Canadian Securities Course - CSC Notes Exam 1

CH1 The Capital Market January 7, 2014 11:45 PM  Canada has five exchanges: the Toronto Stock Exchange (TSX) and the TSX Venture Exchange, the Montreal Exchange (MX, also known as the Bourse de Montreal), owned by the TMX Group Inc., the Canadian National Stock Exchange (CNSX), and the ICE Futures Canada. Each exchange is responsible for the trading of certain products. 1. The TSX lists senior equities, some debt instruments that are convertible into a listed equity, income trusts and Exchange-Traded Funds (ETFs). 2. The TSX Venture Exchange trades junior securities and a few debenture issues. 3. CNSX trades securities of emerging companies. 4. The MXMontreal Exchange trades all financial and equity futures and options. 5. ICE Futures Canada trades agricultural futures and options.  Higher volume of trading in dealer market than auction market  Reporting Unlisted Trades In most of Canada = no req. for firms to report unlisted trades In Ontario=need to report through Canadian Unlisted Board Inc. (CUB), a web based system  Trading Systems Other Than Exchanges: o Quotation and trading reporting systems (QTRS): entities, other than an exchange or registered dealer, that disseminate price quotations for the purchase and sale of securities and report completed transactions to the applicable securities commission. A QTRS must be recognized by a provincial securities regulatory authority. o Alternative trading systems (ATSs): privately owned computerized trading facilities that match buy and sell orders for securities traded outside of recognized exchanges. ATSs can be owned by individual brokerage firms or by groups of brokerage firms.  Equity ATSs now in operation in Canada include CNSX’s Pure Trading, Bloomberg Tradebook Canada, OMEGA ATS, Chi-X Canada, Instinet Canada Cross ICX, Liquidnet Canada, and MATCH Now, operated by TriAct Canada Marketplace LP.  Have the potential to threaten market stability due to lessened transparency, tech issue, etc. In Canada, ATSs are members of the Investment Industry Regulatory Organization of Canada (IIROC). The trading activity of ATS is also regulated by IIROC.  Most client users of these systems are institutional investors who can reduce transaction costs considerably and avoid the market impact of theirtrades if the orders were instead traded through a regular exchange. Some non-brokerage-owned ATSs even allow buyers and sellers to contact each other directly and negotiate a price  3 Fixed Income Electronic Trading Systems 1. CanDeal, a member of IIROC, is a joint venture between Canada's six largest investment dealers, and is operated by the TMX Group. It is recognized as both an ATS and an investment dealer. It offers institutional investors access to Government securities and to money market instruments. 2. CBID, also a member of IIROC and an ATS, operates two distinct fixed-income marketplaces: retail and institutional. The retail fixed-income marketplace is accessible by registered dealers on behalf of retail clients. The institutional fixed-income marketplace is accessible by registered dealers, institutional investors, governments and pension funds. 3. CanPX is a joint venture of Investment Industry Association of Canada (IIAC)/IIROC dealer member firms. The CanPX system is an information processor for government and corporate debt securities that provides investors with real-time bid and offer prices and hourly trade data. The service covers Government of Canada bonds, treasury bills, and provincial bonds, and a select list of corporate bonds from major industrial issuers. Gareth asks his Investment Advisor to purchase $50,000 in new corporate bonds that are being issued to raise funds to build a new processing facility. Select the term that would refer to this type of capital investment. Student Response Value Correct Answer Feedback A. Direct investment. B. Secondary market. 0% C. Corporate investment. D. Indirect investment. General Feedback: Indirect investment occurs when the saver buys the securities issued by governments and corporations, who in turn use the funds for direct productive investment-equipment, supplies, etc. Such investment is normally made with the assistance of the retail or institutional sales department of the investment advisor's firm. CH2 The Canadian Securities Industry January 9, 2014 2:08 PM KEY TERMS Agent Primary distribution Broker Principal CDS Clearing and Depository Services Inc. (CDS) Self-Regulatory Organizations (SROs) Closed-End funds Underwriting Open-End Funds  Investment dealers functions -principal: owns securities as part of its own inventory at some stage in its buying and selling transactions with investors; in both primary and secondary market -agent: the broker acts for or on behalf of a buyer or seller, but do not own title to the securities -underwriting or financing has come to mean the purchase from 1. a government body or 2. a company of a new issue of securities on a given date at a specified price. The dealers act as principals, using their own capital to buy the issue in anticipation of being able to make a profit when later selling it to others in the primary or new issue market. -useful service by participating in 2nd market: 1.knowledge of current conditions tempers advice 2. transactions can be made from own inventory-adding liquidity 3. smooth out undue price distortion（消除价格扭曲） 4. more competitive in serving larger institutional client by buying large blocks of shares 5.also can trade their own account with the intent of making a profit  Trust companies are the only corporations in Canada authorized to engage in a trust business (i.e., to act as a trustee in charge of corporate or individual assets such as property, stocks, and bonds).  The bill establishing the Insurance Companies Act was proclaimed June 1, 1992. The legislation permits life insurance companies to explicitly own trust and loan companies and thus enter new financial businesses through subsidiaries. The Act also requires insurance companies to adhere to investment rules based on a "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 Act also sets out a number of portfolio limits designed to limit exposure to real property and equity securities.  A major activity of the banks is to loan funds to businesses and consumers at interest rates higher than those which they must pay in interest on deposits and other borrowings. The spread between the two sets of interest rates covers the banks operating costs (rent, salaries, administration, appropriations for loan losses, etc.) as well as providing a margin for the banks profits.  Schedule I bank: voting shares must be widely held; large schedule I banks are subject to rules that restrict the control of any individual or group and non-NAFTA shareholders to no more than 20 percent.  **medium sized bank(SE<5billion) by owning up to 65% of the voting shares, provided that the remaining shares remain publicly traded  **a small bank(SE<1billion) can be owned by one individual or org.  Types of Firms Integrated firms: offer products and services that cover all aspects of the industry, including full participation in both the institutional and the retail markets. Most underwrite all types of federal, provincial, municipal and corporate debt and corporate equity issues, actively trade in secondary markets including the money market, trade on all Canadian and some foreign stock exchanges. Institutional firms: serve institutional clients exclusively. Retail firms: account for the remainder of the industry. Retail firms include full-service firms and discount brokers. CH3 The Canadian Regulatory Environment January 11, 2014 3:52 PM FEDERAL REGULATOR banks, some insurance, trust and loan companies  OSFI-Office of the Superintendent of Financial Institutions (Does not regulate securities industry)  CDIC-Canada Deposit Insurance Corporation (CDIC); file claim within 180 days, insures up to100,000 deposit at the same institution/under one insurance category by saving /chequing accounts, Guaranteed Investment Certificates(GICs)/term deposit(<5yr), money order, etc.  Deposits are covered even they are held in more than 1 of 6 categories" • in one name • jointly in more than one name • in a trust account • in a registered retirement savings plan (RRSP) • in a registered retirement income fund (RRIF) • in a mortgage tax account **There is no federal regulatory body for the securities industry in Canada PROVINCIAL REGULATOR securities dealers, credit unions, some insurance, trust and loan companies.  Regulation is delegated to securities commissions or appointed administrator; Quebec has a special body AMF responsible for administering the regulatory framework for Quebec financial sector.  The 13 provincial and territorial regulators collaborate through the Canadian Securities Administrators (CSA), whose goal is to develop a national system of simplified and harmonized securities regulations, policies, and practices while retaining regional flexibility. Self-Regulatory Organizations-SROs  Private, enforce members' conformity with securities legislation and prescribe their own rules of conduct & financial requirements.  The provincial securities regulators(security commissions) delegate certain aspects of securities regulation to self- regulatory organizations (SROs) such as the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA). IIROC-consolidation of investment dealers association and market regulation services inc.  Roles: Financial compliance, business conduct compliance, registration. Enforcement(impose penalties).  Market surveillance: monitoring of trading activities on stock exchange etc; ensure dealer member comply with disclosure of information of public companies; trading analysis and compliance with Universal market integrity rules CIPF protects clients of IIROC dealer members against losses caused by the insolvencyof an IIROC dealer member and theMFDA IPC protects clients ofMFDAmemberfi rms against losses caused by the insolvency of an MFDA member fi rm. Per account: Protection is up to $1 million per customer account in respect of the loss of securities, cash, and other property held by an member firm. SRO Arbitration cannot exceed 100,000 IIAC (Investment Industry Association of Canada ) is a member-based professional association that represents the interests of market participants. It represents the investment industry’s views and interests to federal and provincial governments and their agencies, and to other SROs in such areas as securities and capital markets legislation and regulation and fiscal and monetary policy. Ombudsman for Banking Services and Investments (OBSI)  provides a prompt and impartial resolution of complaints that customers have been unable to resolve with their financial services provider.  member companies who do not agree to a recommendation by the Ombudsman will be publicly reported Know your client rule-must complete a New Account Application Form(NAAF) prior to the acceptance of any order, ***acceptance can be made promptly after first transaction CRM - client relationship model  Relationship disclosure-service, pdt information, fees, reporting frequency. Etc  Conflict of interest management disclosure-avoid, disclose,otherwise controlled  Suitability Assessment Account opening process for a new client: 1. The advisor conducts a client discovery interview to learn more about the client (i.e., risk tolerance, investment objectives etc) 2. The advisor completes a New Account Application Form 3. A partner, director, officer (PDO) or branch manager of the advisor’s dealer member approves the application form. 4. The client may place his/her first transaction. Statutory Rights for Investors  right of withdrawal from an agreement to purchase securities within two business days after receipt or deemed receipt of a prospectus and any amendment  right of rescission to rescind or cancel a contract for the purchase of securities, if the prospectus or amended prospectus offering the security contains a misrepresentation with in 180 days of the date of transaction  Right of action for damagesapplies to an expert (such as an auditor, lawyer, geologist orappraiser) whose report or opinion, or a summary thereof, containing a misrepresentation appears with his or her consent in a prospectus A takeover bid is an offer to the shareholders of a company to purchase the shares of the company that, with the offeror’s already owned securities, will in total exceed 20% of theoutstanding voting securities of the company. In a takeover situation, the company (or individual)making the offer, if successful, will obtain enough shares to control the targeted company.  Must be sent to all holders of the class of securities sought(including convertibles)  The offeror shall deliver a takeover bid circular setting out certain prescribed information.This includes details about the bid, the offeror’s holdings in the target company and its relation to management of the target company.  A directors' circular must be sent to the security holderswithin15 days of the date of the bid. The board of directors of the target company is required to provide certain information and to include either a recommendation to accept or reject the takeover bid and the reason for their recommendation. ***exemption from above 3 requirement include  made through the facilities of the exchange in accordance with the by-laws, regulations and policies of such exchange.  It involves acquisitions which do not aggregate more than 5% of the securities of a class within a 12-month period and the price paid for any of the securities does not exceed the market price at the date of acquisition.  It is an offer by way of private agreement with fi ve or fewer security holders at a price notexceeding 115% of the market price of the securities.  It is an offer to purchase shares in a private company.  In Ontario only, it is an offer where the number of holders of securities subject to the bid does not exceed 50 and the securities held constitute in aggregate less than two per cent of the outstanding securities of that class. Early takeover warning disclosure requirement: >10% must file press release and report with administrator. Insider Trading- must file insider report to administrator, and all changes  Entity owning >10% of voting shares, director or senior officer  Open for public inspection Monique, a Quebec resident, is thinking of buying a 7-year GIC from a financial institution that offers investor or deposit insurance protection. Select the financial institution from which she should purchase the GIC. Student Response Value Correct Answer Feedback A. A chartered bank, covered by CDIC. 0% B. A mutual fund company covered by the IPC. C. An investment dealer, covered by the CIPF. D. An insurance company covered by the OBSI. General Feedback: Monique should give her business to an investment dealer covered by the CIPF as all investments in an account are covered (up to a suggested limit). CDIC only covers GICs up to 5 years. The IPC is not recognized in Quebec and the OBSI does not offer deposit insurance. CH4 The Economy January 12, 2014 1:54 PM  Whereas microeconomics looks at how individuals are affected by changes in prices or income levels, macroeconomics focuses on issues such as unemployment rates, inflation, recessions, and government policy.  Business cycles o EXPANSION: inflation stable, expanded inventory and capacity to meet demand, profit rises, new business outnumber bankruptcies, stock activity, job creation, etc o PEAK: demand outstrip supply, labour and pdt shortages cause wage increases and inflation rises, interest rate rise, bond price fall(dampen business investment and sales), sales decline, stock price and activity fall o CONTRACTION: real GDP decreases, unwanted inventories, business failures outnumber start-ups, income decreases, spend less and save more->cuts into sales o THOUGH: interest rate fall->increase consumer spending, bond/stock price rally, inflation falls o RECOVERY: increase production, widespread layoffs is over, unemployment still high, wage pressures are restrained and inflation may decline further  Economic Indicator o LEADING INDICATOR:The monthly MLI index tracks the performance of these nine components: 1. The money supply (M1)->available liquidity ; interest rate 2. The stock market ->level of profit 3. Interest rate differential between corporations and government short term borrowings. 4. Commodity prices 5. Claims for Employment Insurance 6. The housing index/housing starts 7. New orders for durable manufactured goods 8. The average hours worked per week 9. The US leading indicator o COINCIDENT INDICATOR  Personal income  GDP  Industrial production  Retail sales o LAGGING INDICATOR  Unemployment-inverse to economic condition  Private sector plant and equipment spending  Business loans and interest on such borrowing  Labour costs  The inflation rate  labour force is the sum of the working-age population who are either employed or unemployed. The participation rate represents the share of the working-age population that is in the labour force. The unemployment rate represents the share of the labour force that is unemployed and actively looking for work.  Determinants of Interest Rates ***real interest rate=nominal interest rate -inflation rate -D/S of capital -Default risk -Foreign interest rates and exchange rate -Central bank credibility -inflation  Inflation = − × 100 o Positive output gap->demand-pull inflation o Shock from supply side->cost-push inflation o Philips curve:  Lower unemployment is achieved in the short run by increasing inflation at a faster rate.  Lower inflation is achieved at the cost of possibly increased unemployment and slower economic growth.  cost of disinflation, the sacrifice ratio is used to describe the extent to which GDP must be reduced with increased unemployment to achieve a 1% decrease in the inflation rate ~~5 in Canada  Exchange Rate↑ (more other dollar to exchange 1 Canadian dollar) o Commodity price↑ o Inflation differentials - ↓of other country's currency o Interest rate differential - domestic rate o Current account Surplus↑ o Economic performance/Political stability ↑ o Public debts and deficits↓ CH5 Economic Policy January 12, 2014 5:47 PM  Rational expectations theory suggests that firms and workers are rational thinkers and can evaluate all the consequences of a government policy decision, thereby neutralizing the intended impact of the policy-governments should have little involvement in the economy and simply set basic rules.  Keynesian economics advocates the use of direct government intervention as a means of achieving economic growth and stability through spending and tax policies, especially during a recession. Rationale for the use of government spending and taxation。  Monetarist theory suggest that the economy is inherently stable and left to its own self-adjusting mechanism, will automatically move to a stable path of growth. Instability in the money supply is the major cause of fluctuations in the real GDP and that rapid money supply growth is the major cause of inflation. Eg: instead of pursuing monetary or fiscal policy, the central bank should simply expand the money supply at a rate equal to the economy's long-run growth rate-governments should have little influence on the economy and should simply control inflation (and the money supply).  Supply-side economics, to foster an environment of prosperity, the market should be lef