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CSC - Chapter 2

Canadian Securitites Course Chapter 2

QuestionAnswer
A Financial intermediary: Takes funds from lenders (savings) and gives them to spenders. (loans and mortgages)
A Financial intermediary may also: Play a direct role in bringing a new issue of securities to a financial market.
Financial intermediaries have: Established efficitent and reliable methods of channeling fund between lenders and borrowers.
The Canadian securities industry is a: Regulated industry.
Securities Commissions enforce: Laws and regulations that are created by Provincial governements.
Securities Commissions delegate: Some of their power to Self-Regulatory Organizations. (SRO)
SROs establish and enforce: Industry regulations to protect and maintain fair, equitable and ethical practices.
SROs are responsible for: Setting rules governing aspects of Investment Dealers' operations; including sales, financing and trading.
Brokers and investment dealers act: As intermediaries by matching investors with users of capital.
Clearing and Depository Services Inc. and banks: Settle trades and other transactions.
The Canadian Investors Protection Fund provides: Insurance against insolvency.
Provincial regulators: Oversee the markets and the SROs.
Organizations like CSI provides: Educations for industry participants.
The term intermediaries is used: To describe any organization that facilitates the trading or movement of financial instruments that transfer capital between suppliers and users.
Banks and Trust companies concentrate on: Gathering fund from suppliers (savings and GICs) and transfering them to users. (mortgages, loans, etc.)
Insurance companies and pensions funds: Collect funds and then invest them in bonds, equities and real estate to meet their customers needs for financial security.
Investment dealers sometimes act: As principal or agents. (Agents on their clients behalf)
Investment dealers are also known as: Brokerage firms or securities houses.
The first main function of investment dealers is to: Transfer capital from savers to users through the underwriting and distribution of new securities.
The second main function of investment dealers is to: Maintain secondary markets in which previously or outstanding securities can be traded.
The expansion of chartered banks has been facilitated by: Greater international activity, changes in the bank act permitting banks to compete in new sectors of the FSs industry, the creation of more banks, (notably foreign owned Sched 2 and 3 banks) and the purchase of many major trust companies by banks.
Intergrated Firms offer: A full range of products and services to both retail and institutional markets.
Most intergrated firms will: Underwrite federal,provincial, municipal and corporate debt and corporate equity issues.
Most intergrated firms actively trade in: Secondary markets including the money market, all Canadian and some foreign exchanges.
Most intergrated firms provide ancillary services to security issuers, and large and small investors such as: Economic, industry, corporate and securities research and advice, portfolio evaluation and management, merger and acquisition advice, tax counselling, loans to investors with margin accounts and safe keeping of clients' securities.
Investment Boutiques may specialize in: Stocks and bonds trading, research on particular industries, trading only with instituational clients, unlisted stock trading, arbitrage, portfolio mgmt, underwriting of junior mines, oils and industrials, mutual-fund distribution and tax-shelter sales.
Institutional firms serve: Institutional clients only.
Foreign Firms accounts for: 1/3 of total institutional firms and include affiliates of many major U.S. and European securities dealers.
Retails firms include: Full service and discount brokerage firms.
Full service firms offer: A wide variety of products and services for the retail investor.
Discount brokers execute: Trades for clients at reduce rates, but do not offer advice.
Discount brokers are popular with: Investors willing to do their own research in exchange for lower commission rates.
Organization of a large intergrated firm (Management): Senior managers include a chairman, a president, an executive VP, VPs, (Some of whom are directors) and other directors. (In a few firms includes directors from outside the securities industry) They work at head office, some in charge of branches.
Organization of a large intergrated firm (Front Office) Includes all staff functions pertaining to portfolio management. All portfolio management, trading, and sales and marketing staff are in the front office.
The primary objective of the portfolio management team is: To earn a competitive rate of return on the investors assets with an amount of risk that is acceptable to the investor.
The primary responsibility of the trader is to: Execute effectively and effeciently the firms security trading activities.
The primary challenge for security trading is: To buy or sell the requisite amount of securities at a price that is as close to the currently quoted price as possible.
The sales department is typically divided into: Insitutional and retail sales.
The sales department is typically: The largest and most geographically dispersed unit in the firm. And the success of the firm rests largely on the profits generated by it.
Insitutional sales people deal mainly with: Traders at major financial institutions and larger non-financial companies.
Insitutional sales people deal work with: Their firm's underwriting department, they help help sell new securities issues to institutional accoutns. Their firm's trading department, they help generate day-to-day trading in outstanding securities to such accounts.
Institutional investors are: Pension plans, mutual funds, insurance companies, endowments, charitable foundations, family trusts/estates, corporate treasuries.
Retail sales people deal mainly with: Individual investors and smaller business accounts. They comprise the largest single group of a firm's employees.
Some firms specialize in: Private, high net worth clients, a wide range of portfolio solutions, or as discount brokers.
To sell securities an IA must be: Registered with the provivincial securities commision, be legal age, have passed CSC and conduct and practices handbook exams, participate in 90 day training program, and complete the WME course within 30 months of registration.
Organization of a large intergrated firm (Middle Office): They deal with compliance, accounting, audits and legalities. They are responsible for ensuring that the firm's products and services are designed in conformance with industry best practices and pertinent regulations.
Organization of a large intergrated firm (Back Office): Settles the firm's transactions in an efficient and effective manner. (Trade settlement function)
Trade settlement function fulfills the role of: Ensuring that all of the firm's security transactions, both purchases and sales, are settled in the correct amount, in the correct accounts and at the agreed upon time.
Investment Dealers may act as: Principal or Agents for thier clients.
When acting as principal: The securities firm owns securities as part of its own inventory at some stage in its buying and selling transactions with investors. The difference in price is the dealers gross profit.
When acting as an agent: The broker acts on behalf of a buyer or seller. (It does not own title to the securities at any time during the transaction) The broker profit is the agent's commission charged for each transaction.
Underwriting or financing has come to mean: The purchase from a government body or company of a new issue of securities on a given date at a specific price.
Dealers act as principal: Using their own capital to buy new issues in anticipation of being able to make a profit when later selling it to others in the primary or new issue market.
Dealers accept risk as principals: Since market price of initial issues may fall while they remain in inventory. The issuer normally incurs no liability in the sale of it's own securities since payment is guaranteed by the underwriter regardless of its' success in selling the securities.
Dealer act as principal in secondary markets: By maintaining an inventory of already issued, outstanding securities. The dealer buys securities in the open market, holds them in inventory for varying periods and subsequently sells them.
There is no central market place for: Principal or dealer market activities. Transactions are routinely conducted OTC by means of computer systems of inter-dealer brokers which link dealers and large institutions.
Most secondary trading of debt securities is conducted with: Firms acting as principal, though occassionally agency trades take place.
For new money market issues a dealer may: Sell securities as an agent or, take them up in inventory as principal for later resale.
By participating in the secondary market and maintaining an inventory of outstanding securitites the dealer provides (1): Tempered advice about terms and features for new issues based on the knowledge that is gained from current conditions in the secondary market.
By participating in the secondary market and maintaining an inventory of outstanding securitites the dealer provides (2): Liquidity to the market due to the relative ease of making transactions from their own inventory.
By participating in the secondary market and maintaining an inventory of outstanding securitites the dealer provides (3): Added liquidity and smoothing of undue price distortions, by acting as market makers who have the responsibility of taking positions in some listed stocks.
Firms by listed stocks as principals in order to: Accumulate large blocks of shares to permit them to be more competitive with larger institutional clients.
Firms may trade from their own account with: The intent of making profit.
The liquidity investment dealers add to the secondary marker enhances: The primary market, by assuring buyers of new securities that they will be able to sell their holding at a reasonable prices.
When acting as a broker a firm is an: Agent in a secondary securities. The broker's clients are the principal or owners of the securities. The broker never owns the securities themselves.
By convention a broker may refer to: An investment dealer acting as a principal or an agent.
In Canada securities are cleared through: The Clearing and Depository Services Inc.
Trades are reported to the CDS's clearing a settlement system (CDSX) by: Market places, ATSs, and some OTC participants (mainly banks, ID and trust companies).
A central slearing system limits: The number of securitites and the amount of cash that changes hands every day through netting.
Netting is the process by which: The clearing system establishes and confirms a credit or debit of cash or security position balance for each member firm, compiles their clearing settlement sheets and informs them of the securities or funds it must deliver to balance their accounts.
The Bank act sets out: What a bank may do and provides operating rules enabling it to function within a regulatory framework.
Voting shares of large schedule 1 banks must be: (Shareholder equity less than 5billion) Widely held and are subject to rules that restrict the control of any individual or group and non-nafta shareholders to no-more than 20%.
Voting shares of a medium sized bank may be: (Shareholder equity less than 5billion) Held by a single holder up to 65% of shares. Provided that the remaining shares remain publicly traded.
A small bank can be owned by:(Shareholder equity less than 1billion) A single individual or organization.
Traditional banking includes: Retail, commercial and corporate banking services.
Banks provide a variety of services through: ID, insurance, mortgage, trust, mutual fund and international subsidiaries.
Canadian Banks offer: Consumer and commercial banking products and services; including mortgages and loans, bank accounts and investments. They also offer financial planning, cash management and WMS. (Directly or through subsidiaries)
ID activities, discount brokerage accounts and insurance products are handled by: Subsidiaries within the banking group.
Banks are permitted to take part in diverse sectors of the financial services industry, there are controls on: How they do so and on the sharing of information between subsidiaries.
Chinese Walls are: Controls that inhibit information sharing between various businesses and business units.
Banks loan funds to businesses and consumers at: Interest rates higher than the rates they must pay in interest on deposits and other borrowings. The spread covers operating costs and provides a margin for the banks profits.
Schedule 2 banks are: Incorporated and operate in Canada as federally regulated foreign bank subsidiaries.
Schedule 2 banks may: Accept deposits, which may be eligible for deposit insurance provided by the CDIC and may engage in all types of business permitted to a Schedule 1 bank.
Schedule 2 banks derive their greatest share of revenue from: Retail banking and electronic financial services.
Schedule 3 banks are: Federally regulated foreign bank branches of foreign institutions that have been authorized under the bank act to do banking business in Canada.
Schedule 3 banks focus on: Corporate and institutional finance and investment banking.
Allowing foreign banks to operate in Canada, the government has facilitated: The expansion in the operations of Canadian-owned Schedule 1 banks abroad.
The presence of foreign-owned banks in Canada provides: A conduit for investment of foreign capital in Canada as well as providing Canadian corporate borrowers with alternative sources of borrowed funds.
Federally and provincially incorporated trust companies offer a broad range of financial services such as: They accept savings, issue term deposits, make personal and mortgage loans, sell RRSPs and other tax deferred plans.
Trust companies are the only corporations in Canada authorized to engage in trust business. Trust companies act as: A trustee in charge of corporate or individual assets such as property, stocks and bonds. They also offer estate planning and asset management.
Credit Unions and Caisse Populaires are: Co-operative and member owned. They offer diverse services such as business and consumer deposit taking, lending, mortgages, mutual funs, insurance, trust services, ID services and debit and credit cards.
Credit union are governed by: The Cooperative Credit Assosciation Act.
The Cooperative Credit Associations Act limits: Activities of credit unions to providing financial services to their members, entities in which they have a substantial investment and certain types of coop. institutions, and providing admin. educational and other services to coop. credit societies.
The Cooperative Credit Associations Act requires: Associations to adhere to investment rules based on a "prudent portfolio approach" and prohibits associations from acquiring substantial investments in entitites other than a list of authorized financial and quasi-financial entities.
The Cooperative Credit Associations Act also set out: A number of limits designed to restrict the exposure of associations to real property and equity securities.
The two main businesses of the Insurance Industry are: Life insurance and property and casualty insurance.
Life insurance and related products include: Insurance against loss of life, livelhood or health, such as health and disability insurance, term and whole life insurance, pension plans, rrsps and annuities.
The chief sources of life insurance company funds are: Premiums on whole life, term and group insurance policies; premiums being made from annuities, pensions, group medical and dental care programs; interest on policy loans and mortgages; interest and dividends on securities and mortgages already owned.
Life insurance insurance may be offered through: Private or group insurance plans. (Often sponsered by employers)
Property and casualty insurance encompasses: Protection against loss of property, including home, auto, and commercial business insurance. The largest aggregate premiums are generated by automobile insurance, followed by property insurance, and liability insurance.
Historically insurance companies have tried to, as far as market conditions permit, to: Invest as much of their funds as possible in high yeilding, longer term securities, since many of their contracts are long term in nature, running for the lifetime of the insured. They tend to be active in both mortgage and long term bond markets.
Insurance companies may act as: Agent or broker for other underwriters. Such companies sell insurance policies underwritten by other firms.
Reinsurance is the business of: Exchanging risk between insurance companies to facilitate better risk management. It is a relatively small part of the Canadian insurance market, yet it is an increasingly important business globally.
Insurance companies are governed by: The Insurance Companies Act.
Legislation permits life insurance companies to: Explicitly own trust and loan companies, and thus enter new financial businesses through subsidiaries.
Widely held institutions such as mutual insurance companies would be permitted to: Own schedule 1 banks. They are also allowed to hold a range of other types of corporations.
While companies have enhanced powers to make consumer and corporate loans, the Act contains a number of restrictions on activities such as: In-house trust services and deposit taking. It also continues the practice of allowing only life companies to offer annuities and segregated funds.
The Insurance Companies Act requires adherence to: the "prudent portfolio approach" which replaces the "legal for life" rules. Companies are prohibited from acquiring substantial investments in entities other than a list of authorized financial and quasi-financial entities:
The Insurance Companies Act also sets-out: A number of portfolio limits designed to limit exposure to real property and equity securities.
A number of insurance companies are: Wholly owned by Canadian Schedule 1 banks.
Many large banks have establish their own issurance subsidiaries, the Bank does not: Permit the selling of insurance through their branch networks with the exception of insurance related to loans such as mortgage insurance and loan insurance.
Investment Funds are: Companies or trusts that sell shares to the public and invest the proceeds in a diverse securities portfolio.
Close End Funds typically: Issue shares at start up, or other infrequent periods.
Open End Funds continually: Issue shares to investors and redeem these shares on demand.
Mutual Funds account for: 95% of aggregate funds invested.
Alberta Treasury Branches (Savings Banks) formed when: Chartered banks pulled branches out of small towns. They provide a full range of financial services to Albertans.
Sales finance and consumer loan companies make: Direct cash loans to consumers who usually repay principal and interest in instalments. They also purchase at a discount instalment sales contracts from retailers and dealers when such items as new cars, and appliances are bought on instalment plans.
Created by: FrankLemieux