1
Q
What is Europe’s largest exchange?
A
Euronext
2
Q
What is Euronext’s trading platform called?
A
Optiq
3
Q
Which entities clear Euronext trades? (2)
A
LCH SA
EuroCCP
4
Q
In which UK exchange is open outcry still used?
A
London Metal Exchange
5
Q
What is the CME?
A
Chicago Mercantile Exchange
6
Q
What is the largest US options exchange?
A
CBOE - Chicago Board Options Exchange
7
Q
What is the world’s largest derivative exchange?
A
Eurex
8
Q
Which exchange introduced LEAPs?
A
CBOE - Chicago Board Options Exchange
9
Q
What are the 3 main exchange membership categories?
A
Brokers
Dealers
Broker-dealers
10
Q
What can a broker do?
A
May only trade for third parties
11
Q
What can a dealer do?
A
May trade for their own account, and other members if approved by regulatory body
12
Q
What can broker-dealers do?
A
Trade for their own account and third-parties
13
Q
What do all exchanges have?
A
A clearing house
14
Q
What does a clearing house do?
A
Acts as a central counterparty (CCP) to all trades executed on the exchange between clearing members
15
Q
What is the benefit of a CCP?
A
No counterparty risk, clearing house guarantees all deliveries
16
Q
What are the two types of clearing member?
A
General Clearing Members (GCMs)
Individual Clearing Members (ICMs)
17
Q
What are General Clearing Members (GCMs)?
A
Can clear their own principal trades, on behalf of clients and other non-clearing members
18
Q
What are Individual Clearing Members (ICMs)?
A
Only able to clear their own principal trades and trades on behalf of their clients
19
Q
What is clearing?
A
The correct and timely transfer of securities and funds between buyers and sellers
20
Q
Which type of clearing member is required to have a higher level of financial resources?
A
General Clearing Members (GCMs) over Individual Clearing Members (ICMs)
21
Q
What other terminology for members do some exchanges use?
A
Clearing members (CMs) or Trading members (TMs)
22
Q
What can Trading Members (TMs) do?
A
They can collect collateral and execute trades from clients but must have a relationship with a CM.
23
Q
What is an OTC market?
A
A decentralised market in which participants trade directly between two parties without a central exchange or broker
24
Q
Who acts as market-makers in the OTC market?
A
Dealers
25
Why is hedging a key utility of OTC markets?
Allows for hedging without significant margining requirements, tailor products
26
What is the difference between 'high-touch' and 'low-touch' trading services?
OTC considered high-touch as often desks will provide 24/7 advice to clients whereas exchange trading is more automated
27
What is pit trading?
Open outcry / Ring trading
Face to face trading, where traders will quote prices
Orders shouted out
28
Who can pit trade on LME?
Must have membership, these are valuable due to limited availability.
Can be leased / sold
29
For what kind of trades is CBOTs open outcry trading floor used for?
Complex trades as they are difficult to quote electronically
30
Who uses telephone trading?
Only between clients and executing brokers
Trader at broker will then go on to execute the trade in the market
31
What is specified in an open outcry order?
* the asset
* whether it is a buy or sell order
* the size of order (number of contracts or lots)
* the expiry month, and
* price conditions (if any)
32
What is a market-if-touched (MIT) order?
Combination of a limit and a market order.
Market order executed if price crosses a limit
33
What is an opening order?
Order with or without a price that is executed in first two minutes of trading
34
What is an immediate or cancel order?
Fills immediately or will be cancelled, fill-or-kill
35
What is a cross trade?
Where a match has been established by negotiation prior to entry in the system
36
What is a basis trade?
Exchange of financial asset with a futures contract in a privately negotiated transaction
37
When must block trades be reported?
Between 5 mins to an hour of execution
38
What are the four main advantages of trading OTC?
Products can be uniquely made to fit requirements
Confidentiality, as trades can be negotiated between client and broker
Mitigated counterparty risk
Lighter on BO teams, as no daily margin
39
What is risk pricing?
Requesting a quote for a whole large order from an OTC counterparty to prevent slippage
40
How has counterparty risk in OTC transactions been mitigated since 2008?
OTC trades have to be reported to a facility which is allows for surveillance by regulators
41
What are the three main downsides to OTC trading?
Lower liquidity
High cost to complex trades
Higher credit risk
42
What is the process called where a clearing house becomes counterparty?
Novation
43
What is cash settlement?
Net cash payment on the difference between the final positions closing price and the previous closing price
44
What is cash settlement often known as?
Contract for difference (CFD)
45
How is a buyer selected for physical settlement?
Randomly by the clearing house
46
Why do long-dated gov bonds differ from most financial futures?
Multiple underlying assets can be delivered
Exchange will have a list of eligible bonds
47
Who initiates delivery in futures vs options?
Futures - Seller
Options - Buyer
48
How does delivery work for commodity futures?
Exchanges will have authorised warehouses
49
What is dual capacity?
The ability of a member to act as either principal or agent in any transaction
50
What is cross trading?
When a brokerage firm matches a buy order of one customer against the sell order of another, when one side is non-competitive (where customer has not specified a price)
51
When is cross trading permissible?
When executed in accordance with the Commodity Exchange Act, Commodity Futures Trading Commission (CTFC)
52
When can cross trading take place? (2)
when a member
* has a buyer and a seller for the contract at a given price, or
* is willing to deal with a client as principal.
member takes the trade as principal
53
What is an opening trade?
One that creates a position in the market, and incurs obligations
54
What is a closing trade?
One that offsets an existing position, extinguishes any obligations
55
What is open interest?
Total number of contracts for any delivery month that remain open
56
Does open interest include short positions?
Open interest is the sum of all open long positions or the sum of all open short positions, not the sum of both.
57
What is OATS?
Order Audit Trail System
Exchanges track all orders
58
What is trade registration?
When the trade is reported into the administration system that is used by the exchange.
59
What is the house account?
For all proprietary trades of the clearing member, no client positions
60
What is pre-registration?
A member firm indicating that a deal it is doing should be allocated/given-up to a second member
61
What is pre-registration sometimes known as? (2)
Allocation/Give-up
62
What is a give-up?
Give-ups are the sending of a trade to another member of the exchange.
63
How is risk mitigated with allocated transactions?
Master Give-Up Agreements
Set the legally-binding framework that governs the relationship between members in a give-up.
Includes compensation clauses
64
Why else may give-ups be performed?
Shortages of trading staff at a give-in firm
Preserve anonymity
65
Why are give-up trades performed?
Separate the execution and the clearing function.
A customer might wish to trade (execute) through one exchange member but state that the trade should be given up to the customer’s usual clearing broker.
66
GIVE UP EXAMPLE
Example
Member firm ABC executes, confirms and matches a trade which it pre-registers, notifying the system that the trade should be allocated to firm DEF (another member).
ABC gives up the trade to DEF. In turn, DEF will claim the trade, which will be registered to DEF as a house, segregated or non-segregated transaction.
67
What must member firms do to remain compliant with exchanges?
Compile trade reports and sent to the exchange within a certain time frame
68
Are OTCs subject to exchange reporting?
Nope, but they must be input into internal systems so they can be managed
69
What are the kinds of trades that need to be manually reported to exchanges?
Block and basis trades, rest are done automatically
70
To who are exchange price feeds available?
Quote vendors - Bloomberg
Members
71
What does each futures expiry month have?
A unique identifier
Jan - F
June - M
Dec - Z
72
Why is it important for clients to monitor open interest?
So they are aware of their exposure at all times, they can have a credit limit with their broker
73
74
Which Platforms are Used on the London Metals Exchange?
## Footnote
There are 4.
- Select
- Sword
- Ring-Trading
- LME Clear
75
Which Platforms are Used on the ICE Futures Europe?
## Footnote
How many versions are there of this.
ICE Clear and ICE Connect (6 versions)
76
Which Platforms are Used on the CME Group?
## Footnote
There are 3 for CME.......
- CME Globex
- CME Direct
- CME Clearing
77
Which Platforms are Used on the Euronext?
* Optiq
* LCH and EuroCCP
* Euronext Clearing
78
Which Platforms are Used on the Singapore Exchange?
## Footnote
DC heros on a quest?
* SGX Quest
* SGX-DC
79
Which Platforms are Used on the China Financial Futures Exchange?
* CFFEX Order Book
* CFFEX CCP
80
What are the Contract Specifications of a Derivatives?
## Footnote
Q S Q T T D E
* Quality
* Size
* Quotation
* Tick Size
* Tick Value
* Delivery Month
* Exchange Delivery Settlement Price (EDSP)
81
What are Components of the Delivery Month for a Derivative?
## Footnote
What can this comprise of?
- Notice Days
- Delivery Days
- Last Trading Days
82
What is the Tick Size?
The minimum price movement of a contract i.e. 1 pence, 1 basis point etc.
83
What is the Tick Value?
The profit or loss for one tick movement.
84
What is Convergence, When Pricing Derivatives?
When the fair value of the future **converges** with the cash price, as it approaches delivery.
85
What is Meant by the Cheapest to Deliver Bond?
## Footnote
Where do these come from?
Many long bond contracts are based on a basket of deliverable bonds. At any point in time one will be cheaper than the other, known as the **Cheapest to Deliver**
86
What is the Cheapest to Deliver Price Factor?
Where the prices are brought in line as often, the price of the deliverable bond and the contract bond might not be the same.
87
How does one Hedge with Bond Futures, What Formula is Used?
No. Contracts Required = **Nominal Value of CDT Holding / Nominal Value of Contract X CTD Price Factor**
88
Do You Round the Number of Contracts When Hedging?
Absolutley Not!!
Always use the whole number
89
What are the Factors of a Short-Term Interest Rate Future (STIR)?
## Footnote
What is the Quotation and Value e.g X GBP per basis point etc.
* Contract for Difference
* 500,000GBP at 3 month short term interest rate e.g. SONIA
* **Quotation:** 100 - Implied Interest Rate
* **Valuation:** 12.50 GBP per basis point (tick size)
90
What Would A Speculator Do With STIR Futures if he Thinks Rates Will Rise?
## Footnote
Why?
Short them, as when rates go up, prices go down.
91
What is the Equation for Hedging with STIRs?
## Footnote
Long or short and why?
Contracts = Value of Exposure / Value of Contracts
Whether long or short depends on ones concern.
92
What is the CISI Equation for Hedging with STIRs?
## Footnote
What must you consider for this?
No. Contracts = Price Change in the Portfolio given a 1 basis point change in Yields / Price Change in the Contract given a 1 basis point change in yield (Tick Value)
## Footnote
Futures are 3 months and 1 basis point in 0.01%
93
What is a Dual Capacity Market Participant AKA?
Broker Dealers?
94
What is a Cross Trade?
## Footnote
How does this work?
Taking opposite pricipal trades from 2 clients, and reporting them on their own book to the exchange.
95
What are the 3 types of Clearing Members?
## Footnote
GIM
- GCMs (General Clearing Members)
- ICMs (Individual Clearing Members)
- NCMs (Non Clearing Members)
96
What Privileges do GCMs Have?
## Footnote
Who can they arrange clearing of trades on behalf of.
They can arrange clearing of trades on behalf of themselves, clients, and other clearing house members.
97
What Privileges do ICMs Have?
## Footnote
Who can they arrange clearing of trades on behalf of.
They can arrange trades to be cleared on behalf of themselves and other clients.
98
What Privileges do NCMs Have?
## Footnote
Who can they arrange clearing of trades on behalf of, if not who?
They cannot arrange for trades to be cleared therefore they must "give up" trades to GCMs for clearing. (they can only have a miximum of 2 agreements)
99
What is a "Give Up"?
## Footnote
Regarding clearing.
When the executing broker and clearing broker are different.
100
What are Characteristics of Quote-Driven Markets for Derivatives?
## Footnote
What are these best at selling?
For Illiquid contracts.
* Price Makers
* Bid / Offer Spreads
* Screen and Phone calling based
* Open Outcry
101
What are Characteristics of Order-Driven Markets for Derivatives?
## Footnote
What are these best at selling?
More Liquid contracts.
* Negotiated prices
* Electronic trading
102
What is STP?
## Footnote
What does this mean?
Straight through processing.
Where the order is filled and booked electornically and then sent straight to the clearing house.
103
What are the Steps to Open Outcry Trading?
## Footnote
Before it is submitted to the clearing house?
Client > Broker (order slip) > Booth Clerk (dealing slip) > Pit Trader (dealing slip) > Booth Clerk > Broker > Clearing House.
104
Who are Pit Officials in Open Outcry Trading?
Take dealing slips and are responsible for official prices, that are then submitted to price vendors.
105
What is an Out Trade in Open Outcry Trading?
When the dealing slips do not match, this could casue the trade to fail, or could mean the details need to be reconfirmed.
106
Does the LME Operate on an Order Book or Open Outcry?
Both.
107
What is the LME Order Book Called?
## Footnote
What times do these trade between?
LME Select
01:00 AM - 19:00 AM
108
What is the LME Quote Driven Market Called?
24 Hour inter-office market.
109
How Does the LME Open Outcry Trading Day Operate?
## Footnote
The structure.
* 4 ring sessions per day (each metal trades for 5 minutes)
* 2 Kerb sessions (all metals are trading together)
110
What is Significant About Session 2 of the LME Open Outcry Day?
## Footnote
What does this also provide?
This provides the official LME prices for the day.
It also provides the prices for EDSP.
111
What are Example of Order Driven Trading Systems?
ICE Connect, CME Globex, LME Select
112
What is Quoted in the Touch Strip?
The highest priced buy and sell orders.
113
What is Level 2 in the Market Order Book AKA?
## Footnote
What is this?
Market in Depth.
All other order below the touch strip.
114
What is the Price Limit on the Limit Order AKA?
## Footnote
e.g. Sell 600 at 210
No worse than price. i.e they will not take a price less that 210.
115
What is an Immediate or Cancel Order?
## Footnote
Fill-or-Kill
A limit order that cannot be partially filled, it is either executed or cancelled.
116
What is a Market-if-Touch Order?
A market order with an activation price. This holds off the market order until the touch strip shows the price.
117
What is a Stop-Loss Order?
Where a market order is automatically placed when the price falls below a certain level, in order to close out a position quickly.
118
What is a Stop-Limit Order?
## Footnote
Why is this different to a stop loss order and why can this be bad?
Where a limit order is automatically placed when the price falls below a certain level, **in order to close out a position quickly and guarantee a price**.
Some positions may stay open causing further loss.
119
What is a Good Till Cancelled Order?
Where the order is not cancelled at the end of the day, it instead stays open until filled or otherwise specified.
120
What is a Day Order?
An order that is placed but then also cancelled at the end of the trading day if it is not filled.
121
What is a Limit or Market-on-Close Order?
A limit order that is automatically transformed into a market order at the end of the day, if it is not filled at the specified price.
122
What are the Characteristics of a Block Trading Facility?
| Wholesale Trading Facilities
## Footnote
What does this mean?
* Large order arranged bilaterally off order book but on-exchange
* Gives certainty or pricing and execution (not always book price)
* Trade details are reported to exchange (5 minutes ICE futures)
* Published trade details destinguished from order book execution (to show block trade).
123
What is a Basis Trading Facility?
| Wholesale trading activities.
* Transactions involving the simultaneous trading of the financial asset and offsetting number of futures.
* Agreed off order book but on exchange.
* Trade details reported to the exchange (15 mins ICE futures)
124
What do COMEX, NYMEX, CBOT and PHLX Trade?
## Footnote
COMEX sub is made from? PHLX is a Flex
* COMEX - Metals
* NYMEX - Oil Derivatives
* PHLX - Financial Contracts
* CBOT - Agricultural and financial contracts.
125
What is Exchange Futures for Physical?
## Footnote
What are the conditions of this?
An exchange of an OTC position for a futures position.
- Non financial (commodities)
- Has to be similar in value or quantity
126
What are the Pros of EFPs?
- Reduced credit risk for OTC position
- Reduced margin requirements
- 24 hour trading
127
128
What are the Cons of EFPs?
## Footnote
m2m
Operational risk due to daily mark to market accounting and margins.
129
What are the Components of a Universal Stock Future?
## Footnote
ie. What is the Tick size? Valuation method? etc.
* A single stock future
* Global Product
* Contract specs
(Physically delivered or cash settled)
(Contract size: typically 100 shares or 1000 in UK or Italy)
* Valuation: Price per share
* Tick Size: 1 penny
130
What are the Components of a Long Gilt Future?
## Footnote
What does this mean for the tick size and tick value?
* Contract size: GBP 100,000NV 4% Gilt
* Quotation = GBP100NV
* Valuation = GBP10 **(Tick Value)** per GBP 0.01 **(Tick Size)** per GBP100NV (Contract)
CISI: Derivatives (CMP)
flashcards
Decks in class (9)
# Cards
-
Chapter 1: Introduction to Derivatives232
-
Chapter 2: Underlying Markets56
-
Chapter 3: Market Structure130
-
Chapter 4: Principles of Exchange-Traded Derivatives94
-
Chapter 5: Principles of OTC Derivatives115
-
Chapter 6: Principles of Clearing and Margin105
-
Chapter 7: Delivery and Settlement71
-
Chapter 8: Trading, Hedging and Investment Strategies119
-
Chapter 9: Regulatory Requirements63
