Global Securities Markets – Short Questions and Answers

1) What is a Corporate Actions?

It is a collective term used to describe the entitlements of a security holder.

2) What is a Naked Dividend?

When a dividend is declared from the profits of past years then such a dividend is called as “Naked Dividend”.

3) What do you mean by Consolidation?

When the face value of a security (usually shares) is increased in order to increase its market price, then such an action is called Consolidation. It also refers to a corporate action whereby a company reorganizes its business in such as way that it keeps its core strengths and sells of unproductive businesses.

4) What is CUSIP?

It is a security identifier which is used for securities issued and traded in the US and Canada. CUSIP itself stands for Committee on Uniform Securities Identification Procedures.

5) What is SEDOL?

It is a security identifier which is used for securities issued and traded in UK and Ireland. SEDOL stands for Stock Exchange Daily Official List.

6) What is ISIN?

It is a security identifier which is used all over the world. ISIN stands for International Securities Identification Number.

7) What are Convertible Debentures?

They are debentures which can be converted into ordinary (common) equity shares at a particular point of time in future at a predetermined conversion price given the issuer.

8) What are redeemable preference shares?

They are preference shares which can be redeemed into cash in future.

9) What are share warrants?

They are financial instruments which are generally attached to a debenture issue. They allow its holder to convert them into the underlying shares (ordinary or preference shares) at a particular time in future at a predetermined conversion price fixed by the issuer. If the market price of the shares (ordinary or preference) at the time of conversion is more than the conversion price then the holder will convert, or else they would be worthless to the holder.

10) What is Stock Borrowing?

It is a mechanism through which one party (called the Borrower) borrows stock from another party (called the Lender) for a particular period of time for an agreed interest rate. Both the parties enter into an legal agreement for such a transaction, which is called Stock Lending and Borrowing Agreement. The transfer of stock happens by way of title transfer. The stock is returned by the borrower to the lender at the end of the borrowing period. Any benefits arising out of corporate actions during the borrowing period is transferred by the borrower to the lender.

11) What is Maintenance Margin?

It is a level set by the exchange or the broker below which the balance in the margin account should not fall. If the balance in the margin account breaches this level then the party should replenish the margin account to the level of the initial margin.

12) What is Initial Margin?

It is the margin that is paid by the parties to a contract to their respective brokers at the time of entering into a derivatives contract. The amount of margin is determined by the exchange and is the same for both the parties. This margin can either be given in cash or securities.

13) What is Variable Margin?

It is the margin that is paid when the margin account depletes below the maintenance margin level. The amount of this margin is equal to the difference between the Initial margin and the balance in the margin account after it has fallen below the maintenance margin level.

14) What is Mark to Market?

It is a method in which the derivatives contract is valued everyday at its closing price, and the daily losses are collected from the losing party and paid to the winning party. The procedure is followed till the expiry or termination of the contract. The purpose of this method is to minimize the counterparty credit risk to a single day’s loss.

15) What is Reconciliation?

It is a method in which data (transactions) from two sets of books maintained by two different parties are compared for the purpose of matching the key items. If all the key items are matched then it means that both the parties have recorded the transactions in a similar way. If the key items do not match then that means either of the parties have not recorded the transactions properly and hence investigation of the transactions is required.

16) What is Trade Guarantee?

It is a guarantee of performance of contract provided by the Stock Exchange to the parties to a transaction, provided the parties honour their obligations. In other words, it is a guarantee provided by the stock exchange to every buyer that if he pays the money then he will get his securities, irrespective of whether the seller fulfills his obligation or not. Similarly, it is a guarantee provided by the stock exchange to every seller that if he delivers his securities then he will get his money. This guarantee is provided by the exchange in two ways – first, by becoming the counterparty to both the parties, and second, by imposing strict margin requirements on the brokers.

17) What is Novation?

It refers to a process through which one party to a contract, with the permission of the other party, gives away his rights and obligations under the contract to a third party. The third party, by way of assuming the rights and obligations, becomes a party to the contract. The party who has given away his rights and obligations under the contract is called as “Outgoing party”. The third party who assumed the rights and obligations is called as “Incoming party”.

18) What is a Derivative?

It is a financial instrument whose value is derived from that of an underlying asset. The primary purpose of derivatives is risk management.

19) What is Trade Affirmation?

It is a process in which one party sends the details of a trade to another party for the purpose of receiving consent or approval. The consent or approval is sought in order to process the trade further. Trade Affirmation is one of the methods of Trade Confirmation. Without the affirmation or confirmation, there is no legality to the trade. Usually, this process is used in trades where one party is a broker or dealer while the other party is an Institutional Client, such as an Investment Manager.

20) What is Trade Matching?

In dealer-to-dealer trades, both the parties (dealers) will send the details of the trade to each other and try to match the records of their trades with the records received from the opposite party. This process of matching the own records of a dealer with that of the records of the opposite (counter) party is called as “Trade matching”. The purpose of trade matching is Trade Confirmation. If the records are not matched then the trades cannot be processed further. Once the trades are matched, the trades become legally enforceable.

21) What is Trade Booking?

It is the task of recording the essential details of a trade in the official records of the company. Trade booking should be done as soon as possible after Trade execution. Usually, this process is automated through STP (Straight Through Processing).

22) What is Security Identifier?

It is a unique identification given to a security for the purpose of distinguishing it from other securities. The unique identification helps in avoiding confusion when two or more securities have similar names. It also helps in faster identification and processing of trades.

23) What is Static Data?

It refers to the data is more or less permanent in nature and does not change with every trade. Usually, the data relating to bank account details, depository details, counterparty address, the authorised signatory and other such non-trade related details are referred to as Static Data.

24) What is Trade Data?

It refers to the essential data pertaining to a trade such as Security, Quantity, Price, Counterparty reference, Market, Currency, etc. These details change from trade to trade and are trade specific.

25) What is a Financial Asset?

A financial asset is an asset whose value depends on that contractual relationship between the parties. Unlike a physical asset, there is no intrinsic value of the asset. There exists only value due to the terms and conditions of the contract. The examples of such assets are Shares, Debentures, Bank deposits, etc.

26) What is a Stock Exchange?

It is an organised market place where buying and selling of securities takes place between various participants.

27) Who are Venture Capitalists?

Venture capitalists are companies or an association of persons who invest their money in new business ideas or in unlisted securities held by companies that have a potential to flourish into successful businesses. Usually, the venture capital firms take a substantial (generally controlling) stake in the business they invest into. They also take up directorship positions, particularly financial decision making control, in order to ensure the safety and prudent utilisation of their investments. The investments they do is generally into equity capital of the company.

28) Who is a Investment Banker?

A Investment Banker is a consultant and a broker who, for a fee, provides specialised services to companies such as raising capital from the public or private placement of securities, helping in mergers and acquisitions, raising syndicate loans, trading, research and consulting services, and any other services that might be required by companies from time to tome.

29) What are Junk Bonds?

They are bonds which are issued by companies that have a very poor credit rating. There is a high probability of default in such bonds. Due to the high risk involved in the bonds, they carry high interest rates. Investors who wish to take the risk may purchase these bonds with the expectations that the default will not occur and that they will get a substantially higher return compared to other bonds where the probability of default is lower.

30) What is EPS?

It means Earnings per Share. It is a ratio of the Net Profit to the Number of outstanding shares. The net profit here denotes the profit after interest, depreciation and taxes. In other words, it is that profit which can be distributed to ordinary shareholders. It is a good indicator of the profitability of any company. It can be used to compare the profitability of a company over a period of time, as well as against its peer groups. The period of earnings is usually an year but it can even be half-yearly or quarterly, depending upon the need and availability of information.

31) What is PE Ratio?

PE (Price Earnings) ratio is a ratio of the market price of a security to that of its earnings. It is generally used in comparison with peer groups for making investment decisions. If the PE of a security is too high then it denotes that the security is expensive to buy. Similarly, if the PE of a security is too low then it denotes that it is cheaper to buy. However, it is quite possible that the PE is higher because the market expects a significant increase in its earnings in future. Similarly, if the PE is too low then it is possible that the market expects a significant reduction in earnings in future.

32) What is Dividend?

It means distribution of profits in cash by a company to its shareholder. A company can give dividend only if it has profits. The profits need not be from the current year; past profits (accumulated profits) can also be used in giving dividends. There should be sufficient cash to give dividends. The cash can be declared as a percentage of the face value or as amount per share. The dividend can be paid either at the end of the year and/or at any time during the year.

33) What is Margin?

It is a deposit paid by parties to a contract to their brokers at the time of taking position in the market. It is not an advance and hence it cannot be adjusted to the contract value. It is fixed by the exchange on which the contract is traded. In case of OTC contracts, the margin is determined by both the parties.

34) What is Netting provision in OTC derivatives?

It is a provision agreed by the parties to a OTC derivatives contract whereby in the event of bankruptcy of one of the parties, the other party can net the outstanding payables between them under the contract and remit or receive the same. This provision helps the solvent party in reducing or eliminating its payables and receivables to the other party in the event of bankruptcy. It may also help the solvent party to avoid being a part of the liquidation proceedings of the insolvent party.

35) What is Rights Issue?

It is a right given by the company to its existing shareholders to subscribe to new shares of the company. The existing shareholders can either subscribe to the rights, renounce the rights, or sell the rights in the open market. Usually, the rights issue is a cheaper form of financing the company’s needs compared to an IPO or FPO. Hence, the rights issue is priced lesser than the current market price. The right to subscribe to new shares of the company are issued as a ratio to the existing shares held by the shareholders. For example, a 3-for-5 rights issue means that a shareholder having 5 shares will get the rights to subscribe to 3 additional shares in the company.

36) What is the purpose of margin?

The purpose of margin is to mitigate counterparty credit risk.

37) What is the main function of a Depository?

There are three main functions of a depository namely, 1) Safekeeping of securities, 2) Transfer of securities between parties upon instructions, and 3) Asset Servicing.

38) What is Clearing?

It is a process of calculating the obligations of the participants for settlement. It usually involves applying netting to both securities and cash position among all the participants involved in clearing.

39) What is Settlement?

It is a process of transferring securities from the seller to the buyer, and cash from the buyer to the seller. In a bilateral OTC transaction, this is done between the parties. In a cleared OTC transaction, this is through a Central Clearing Counterparty. In an exchange, this is done by the clearing corporation through the involvement of clearing brokers.

40) What is DvP?

It means Delivery versus Payment. It refers to a process in which the brokers will have to first deliver the securities and cash to the clearing corporation as determined by the Pay-In obligations under the clearing process and only then the clearing corporation will pay the securities and cash to the brokers as per the Pay-Out obligations under the clearing process.

41) What are Breaks in Reconciliation?

During a reconciliation process, it is possible that some transactions do not match; such transactions are referred to as Break Items or simply Breaks. These items will have to be investigated and reconciled again.

42) What does Position mean?

It means exposure to market risk. Whenever a person buys a contract in the expectation that the price will rise in future, he is said to have taken a “Long Position”. When the person sells a contract in the expectation that the price will fall in future, he is said to have taken a “Short Position”. Both the positions expose the person to market risk. If a person takes a Long Position in a particular security and subsequently takes a Short Position in that security, then the position is said to be “Square”, which means that he has no future exposure to market risk. It is very important to keep track of positions in various securities as it represents the risk that the individual or firm is taking.

43) What is GAP?

It refers to Liquidity risk. Whenever a position is taken in the market, a Gap exists. When a long position is taken, there is a need to pay money at the time of settlement. The firm has to track these flows of money (receivables and payables) on various settlement dates in order to ensure successful settlement and management of cash.

44) What is Premium in an Option?

It is the amount paid by the buyer of the option to its seller at the time of entering into an options contract. It is also referred to as the price of the option.

45) What is an SRO?

It means Self Regulating Organisations. It refers to organisations or trade bodies which have the power to make rules and regulations governing its members. The rules and regulations laid down by it are enforceable on all its members. The power of such organisations to make rules and regulations are recognised by law.

46) What are Treasury Bills?

They are short term instruments issued by the Government. They represent short term borrowings. They are usually issued at a discount to the face value and redeemed at the face value.

47) What are Treasury Bonds?

They are long term instruments issued by the Government. They represent long term borrowings. The interest on these instruments are usually paid semi-annually.

48) What is Commercial Paper?

It is a short term unsecured instruments issued by the corporates.

49) What is Trade Enrichment?

It is a process of adding Static Data to Trade Data for processing a trade for clearing and settlement.

50) What is PvP?

It refers to payment versus Payment. It is used in foreign exchange settlement.

Registered Systematic Internalisers in Europe

1. Danske Bank
2. FinecoBank s.p.a.
3. Goldman Sachs International
4. Nordea Bank Denmark A/S
5. Knight Capital Europe Limited
6. Citigroup Global Markets Limited
7. Citigroup Global Markets U.K. Equity Limited
8. Societe Generale Option Europe – SGOE
9. UBS Limited
10. UBS AG (London Branch)
11. Credit Suisse Securities Europe Limited

 

Registered Central Counterparties in Europe

1. Athexclear
2. LCH Clearnet SA
3. CCP Austria (Abwicklungsstellefuer Boersengeschaefte Gmbh)
4. Cassa di Compensazione e Garanzia
5. CME Clearing Europe Limited
6. European Commodity Clearing AG
7. European Central Counterparty N.V.
8. Eurex Clearing AG
9. ICE Netherlands BV
10. ICE Clear Europe Limited
11. KDPW_CCP SA
12. Keler CCP Central Counterparty Limited
13. The London Clearing House Limited
14. LCH.Clearnet Limited
15. LME Clear Limited
16. BME Clearing
17. NASDAQ Clearing AB
18. Omiclear-CC, SA
19. Central Depository and Clearing Company Inc.

 

Regulated Multilateral Trading Facilities in Europe

1. Alternext
2. Sistema de Negociacao Multilateral Alternext
3. MTS Netherlands
4. Aquis Exchange Limited
5. BATS Trading Limited
6. Boerse Berlin (Freiverkehr)
7. Beta Market
8. BGC Brokers LP
9. Blink MTF
10. Instinet Blockmatch
11. Baltex Freight Derivatives Market
12. Monetary Financial and Commodities Exchange – SIBIU S.A.
13. Bloomberg Trading Facility Limited
14. MTS Belgium
15. Warsaw Stock Exchange
16. Brokertec Europe Limited
17. Bondvision UK
18. JP Morgan Cazenove
19. Cantorcoze
20. Creditex Realtime
21. Duesseldorfer Boerse (Freiverkehr)
22. Duesseldorfer Boerse Quotrix (Freiverkehr)
23. Bratislava Stock Exchange – MTF
24. E-Mider
25. E-Mid Repo
26. Euro MTF
27. EuroMTS
28. Athens Exchange Alternative Market
29. EasyNext
30. Easynext Lisbon
31. Equilend Europe Limited
32. Boerse Berlin Equiduct Trading (Freiverkehr)
33. EuroTLX
34. Cantor Spreadfair
35. MTS France SAS
36. First North
37. First North Estonia
38. First North Finland
39. First North
40. First North Lithuania (Alternative Market)
41. First North Latvia
42. First North Stockholm
43. Frankfurter Wertpapier Boerse (Freiverkehr)
44. First North Stockholm
45. Frankfurter Wertpapier Boerse (Freiverkehr)
46. 42 Financial Services
47. GFI Credit Match
48. GFI Forex Match
49. GFI Energy Match
50. GFI Rates Match
51. Galaxy
52. MTS Germany
53. Griffin Markets Limited
54. Hanseatische Wertpapier Boerse Hamburg (Frieverkehr)
55. Boerse Hamburg Land and Schwarz Exchange (Frieverkehr)
56. Niedersaechsiche Boerse Zu Hannover (Frieverkehr)
57. Hi-MTF Order Driven
58. Hi-MTF
59. Hi-MTF Request-for-Quote
60. MTS Hungary
61. ICAP Global Derivatives Limited
62. ICAP Europe MTF
63. ICAP Energy
64. ICAP Energy MTF
65. ICAP Securities
66. ICAP TrueQuote
67. MTS Ireland
68. ISDX Growth
69. ISDX Secondary Market MTF
70. ISWAP Euro Limited
71. Liquidnet Europe
72. LMAX
73. Mercado Alternativo Bursatil
74. Marketaxess Europe Limited
75. Mercado Alternativo de Renta Fija
76. Currenex MTF
77. MTS Czech Republic
78. Merkur Market
79. FX Connect
80. Marche Libre
81. Mercato Borsa Italiana Equity MTF
82. Euronext Bondmatch
83. MTS Austria
84. MTS Denmark
85. MTS Finland
86. MTS Greece
87. MTS Interdealer Swaps Market
88. MTS Swap
89. Boerse Muenchen (Freiverkehr)
90. Boerse Muenchen – Market Maker Munich – Friverkehr
91. My Treasury
92. Nordic MTF
93. NASDAQ OMX NLX
94. NX
95. MTS Portugal
96. MTS Prime
97. MTS Israel
98. Reuters Transaction Services Limited
99. Sigma X MTF
100. Sharemark
101. MTS Spain
102. Spectronlive Trayport
103. BondVision Italia MTF
104. Baden – Wuerttembergische Wertpapier Boerse (Freiverkehr)
105. Swapteam
106. TP Energy – Tullett Prebon (Europe) Limited
107. TP Tradeblade – Tullet Prebon (Europe) Limited
108. Traditional Energy
109. Volbroker
110. Trading Facility
111. TOM MTF Derivatives Market
112. TP Creditdeal – Tullett Prebon (Securities) Limited
113. TP Forward Deal – Tullet Prebon (Europe) Limited
114. TP Repo – Tullet Prebon (Securities) Limited
115. TP Swap Deal – Tullett Prebon (Europe) Limited
116. TRAD-X
117. Tradeweb
118. Turquoise Global Holdings Limited
119. UK Gilts Market (MTS United Kingdom)
120. Vega – CHI
121. MTS Slovenia
122. Tradition – Volatis
123. Ventes Publiques
124. Wiener Boerse AG Dritter Market (Third Market)
125. WCLK Platform
126. AIM Italia – Mercato Alternativo Del Captitale
127. Bucharest Stock Exchange
128. Irish Stock Exchange – Global Exchange Market
129. Irish Stock Exchange – Enterprise Securities Market
130. Irish Stock Exchange – Atlantic Securities Market
131. Emerging Companies Market
132. Frankfurter Wertpapier Boerse XETRA (Freiverkehr)
133. Eurex Bonds Gmbh
134. Eurex Repo Gmbh
135. Tradegate Exchange (Freiverkehr)
136. Latibex
137. SI Enter
138. London Stock Exchange – AIM
139. London Stock Exchange – MTF
140. Marche Libre
141. Extramot
142. Sistema Espanol de Negociacion de Activos Financieros
143. New Connect
144. Oslo Connect
145. Posit
146. Prague Stock Exchange – MTF
147. RM – System Czech Stock Exchange (MTF)
148. Aktietorget
149. Smartpool Trading Limited
150. TP Energy Trade – Tullet Prebon (Europe) Limited
151. UBS MTF
152. Zagreb Stock Exchange – MTF

 

Registered Regulated Markets in Europe

1. BATS Europe
2. Boerse Berlin (Regulated Market)
3. Boerse Berlin (Second Regulated Market)
4. Derivatives Regulated Market
5. BondVision Italia
6. BATS Europe
7. CME Europe Limited
8. Duesseldorfer Boerse
9. Duesseldorfer Boerse Quotrix
10. Boerse Berlin Equiduct Trading
11. Electronic Openend Funds and ETC Market
12. European Wholesale Securities Market
13. Fish Pool ASA
14. Frankfurter Wertpapier Boerse
15. Gibralter Stock Exchange
16. Hanseatische Wertpapeier Boerse
17. Boerse Hamburg Lang and Schwarz Exchange
18. Niederaechsische Boerse Ze Hannover
19. Electronic Secondary Securities Market
20. Intercontinental Exchange (ICE Futures Europe)
21. ICE Futures Europe – Financial products division
22. ICE Futures Europe – Equity products division
23. ICE Futures Europe – Agricultural products division
24. ISDX Main Market
25. Mercada Electronico De Renta Fija
26. Mercada De Futures E Opcoes
27. Market for Investment Vehicles (MIV)
28. Electronic Bond Market
29. Electronic Share Market
30. MTS Italia
31. MTS Corporate
32. Boerse Muenchen Market Maker Munich
33. ICE Endex Derivatives B.V.
34. Norexeco ASA
35. NASDAQ OMX Oslo ASA
36. Mercado De Derivados OMIP
37. Warsaw Stock Exchange
38. Bondspot Securities Market
39. Bolsa De Barcelona Renta Fija
40. Bolsa De Bilbao Renta Fija
41. Spot Regulated Market
42. Securitised Derivatives Market
43. SEND – Sistema Electronico De Negociacion De Deuda
44. Baden – Wuerttembergische Wertpapier Boersa
45. Wiener Boerse AG
46. Wiener Boerse AG Geregelter Freiverkehr
47. Athens Exchange Derivatives Market
48. Euronext Amsterdam
49. Borsa de Barcelona
50. Bolsa de Bilbao
51. Bratislava Stock Exchange
52. Euronext Brussels Derivatives
53. Euronext Brussels
54. Budapesti Ertektozsde
55. Bulgarian Stock Exchange – Sofia JSC
56. NASDAQ Copenhagen A/S
57. Cyprus Stock Exchange
58. Italian Derivatives Market
59. Mercado de Deuda Publicaen Anotaciones
60. AIAF – Mercado de Renta Fija
61. Irish Stock Exchange – Main Securities Market
62. European Energy Exchange
63. Frankfurter Wertpapier Boerse Xetra
64. Euronext EQF – Equities and Indices Derivatives
65. Eurex Deutschland
66. Tradegate Exchange
67. NASDAQ Helsinki OY
68. OMX Nordic Exchange Iceland
69. Euronext London
70. Euronext Lisbon
71. AB NASDAQ OMX Vilnius
72. Ljubjana Stock Exchange – Official Market
73. The London Metal Exchange
74. London Stock Exchange – Derivatives Market
75. London Stock Exchange – Regulated Market
76. Bourse de Luxembourg
77. Bolsa de Madrid
78. Malta Automated Trading System
79. Autorite des Marches Financiers (AMF)
80. Mercado Continuo Espanol
81. MONEP
82. MEFF – Segmento Derivados Energia
83. MEFF – Exchange
84. Nordic Growth Market NGM AB
85. NXECHANGE
86. Oslo Axess
87. Oslo Bors ASA
88. Euronext Paris
89. PowerNext Derivatives
90. Prague Stock Exchange – Regulated Market
91. Power Exchange Central Europe
92. NASDAQ Riga
93. system Czech Stock Exchange
94. NASDAQ Stockholm AB
95. NASDAQ OMX Tallinn
96. Bolsa De Valencia
97. Zagreb Stock Exchange

 

Glossary of terms used in markets in financial instruments (MiFID)

Access Requirements

Rules governing the decision of an operator of a financial market infrastructure, such as a stock exchange or clearing house, to allow third parties to do business on or through their systems.

Admission to trading

The decision for a financial instrument to be traded in an organised way, notably on the system of a trading venue.

Algorithm

An algorithm is a set of defined instructions for making a calculation. They can be used to automate decision making, for instance with regards to trading in financial instruments.

Algorithmic trading

Algorithmic trading is trading done using computer programmes applying algorithms, which determine various aspects including price and quality of orders, and most of the time placing them without human intervention.

Appropriateness test

The requirement for a financial firm to take the necessary steps to ascertain whether a financial product or service is suitable to the needs of their client.

Approved Publication Arrangement (APA)

It is a system that requires firms executing transactions to publish trade reports through a body that ensures timely and secure consolidation and publication of such data.

Approved Reporting Mechanism (ARM)

An approved reporting mechanism is a platform that reports transactions on behalf of firms. This can also be done via the multi-lateral trading facility or regulated market on which the transaction was performed.

Arbitrage strategy

It is one that exploits differences in price that exist due to market inefficiencies, for example, buying an instrument on one market and simultaneously selling a similar instrument on another market.

Asset Backed Security (ABS)

It is a security whose value and income payments are derived from and collateralised (or “backed”) by a specific pool of underlying assets which can be for instance mortgage or credit cards credits.

Automated trading

The use of computer programmes to enter trading orders where the computer algorithm decides on aspects of execution of the order such as the timing, quantity and price of the order. A specific type of automated or algorithmic trading is known as high frequency trading (HFT). HFT is typically not a strategy in itself but the use of very sophisticated technology to implement traditional trading strategies.

Best execution

MiFID (Article 21) requires that firms take all reasonable steps to obtain the best possible result for their clients when executing orders. The best possible result should be determined with regard to the following execution factors: price, costs, speed, likelihood of execution and settlement, size, nature, or any other consideration relevant to the execution of an order.

Bid-ask-spread

The bid-ask spread is the difference between the price at which a market maker is willing to buy an asset and the price it is willing to sell at.

Bilateral order

An order which is only discussed and disclosed to the counterparties to the trade.

Broker crossing network

A number of investment firms in the EU operate systems that match client order flow internally (for example, Citigroup, Credit Suisse, Deutsche Bank, JP Morgan, Morgan Stanley and UBS). Generally, these firms receive orders electronically, utilise algorithms to determine how they should best be executed (given a client’s objectives) and then pass the business through an internal system that will attempt to find matches. Normally, algorithms slice larger ‘parent’ orders into smaller ‘child’ orders before they are sent for matching. Some systems match only client orders, while others (depending on client instructions/permissions) also provide matching between client orders and house orders. Broker crossing networks do not show an order book, and as noted above, simply aim to match orders; due to this nature they are sometimes compared to Dark Pools, which have similar characteristics.

Central Counterparty (CCP)

It is an entity that acts as an intermediary between trading counterparties and absorbs some of the settlement risk. In practice, the seller will sell the security to the central counterparty, which will simultaneously sell it on to the buyer (and vice versa). If one of the trading parties defaults, the central counterparty absorbs the loss.

Churning

It is where a broker conducts extensive trading on a client’s account in order to increase their commission.

Circuit breaker

A circuit breaker is a mechanism employed by a market in order to temporarily suspend trading in certain conditions, including sudden, deep price falls, On aim of the use of circuit breakers is to prevent mass panic selling and to prevent associated herd behaviours.

Classification of clients

Protection requirements are calibrated in MiFID to three different categories of clients, notably clients, professionals, and eligible counterparties. The high level principle to act honestly, fairly and professionally and the obligation to be fair, clear and not misleading apply irrespective of client categorisation.

Clearing

The process of establishing settlement positions including the calculation of net positions, and the process of checking that securities, cash or both are available for the settlement of obligations. In other words it is the process used for managing the risk of open positions.

Collateral

A guarantee that is used by the collateral provider to secure an obligation to the collateral taker. Collateral usually takes the form of cash or securities. It is also referred to as margin.

Clearing eligible

A financial instrument which is deemed to be sufficiently standardised in order to be cleared by a central counterparty.

Client assets

Client assets are assets (cash, equities, bonds, etc.) which belong to the client, but which are held by investment firms for investment purposes.

Commodity derivative

A financial instrument the value of which depends on that of a commodity, such as grains, energy or metals.

Complex product

A financial product the structure of which includes different components, often made of derivatives and the valuation of which will evolve in a non-linear fashion. These notably include tailor-made products such as structured products, asset backed securities, and non-standard OTC derivatives.

Non-complex instruments

The MiFID Level 1 Directive (Article 19(6)) lists specific types of instruments/products that can always be treated as non-complex for investor protection purposes and notably information requirements. Under EU law, the complexity of an instrument is determined by the way it is structured and the ease with which the risk attached to the product can be understood.

Conflicts of interest

The term conflict of interest is widely used to identify behaviour or circumstances where a party involved in many interests finds that two or more of these interests conflict. Conflicts of interest are normally attributed to imperfections in the financial markets and asymmetric information. Due to the diverse nature of financial markets, there is no general definition of a conflict of interest; however, they are typically grouped into Firm/Client, Client/Client and Intra Group conflicts. MiFID contains provisions for areas where conflicts of interest commonly arise and how they should be dealt with.

Consolidated tape

It is an electronic system which combines sales volume and price data from different exchanges and certain broker-dealers. It consolidates these into a continuous live feed, providing summarised data by security across all markets. In the US, all registered exchanges and market centers that trade listed securities send their trades and quotes to a central consolidator. This system provides real-time trade and quote information.

Credit Default Swap (CDS)

A credit default swap is a contract between a buyer and a seller of protection to pay out in the case that another party (not involved in the swap). defaults on its obligations. CDS can be described as a sort of insurance where the purchaser of the CDS owns the debt that the instrument protects; however, it is not necessary for the purchaser to own the underlying debt that is insured.

Cross market behaviour

Trading strategies which involve placing orders or executing trades in several markets.

Dark Pool

Dark pools are trading systems where there is no pre trade transparency or orders in the system (i.e. there is no display of prices or volumes of orders in the system). Dark pools can be split into two types: systems such as crossing networks that cross orders and are not subject to pre trade transparency requirements, and trading venues such as regulated markets and MTFs that use waivers from pre-trade transparency not to display orders.

Dealer

A dealer is an entity that will buy and sell securities on their own account, acting as principal to transactions.

Derivative

It is a type of financial instrument whose value is based on the change in value of an underlying asset.

Direct Market Access (DMA)

Participants require access to a market in order to trade on it. Direct market access refers to the practice of a firm who has access to the marketing allowing another third party firm electronic access to the market via their own systems.

Directive

It is a legislative act of the European Union, which requires member states to achieve a particular result without dictating the means of achieving that result. A directive therefore needs to be transposed into national law contrary to regulations that have direct applicability.

Dissemination

It refers to giving out information.

Distortion and misleading behaviour

It refers to behaviour that gives a false or misleading impression of either the supply of, or demand for, an investment; or behaviour that otherwise distorts the market in an investment.

Distribution policy

A financial firm’s internal guidelines as to how and under which conditions the firm and its personnel provide services for and offer products to its clients.

Electronic order book trading

A system of transacting in financial instruments based on publicly available prices and sizes at which investors are willing to transact. It is distinguished from request for quote trading, where investors contact each other bilaterally in order to establish the prices which they can trade on.

EMIR

European Market Infrastructure Regulation

Equivalence assessment

The process by which the European Commission gathers information and makes a decision with regards to whether or not the financial market rules and supervision of a third country are as strict and comprehensive as those in Europe.

EU Emission Allowance (EUA)

An allowance to emit one tonne of carbon dioxide equivalent during a specific period, as more specifically defined in Article 3(a) of Directive 2003/87/EC.

ETS

European Union Emission Trading Scheme a ‘cap and trade’ system: it caps the overall level of emissions allowed but, within that limit, allows participants in the system to buy and sell allowances as they require. These allowances are the common trading ‘currency’ at the heart of the system. One allowance gives the holder the right to emit one tonne of Co2 or the equivalent amount of another greenhouse gas. The cap on the total number of allowances creates scarcity in the market.

Execution-only services

Investment firms may provide investors with a means to buy and sell certain financial instruments in the market without undergoing any assessment of the appropriateness of the given product – that is, the assessment against knowledge and experience of the investor. These execution-only services are only available when certain conditions are fulfilled, including the involvement of so-called non-complex financial instruments (defined by article 19 paragraph 6 of MiFID).

Fair and orderly markets

A common way of describing a situation in which prices are the result of an equilibrium between supply and demand, so that all available information is reflected in the price, unhindered by market deficiencies or disruptive behaviour.

Financial Instrument

A financial instrument is an asset or evidence of the ownership of an asset, or a contractual agreement between two parties to receive or deliver another financial instrument. Instruments considered as financial are listed in MiFID (Annexure 1).

Fit and Proper

Persons who effectively direct the business of an investment firm need to have a good reputation and to have the right level of experience so as to ensure the sound and prudent management of the investment firm. This is so called fit and proper test.

Front Running

Front running is where a broker intentionally trades because of and ahead of a client order. For example, a broker who buys 100 Company A shares, before executing a client’s order for 100,000 Company A shares (with the large client order possibly increasing the share price).

Fundamental Data

Information on the supply and demand of goods and services in the real economy.

Hard position limit

A hard position is a strict pre-defined limit on the amount of a given instrument that an entity can hold.

Hedging

Hedging is the practice of offsetting an entity’s exposure by taking out another opposite position, in order to minimise an unwanted risk. This can also be done by offsetting positions in different instruments and markets.

High frequency trading

High frequency trading is a type of electronic trading that is often characterised by holding positions very briefly in order to take advantage of short term opportunities in terms of price rises and falls. High frequency traders use algorithmic trading to conduct their business.

Improper disclosure

Improper disclosure is where an insider improperly discloses inside information to another person.

Inducement

Inducement is a general notation referring to various types of incentives provided to financial intermediaries in exchange for the promotion/sale of specific products to their clients.

Information asymmetry

It occurs when one party to a trade or transaction has more or better information than another party to that trade or transaction, giving it an advantage in that trade or transaction.

Insider dealing

Insider dealing is when an insider deals, or tries to deal, on the basis of inside information.

Interest rate swap

An interest rate swap is a financial product through which two parties exchange cash flows; for instance, one party pays a fixed interest rate on a notional amount, while receiving an interest rate that fluctuates with an underlying benchmark from the other party. These swaps can be structured in various different ways negotiated by the counterparties involved.

Intermediary

A person or firm who acts to bring together supply and demand from two other firms or persons. In the context of MiFID, intermediary are investment firms.

Inter-positioning

It is where a broker adds another intermediary in a trade even if not required. This increases commissions of the intermediary for which the original broker will generally also gain some form of benefit – e.g. through mutual inter-positioning or other benefits. The client ultimately loses out by not receiving best execution.

Investment services

Investment services are legally defined MiFID (Article 4 and Annexure I), and covers various activities from reception of orders, portfolio management, underwriting or operation of MTFs.

Indication of Interest (IOI)

It is where a buyer discloses that he wishes to purchase an instrument, often made before an initial public offering. This can also be called expression of interest. An IOI does not force the party expressing an interest to act on it, i.e. to trade on it.

Latency period

The time an order entered into a trading system stays in it before being executed or withdrawn.

Liquidity

It is a complex concept that is used to qualify the markets and the instruments traded on these markets. It aims at reflecting how easy or difficult it is to buy or sell an asset, usually without affecting the price significantly. Liquidity is a function of both volume and volatility. Liquidity is positively correlated to volume and negatively correlated to volatility. A stock is said to be liquid if an investor can move a high volume in or out of the market without materially moving the price of that stock. If the stock price moves in response to investment or disinvestments, the stock becomes more volatile.

Lit market

It is one where orders are displayed on order books and are therefore pre trade transparent. One the contrary, orders in dark pools or dark orders are not pre trade transparent. This is the case for orders in broker crossing networks.

Lit and Dark orders

A lit order is one which can be seen by other market counterparts. A dark order is one which cannot be seen by other market counterparts. Matching dark orders are automatically executed by the trading venue without each counterpart knowing details of the other.

Manipulating devices

It refers to trading, or placing orders to trade, which employ fictitious devices or any other form of deception or contrivance.

Manipulating transactions

It refers to trading, or placing orders to trade, that gives a false or misleading impression of the supply of, or demand for, one or more investments, raising the price of the investment to an abnormal or artificial level.

Market abuse

It consists, inter alia, of market manipulation and insider dealing, which could arise from distributing false information, distorting prices or improper use of insider information.

Market disorder

General trading phenomenon which results in the market prices differing from those that would result exclusively from supply and demand.

Market efficiency

It refers to the extent to which prices in a market fully reflect all the information available to investors. If a market is very efficient, then no investor should have more information than nay other investor, and they should not be able to predict the price better than another information.

Market fragmentation

It refers to the dispersion of business across different trading venues. It is considered to reduce readily access to liquidity.

Market integrity

It is fair and safe operation of markets, without misleading information or inside trades, so that investors can have confidence and be sufficiently protected.

Market maker

A market maker is a firm that will buy and sell a particular security on a regular and continuous basis by posting or executing orders at a publicly quoted price. They ensure that an investor can always trade the particular security and in doing so enhance liquidity in that security.

Market operator

A firm responsible for setting up and maintaining a trading venue such as a regulated market or a multi lateral trading facility.

Multilateral Trading Facility (MTF)

MiFID introduced the concept of Multilateral Trading Facilities (MTFs) to replace Alternative Trading Systems (ATSs) (which had been established prior to MiFID but were not subject to specific European legislation). An MTF is a system, or “venue”, which brings together multiple third-party buying and selling interests in financial instruments in a way that results in a contract, MTFs can be operated by investment firms or market operators and are subject to broadly the same overarching regulatory requirements as regulated markets (e.g. fair and orderly trading) and the same detailed transparency requirements as regulated markets; in this sense they are more like a traditional regulated market than a broker crossing network or a systematic internaliser. There are currently 139 MTFs authorised in Europe offering trading on a diverse range of products. The most prominent MTFs are equity platforms, such as Chi-X and BATS Europe; however, there are a large number of smaller specialist MTFs providing trading in specific instruments, examples include GFI’s Creditmatch, Forexmatch, Marketwatch and Energywatch MTFs.

Misuse of information

Misuse of information is behaviour based on information that is not generally available but would affect an investor’s decision about the terms on which to deal.

Opaque market

It is similar to dark pool.

Order matching

Order matching is the process by which offer and demand for the same security at the same price and size are brought together, which takes place in venues such as broker crossing networks, where the orders of one party are matched to the bids of another, allowing them to conclude transactions at midpoint, therefore saving on the bid offer spread.

Order resting period

The time an order waits on a trading system before it is executed. Similar to latency period.

Over the Counter (OTC)

It is a method of trading that does not take place on an organised venue such as a regulated market or a MTF. It can take various shapes from bilateral trading to via permanent structures (such as systematic internalisers and broker networks).

Organised Trading Facility (OTF)

Any facility or system operated by an investment firm or a market operator that on an organised basis brings together third party buying and selling interests or orders relating to financial instruments. It excludes facilities or systems that are already regulated as a regulated market, MTF or a systematic internaliser. Examples of organised trading facilities would include broker crossing systems and inter-dealer broker systems bringing together third-party interests and orders by way of voice and/or hybrid voice/electronic execution.

Placing

It refers to the process of underwriting and selling an offer of shares.

Position limit

It is a pre-defined limit on the amount of a given instrument that an entity can hold.

Position management

It refers to monitoring the positions held by different entities and ensuring that the position limits are adhered to.

Positing reporting

A requirement on financial firms to regularly display their exposure to a certain market. Under MiFID, it relates to the aggregated reporting by the operators of platforms on which commodity derivatives are traded of the positions that types of traders have taken on that platform.

Post-trade transparency

It refers to the obligation to publish a trade report every time a transaction of a share has been concluded. This provides information that enables users to compare trading results across trading venues and check for best execution.

Pre-trade transparency

It refers to the obligation to publish (in real time) current orders and quotes (i.e prices and amounts for selling and buying interest) related to shares. This provides users with information about current trading opportunities. Therefore, it facilitates price formation and assists firms to provide best execution to their clients.

Pre-trade transparency waiver

It is a waiver specified in MiFID (Article 29) as a way for the competent authorities to waive the obligation for operators of Regulated Markets and Multilateral Trading Facilities (MTFs) regarding pre-trade transparency requirements for shares in respect of certain market models, types of orders and sizes of orders.

Price discovery

It refers to the mechanism of price formation on a market, based on the activity of buyers and sellers actually agreeing on prices for transactions. Price discovery is affected by  factors such as supply and demand, liquidity, information availability and so on.

Primary market operation

Primary market operations are transactions related to the issuance of new securities. They differ from secondary market operations which deal with the trading of securities already issued and admitting to trading.

Post trading

The generic term used to denote all processes which take place from the moment that a transaction is concluded to the moment the legal transfer of ownership occurs. This includes clearing, settlement, and other financial firm back-office activities.

Prospectus

A prospectus is a document that describes a financial security for potential buyers. A prospectus provides investors with information about the security or offers concerned such as a description of the company’s business and financial statements, a list of material properties and any other material information. In the context of an individual securities offering, such as an initial public offering, a prospectus is distributed by underwriters or brokerages to potential investors.

Prospectus Directive

Directive 2003/71/EC of the European Parliament and of the Council, which lays down rules for information to be made publicly available when offering financial instruments to the public.

Pump and Dump

Pump and Dump is where persons who already hold a long position in an instrument aim to increase its value by spreading false, misleading or exaggerated information about it. The position is then sold at a higher price and a profit is made.

Reasonable commercial basis

The obligation on a financial firm to do business with other market participants willing to pay a prevailing market fee, and not to impose unnecessary conditions on them.

Regulated Market

A regulated market is a multilateral system, defined by MiFID (Article 4), which brings together or facilitates the bringing together of multiple third-party buying and selling interests in financial instruments in a way that results in a contract. Examples: the traditional stock exchanges such as the Frankfurt and London Stock Exchanges.

Regulatory arbitrage

Regulatory arbitrage is exploiting differences in the regulatory situation in different jurisdictions or markets in order to make a profit.

REMIT

The proposed Regulation on Energy Market Integrity and Transparency, laying down rules on the trading in wholesale energy products and information pertaining to those products that needs to be disclosed.

Repository (Trade)

A mechanism that gathers together information on financial contracts, storing the essential characteristics of those contracts for future reference.

Retail investor/client

A person investing his own money on a non-professional basis. Retail client is defined by MiFID as a non professional client and is one of the three categories of investors set by this Directive, besides professional clients and eligible counterparties.

Risk Premium

The risk premium is the smallest return that investors would accept above the amount that a “risk free” asset would return. A risk-free asset is theoretical asset that would never default. So the risk premium is the amount that an investor wants to be paid for taking risk.

Sanction

A penalty, either administrative or criminal, imposed as punishment.

Secondary listing

A secondary listing is the listing of an issuer’s shares on an exchange other than its primary exchange.

Settlement

The completion of a transaction or of processing with the aim of discharging participants’ obligations through the transfer of money and/or securities.

Short and Distort

Short and distort is the opposite of Pump and Dump and is where a person short-sells an instrument and then spreads negative rumours in an attempt to drive down the instrument’s price and realise a profit.

Single rulebook

The single rulebook is the concept of a single set of rules for all Member States of the Union so that there is no possibility of regulatory arbitrage between the different markets.

Spoofing and Layering

Spoofing is a form of order book manipulation and involves putting apparent trades on order books to create a misleading impression of the stock price or liquidity. Layering is a form of spoofing by which a trader enters several orders to improve the price of a trade in the opposite direction. For example, an abuser will:

• submit multiple orders at different prices on one side of the order book slightly away from the touch.
• then submit an order to the other side of the order book (which reflected the true intention of  trade); and
• following the execution of the latter order, rapidly removing the multiple initial orders from the book.

By submitting the false orders the abuser gives the market a misleading impression which may encourage them to trade with the intended order.

Spot Market

A market on which goods are bought and sold for immediate delivery.

Spread

This can refer to the bid ask spread.

Standardised Derivative

A standardised derivative is one with regular features based on a standard contract.

Structured bond

A structured bond’s value is linked to an underlying index or instrument, so that the bond would pay a coupon in the same way as an ordinary bond, but the actual value of the bond is to be repaid would depend on the underlying performance that is linked to it.

Structured deposit

A structured deposit’s return may be linked to some index or underlying instrument, so that the amount repaid is dependent on this underlying performance.

Structured UCITS

UCITS which provide investors, a certain predetermined dates, with algorithm-based dividends that are linked, for example, to the performance of certain products or the evolution of a product index or reference portfolio.

Swap Execution Facility (SEF)

A swap execution facility is a US trading venue similar but not identical to an exchange, whereby many different buyers and sellers can make bids and offers on swaps. The SEF must also publish relevant data.

Syndication

It is  process through which a group of banks are providing a loan to a debtor, usually with the division of risk and financing across the different banks which are part of the process (syndicate).

Systematic Internalisers (SI)

Introduced by MiFID in 2007 Systematic Internalisers (SIs) are institutions large enough to match client orders internally, or against their own books (unlike a broker crossing network, which may route orders between a number of institutions). They are defined in MiFID as an investment firm which, “on an organised, frequent and systematic basis, deals on own account by executing client orders outside a regulated market or an MTF”.

A firm does not need specific authorisation from its competent authority to carry out systematic internalisation; however, similar to MTFs and RMs, they are required to conform to some transparency requirements, such as providing public quotes. Only a few (generally large) firms have set up SIs and, currently, there are 12 registered.

Systemic failure

A systemic failure refers either to the failure of a whole market or market segment, or the failure of a significant entity that could cause a large number of failures as a result.

Tied agent

A company or sales person who can only promote the service of one particular provider (generally their direct employer).

Trade repository

A centralised registry that maintains an electronic database of information on open OTC derivatives contract.

Trading venue

A trading venue is an official venue where securities are exchanged; it includes MTFs and regulated markets.

Transaction reporting

Investment firms are required to report to competent authorities all trades in all financial instruments admitted to trading on a regulated market, regardless of whether the trade takes place on that market or not. It covers all transactions on these instruments, including OTC trades. Transaction reporting is not public, and contains more details about the transaction than pre and post trade transparency.

Transparency

The disclosure of information related to prices quoted (pre trade transparency) or transactions (post trade transparency) relevant to market participants for identifying trading opportunities and checking best execution and to regulators for monitoring the behaviour of market participants.

Transparency Directive

Directive 2004/109/EC of the European Parliament and of the Council which lays down rules for the publication of financial information and major holdings.

Undertakings for Collective Investment in Transferable Securities Directives (UCITS)

They are a standardised and regulated type of asset pooling, subject to harmonised EU rules and typically devised for and marketed to retail investors.

Underwriting

It refers to the process of checks that a lender carries out before granting a loan, or issuing an insurance policy. It can also refer to the process of taking responsibility for selling an allotment of a public offering.

Vertical Integration Model

A model in which all steps of a production process are carried out by a single firm, for instance trading, clearing and settlement services.

Volatility

It refers to the change in value of an instrument in a period of time. This includes rises and falls in value or the general fluctuations of prices or markets. It is usually expressed as a percentage.

Global Securities Markets – Basic Level – Mock Test – 2

1) The financial services sector creates a wide range of financial products so that _____________.

a. Savers get confused

b. Savers have a range of choices

c. Savers have no choice but to invest

d. Savers do not actually invest

2) An ______________ is a financial institution that assists corporations and governments in raising capital by underwriting and/or acting as the client’s agent in the issuance of securities.

a. Broker – Dealer

b. Primary dealer

c. Investment bank

d. Commercial bank

e. All of the above

3) An investment bank advising its clients on a takeover defense is part of its _______________ activities.

a. Corporate finance

b. Capital markets

c. Sales and trading

d. None of the above

4) Smaller investment banks specializing in Sell-side activities such as sales, trading, research are typically called ______________

a. Boutique investment banks

b. Primary dealers

c. Commercial banks

5) In terms of profit margins, retail banks generally have ___________ margins.

a. High

b. Low

c. Medium

6) Ability of the banking system to disperse risk is known as ___________ role

a. Transformational

b. Intermediary

c. Diversification

d. Securitisation

7) The policy role is typically the forte of ___________________

a. Large foreign banks

b. Central banks of the country

c. Large domestic banks

d. Government of that country

8) Which of the following makes Wealth Management an attractive business for banks?

a. Earning margins on deposits placed with banks

b. Earning brokerage and commission on trades

c. Earning investment management fees

d. Earning low-risk margins on the loans taken against assets

e. All of the above

9) A wealth management client is seeking maximum return through a broad range of investment strategies that may involve a high level or risk. The adviser will classify this client’s investment objective as _______________

a. Income

b. Income and growth

c. Growth

d. Outright growth

10) What distinguishes banks from every other type of financial services company is their ability to _______________________

a. Have large number of branches

b. Provide collection and clearing services

c. Provide different types of products and services

d. Make money

11) A financial asset is an asset whose value arises from _______________

a. Its features

b. Physical appearance

c. A contractual relationship

d. All of the above

e. None of the above

12) The __________________ provides a source of funds to the issuer

a. Primary market

b. Secondary market

c. Derivatives market

d. Money market

13) This is where the securities are traded after being issued in an IPO.

a. Primary market

b. Secondary market

c. Tertiary market

d. Derivatives market

e. None of the above

14) Angel investing normally happens during early business stage

a. True

b. False

15) Which of the following are not traded on an exchange?

a. Futures

b. Options

c. Forwards

d. None of the above

e. All of the above

 

For more questions and answers, kindly visit the “GSM – Mock Test – 2” link in the “Documents and Forms for Download” section of my blog. The password to open the document is “test”.

The questions and answers are meant for free educational purposes only. I request the readers not to use them for commercial purposes.

Corporate Actions – Intermediate Level – Mock Test – 2

1) When two companies issue bonds otherwise on the same basis, a difference in the coupon offered will typically reflect a difference in:

a. Corporate structure

b. Credit risk

c. International representations

d. Recent probability

2) A nil-paid security will normally involve what type of corporate actions?

a. Rights issue

b. Open offer

c. Scheme of arrangement

d. Consolidation

3) What type of event is an open offer?

a. Voluntary

b. Optional

c. Mandatory with options

d. Mandatory

4) Which one of the following is used to determine who receives the dividend on a share?

a. Payment date

b. Ex-date

c. Record date

d. Announcement date

5) Which of the following methods of bond redemption can be considered as elective corporate actions?

a. Bullet

b. Put option

c. Call option

d. Drawing by lottery

6) What is the entitlement on a bonus issue if the client is holding 100 shares in a bonus with a ratio of 50 for every 1, assuming the ex-date is the 15th of the month and the client sold 10 on the 15th and purchased 50 on the 14th?

a. 4,000

b. 5,000

c. 7,000

d. 7,500

7) Deferred shareholders will only receive a dividend if:

a. Exceptional profits are declared

b. Ordinary shareholders have been paid a specific minimum

c. The issue goes into liquidation

d. The shares are held until the maturity date

8) By definition, a corporate action will affect the company’s share:

a. Capital

b. Dividend

c. Price

d. Ownership

9) An investor buys 100 call warrants for a premium of £0.40 each and a strike price of £1.00. What will the share price have to reach for the investor to make a profit of £50?

a. £51.00

b. £1.90

c. £1.40

d. £0.90

10) Which one of the following statements regarding poison pill rights is true?

a. They are common in the UK

b. They are illegal in the US

c. They are meant to deter aggressive takeovers

d. They are usually in the form of low cost convertible bonds

11) When a share is traded as a special-ex transaction, this signifies that:

a. The buyer will be entitled to any dividend

b. The buyer is prohibited from trading again until after the ex-date

c. The seller will be entitled to any dividend

d. The seller is prohibited from trading again before the ex-date

12) What is a Stock Situation Notice?

a. A market notification published by a listed company about its own shares

b. An investment bank analyst’s view of the potential performance of a share

c. A market notification published by the London Stock Exchange

d. Euroclear’s view of the potential performance of a bond

13) Which of the following is eligible to appoint a proxy?

a. Proxy agent

b. Shareholder

c. Nominee company

d. Issuing company

14) An investor holds 5,000 shares in a company priced at £8.50 per share. The company subsequently makes a one-for-five share rights issue at £6.50. Nil-paid rights on the share issue therefore will be worth:

a. £1.67

b. £2.00

c. £6.50

d. £8.17

15) Dividend on US shares are usually paid:

a. Three-monthly

b. Four-monthly

c. Six-monthly

d. Annually

16) Lazy money is usually referred to around which type of corporate action?

a. Warrants

b. Rights

c. Open offers

d. Takeovers

17) A zero coupon bond will usually pay interest

a. Annually

b. Bi-annually

c. Monthly

d. Never

18) Which of the following will assist a company that might require funds for research and development?

a. Rights

b. Scrip

c. Consolidation

d. Bonus

19) On which of the following dates will stock movement normally take place?

a. Record date

b. Effective date

c. Ex-date

d. Expiry date

20) Following a liquidation there are sufficient funds to pay preference shareholders. Consequently, they will receive:

a. The pre-liquidation market price

b. The nominal value

c. The equitable value decided by the liquidator

d. The unpaid net dividends only

 

For more questions and answers, kindly visit the “Corporate Actions – Mock Test – 2” link in the “Documents and Forms for Download” section of my blog. The password to open the document is “test”.

The questions and answers are meant for free educational purposes only. I request the readers not to use them for commercial purposes.

Global Securities Markets – Basic Level – Mock Test – 1

1) Which of the following are the key functions of financial markets?

a. Raising capital for companies

b. Allocate capital efficiently

c. Transfer risk from risk averse to risk seeking investors

d. All of the above

2) The banking industry facilitates movement of funds from the surplus sector of the economy to the deficit sector. This is an example of _____________ role played by banks.

a. Transactional role

b. Transformational role.

c. Intermediary role

d. Diversification role

3) Credit Unions, a type of banks in the USA are similar to ___________ banks in India.

a. Commercial banks

b. Cooperative banks

c. Foreign banks

d. Regional rural banks

4) Monetary policies framed by Central Banks focus on which of the following?

a. Income taxes levied on individual and corporates

b. The surpluses/deficits of the government

c. Controlling liquidity in the economy (money supply)

d. ‘B’ and ‘C’ above

5) Interest earned by a bank on the loans made by it are reflected as _______________ in its financials.

a. Assets

b. Income

c. Liabilities

d. Expenditure

6) Which of the following is a role typically not performed by the Central Bank?

a. Setting the official short-term interest rate

b. Establishing tax policies

c. Controlling money supply

d. Acting as a banker to the government

7) When there is excess money in the system and the central banker wants to reduce it, the open market operations carried out is to _____________.

a. Sell securities

b. Buy securities

c. Create securities

d. Purge securities

8) Deposits taken by a bank are reflected as ___________ in its financial statements.

a. Assets

b. Income

c. Liabilities

d. Expenditure

9) Which of the following type of bank in India is promoted jointly by Central Government / State Government / Sponsoring Bank and focuses on institutional credit for agriculture and rural sectors.

a. Public sector bank

b. Private sector bank

c. Regional rural bank

d. Cooperative bank

10) Which of the following characterises retail banking?

a. Relatively higher volumes and lower values of relationships

b. Relatively lower volumes and higher values of relationships

c. Relatively higher volumes and higher values of relationships

d. Relatively lower volumes and lower values of relationships

11) If customers served and delivery channels are two key dimensions of retail banking, the dimension is _______________

a. Products and services

b. Regulation and compliance

c. Branches and ATMs

d. None of the above

12) Licensing of banks in India is an important function of RBI. This forms part of which of the following function of the banks?

a. Regulatory function

b. Monetary function

c. Banker to Banks function

d. Banker to Government function

13) The Reserve Bank of India requires bank to maintain a certain amount of cash in reserve as a percentage of their deposits. This is known as the ________________

a. Statutory Liquidity Ratio (SLR)

b. Cash Reserve Ratio (CRR)

c. Repo Rate (RR)

d. Reverse Repo Rate (RRR)

14) The rate at which RBI lends to the banks to provide liquidity to the banking system is the __________________.

a. Reverse repo rate

b. Repo rate

c. CRR

d. SLR

15) Corporate banking is primarily characterised by ____________________.

a. Large number of small value relationships

b. Small number of large value relationships

c. Very large number of very large relationships

16) Which of the following is a source of working capital funding for a corporate?

a. Banks

b. Commercial paper

c. Banker’s acceptance

d. All of the above

17) ___________________ represents the funds required to operate the business of the company.

a. Term finance

b. Working capital

c. Project finance

d. Acquisition finance

18) Banks offer __________________ type of products to their corporate banking customers.

a. Standardised

b. Customised

c. Innovative and Customised

d. None of the above

19) Which of the following range of offerings reflect the select world of wealth management?

a. A narrow range of products

b. A wide range of products

c. A select range of products

d. A few high end products

20) Which of the following is not the service of wealth management sector?

a. Tailored banking products

b. Investment management

c. Investment products in areas such as Forex, Structured Investments, Property, etc.

d. Trusts and Estate Management

e. Tax and Estate Planning

21) An investment cannot have which of the following cash flows?

a. One cash outflow followed by one cash inflow

b. One cash outflow followed by multiple cash inflows

c. Multiple cash inflows followed by one cash outflow

d. Multiple cash outflows followed by one cash inflow

22) A technically viable product that has established commercial success and is looking to scale up will need to access ___________ capital.

a. Public Issue

b. Private Equity

c. Venture Capitalist

d. Angel Investor

23) A technically viable product seeking to establish commercial success will need to access for capital _________________

a. Angel Investor

b. Venture capitalist

c. Private equity

d. Public issue

24) When an Issuer issues equity, it involves _______________

a. A promise to repay the principal invested

b. A promise to repay interest on the money invested

c. A guaranteed return

d. None of the above

25) Which of the following best describes an “investment”/

a. Buying shares in the hope the price will rise

b. Investing in real estate

c. An outflow of cash today against an expected future inflow of cash

d. All of the above

 

For more questions and answers, kindly visit the “GSM – Mock Test – 1” link in the Downloads and Forms section of my blog. The password to open the document is “test”.

The questions and answers are meant for free educational purposes only. I request the readers not to use them for commercial purposes.