IMC Unit 1 1-2

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IMC Unit 1 1-2
2011-11-08 08:36:51
Financial Services Industry Markets

Chapters 1 and 2
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  1. How does money function as a medium of exchange?
    • 1.It is divisble into small units
    • 2.There are sufficient quantities of money to use for transactions
    • 3.Money is generally accepted by all parties in transactions
  2. What are the 3 sectors of the economy?
    • 1. The personal sector (individuals or households)
    • 2. The business sector (or industrial and commercial sector)
    • 3.The government sector-central government, local government and public corporations
  3. What other 2 factors, in addition to the personal, business and government sectors, must one take into consideration when analyzing the flow of funds?
    • 1. The overseas sector
    • 2. Financial intermediaries
  4. What is a financial intermediary?
    Is a go-between, and is an institution which links lenders with borrowers by obtaining deposits from lenders and then re-lending them to borrowers. Is a party bringing together providers and users of finance, either as a broker facilitating a transaction between two other parties, or in their own right as a principal
  5. What is the role of a financial intermediary?
    they provide a means by which funds can be transferred from surplus units (someone with savings to invest in the economy) to deficit units (someone who wants to borrow money to buy a house)
  6. UK Financial Intermediaries include:
    • Banks
    • Building Societies
    • Insurance Companies, Pension Funds, Unit Trust Companies, Investment trust companies
    • The goverments National Savings & Investments (NS&I)
  7. NS&I
    • the governments National Savings and Investments
    • -a government institution set up to borrow on behalf of the government, mainly from the non-banking private sector of the economy
  8. Who are arguebly the major financial intermediaries in the UK?
    Banks, clearing banks are the biggest operators in the retail banking market
  9. Almost all financial intermediaries place part of their funds with other institutions, and a number obtain most of their funds by borrowing from other institutions. Which are examples of these that borrow?
    Finance house, leasing companies and factoring companies
  10. What are the benefits of financial inetermediaries?
    • 1. convenient way in which lenders can save money to spend in the future by for example depositing money, thereby FI provide a ready source of funds for borrowers
    • 2. they can aggregate or package amounts lent by savers and lend on to borrowers at different amounts
    • 3. provide maturity transformation
    • pooling funds of large numbers of people, FI's are able to give small investors access to professionally managed diversified portfolios covering a wide range of different securities through collective investment products such as unit trusts and investment trusts
    • 5. pooling funds reduces risk
  11. maturity transformation
    FI's bridge the gap between the wish of most lenders for liquidity and the desire of most borrowers for loans over longer periods
  12. Capital Markets
    for raising and investing largly long term capital
  13. Money markets
    • for lending and borrowing largely for short term capital
    • -largely involve wholesale borrowing and lending
    • -essantially shorter term debt markets, with loans being made for a specific period at a specified interest rate
    • -amounts are generally large, over 50,000 GBP and often in millions of pounds
    • -extremely fine terms, with small margins
    • -emphasis on liquidity
  14. short term capital
    lent or borrowed as shorts as overnight to as long as 1 year or possibly even longer
  15. long term capital
    capital invested or lent and borrowed for a period of 5 years or more, sometimes shorter
  16. medium term
    1 or 2 years up to about 5 years
  17. LSE
    • London stock exchange, an organized capital market
    • -provides way for larger companies to raise funds by issuing shares (equity)
  18. AIM
    • Alternative Investment Market, opened in 1995 and regulated by the LSE, is a market for smaller companies which cannot meet the more stringent requirements needs to list on the LSE
    • -cheaper to be on AIM because does not need to meet the requirements of the LSE
  19. Gilt Edged Market
    a capital market in the UK, the government borrows over the medium-long term by issueing government stocks (called gilt-edged stocks or gilts)
  20. Does second hand gilt trade exist?
    Yes, until the debt eventually matures and the government redeems the stock
  21. Primary gilt market
    for sale of new gilt issues
  22. secondary gilt market
    existing holders selling their holdings og gilts to other investors
  23. Pension Funds
    Institutional investor, invest pension contributions of individuals who subscribe to a pension fund and of organizations with a company pension fund
  24. Insurance company
    • invest premiums paid on insurance policies by policiy holders.
    • Life Assurance policies, including life-assurance based savings policies, account for substantial assets which are invested in equities, bonds, property and other assets
  25. Investment trusts
    investment trust companies invest in the shares and stocks of other companies and the government
  26. OEICs
    Open Ended Investment Companies
  27. Collective funds
    • Unit trusts and OEICs
    • -similar to investment trusts as they invets in stocks and shares of other companies
  28. Venture Capital
    • specialize in raising funds for new business ventures, such as management buyouts
    • more risky ventures
  29. Changes in capital markets
    • 1. globalization of capital markets
    • 2. Securitization of debt
    • 3. Risk management (and risk assessment)
    • 4. Increased competition
  30. ADRs
    American Depository Receipts, shares of UK companies are traded in the US, as US banks buy shares of UK companies and then trade the ADRs
  31. Securitization of Debt
    creating tradable securities which are backed by less liquid assets such as mortgages and other long term loans
  32. Issue with risk assessment of capital markets
    various techniques such as options and swaps (derivative financial instruments) make it more difficult for banks and other would be lenders to asses the financial risk of a company
  33. Increased competition
    banks have made shifts towards more fee-based activites (such as selling advice and insurance products for comission) and away from traditional transactions based activities (holding deposits, making loans)
  34. Clearing banks
    • operate the clearing system for settling payments
    • -involved in both retail and wholesale banking but commonly regarded as the main retail banks
  35. Wholesale Banks
    banks which specialize in lending large amounts to major customers
  36. investment banks
    offer services, often of a specialized nature, to corporate customers
  37. Building Societies
    • mutual organizations whose main assets are mortgages of their members
    • -among their liabilities are the balances of the investor members who hold savings accounts with the society
    • -sector has shrunk in size over the last 20 years as they have converted to public limited companies/banks or been taken over by banks and other financial institutions
  38. Building Societies Act 1986
    requires that at least 50% of building societies funds must be raised from share accounts held by individual members
  39. Central Bank
    • In the UK, the Bank of England which acts on behalf of the government.
    • - a nationalized corporation
    • -holds public deposits, which includes: National Loans fund, Consolidated Fund, the account of the paymaster general and in turn the exchange equalisation account
  40. Functions of Bank of England
    • 1. holds public deposits
    • 2. central note issueing authority
    • 3. manager of national debt
    • 4. manages Exchange Equalisation Account (foreign currency reserves)
    • 5. advisor to government on monetary policy
    • 6. MPC
    • 7. lender to the banking system
  41. MPC
    • Monetary Policy Committee, agent for the government in carrying out monetary policies
    • -since 1997 has had operational responsability for setting short term interest rates at level appropriate with meeting governments inflation targets
  42. EEA
    Exchange Equalisation Account or the UKs foreign currency reserves
  43. Open market operations
    the buying and selling of short term assets between the central bank and the short term money market
  44. UK Financial Services Industry
    • -employs over 1 million people
    • -earnings amount to over 5% of GDP
  45. City of London
    • Square mile
    • centre for the UK Financial services industry
  46. How many banking groups in UK?
    Over 300
  47. 10 largest UK owned banking groups hold what % of UK household deposits? BUilding societies?
    • 1. 70%
    • 2. 20%
  48. Foreign Banks in the UK?
    • around 500, compared with 300 in the US
    • London accounts for 19% of global cross-border bank lending, more than any other financial centre
  49. Total assets of UK banking system?
    Over 3 trillion GBP, of which 55% belongs to foreign banks
  50. Assets of UK owned banks?
    1.3 trillion, dominated by a dozen banks
  51. Bancassurance
    • or all finanz
    • insurance companies that are subsidiaries of banks and building societies whose primary market is the customer base of the bank or building society
  52. Reinsurance
    process by which a company can sell or pass on its risks on its policies to a third party reinsurer
  53. UK Insurance Business
    generates premium income in the UK insurance market of over 170 billion pounds annually, 3rd to the US and Japan
  54. Lloyds
    • acts as majoyr reinsurer for life assurance
    • -underwriting syndicates operate independently
    • -syndicates are run by managing agents who appoint underwriters to assess risks on behalf of the syndicate
  55. Syndicates
    provide capital and assume the risk of liabilities they insure or reinsure under Lloyds 'names'
  56. Pension crisis
    Worldwide, rapidly aging populations are passing pensions provision from the state sector to the private sector
  57. Fund Management AUM?
    Over 4 trillion pounds, 1/4 for overseas clients
  58. Gramm-Leach-Bliley Act of the late 90's
    enabled different types of companies operating in the US financial servies industry to merge
  59. Mixed Economy
    • some degree of state intervention while mostly markets are able to operate freely
    • -stands between 2 extremes, Laissez-faire free market economy and a centrally planned command economy
  60. EU
    27 members including the UK
  61. Free trade area
    exists when there is no restriction on the movement of goods and services between coutries
  62. Customs Union
    in addition to free trade area, there are common external tariffs applying to imports from non member countries (acts as protectionist bloc to non members, promoting trade with members)
  63. Common Market
    In addition to Customs Union, there are also free markets in each of the factors of production. A british citizen can work in any EU country for example. The idea is create stronger links between countries, by harmonising government economic policies and establishing a closer political confederation
  64. Treaty of Rome
    The treaty which founded the EU
  65. Target UK inflation rate?
    2% plus or minus 1% as measured by the CPI
  66. CPI
    Consumer Price Index AKA HCIP (Harmoized Index of COnsumer Prices)
  67. HCIP
    Harmonized Index of Consumer Prices AKA CPI
  68. Benchmark Repo Rate
    Rate at which MPC decides BOE should deal to the markets
  69. Easing Monetary Policy is:
    • 1. reducing interest rates
    • 2. loans are cheaper, consumers increase levels of debt, spend more, demand will rise, companies improve sales, companies will find it cheaper to borrow, low interest costs will boost bottom line profits
    • 3. Mortgage loans will be cheaper, property prices will increase
    • 4. Value of other assets will rise, investors will pay higher rates for gilts because they do not require such a high yield as before the interest rate reduction
    • 5. interest rates on cash deposits will fall, those dependent on cash deposits will be worse off
  70. Tightening Monetary Policy
    • 1. Increase interest rates
    • 2. Loans costs more, demand from consumers, especially for less essential "cyclical" goods and services may fall. Companies find it more expensive to borrow money which can eat into profits, on top of any effect from the drop in demand
    • 3. mortgage loans costs more, property prices drop
    • 4. asset prices tend to drop, investors will require higher returns than before and will pay less for fixed interest stocks such as gilts
    • 5. interest rates on cash deposits will rise, those reliant on cash deposits for income will be better off
  71. Quantitative Easing
    • method by which the central bank manipulates liquidity in the financial system
    • -also known as printing money, the central bank will purchase mostly short term financial assets using money it has created ex nihilo (out of nothing) and has shown as a credit on the central banks books
  72. Ex nihilo
    Out of nothing, term referring to QE, printing money etc.
  73. Open Market Operations
    QE is intended to increase the overall money supply through deposit multiplication, as the institutions recieving the money will be encouraged to lend and the cost of borrowing will drop
  74. Exchange Rate Policy
    • -influence exchange rates by buying or selling currencies through its central bank reserves
    • -changes in interest rates, if UK interest rates are raised, this makes sterling a relatively more attractive currency to hold, so upward pressure on the vaule of the sterling
  75. Fiscal Policy
    Spending, taxing and borrowing
  76. Expenditure
    government must pay for health service, public education, police force, roads, public buildings, etc. and pay administrative workers, also encourage investment by private sector by means of grants
  77. Income
    comes from taxation, also from direct charges to users of government services such as National Health Service charges
  78. Borrowing
    if expenditure exceeds income, government then must borrow. The amount borrowed each year is known as the PSNCR in the UK
  79. PSNCR
    Public Sector Net Cash Requirement, amount the government borrows each year
  80. A governments fiscal stance may be:
    neutral, expansionary or contractionary
  81. increasing taxes
    is contractionary, if spending is not increased at same rate. Deliberately increasing taxes may also be done to take inflationary pressures out of the economy
  82. The Budget
    • the formal planning of the fiscal policy in the spring of each year
    • -the chancellor of the exchequer also delivers a pre-budget report each autumn
  83. Institutional framework has the following aims for industrial policy:
    • promoting effective competition
    • flexibility in labour and capital markets
    • maintaining a legal system which gives confidence and trust to market participants
    • providing a stable macroeconomic framework
  84. Innovation policies
    seek to balance the benefits of intellectual property protection with facilitating the widespread exploitation of new knowledge through easing barriers to the widespread dissemination and adoption of ideas
  85. Department for Business, Innovation and Skills
    Plays key role in industrial policy
  86. EU Industrial Policy
    • 1.a committment to focus on growth and employment
    • 2.shaping policies to allow businesses to create more and better jobs implemented in a way that balances and mutually reinforces economic, environmental and social objectives
    • 3. integrated approach aimed at improving the coherence between different policy dimensions and increasing their relevance to business
    • 4. bringing business directly into the process through the establishment of "high level groups"
  87. High Level Groups
    bring together various EU commission directorates general, member state governments and relevant stakeholders from industry, consumer/civil society, trade unions, non governmental organizations, regulators etc. provide advice to policy makers
  88. FSA 1986
    • Financial Services Act of 1986 was brought in to replace the system of self-regulation which had previously prevailed in the UK financial sector
    • -brought a new system of 'self regulation within a statutory framework', with financial services firms authorized by SRO's
  89. SRO's
    Self Regulatory Organizations set up by the FSA 1986 to authorize financial service firms
  90. FSMA 2000
    • Financial Services and Markets Act 2000, established the FSA as the single statutory regulator of financial services industry
    • -this act brought together the regulation of investment, insurance and banking
    • -giving financial advice on investments became a regulated activity on December 1 2001
  91. FSA
    Although not a government agency, the FSA carries out the work of statutory regulation. The chancellor of the exchequer is ultimately responsible for the system of regulation for the financial services industry
  92. Voluntary codes
    • developed by the industry sector itself, although not written into law, can turn into law, for example:
    • mortgage advice and selling in Oct 2004
    • General Insurance regulation in Jan 2005
  93. The Banking code
    until 2009, this voluntary code was followed by banks and building societies, but in Nov 2009, this transferred over to FSA regulation, responsible for the regulation of deposit and payment products
  94. Lending Code
    The LSB continues to monitor and enforce compliance with a new lending code that replaces those elements of the banking code and business banking code relating to lending
  95. LSB
    Lending Standards Board which enforces compliance with new lending code that replaced banking code relating to lending
  96. FSAP
    • Financial Services Action Plan which formed in 1999 at the Lisbon conference aiming to create one single market in financial services by 2005
    • -long term aim was that europe would be worlds most competetive market by 2010
  97. FSAP
    • -committee of 'wise men' set up, chaired by Alexandre Lamfalussy
    • -had a 4 level approach to complete the single market for the investment industry
    • -consisted of 42 ne legislative measures, including 27 directives
  98. FSAP 4 Level Approach-Level 1
    • 1. Legislation-Regulations and directives proposed by the European Commission following consultation with EU Parliament and EU Council.
    • -should be based on broad framework principles with detailed techinical implementation done in level 2
  99. FSAP 4 Level approach-Level 2
    2. The ESC assists the EU Commission in adopting technical implementing measures. The ESC is made up of policy makers from member states
  100. ESC
    European Securities Committee, made up of policy makers from member states, assists EU Commission in adopting techinical implementing measures in Level 2 of FSAP, reps from HM treasury sit on ESC
  101. FSAP 4 level approach - Level 3
    CESR has job of improving the consistent implementation of Level 1 and Level 2 legislation across member states. CESR is made up of regulators from member states
  102. CESR
    Committe of European Securities Regulators, created in Level 3 of FSAP, comprised of regulators from member countries, job to give advice to ESC
  103. FSAP 4 level approach - level 4
    EU commission, member states and supervisory authorities work to ensure implementation and enforcement of EU law
  104. Market Abuse Directive
    FSAP directive, sought to harmonize rules on abusive practices
  105. Takeover Directive
    • FSAP Directive to harmonize rules relating to takeovers in the EU.
    • -Good example of political, cultural and economic divergence in EU
    • -12 versions were tabled and rejected
    • -in 2004 agreement was reached, although some parts were optional (relating to frustrating action), so effectiveness is questioned
    • -does not harmonize takeover law in EU
  106. MiFID
    • FSAP Directive adopted by EU council in 2004: Markets in Financial Instruments Directive (aka ISD II) has expanded reach of cross-border investment activity which was limited by ISD I.
    • -was fierce debate about MTF's passporting, some member states wishing to maintain the dominant position of their domestic markets
    • -due to number of changes MiFID required on the industry, implentation was delayed to November 1 2007
    • -applies to all investment firms
  107. ISD II
    Investment Servics Directive II aka MiFID
  108. Distance Marketing Directive
    FSAP Directive: cancellation rights and documenationmust be provided in a wider range of cases such as for securities broking services provided at a distance. Required UK firms to significantly alter their documentation and cancellation procedures. Came into affect in late 2004
  109. FSAP Effectiveness?
    • Cons:
    • lack of various member states to harmonize, to great of a focus on 2005 deadline, lack of consumer desire to deal with foreign service providers, lack of integration of cross border settlement and clearing houses, lack of clear view of what single market may look like
    • Pros:
    • -all 42 FSAP measures have been adopted by the EU
    • -ESC and CESR have been successful and implemented into banking/insurance sphere as EBC and CEBR
  110. EBC
    European Banking Committee
  111. CEBR
    Committee of European Banking Regulators
  112. FSF
    Financial Stability Forum: made up of authorities from various major countries and international institutions
  113. FSF 2008 report
    • turmoil in summer of 2007, followed by an exceptional boom in credit growth and leverage. A long period of benign economic and financial conditions increased amount of risk that borowers and investors were willing to take. Institutions responded expanding market for securitization of credit risk and aggressively developing the 'originate and distribute model'. System became dependent on originators underwriting standards and the performance of credit rating agencies.
    • By the summer of 2008, accumulated losses on US subprime mortgages triggered global disruption as large losses were sustained on complex structured securities. Institutions reduced leverage and increased demand for liquid assets, many credit markets became illiquid, hindering credit extension.
    • 8 months after start of market turmoil, institutions were burdoned with assets that had suffered major declines with vanishing market liquidity. Market participants were reluctant to transact in these instruments, adding to uncertainty
  114. Originate and distribute model
    institutions responded to increased investor risk appetite in 2007-2008, and institutions originating loans then distributed them as packaged securities aggressively
  115. ESRB
    European Systemic Risk Board: response of 2007-2009 market turmoil, this board has representation from central banks across europe and will monitor threats to financial stability
  116. MiFID Level 1
    specific conduct of business principles
  117. MiFID Level 2 Directive
    covers technical implementation measures in the form of organisational requirements and opertating conditions
  118. Maximum harmonisation
    relating to MiFID, member countries cannot add rules of their own or make amendments to original text, known as gold plating
  119. Gold Plating
    process where member states amend EU directives to better serve there own needs. FSA has been accused of this
  120. MiFID Level 3 Directive
    EU commission and CESR to focus on MiFID implementation across member states
  121. EEA Passporting
    European Economic Area (EU plus Norway, Iceland and Lichtenstein), firms to operate in home state and host states of EEA
  122. Tied Agent
    established in the EEA will act on behalf of the firm instead of setting up a branch (similar to appointed representative under FSMA 2000)
  123. Should firms with ISD passport automatically be given a MiFID passport?
  124. MiFID Exclusions
    • (much of the retail financial services sector falls outside the scope of MiFID)
    • -applies to EEA domiciled firms only (FSA extends MiFID requirements to MiFIC equivalent activities of third country firms
    • -Excludes Insurance/reinsurer companies
    • -Excludes Pension funds and collective investment schemes and their depositories or managers
    • -Excludes group treasury activities
    • -excludes persons administering their own funds
    • -excludes professional investors investing only for themselves
    • -excludes commodity producers and traders
    • -excludes investment services relating to administration of employee share schemes
    • -excludes incidental business in the course of professional activity bound by legal, ethical or regulatory provisions
    • -excludes firms not providing investment services or involved in investment activities
  125. MiFID Article 3
    allows member state to exclude activities of investment firms whose investment services are limited to recieving and transmitting orders in transferrable securities or collective investment schemes, plus related advice. Such firms may not hold client money or securities, nor put themselves in debt of the client. Orders must be transmitted only to investment firms, credit institutions, EEA-regulated collective investment schemes or closed ended funds traded on a regulated market in the EEA. Many firms of financial advisors and other retail investment product distributors will meet this criteria, although they may alternatively opt in to benefit from passporting
  126. CRD
    Capital requirements directive
  127. Common platform
    • organizational and systems and controls requirements of MiFID and the CRD implemented through a single set of high level rules
    • -firms subject to both MiFID and CRD include most banks and investment firms
    • -firms subject to MiFID only are those authorised to provide investment advice and/or receive and transmit orders without having permission to hold client money or securities
    • -firms subject to CRD only include banks that do not perform any investment services or other activities within the scope of MiFID
  128. COBS
    Implementation of MiFID has led to the introduction of a new Conduct of Business Sourcebook, whose rules are shorter than the previous COB sourcebook
  129. MTFs
    • Multilateral Trading Faclities is able to passport in MiFID as a core investment service. MTFs are systems where firms provide services similar to those of exchanges by matching client orders
    • -examples Turquoise, Chi-X, PEX (Portugal), and Nordic MTF. BATS Europe operated by the US platform BATS Trading and Nasdaq OMX Europe, an equities platform of the US based Nasdaq OMX were both launched in 2008. Smartpool (the euro unit of Liffe partnered with HSBC and BNP Paribas) opened for large execution of european stocks.Swiss Block (SIX Swiss Exchange partnered with US based Nyflix Millenium) for Swiss blue chip stocks. Nyflix also operates Euro Millenium. Equiduct is another MTF.
  130. Systematic Internaliser
    an investment firm which deals on its own account by excuting client orders outside a regulated market or MTF. MiFID requires such firms to provide firm quotes in liquid shares (for orders below standard market size) on a regular basisand during trading hours
  131. CIS
    Collective Investment Scheme
  132. UCITS
    • Undertaking for collective investment in transferrable securities
    • -transferrable securities
    • -money market instruments
    • -forward contracts and financial derivatives
    • -deposits
    • -units in other CIS's
    • Excluded-commodity derivatives, although derivatives based on commodity indices are eligible
  133. UCITS & Non UCITS borrowing rules:
    UCITS can only borrow up to 10% on a temporary basis while NON UCITS schemes can borrow 25% on a permanent basis
  134. LSE plc
    London Stock exchange plc is a business which runs a market place in securities, meeting savers and borrowers
  135. primary market
    companies (the borrowers) issue shares to the investing public (the savers)
  136. seconday market
    trading in second hand shares, allowing investors to convert shares into cash
  137. Big Bang Day
    Oct 27th 1986, UK stock markets changed from a physical market place to screen systems and telephones
  138. Dual capacity
    all stock exchange members are now broker-dealers that can act as agents on behalf of customers or as principals dealing directly with the customers
  139. SETS
    • the Stock Exchange electronic Trading Service known as the Order Book
    • -order driven
    • -No market makers
    • -trades all stocks classified as 'liquid' under MiFID (all FTSE All Share Index stocks, ETFs, ETCs and the most actively traded Irish stocks)
    • -includes most AIM traded stocks
    • -limit orders are automatically matched by the electronic order book, if not matched entirely, unmatched portion will remain on the order book
    • -orders are prioritized in a strict sequence, price first, then time of input with the earlier orders first
  140. SETSqx
    • Stock Exchange Electronic Trading Service - quotes and crosses
    • -combined order and quote driven
    • -at least one market maker per stock
    • -all stocks classified as 'illiquid' under MiFID i.e. illiquid equities
    • -trades All AIM stocks in AIM EURO not traded on SETS
  141. SEAQ
    • Stock Exchange Automated Quotations System aka Quote Display System, is a secondary system used for fixed income securities and less frequently traded AIM stocks
    • referred to as a competing market maker system
    • -quote driven
    • -at least 2 market makers per stock
    • -No Full List stocks traded
    • -trades all remaining AIM stocks (highly illiquid AIM stocks) after SETS & SETSqx
  142. Order Driven
    relevant trading system will match buyers and sellers automatically, provided they are willing to trade at prices compatible with each other. Purely driven by the buyers and sellers in the market themselves
  143. Quote Driven
    requires certain market participants (market makers) to take responsibility for acting as buyers and sellers to the rest of the market so there will always be a price at which a trade can be conducted. Not done automatically, so trades are normally conducted over the phone
  144. Order matching system
    as seen in SETS, cost efficiently allows buyers and sellers to deal with one another directly rather than going through dealers (market makers who would charge a spread)
  145. LCH.Clearnet
    London Clearing House, acts as the central counterparty to all SETS trades. Buyers buy and sellers sell to LCH.Clearnet
  146. EMS
    Exchange Market Size, market makers undertake an obligation to quote firm, two-way prices in share for which they register. They quote both buying and selling prices at which they must deal up to a predetermined transaction size dependent on historical volumes
  147. MQS
    Minimum Quote Size = 1 X EMS, the minimum amount of shares a market maker is prepared to buy or sell at their quoted price
  148. Novate
    in SETS, all automatically executed trades novate to LCH.Clearnet
  149. Consequences of Dual Listing
    • -access to wider pool of investors
    • -increased liquidity may reduce bid/offer spreads, lowering transaction costs for investors
    • -will face higher costs in maitaining each listing
    • -greater compliance burden (in US, Sarbanes-Oxely Act provisions)
  150. Fixed interest securities
    • fixed interest stocks or 'bonds' are negotiable debt instruments issued by a borrower for a fixed period of time paying interest, known as the coupon
    • -fixed interest covers Government bonds (gilts in the UK) and corporate bonds
  151. Coupon
    fixed interest on fixed period of time paid for a bond. Coupon is fixed at issue date and is paid regularly to the holder of the bond until it is redeemed at maturity when the principal amount if repaid
  152. DMO
    • Debt Management Office of the treasury is responsible to make sure the government is able to borrow the money it requires to fund the PSNCR
    • -DMO controls the issue of gilts into the market place using a variety of methods depending on the circumstances
    • -currently the DMO believes the range of issues in the market is too large and could result in excessive fragmentation of ssupply and demand
  153. Tranche
    opening up an existing gilt, same terms as a currently issued gilt, adds liquidity without complicating with further variations in prices/terms
  154. Tranchette
    a small tranche
  155. GEMMs
    • Gilt-Edged Market Makers make sure two way quotes are available at all times for gilts
    • -DMO must approve them, and once approved, the GEMM is obliged to make a market in all conventional gilts
    • -GEMMs make use of the LSE's SEAQ
  156. IDBs
    • Inter-dealer brokers act as an escape valve for GEMMs.
    • IDBs allow GEMMS to unwind positions through an anonymous dealing service thereby not revealing to the market if the GEMM is unwinding a large position.
    • -IDBs are only accessible to market makers in the gilts market
    • -and are an important mechanism to ensure equity market liquidity
  157. SBLIs
    Stock Borrowing and Lending Intermediaries allow for market makers to take short positions in a stock as they provide access to large pools of unused stock
  158. Broker-dealer
    all members of the LSE are broker-dealers who have dual capacity
  159. Exchange Traded Instrument
    one that is packaged in a standardized way in respect of contract size and dates for example, creating a liquid market in the instrument on an exchange
  160. OTC
    Over the counter instruments is one that has been specially negotiated with a financial institution, generally to fit the needs of a particular client or group of clients
  161. Dark liquidity pools
    • these non displayed liquidity venues allow for firms to buy and sell blocks of stocks off exchange away from the public domain.
    • -there are more than 40 dark pools operating in the US, the largest being Goldman Sachs Sigma X & Credit Suisse's Crossfinder
    • -by mid 2008, dark pools were estimated to account for 12% of US daily stock trading volume
    • -in the past stock exchanges have viewed dark pools as there main competition, the moves by Liffe and SIX Swiss Exchange show the mentality, if you cant beat'm, join'm
  162. Iceberg Facility
    • The LSE and Liffe both offer this, where only a small part of a large order is displayed at one time. This is in response to need for ability to make large orders that dark pools specialize in
    • -sell side brokers have been developing algorithms to detect in an order is being traded away from the market
  163. Euroclear UK & Ireland
    • Settlement of UK equities, corporate bonds, gilts and money market instruments occurs through euroclear which operates an electronic dematerialized settlement system
    • -settlement in sterling or Euros is made on a DVP basis
  164. DVP
    Delivery versus payment, method of settlement known as real time gross settlement, where both parties are ready to settle at the same time
  165. Elecronic dematerialized settlement system
    system used by Euroclear UK & Ireland on a DVP basis
  166. cum (with) dividend
    purchaser of shares is entitled to recieve the next dividend
  167. books closed date
    the record date or on register date, the company will pay the next dividend to all shareholders who are on the register of shareholders on the books closed date
  168. two business days prior to the books closed date refers to what?
    • due to the problem of dividends not properly dealt to the current owner of shares, shares will commence trading ex-dividend on the stock exchange 2 business days prior to the books closed date
    • -the ex-dividend date will usually be a wednesday, making the books closed date normally a friday
    • -ex-dividend trading will last until dividend is paid
    • -announcement of dividend payment will be 10 business days before the ex-dividend date
  169. RIEs
    • Recognized Investment Exchanges, this status exempts an exchange from the requirement of regulatory approval of arranging deals etc.
    • -membership of an RIE does not confer authorization to conduct regulated activities
  170. Exchanges with RIE status:
    • EDX London ltd
    • ICE Futures Europe
    • Liffe Administration and Management (NYSE Liffe)
    • LSE plc
    • PLUS Markets plc
    • The London Metal Exchange Limited (LME)
  171. The most important London market for financial futures and options is
    • NYSE Liffe, formerly Euronext Liffe, and before that the London International Financial Futures and Options Exchange (LIFFE)
    • -trading takes place on an electronic order matching system Liffe.connect
    • -only NYSE Liffe members are able to trade and clear contracts
    • -once a trade has been matched, LCH clearnet becomes the central counterparty and requests margin is posted
    • -initial margin is payable on opening a contract which is returnable good faith deposit
    • -LCH clearnet requires a deposit linked to the worst probable (not possible) one day loss that a position could sustain
    • -variation margin is payable based on profits gained or lost on each position each day, pay as you go, normally paid in cash only
    • -day to day supervision of rules is carried out by the Market Supervision Department
  172. NYSE Liffe Membership Rules
    • -focus on trading conduct
    • -they focus primarily on relationship between members rather than member to customer relationship
    • -membership does not convey any kind of authorization to conduct investment business in the UK, only allows access to the market place
  173. ROIEs
    • Recognised Overseas Investment Exchanges are permitted to operate in the UK
    • A ROIE is also granted exemption from the requirement to seek authorisation under FSMA 2000
    • -Chicago Board of Trade (CBOT)
    • -Eurex (Zurich)
    • -ICE Futures U.S. inc.
    • -Nasdaq
    • -New York Mercantile Exchange Inc. (NYMEX Inc.)
    • -SIX Swiss Exchange AG
    • -Sydney Futures Exchange Limited
    • -The Chicago Mercantile Exchange (CME)
  174. RCHs
    • Recognized clearing houses
    • permits the organization to carry out the clearing and settlement functions for an exchange
    • There are 4 RCHs
    • -Euroclear Uk & Ireland limited
    • -LCH.Clearnet Limited
    • -European Central Counterparty ltd
    • -ICE Clear Europe Limited
  175. DIEs
    • Designated Investment Exchanges
    • this status assures UK users that the FSA believes the overseas market to be appropriately regulated and protects investors rights
    • -designated does not mean exempt from the requirement to seek authorisation as they are unable to conduct regulated activities in the UK like the RIEs are able to
    • -there are currently 30 DIEs, which include
    • Tokyo Stock Exchange
    • New york Stock Exchange
    • New york futures exchange
    • International Capital Markets Association
    • Hong Kong Exchanges and Clearing Limited
  176. UKLA
    • UK Listing Authority is the FSA's division which determines which companies may be listed on the LSE and be on the official list
    • There are two levels of entry onto the stock market
    • 1. through the official list and traded on the main market
    • 2. through AIM
    • UKLA regulates the official list, while the LSE regulates AIM
  177. UKLAs Listing Rules
    • -found in the FSA handbook
    • -expected market value of shares must be at least 700,000 GBP
    • -if the company is to issue debt, expected market value of debt must be at least 200,000 GBP
    • -all securities must be freely transferrable
    • -must have a trading record, audited accounts, and continous business activity in its main business for at least 3 years, although this can be waived for innovative high growth companies, investment companies, and in certain other situations
    • -shares must be sufficiently marketable. A minimum of 25% free float is normally seen to satisfy this requirement.
    • -must pay a fee
    • -must appoint UKLA approved sponsor
    • -must produce a prospectus
    • -once listed, must produce interim (6 months) accounts within 3 months, and annual accounts within 6 months
  178. UKLA approved sponsor
    • -ensure company and directors are aware of their obligations
    • -ensure the company is suitable for listing and satisfy UKLA of this fact
    • -liase with UKLA and submit documentation to them as required
    • -co-ordinate the listing process
  179. LSE listing Continuing Obligation
    • -notify the LSE of any price-sensitive information
    • -publish information about important transactions undertaken by the company under the Class Test rules
    • -inform the LSE of any changes in the important registers of ownership of the shares, such as notifiable interests and directors shareholdings
    • -notify the LSE of dividends
    • -issue reports
    • -all disclosures must be made through an official RIS or UKLA approved PIP service
    • -if announcement is lengthy, prominence should be given to current and future trading prospects
    • -if inside info is leaked, company must take immediate action to release info to entire market
    • -company should correct forecasts as soon as they see a change
  180. RIS
    • Regulatory information service, UKLAs official route for listed companies disclosures
    • -Regulatory News Service (RNS) of the LSE
    • -Firstsight
    • -PR Newswire Disclosure
    • -Business Wire REgulatory Disclosure
  181. PIP
    Primary information provider, a service for companies to disclose various information to the UKLA, if the PIP is approved by the UKLA
  182. 48 hours prior to the meeting
    the 48 hour rule, when getting listed by the LSE, all applicants must have a sponsor to guide them through the process of applying for a hearing and submitting all the relevant documention to the competant authority, the UKLA, all documentation must be submitted 48 hours before the hearing
  183. Conditions for listing on AIM
    • all securities must be freely transferrable
    • aim companies must has an LSE approved nominated advisor (NOMAD)
    • must have a broker to support trade
    • must comply with ongoing obligations to publish price sensitive info immediately and disclose details of significant transactions
    • companies with a track record of less than 2 yearsmust agree to lock in, therefore anyone significant shareholders with greater than 0.5% must agree not to sell there shares for at least 1 year
    • -no min free float, no min market cap, no min trading history
    • -must provide the AIMs version of the prosepectus, the Admission Document
  184. NOMAD
    Lse approved Nominated Advisor for AIM listed companies. If the company loses its NOMAD it must find a new one or the listing will be suspended
  185. Admission document
    AIM prospectus, a shorter, less detailed version
  186. PMG
    • PLUS Market Group is an independent FSA regulated UK provider of primary and secondary equity market services and currently trades over 7000 small and mid cap company shares under MiFID rules
    • -to gain admission a company must appoint a PLUS Markets corporate advisor
    • -at least 1 independent director
    • -audited published reports within 9 months before admission
  187. PLUS Primary market
    • specializes in smaller companies, domestic and international, wide range of sectors
    • -currently around 180 companies quoted on the primary market with combined market cap of 2.4 billion GBP
  188. PLUS Secondary Market
    based on quote driven trading model, market makers commit their own capital to the market, playing a key role in providing both price formation and liquidity
  189. Prospectus Directive
    • EU directive from Dec 2003
    • produced whenevre there is a public offer of securities to the general public or where securities are admitted to trading on a regulated market
    • -must be approved by relevant authority (FSA n the UK)
  190. When was AIM deregulated?
    in 2004
  191. Prospectus Directive Exemptions:
    • -offers made to qualified investors
    • -total consideration for the offer over a 12 month period is less than 100,000 GBP
    • -offers made to fewer than 100 persons per EEA state, other than qualified investors
    • -documents where securities are offered in connection with a takeover or merger, if they contain information similar to that in a prospectus, such documents will not require formal approval
  192. LR
    Listing Rules for LSE
  193. LR 9 Annex 1
    • Contains Model Code for Directors dealings
    • -restricts directors dealings on their own account in the companies shares at certain times
    • -no trades should be undertaken by its directors in the close period or 60 days before the company publishes annual results or reports
  194. Close period
    • -60 days before annual report is published
    • -for bi-annual reports, close period is time between 6 month period end and the reports release
    • -qrtly results, close period is 1 month
    • -if Interim Management statements are issued instead of qrtly reports, there in no close period and discretion must be used
  195. DTR
    • Disclosure and Transparency Rules states that if Interim Management Statements are released instead of qrtly reports, there is no close period and companies must excercise discretion
    • -requires issuers to control inside information & make timely disclosures of price sensitive info
    • -requires PDMRs to publicly notify to the issuer and the market via a RIS
    • -requires issuers to maintain lists of insiders
  196. PDMRs
    • Person discharging managerial responsabilities
    • -directors and senior executives
    • -other than directors, PDMRs must get approval from designated director or company secretary if dealing in company secuirities
    • -must seek top prohibit dealings during close period for any connected persons
  197. Trading Plan for PDMRs
    • Since March 2009, PDMRs can trade in there own securities during both open and prohibited periods by entering into a trading plan with say an investment manager on the basis that
    • -trading plan must be entered into in an open period, and cannot be amended in the prohibited period
    • -cancellation of trading plan is not permitted during prohibited period except in exceptional circumstances and provided the PDMR does not have inside information
  198. PR
    Prospectus rules, set out the requirements for and contents of, prospectuses.
  199. Notification rule for interest in a company
    • -reaches or falls below 3% of the voting rights
    • -increases or reduces across one full % point above 3% (i.e. 4.9% to 5.2%)
    • they must notify the company within 2 business days, and the company must make this public by the end of the following trading day
  200. Voting rights
    for certain voting rights, the thresholds that apply are 5%, 10% and each whole % figure about 10%
  201. EEA Issuers
    if incorporated and with their registered office in their home country, then they follow there home rules regarding notification of interest in company
  202. Short interest notification rules for financial sector companies
    • introduced in the crisis of 2008
    • -a short position representing .25% or more of the issued capital and if the holding crosses .1% bands above .25% (.35%, .45%, etc.)
    • -must report net exposure for previous day market close
  203. Connected parties
    • -own position
    • -spouse or infant child (under 18)
    • -owned by a connected/controlled company, stakeholder owns at least 1/3rd of the capital
    • -any concert parties
  204. Concert parties
    organisational grouping, 5 people agree to buy 10% of a company, 2% each
  205. non beneficial holdings interest notification
    of at least 10% must notify company with 2 business days
  206. 2 Registers of Interest
    • 1. over 3% interest disclosure of substantial holdings, material and notifiable interests
    • 2. directors share interests
    • open to public record, and any changes must be notified to the market via RIS or PIP without delay (end of following business day)
  207. Directors Model Code
    • placed under a number of voluntary controls
    • in general-should not buy or sell shares 2 months preceding an announcement
    • -not permitted to deal in futures and options on the shares of their company
  208. Corporate Governance requirements
    • UKLA requires companies to disclose in their annual report
    • 1. company must explain how both the main and supporting principles of the Combined Code on Corporate Governance have been applied
    • 2. company must disclose whether they have complied with the provisions of the code of best practice
  209. Combined Code of corporate governance: Section A
    • Directors
    • -headed by an effective board
    • -chairman runs the board
    • -chief executive runs the company
    • -no one individual should have unfettered powers of decision
    • -include balance of executive and non-executive directors (in particular independent non-executive directors)
    • -so no individual or small group can dominate
    • -a formal, rigorous amd transparent procedure for appointment of new directors
    • -directors regularly update skills and knowledge
    • -formal and rigorous annual evaluation of own performance, committees and directors
    • -directors should be submitted for re-election at regular intervals
    • -board should ensure planned and progressive refreshing of the board
    • revised in June 2008, published by the Financial Reporting Council
    • -likely to be reviewed periodically
  210. Combined Code of Corporate Governance: Section B
    • REmuneration
    • directors remuneration are sufficient to attract, retain and motivate directors
  211. Combined Code of Corp Governance: Section C
    • Accountability and Audit
    • -financial reporting is balanced and understandable
    • -sound system of internal control
    • Audit committee and auditors-a formal and transparent arrangement for apply financial reporting and internal control principles and maintaining relationship with auditors
  212. Combined Code of CG: Section D
    • Relations with shareholders
    • -dialogue with institutional shareholders based on mutual understandiong of objectives
    • -board should use the AGM to communicate with investors and encourage participation
  213. AGM
    • Annual General Meeting, The companies act states that 21 calender days notice must be given, unless all shareholders wave the notice period
    • -approving the accounts
    • -reappointing directors
    • -reappointing auditors and giving power to the directors to fix their remuneration
    • -approval or rejection of the dividend
  214. Combined Code of CG: Section E
    no formal status, but basically emphasizes the idea of what good corporate governance should look like for institutional shareholders
  215. Profit Warnings
    downward profit revisions
  216. Proxy
    • If shareholder is unable to attend a meeting, they cannot appoint someone to vote for them or ask the chairman to vote for them
    • -general proxy (vote has he/she thinks)
    • -special proxy (appointed to vote either for or against)
  217. EGM
    • Extraordinary General Meeting
    • -following EU Shareholder Rights Directive, 21 calender days notice
    • -however, listed companies may require a minimum of 14 days notice, provided they pass a special resolution annualy and offer all shareholders ability to appoint a proxy electronically
  218. Electronic Notice
    notice period from delivery date of electronic communication, 48 hours after being sent is delivery date
  219. Quorum
    is achieved when two shareholders are present (minimum number required)
  220. Voting
    • can be done by show of hands, or poll vote (one vote per share)
    • Proxies may only vote by way of a poll vote
  221. Poll Vote
    • Vote per share
    • Proxies can only vote by a poll vote
    • -poll vote may be demanded by shareholders representing 10% or more of the voting rights
    • -or 5 members or the chairman can demand a poll vote
  222. Name 2 UK derivative exchanges
    NYSE Liffe and the London Metals Exchange
  223. What is the most importan source of regulation for derivatives in Europe?
  224. MiFID derivative regulation includes:
    • Options
    • swaps
    • futures
    • forward rate agreements
    • commodity derivatives
    • derivatives for transfering credit risk
    • CFDs
    • Derivatives relating climatic variables, freight rates, emission allowances, inflation rates or other official economic stats capable of being settled in cash
  225. SEC
    Securities and Exchange Commission primarily regulates derivatives
  226. CFTC
    Commodity Futures Trading Commission primarily regulates commodities
  227. US regulations on derivatives
    • Stem from wall street crash of 1929
    • -Commodity Exchange Act 1936
    • updated by
    • -Commodity Futures Modernization Act 2000
  228. How are derivatives valued?
    must be recognized in the balance sheet at fair value (except those used as a hedge), or stated at their current market value 'marked to market'
  229. treatment of gains and losses of derivatives (when not classified as a heding instrument)
    as income and expenses
  230. Transparency Directive
    • MiFID is backed by this directive, its efforts trying to create a single capital market in EEA
    • -requires pre and post trade transparency
    an electronic order matching system used by NYSE Liffe
  232. NYSE Liffe
    • London International Financial FUtures and Options exchange
    • -uses electronic order matching system LIFFE CONNECT
    • -LCH acts as central counterparty
    • -LCH recieves feed from NYSE Liffe of trades from its LIFFE CONNECT trading system
    • -these are agreed trades and the TRS and CPS permit clearing members to confirm business into the correct clearing accounts
  233. TRS
    Trade Registration System in LCH
  234. CPS
    Clearing Processing System in LCH
  235. How are OTC derivatives settled?
    • Direcly with the counterparty, rather than through an exchange of clearing broker, but this is changing
    • -soon OTC derivatives will clear through clearing houses
  236. JGB
    • Japanese Government Bonds
    • -semi annual coupon
    • -settles in 3 business days
    • -both registered and bearer bonds
    • -normal life of 10 years, although some super longs of 40 years
    • -25% withholding tax, but bilateral agreement reduces to 10%
    • -no medium term debt
    • -settled by JGBCC
    • -accrued interest is actual, convention 365
  237. US T-Bond
    • -Semi annual coupon
    • -settles same or next day
    • -all registered bonds
    • -normal life of over 10 years
    • -No withholding tax
    • -T-note life is 2-10 years
    • -Settled by the Federal Reserve
    • -Accrued interest is actual
  238. French OAT
    • -annual coupon
    • -T+1
    • all bearer bonds
    • between 6 and 30 years
    • No withholding tax
    • BTAN life of 2 to 5 years
    • Settled by Relit, Sicovam, Euroclear and Clearstream
    • accrued interest is actual
  239. German Bund
    • Annual coupon
    • T+3
    • Bearer bonds
    • mostly 10 year
    • no withholding tax
    • BOBL-up to 5 years
    • Schatz- 2 to 6 years
    • Settled by Euroclear and Clearstream
    • Actual Accrued Interest
  240. Eurobonds
    • Annual coupon
    • T+3
    • Bearer bonds
    • Varied life
    • no withholding tax
    • settled by euroclear and clearstream
    • actual accrued interest
  241. UK Corporate Bonds
    • Annual Coupon
    • T+3
    • Registered bonds
    • 20% withholding tax
    • Settled by CREST
    • Actual accrued interest
  242. UK Gilt
    • Semi-annual coupon
    • settles same/next day
    • Registered bonds
    • no withholding tax
    • varied life span
    • settled by CREST, Euroclear, clearstream and Bank of NY
    • Actual accrued interest
  243. Pre-release form
    • for ADRs, bank releases receipt before the deposit of the shares in its vaults. Dealer can then sell the receipt but the cash raise must be lodged with a holding bank as collateral
    • -this may exist up to 3 months
  244. ADR creation fee
    one off 1.5% fee
  245. Do ADR holders participate in rights or bonus issues?
    No, bank sells them and distributes proceeds to holders
  246. GDR
    • Global Depository Receipt
    • Very similar to ADR, primarily used to raise USD capital
  247. Does the US have the worlds largest stock market?
    • Yes, constituents include
    • New York Stock Exchange
    • American Stock Exchange
    • The Philadelphia Stock Exchange
    • Boston Stock Exchange
    • Chicago Stock Exchange
    • Cincinatti Stock Exchange
    • Pacific Exchange
  248. New York Stock Exchange
    established in 1792, is an order driven floor dealing market
    is a screenbased, quote driven market owned and operated by Nasdaq OMX Group
  250. NYSE Specialists
    brokers who recieve and match orders via a limit order book. Specialists can also act as market makers where an order cannot be matched via the order book
  251. superDOT
    • on the NYSE, the super designated order turnaround system is the alternative to telephoning orders to specialists.
    • superDOT does most small trades and benefits from speed (typically 20 seconds of entering the order)
  252. Is the US Government Bond market the largest in the world?
    Yes, key player is the Federal reserve, and the US treasury is responsible for issueing debt in order to fund the deficit
  253. Primary dealers
    these firms are the market makers authorized to conduct trades by the fed and obliged to make markets in all issues
  254. T-Bills
    • 3-12 months at a discount to face value
    • weekly issues of 3 or 6 month bills
    • monthly issues of 1 year bills
  255. T Notes
    • coupon securities, 2-10 years
    • monthly issues of 2 and 5 year notes
    • quarterly issues for longer
  256. T Bonds
    • Coupon securities, over 10 years
    • quarterly issues
  257. Competetive Auction
    In the US, primary dealers are obliged to bid for stock, and bids are on a yield basis (rather than price in the UK)
  258. Rule 144A
    • Corporates are allowed to issue bonds into the private placement market without seeking full SEC registration
    • -not restricted to overseas issuers but dominated by domestic issuers
  259. Yankee Bond
    • a dollar denominated bond issued in the US by an overseas borrower
    • eurodollar bonds may not be sold into the US market until they have seasoned (a period of 40 days), whch has created a devide between the euromarket and the domestic market
  260. Tokyo Stock Exchange
    order driven through the CORES dealing system, t+3 by book entry transfer through the JSCC
  261. JSCC
    Japanese Securities Clearing Corporation
  262. Bond Market in Japan
    • Dominated by government bonds. Not in terms of volume, where JGBs account for only half of the market, but in the secondary market they account for over 80%
    • -strong focus on the 'benchmark' bond which has caused huge discrepancies between the benchmark and other side issues
  263. Japanese Bond issue process
    • complex with monthly auction/syndicate issue
    • the syndicate (still dominated by large investment banks) is allocated 40% of the issue, with 60% sold via public auction
    • -terms issued by ministry of finance
  264. Where are JGBs traded?
    • on both the TSE and the Broker-Broker (OTC) Market
    • -90% of volume on benchmark issues
  265. TSE
    Tokyo Stock Exchange, settles T+3
  266. Japanese OTC Market
    Broker-Broker market, settlement takes 9 days or more
  267. Samurai
    publicly issued yen bonds
  268. Shibosai
    yen bonds issued via private placement
  269. How many stock markets in France?
    • 1, the Euronext
    • it operates a computerised order book known as NSC
    • T+3 through the systems of Euroclear France, the central securities depository
  270. Franc Fort Policy in 1985
    transformed the french economy
  271. Maastricht Treaty
    in 1993 France announced committment to move towards a more independent central bank in line with this treaty, making france the most efficient bond market within the first wave of the EMU
  272. EMU
    European Economic and Monetary Union
  273. MATIF
    The french financial futures market, now part of Euronext
  274. BTFs
    • French T Bills, issued at a discount to face value
    • matures 13, 26 and 52 weeks
  275. BTANs
    • fixed rate treasure notes, issued between 2 and 5 years with annual coupons
    • new issues on a 6 monthly basis, reissues on a monthly basis
  276. OATS
    French bonds, 6 to 30 years
  277. French Corporate bonds
    Makes up half the market
  278. Deutsche Borse
    • fierce competitotor of the LSE
    • places trades through XETRA
    • T+2
    • settlement through Clearstream
  279. German Bond Market
    third largest in the world after, after US and Italy
  280. German Corporate debt market
    • Is very strong, unlike the UK, Germany has a strong corporate debt market and a relatively weak equity market
    • -bulk of finance for industry is provided through the banks, either as lenders or shareholders. Debt securities other than eurobonds are less significant
  281. German bond market as benchmark for government bonds in the eurozone?
    yes, with the adoption of the EURO
  282. Pfandbriefe
    • bonds collateralized against portfolios of loans
    • Offenliche Pfandbriefe-backed by loans to public sector
    • Hypotheken Pfandbriefe-backed by mortgages
  283. Bundesanleihen
    conentional bonds in the market, normally 10 year
  284. Unity Bonds
    Special Bunds issued to fund the reunification process
  285. Bobls
    medium term issues, up to 5 years
  286. Bundesschatzanweisungen (Schatze) and Kassenobligationen
    second type of medium term issues, 2-6 year
  287. BU-Bills
    6 month bills issued by Bundesbank
  288. German bonds settlement date
    T+3 matching the eurobond three day settlement
  289. Eurobond market
    • an international market in debt, companies issueing debt in the eurobond market have their securities traded all over the world
    • -eurobond market only accepts highly rated companies since eurobonds themselves are unsecureddebt
  290. Are eurobonds issued by a borrower inside the country in which there currency is demoninated?
    • No, predominantly outside of the country in whose currency it is denominated
    • example: US Dollar Eurobond can be issued anywhere in the world except for the US, as such a better name would be the 'international bond'
  291. Bearer bonds
    Eurobonds are bearer form, meaning there is no formal reistration of ownership held by the company
  292. Eurobond
    • -unlike most government bonds, eurobonds do not attract withholding tax
    • -pay coupons gross and usually annually
    • -most are issued in bullet form but some bonds are redeemed over a period of years
    • -each year a drawing of eurobond unique numbers are picked, published and called in and redeemed
    • -T+3
    • -telephone driven and houses based in london
    • -settled by Euroclear and Clearstream
  293. drawing on a eurobond
    each year a number of eurobonds will be drawn, published and redeemed
  294. ICMA
    International Capital Market Association which regulates the Eurobond market
  295. Eurobond Issuance
    • -most common form is a placing, issuer appoints a lead manager awarding them the mandate, giving them the power and responsibility to issue the bond on the issuers behalf
    • -lead manager may then create a management group with multiple eurobond houses
  296. Bought deal
    lead manager agrees to detailed terms with issuer including the coupon and maturity
  297. Fixed Price ReOffer
    • members of the management group are prohibited from selling the bonds in the secondary market at below the issue price until the syndacite has been broken
    • -the syndicate will break when the lead manager believes the bulk of the issue has been placed
  298. International markets settlement
    • USA (T+3 equities, T+0 govt bonds, settled by DTC)
    • Japan (T+3 eq, T+3 govt bonds, settled by TSE)
    • Germany (T+2 eq, T+2 govt bonds, clearstream)
    • France (T+3-- Euroclear)
    • UK (T+3 eq, T+1 gb, euroclear uk & ireland)
  299. CSD
    • in 1989, G30 recommened each domestic market establish a Central Securities Depository
    • -almost all countries have some form of central depository
    • -domestic/local client base
    • -domestic activity only
    • -local securities only
    • -settlement
    • -custody
  300. Dematerialised system
    no document that physically embodies the claim, rather collection of securities accounts, instructions to financial institutions which maintain those accounts, confirmation of account entries
  301. Immobilisation
    common in markets that previously relied on physical share certificates, which are now immobilisded in a depository, which is the holder of record in the register
  302. ICSDs
    • International Central Securities Depositories have established linkages with several domestic CSDs and have created a sub-custodian network
    • -principal ICSDs are Euroclear and Clearstream
    • -international client base
    • -cross border activity