chp 1 - mock exam

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Questions and Answers

What are the main activities that take place in the wholesale financial markets?

Bond markets, foreign exchange, and derivatives (correct)

Equity markets, retail banking, and insurance markets

Retail banking, insurance markets, and derivatives

Insurance markets, fund management, and investment banking

In the financial services sector, what does the wholesale sector also refer to?

Retail sector

Institutional sector

Corporate sector

Professional sector (correct)

What types of trading activities are involved in the wholesale financial markets?

Bond trading, insurance trading, and currency trading

Equity trading, bond trading, and foreign exchange trading (correct)

Equity trading, retail banking, and credit card trading

Insurance trading, retail banking trading, and derivatives trading

Which sector focuses on managing the investment portfolios of collective investment schemes (CISs) and pension funds?

Wholesale sector Signup and view all the answers

What type of banking services are tailored to organisations in the financial sector?

Investment banking Signup and view all the answers

Which of the following is not an activity that takes place in the wholesale financial markets?

Retail banking services Signup and view all the answers

What does the retail sector primarily focus on in terms of customers?

Personal customers Signup and view all the answers

What is a primary function of investment banks?

Arranging finance for companies looking to go public or raise capital Signup and view all the answers

Which of the following is a service typically offered by investment banking groups?

Finance-raising and advisory work for governments and companies Signup and view all the answers

What distinguishes larger investment banks from smaller ones?

Specializing in specific product lines rather than offering a wide range of services Signup and view all the answers

Which group of clients do investment banks typically offer investment management services to?

Corporate pension funds, charities, and wealthy private clients Signup and view all the answers

What type of financial risk do investment banks help corporate clients protect themselves against?

Exchange rate and interest rate fluctuations Signup and view all the answers

What is the primary function of a custodian in the financial industry?

Holding assets in safekeeping for others Signup and view all the answers

Which activity is NOT typically performed by a custodian for their clients?

Conducting market research for investment opportunities Signup and view all the answers

What has led to cost pressures on custodians and resulted in industry consolidation?

Competition pushing down charges for custody services Signup and view all the answers

Which major banks are mentioned as being dominant in the global custodian market?

Bank of New York Mellon and State Street Signup and view all the answers

Apart from traditional custody services, what other offerings are typically provided by global custodians?

Stock lending and portfolio performance measurement Signup and view all the answers

What do savings institutions, such as cajas, credit unions, and building societies, have in common?

They have modern financial technology incorporated in their operations. Signup and view all the answers

What is the primary reason why savings institutions are often referred to as 'mutual societies' or 'mutual savings banks'?

They are jointly owned by the individuals who deposit or borrow money. Signup and view all the answers

What is the significance of demutualisation for savings institutions?

It allows them to be quoted on stock exchanges. Signup and view all the answers

In what way have many savings institutions evolved over the years?

By merging with or being acquired by larger financial entities. Signup and view all the answers

What distinguishes smaller banks, focusing on underserved areas, from traditional banking institutions?

They utilize specialized technology without community branches. Signup and view all the answers

What is a key function of the insurance industry as described in the text?

Collecting premiums in exchange for coverage Signup and view all the answers

How does the insurance industry generate income to invest in equity and bond markets?

By collecting premiums from clients Signup and view all the answers

What type of policies are designed to pay out if an individual is unable to meet loan repayments?

Payment protection policies Signup and view all the answers

What is one of the main reasons insurance companies hold a large amount of cash?

To satisfy potential claims on policies Signup and view all the answers

What type of insurance covers the risk of an airline's planes crashing?

Fleet insurance Signup and view all the answers

What is a key rationale behind firms outsourcing investment administration to third-party administrators (TPAs)?

To reduce their overall operating expenses Signup and view all the answers

What is the primary purpose of third-party administrators (TPAs) in the investment industry?

To carry out administrative functions more efficiently for other firms Signup and view all the answers

What does the text suggest about the relationship between a firm and a third-party administrator (TPA) in terms of responsibility?

The firm retains ultimate responsibility despite outsourcing Signup and view all the answers

What has contributed to the growth of third-party administrators (TPAs) in the investment industry?

Increased complexity of investment management tasks Signup and view all the answers

How do third-party administrators (TPAs) enable firms to benefit from outsourcing according to the text?

By allowing firms to focus on core business areas while handling administrative functions efficiently Signup and view all the answers

Which type of advice requires firms to provide unbiased, unrestricted recommendations based on comprehensive analysis?

Independent advice Signup and view all the answers

What is the key requirement for firms providing independent advice regarding the market's products?

To offer comprehensive and fair analysis of all available products Signup and view all the answers

Which type of advice involves a firm giving recommendations solely on its own range of products?

Restricted advice Signup and view all the answers

What is the primary differentiator between independent advice and restricted advice?

The bias in recommendations Signup and view all the answers

In the context of investment firms, what must be clearly communicated to customers if a firm provides restricted advice?

The range of products they offer Signup and view all the answers

In execution-only sales, what is the customer responsible for?

Assessing the product's suitability Signup and view all the answers

What is a key requirement for firms operating on an execution-only basis?

Recording evidence of not giving advice Signup and view all the answers

What is a significant aspect of ensuring firms operate within regulatory guidelines in execution-only sales?

Recording the sale details in writing Signup and view all the answers

What practice is considered long-established in the context of execution-only sales?

Sales based on customer request without advice Signup and view all the answers

What is the primary role of firms in execution-only sales?

Executing transactions as per customer requests Signup and view all the answers

Study Notes

Wholesale Financial Markets

Equity markets involve the trading of quoted shares.
Bond markets involve the trading of government, supranational, or corporate debt.
Foreign exchange markets involve the trading of currencies.
Derivatives markets involve the trading of options, swaps, futures, and forwards.
Insurance markets involve major corporate insurance, reinsurance, captive insurance, and risk-sharing insurance.

Wholesale Sector Activities

Fund management involves managing the investment portfolios of collective investment schemes (CISs), pension funds, and insurance funds.
Investment banking involves providing banking services tailored to organizations, including undertaking mergers and acquisitions (M&A), equity trading, fixed-income trading, and private equity.
Custodian banking involves providing services to asset managers, including the safekeeping of assets, administration of underlying investments, settlement, corporate actions, and other specialized activities.

Retail Sector

Retail banking involves providing traditional range of current accounts, deposit accounts, lending, and credit cards to personal customers.

Investment Banks

Investment banks provide advice and arrange finance for companies that want to float on the stock market, raise additional finance by issuing further shares or bonds, or carry out mergers and acquisitions.
They also provide services for institutional firms that might want to invest in shares and bonds, particularly pension funds and asset managers.

Custodians

Custodians are banks that specialize in safe custody services, looking after investments such as shares and bonds on behalf of others, such as fund managers, pension funds, and insurance companies.
Activities undertaken by custodians include holding assets in safekeeping, arranging settlement of purchases and sales of securities, asset servicing, providing information on underlying companies, managing cash transactions, and performing FX transactions.

Retail/Commercial Banks

Retail/commercial banks are known by different names in different countries and provide services such as taking deposits from and lending funds to retail customers, as well as providing payment and money transmission services.
They may also provide similar services to business customers.
Larger retail banks also offer other financial products, such as investments, pensions, and insurance.

Savings Institutions

Savings institutions specialize in offering savings products to retail customers, but now tend to offer a similar range of services to those offered by banks.
They are known by different names around the world, such as cajas, credit unions, and building societies.
They are typically jointly owned by the individuals that have deposited or borrowed money from them – the members.

Insurance Companies

Insurance companies collect premiums in exchange for coverage provided and invest premium income in equities and bonds.
They hold a large amount of cash to be able to satisfy any claims that may arise on various policies and, if required, will liquidate investment holdings.

Third-Party Administrators (TPAs)

Third-party administrators (TPAs) undertake investment administration on behalf of other firms and specialize in this area of the investment industry.
The number of firms, and the scale of their operations, has grown with the increasing use of outsourcing by firms.

Independent versus Restricted Advice

Investment firms describe their services as either independent advice or restricted advice.
Firms that describe their advice as independent must ensure that they genuinely do make their recommendations based on comprehensive and fair analysis of all products available in the market, and provide unbiased, unrestricted advice.

Execution Only

A firm carries out transactions on an execution-only basis if the customer asks it to buy or sell a specific named investment product without having been prompted or advised by the firm.
In such instances, customers are responsible for their own decision about a product’s suitability.

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Description

Learn about the distinctions between wholesale and retail financial sectors, and the activities that take place in wholesale financial markets such as equity markets, bond markets, foreign exchange, and derivatives.