Summary - CFA Investment Management Certificate UNIT 1
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Course
CFA Investment Management Certificate
Institution
CFA Investment Management Certificate
Unlock success in the CFA IMC Unit 1 exam with my meticulously crafted summary notes. Condensing complex concepts into digestible bites, these notes are your ultimate study companion. Gain a competitive edge, streamline your study process, and ace your exams with confidence. Elevate your learning j...
1. Financial Market and Institutions..........................................................................................2
2. Ethics and Investment Professionalism............................................................................... 9
3. The regulation of Financial Markets and Institutions..........................................................13
4. Legal Concepts.................................................................................................................. 54
5. Client Advice...................................................................................................................... 57
6. Taxation in the UK.............................................................................................................. 63
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By Soham Kambale
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,1. Financial Market and Institutions
1.1. Introduction to Financial Markets
1.1.1. The Financial Service Industry.
● Financial Intermediation
○ Reducing costs
● Pooling and managing risks
○ Diversification benefits through pooling
○ Transfer of risk to insurance
○ Derivatives for risk management
● Payments and Settlement services
○ Transaction assurance and verification
● Portfolio Management
○ Product specialisation
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1.1.2. The Main Financial Institutions
● Central Bank
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● Deposit Institution
● Investment Institution
1.1.3. The role of government
● Providing services that private firms are unwilling to provide
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● Regulating firms and markets to protect the consumer
● Intervening in the distribution of income generated by private market
transaction
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● Stabilising the economy
1.2. Role of securities markets in providing liquidity and price transparency
1.2.1. Types of Investments
● Real Assets and Financial Securities
○ Debt Claims
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○ Equity Securities
● Indirect Investment through intermediaries
○ Greater Diversification
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○ Reduced Transaction costs
○ Expertise
○ Special Access to institutional investments
○ Speculate
● Foreign exchange market transactions
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1.2.2. The function of securities markets
● Raising capital
● Transferring risk
● Price discovery
● Creating liquidity
● Primary and Secondary Markets
○ IPO
1.2.3. Price Transparency and Liquidity
● Price Transparency
○ Pre-Trade
■ Real-time data about quotes
○ Post-Trade
■ Shortly after the trade occurs
● Liquidity
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, ○ Liquidity risk
■ Investor demands higher premiums due to the
difficulty in selling an asset
■ Low transaction costs as well
1.2.4. Transaction Costs
● Implicit Costs££££
○ Bid Ask Spread
○ The Price impact of a trade
○ Opportunity Costs
● ££££££££Explicit Costs
○ Commission
○ Value Added Tax(VAT)
○ Stamp Duty Reserve Tax(SDRT) 0.5% of transaction value
○ Central Counterparties(CCP)
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○ Central Securities Depositories(CSD)
○ Differences in channel affect the cost of trade
■ LSE/LCH/EUI - 83/17%
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■ Bats CHI-X/EMCF/EUI - 41/59%
● Pooled investments
○ Entry Cost
○ Ongoing charges Figure(OCF)
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● Calculating Round Trip Transactions
○ Retail - £5 to £12.50 per trader
○ Institutions - 10 to 20 basis per trade
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1.3. Types of Financial Markets
1.3.1. The UK Equity Market
● Regulated Markets
○ London Stock Exchange
■ SETS
● Electronic Limit Book Order
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● FTSE 100
● FTSE 250
● FTSE Small Cap
● AIM and Irish
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● Exchange Traded Funds
● Exchange Traded Products
● Call periods and Auctions at 7.50 and 16.30
● Uncrossing Trade where bid and ask are
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matched
● Settlement - T+2 through CREST
■ SETSqx and SEAQ
● Less liquid than SETS
● Periodic electronic Auction Book
● Non-electronic quote driven market making.
● Several Uncrossing trades in a day
● 8.00, 9.00, 11.00, 14.00 and closing
● LCH is central counterparty
■ International Trading
● International Order Book in the form of DR
● European Quoting Service (EQS)
● Multilateral Trading Facilities
● Systematic Internalisers
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, ● Organised Trading Facility
● Settlement of GILTS is through CREST
○ Gilt-edged market makers (GEMMS)
○ Settlement - T+1
1.3.2. The UK gilt and Corporate Bond Market
● LSE operates electronic Order Book for Retail Bonds (ORB)
● GILTS
○ Semi-annual Coupons
○ Debt Management Office(DMO)
○ Main holders are UK pension funds, UK insurance
companies, Overseas Investors, UK banks, Building
societies, Private individuals.
○ Settlement of T+1 through CREST
● Corporate Bonds
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1.3.3. Dual Listing
● Dual listed Company(DLC)
● Operates as a single entity but are two separate corporations.
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● Are cross borders and have tax advantages.
1.3.4. Exchange Trading, Over the Counter and Alternative Trading Venues
● Exchange trades have benefits of regulation, clearing house,
electronic trading, transparency, centralisation.
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● OTC markets are decentralised, opaque, lack clearing house, refers
to bilateral contract, off book trades
● Multilateral Trading Facilities
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○ MTF organised by investment firms or market operators
○ Both follow regulatory standards
○ Example: Bats CHI-X ( aka CBOE)
● Systematic Internalisers
○ Investment firms which execute client orders through their
own account outside regulated markets or MTFs.
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● Organised Trading Facilities
○ Interests in Bonds, Structured Finance Products, Emission
allowances, Derivatives
○ Rules are discretionary
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● Dark Pools
○ Electronic Crossing Networks that provide liquidity which is
not displayed on conventional orderbook
1.3.5. Quote Driven and Order Driven Markets
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● SEAQ is quote displayed
○ Require market makers to maintain liquidity
○ MM quote the price, if in case they don't wish to trade they
will not quote a good price.
● SETS is an order book or Order Driven
○ Large volume where all customers put order in common book
1.3.6. High Frequency Trading
● Algorithmic Trading
○ Under MiFID II AT must enter a binding agreement to be a
market maker for specified period to improve liquidity,
especially in high-volatility
● High Frequency Trading (HFT)
○ Market making based on order flow
○ Market making based on tick data information
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