made
24
Q
Post-trade transparency meaning?
A
Transparency on trades after they occur
25
What do MIFID - Markets in financial instruments directive think about trade transparency?
MIFID II requires it by their regs, especially for equities.
26
How can you assess/consider liquidity in security markets?
Bid/Ask spreads - Wider = illiquid
Trade transparency encourages liquidity. Liquidity risk is priced into a stocks value.
27
What transaction costs are there when trading?
purchaser costs - like property and NIY. Drag on performance.
Price impact of trade - (less liquid market) if you buy lots of shares relative to daily vol. the market maker can change price mid- transaction.
Opportunity cost of slow transactions.
Commissions on GILTS etc. 0.5% - 1% up to £5k. £1m> no charge.
SDRT on UK individual stocks of 0.5% on purchase. ETF's, loan stocks, options, foreign cos. SDRT exempt.
28
What is PTM levy?
UK stocks being traded over £10k in value have a £1 payment per trade.
29
What system is UK Equities traded on (FTSE Constituents, some AIMS and Irish Secs)
SETS - algorithmic trading platform - no human market maker
30
What is EMS - Exchange Markets Size in context of securities market
The amount of trade stock a market maker must quote a certain price for e.g., buy/sell price for xx,xxx units. Prevents price impact.
31
What does SETS stand for?
Stock exchange trading system
32
What is SETS used for?
Electronic order book used in highly liquid stock exchanges - SETS is LSE. Purely algorithm
33
What is SEAQ used for?
LSE Stock exchange automated quotation system - Quote driven book - small cap and less liquid securities. The 'book' shows prices traded, the contacts and buy/offer quotes from market makers. The market maker then reports the prices exchanged.
34
What is SETSQX used for?
Hybrid of SETS and SEAQ, combines auction and quotes. There is continuous quote driven trading and periodic auctions. Part electronic part market maker.
35
What different types of market are there?
1) Regulated Markets
2) MTFs - Multi-lateral trading facilities
3) Systematic Internalisers
4) Organised trading facilities
5) Dark pools
6) OTC - Over the counter
36
What is a regulated market?
Regulated markets like the LSE for large corporations. Centralised communication systems, multi-lateral, fast p+p transparency.
37
Explain over the counter trades?
Bi-lateral, decentralised - buying straight from the dealer which is likely an investment bank. Good for pensions etc wanting to move big quantities and not suffer from price impact or slippage.
38
What is a multi-lateral trading facility/MTF?
Created by banks/investment firms, slightly less (but still highly) regulated and cheaper to operate on than RMs. E.g., Turquoise on LSE. Its just a different cornershop to buy the same milk, but like a 'boss man' shop. Pensions stick to RMs. Can trade more on it than RMs, like depositary receipts.
39
What is a systematic internaliser?
E.g., A bank, doing bi-lateral deals with clients. Under MIFID they must honour buy/sells and have a suitable EMS. Can't do mark-ups to retail investors.
40
What is an Organised Trading Facility?
Less regulated/regulated by MIFID but not like LSE. A facility where parties can sell bonds, structured finance products, emissions allowances, derivatives contracts - traded by way of a contract. Created under MIFID II to capture the trading of these products.
41
What is a dark pool?
A multi-lateral OTC - conceals identity and prevents trade impact. Typically MTFs that opt out of pre and some post trade transparency. No orderbook. Used in many cases by institutions managing trade impact and slippage. Post trade announcements can be delayed to T+2 if the trade size is big enough.
42
What is the International Trading Book?
LSE's own (RM) international trading venue. Primarily depositary receipts for foreign stocks - Russian, Indian etc.
43
What is the EQS - European Quoting Service?
An MTF owned by LSE for trading European stocks/Brexit related - secondary listings, depositary receipts and European shares traded outside of their home market.
44
How are trades settled?
Security trades (equities/bonds) are settled through CREST. A Central Securities Depositary. CREST transfers ownership of securities, moves cash assets between parties. Clear & settle trades on LSE, AIM & Others. Engine Room for security trading.
45
What are the settlement periods?
LSE Equities = T + 2
US Equities = T + 1
Gilts = T + 1
46
How often are gilt coupon/interest payments?
Semi-annually
47
How are gilts created?
HM Treasury tells the DMO (Debt management office) to sell gilts by auction to GEMMs (Gilt-Edged Market Makers). GEMMS have to bid in auctions & always offer bid/offer prices to investors, to guarantee liquidity.
48
How are Gilts traded?
Institutions etc trade them OTC. They're liquid but quote driven.
Small denominations are available for retail investors on LSE ORB.
49
What must GEMMS do to gain their rights over GILTS and what rights are they?
Bid in DMO Auctions
Provide Bid/Offer prices always
Provide DMO Data re prices
Provide Price Data in real time to third parties
Now they have the privilege of participating in auctions, they can also strip and re-constitute gilts.
50
How are Corporate Bonds created?
- Private Placings - The company go direct to pensions/insurance companies whom they know (may make less money)
- Offer for sale openly - Go to an investment bank who underwrite the deal and 1) syndicate it 2) buy it outright
51
How are Corporate Bonds traded?
OTC - through dealers who commit risk capital, bought-up buy institutions etc.
Some Corporate bonds are traded on Retail Orb but liquidity is thin.
52
What is a dual listing?
When two corporations function as one operating business through legal equalisation. They retain seperate legal identities and stock exchange listings. Why? Tax Advantages. Shares should be same prices.. even if they're not. Same parental cashflow.
53
What is a trading venue?
Regulated Markets, OTF's, MTF's.
54
Characteristics of a Trading Venue?
Characteristics of a system or facility
Third party buying and selling
Trading interests interact with the system
Trading interests are financial instruments
55
What is a Market Order?
Ordering a number of shares, not considering the open price (there are pre-opening indications).
56
What is a Limit Order?
Ordering shares say 500 for no more than £50. If opens at £51, none are bought.
57
How are Automated Trading Systems regulated?
Under MIFID II there are strict regs to ensure that they are always functioning and don't contain errors. They entera binding agreement.
58
4 High Frequency Trading Strategies?
Market making based on order flow
Market making based on tick data info
Event Arbitrage
Statistical Arbitrage
59
HFT regulations?
Under MIFID II firms must share their data to competent authority, storing it for 5 years. There have been near market collapses in America due to HFT affects.
60
Who are the UK Competent authoriy?
FCA
61
How do UKLA/Listing Authority (as part of FCA) have powers of admitting companies to the official list?
FSMA 2000 - Financial Services Markets Act 2000
62
What impact do EU Directives have on listing rules?
Prospectus requirements
63
FCA proposed new listing rules from 2024 enhance and do what?
Simpler, easier to IPO. One category for commercial companies and another for investment trusts.
64
Who are premium category listings for?
Large corporations, OEICs, CEICs, - to benefit from increased profile but tougher corporate governance & v costly
65
Why do a standard listing?
Minimum listing requirements, can be on LSE official list or Aquis LSE BUT NOT INDICIES and therefore less liquidity possibilities
66
What is a critical difference between premium and standard listings?
Standard listings arent included in indicies. FTSE100,250 etc.
67
What are the Premium conditions for listing?
3 years published accounts
Expected MV of all securities listed must be over £30m and £200k for debt securities.
10% of secs must be held by the public by admission date (public = e.g., any investment institution)
Must have 12 months working capital
A sponsor (e.g., Investment Bank)
68
What are the differences with Standard Listings?
No 3 years accounts
No Sponsor
No 12 months working capital (except where a prospectus is required)
69
When is a prospectus required?
When an application is made to the public (non-professional investors)
Securities are admitted to trade
70
What does a prospectus include?
General financial position - assets, liabilities and rights attached to securities.
71
Listing on AIM implications?
No company min size, shares sold to public or trading record required.
They must have a nominated advisor from a LSE approved register who assesses director, financial position and promoter fitness.
72
High Growth Segment listing criteria?
Incorporated in EEA
Commercial company issuing equities
Free float minimum of 10% at IPO
Demonstrate revenue growth of 20% pa (compounded) for 3 years
73
What is the AQSE listing criteria?
Same criteria as official list, premium or standard option.
Have an AQSE corporate advisor at all times.
24 months of accounts
10% free float to be listed
Corporate governance including an independent, non-exec director.
74
What are the exemptions from listing particulars/prospectus?
When you offer only to qualified investors (professional investors elect to be qualified. retail have to have 500k+ portfolio, worked in secs 1+ year, done significant deals (1000+ eu x5)
Offered to less than 150 persons
Where min share price is 100k
Where proposed shares represent less than 20% of the number of shares of the same class are submitted to trading on the same market.
75
What is PSNCR?
Public Sector Net Cash Requirement
76
What is the ex-dividend date?
7 days prior to gilt coupon payment. You can trade at 6 days and keep the coupon.
77
Can a private company list on exchange?
No, only public companies, PLC's can list.
78
Who is UKMAR?
UK Market Abuse Regulation
79
What is a PDMR?
Under UKMAR - Persons Discharging Managerial Responsibilities (includes Directors)
80
What is a PDMR responsibility with their shares?
Can only buy/sell shares by notifying the subject listed company & FCA within 3 days of purchase/sale. The company most notify the market asap, no later than next day.
81
What are DTR's?
Disclosure Transparency Rules
82
DTR Rules on share purchasing?
An investor must notify a company within 2 days if it acquires 3% of its shares, further disclosures are required at increments of 1%.
83
What's a concert party?
Regulation to stop coordinated purchasing of shares as a concert above the 3%, concert ownership is aggregated. The rules also stop individuals acquiring voting rights but not the underlying shares.
84
What is a PSC?
Person with significant control
85
Implications of being a PSC?
Person's with significant control must register with the company, all holdings are then publicly visible for tax etc. (Primarily in Ltd company's)
86
Who oversees the Corporate Governance Code and Stewardship Code?
FRC - Financial Reporting Council
87
What is the corporate governance code about?
Balancing interests of all stakeholders (customers, shareholders, employees, suppliers and community).
88
Examples of Corporate Governance Code Principles?
Board Leadership, Company Purpose, Division of Responsibilities, Compensation Succession Evaluation, Audit Risk Control, Remuneration.
89
Who does the Corporate Governance Code (legally) apply to?
All premium listed companies (UK Registered or not)
90
What is SRDii and what does it set about to accomplish (inc. climate)?
Shareholder Rights Directive tackles perceived lack of engagement from shareholders. Shareholders must disclose investment strategy and report performance in SIP (Statement of Investment Principles).
Also Climate Reporting Obligations for pensions with AUM £1b+ , they've to provide climate reporting metrics and benchmark them against Paris Climate Goals?
91
Board Diversity targets?
(2011) 25% of FTSE100 Board seats held by women.
(2016) 33% on FTSE350 women
(2021) 1 min. Ethnic Minority on each board
92
What are remuneration rules for listed companies?
Premium/Standard listed companies must produce a directors remuneration report.
93
Remuneration rules?
Companies must provide a report which outlines the rules around remuneration.
They then must provide an implementation report setting out actual payments and how they're calculated.
94
What's the point of Section 172 reporting?
Directors legislation to ensure good faith - promote success of the company for benefit of all stakeholders. Large UK incorporated companies must include a statement in their strategic report of how they engage stakeholders.
95
What is Stewardship [code]?
Stewardship is responsible allocation, management and oversight of capital to create long-term value for clients and beneficiaries, leading to sustainable benefits for the economy, environment and society.
96
Stewardship principle split?
12 for asset managers, investors and owners.
6 principles for service providers, consultants & proxy advisors.
97
DTR Rules - What do you do if a party are acting in concert and you're the company?
Serve them a Section 793 Order. If shareholders don't comply, the shares are frozen.
98
Info Dissemination and Disclosure by listed companies requires?
Continuous obligation to rules, drafts of meetings and circulars to UKLA for approval. Price sensitive info must be released to the market by a Regulatory information service (RIS) or Primary Info Provider (PIP).
99
What is Price Sensitive info under Info/Dissem/Disclos rules?
Acquisitions, profits/losses, changes of directors.
100
When do you have to hold a general meeting?
Within 6 months of year end and no more than 15 months between meetings.
101
How much notice do you give for AGM's and GM's?
AGM: 21 days GM: 14 days
102
How long for electronic communications to be deemed delivered?
48 hours after being sent
103
Who calls AGM's and GM's?
AGM's: Directors GMs: Directors or 5% or more of shareholders
104
Two ways to vote?
Show of Hands and Polling
105
Difference in voting by hands and poll?
1 hand = 1 vote / 1 poll vote = 1 vote per share, and proxies counted
106
Who can demand a poll?
Five members or 10% or more of shareholders
107
What is a general proxy?
Appointing someone on your behalf to vote in your interest
108
What is a Special Proxy or Two Way proxy?
Appointing someone to vote as you pre-prescribed
109
What is an Ordinary Resolution and how many votes required?
Standard recurring decisions, 50%+ of votes
