What is an Investment?
To invest is to acquire an asset with the expectation of growing value in the
future. It is linked to the concept of ownership.
The Investment Process
The investment process can be split in three steps: The Pre-trade, The Trade and The Post Trade
The pre-trade concerns the decision on what to buy in what quantity. The trade process is the actual agreement between the seller and the buyer regarding the price and the quantity. At this moment, the asset changes ownership. The post-trade concerns everything after the trade itself: the management of the trade.
The Market and The Institutions
"Market" in a very general way, refers to the availability of, and inter-relationships between, potential buyers and sellers of goods or services. The term "market" can be used in a
variety of ways to refer to different physical locations or environments in the investment system for the purchase and sale of securities, commodities or currencies.
THE INVESTMENT BANKS
The INVESTMENT BANK is a financial specialist who acts as an intermediary in the selling of securities.
Three basic functions are provided by the investment banker:
1. He assumes the risk of selling a new security issue at a satisfactory (profitable) price. This is called underwriting. Typically, the investment banking house, along with the underwriting syndicate, actually buys the new issue from the corporation that is raising funds. The syndicate (group of investment banking firms) then sells the issue to the investing public at a higher (hopefully) price than it paid for it.
2. He or she provides for the distribution of the securities to the investing public.
3. He or she advises firms our governments on different matters like merge and
acquisitions, economic health,
THE INSTITUTIONAL INVESTORS
An INSTITUTIONAL INVESTOR is an organization that invests its own assets or those it holds in trust for others. Typical institutional investors are investment companies (including mutual funds), pension systems, insurance companies, universities and banks.
What is Custody ?
Custody means “safekeeping of assets”. This refers to “keep” the assets in a “safe” place. They are two main reasons why banks are originally responsible for custody:
First, you need a vault in order to immobilize the assets if physical, and secondly because it implies the exchange between cash and securities.
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Custody function involves to:
capture the trade
protect the investment, to gain ownership : settlement date
record the position
Keep track of the rights (income, corporate action, taxes,…)
The Custodian
CUSTODIAN is an agent, usually a bank, which receives delivers, and safekeeps cash
and securities for its clients. The custodian is also responsible for the
maintenance of the securities while they are under custody.
RECEIPTS AND DELIVERIES
Receipts and deliveries of securities and cash are done only upon instruction or authorization of the client or the client's authorized investment manager. These transactions usually involve a trade, that is, a purchase or sale of securities or cash. When a security is purchased, the security is received in and cash is delivered out. When the security is sold, the security is delivered out and cash is received in. Cash itself can be purchased and sold as an investment in the context of foreign exchange.
SAFEKEEPING
Securities under custody must be protected in a secure environment regardless of
whether they are held physically or electronically. Securities held physically are generally kept in a vault at the custodian bank or in a SUBCUSTODIAN bank hired by the primary custodian. Securities held in Book Entry are recorded on the books of the DEPOSITORY as being in the account of the custodian. Once securities have been purchased and received into safekeeping, the custodian is responsible for the maintenance of these assets as it pertains to registration, income collection, and corporate actions.
INCOME
One major custodial responsibility is the timely crediting of income payments due
to the client from investments held in the client's portfolio. Custodians need to be aware of any income event affecting securities under their care. This is often accomplished by contracting for the services of various Information agents, who provide, among other things,
information regarding the terms of a securities issue, income schedule, or
dividend announcements.
CORPORATE ACTIONS
A corporate action on a security can have a significant impact on the value of that
security, and therefore on the value of the client's portfolio. Monitoring and accurately processing corporate actions on securities held under custody is one of the important responsibilities of a custodian. The custodian must be aware of any pending action, which could affect any security being held on behalf of any client; monitoring for corporate actions thus becomes a significant element of custodial functions. Most custodians have contracted with a variety of news services or information agents in order to daily information regarding corporate events. Further information might be obtained from depositories, sub custodians, or even issuers.
ACCOUNTING SERVICES
The custodian may also provide accounting services to the client, although this
service is not necessarily part of every custodial contract. This accounting can include pricing of securities in the portfolio on a daily, weekly, or monthly basis, keeping track of expense accruals and payments, capital purchases or contributions and disbursements, and calculating the NET ASSET VALUE of the portfolio (also known as fund pricing.)
THE SUBCUSTODIAN
Rule: The securities stay in the local market. They remain in the country where they are issued.
A SUBCUSTODIAN can be a bank located in any country, hired by a primary custodian that performs custodial functions in the local market in which it has expertise. The success of the custodian in servicing its clients depends greatly on the sub custodian's ability to function for the custodian in that particular market; therefore, a consistently high level of service quality must be provided.
Role of the Subcustodian
The role of the subcustodian generally includes:
1. Settling and vaulting securities,
2. Collecting income,
3. Sending information to the custodian regarding cash and security movements, cash balances, month-end securities positions, notification of corporate actions and upcoming income events, and reporting changes in the market environment and tax regulations.
TRUSTEE
A TRUSTEE is a person or entity who is legally responsible for another person
or entity's investment, property or other assets. There are two types of Trustees in the financial industry, Trustees for Master Trust Accounts and those for Corporate Trust Accounts.
Trustees for Master Trust Accounts
A MASTER TRUST is a pool of trusts or a pool of assets involved in one trust
agreement. A trustee for a master trust manages and oversees all assets for a trust client according to a trust agreement or plan document. Most often a trustee is hired to service PENSION PLANS. Many of the responsibilities of a trustee and a Custodian are similar,
however, a trustee has more responsibilities and greater legal burden on behalf of the plan or trust. A trustee has a FIDUCIARY RESPONSIBILITY to act with discretion and diligence in the best interest of the client. These fiduciary responsibilities in general apply to a trustee who has the power to act on behalf of the client, to manage a plan, or who provides investment advice regarding the plan assets or administers a plan.
In most cases, the trustee is liable for a loss which occurs as a result of its actions, unless the mistake was created by a third party or unless the contract includes a provision to indemnify the trustee from any loss or expense.
Because agreements between the client and the trustee may vary, the responsibilities of the trustee can be different from one client to another. Some of the basic responsibilities of a trustee are recordkeeping, income collection, corporate action processing, and pricing, although there can be additional responsibilities according to the terms of the agreement.
Trustees are also responsible for collecting Income and monitoring corporate actions on securities held in client portfolios. When a corporate action is announced, the trustee must notify the Investment Manager who will decide the suitable course of action on behalf of the client. This final decision is passed back to the trustee who will act accordingly.
CORPORATE TRUSTEE
A company issuing bonds in an amount greater than $5 million must hire a bank or trust company to administer its securities. The CORPORATE TRUSTEE acts as intermediary between the company issuing the bonds and the investors buying the bonds.
THE SECURITY BROKER
An INVESTMENT BROKER can be anyone who earns commissions or fees for executing investment transactions that transfer ownership from one party to another.
All brokerage firms and all brokers acting as individuals must be a member of the exchange through which they trade and must pay an annual membership fee to the exchange. Exchanges have strict codes of conduct and can bar individuals or firms from membership due to fraudulent or unethical activity. Brokers can hold MEMBERSHIP in more than one
exchange. Some brokers specialize in a particular security type or commodity and would therefore be a member of that specialized exchange.
Some of their functions include: transition management, directed brokerage, soft dollars agreements, commission recapture programs, electronic trading,
THE SECURITY EXCHANGES
A STOCK EXCHANGE is a private association that provides a physical location and clerical support for its members. Trading occurs AUCTIONSTYLE with investors exchanging bids and offers on the exchange’s listed securities.
Organized security exchanges are tangible entities whose activities are governed by a set of bylaws. Security exchanges physically occupy space and financial instruments are traded on such premises.
Exchanges do not buy or sell securities, nor do they set prices. TRADING is conducted on the exchange “FLOOR” where each SPECIALIST presides over the auctioning of shares for one or more of the listed companies. Sellers willing to take the lowest prices and buyers willing to pay the highest prices are given priority trade instructions.
When a company first goes public (INITIAL PUBLIC OFFERING), the management decides how its shares will be traded among investors, either on a stock exchange, an auction market, or OVER-THE-COUNTER, a negotiated market.
Major stock exchanges must comply with a strict set of reporting requirements established by the SECURITIES AND EXCHANGE COMMISSION (SEC). These exchanges are said to be registered.
Organized security exchanges provide several benefits to both corporations and investors. They (l) provide a continuous market, (2) establish and publicize fair security prices, and (3) help businesses raise new financial capital.
A corporation must take steps to have its securities listed on an exchange in order to directly receive the benefits noted above. Listing criteria differ from exchange to exchange.
Three of the most well known United States exchanges are the
Three of the most well known United States exchanges are the NEW YORK STOCK EXCHANGE (NYSE), THE AMERICAN STOCK EXCHANGE (AMEX), AND THE NATIONAL ASSOCIATION OF SECURITIES DEALERS AUTOMATED QUOTATION SYSTEM (NASDAQ). Other national exchanges specialize in commodity and security options and futures trading. These include the CHICAGO BOARD OF TRADE, CHICAGO BOARD OF OPTIONS EXCHANGE, MID-AMERICA COMMODITY EXCHANGE, NEW YORK COFFEE, SUGAR AND COCOA EXCHANGE, NEW YORK COTTON EXCHANGE, NEW YORK FUTURES EXCHANGE, PACIFIC STOCK EXCHANGE AND THE PHILADELPHIA EXCHANGE.
The New York Stock Exchange
The NEWYORK STOCK EXCHANGE sometimes referred to as the "Exchange" or the "Big Board", was established in 1792 and is the oldest and largest securities exchange in the United States. Usually only large firms can meet the stringent eligibility requirements of the NYSE. These require that a firm have a minimum of one million publicly held shares, a market value of publicly held shares of at least $10 million, total market value of $16 million, annual net income of over $2.5 million before federal income taxes, and 2,000 holders of 100 shares or more.
The American Stock Exchange
The AMERICAN STOCK EXCHANGE was originated in 1921.The AMEX could be considered a proving ground for the NYSE, as it trades securities from mainly small and medium size companies. A large number of companies that were once listed on the AMEX have moved to the NYSE. Another difference between these two exchanges is that the AMEX has an options market where the NYSE does not.
Regional Stock Exchanges
Regional stock exchanges are organized securities exchanges located outside of New York City and registered with the SEC. They do not exclusively list only regional or local securities, but list many issues that are also on the New York exchanges. NYSE and AMEX listings often also list on a regional exchange to receive broader market exposure. This dual
listing practice of a security on one or more exchanges increases competition for the issue and boosts trading availability due to different time zones. Regional exchanges in the United States include the BOSTON, INCINNATI, MIDWEST, PACIFIC, PHILADELPHIA STOCK EXCHANGES.
NASDAQ
NATIONAL ASSOCIATION OF SECURITIES DEALERS AUTOMATED QUOTATION
SYSTEM (NASDAQ) is a computerized communication system that serves the dual function of providing security information to its members and acting as an exchange for stocks. Ranking third in trading volume behind the New York Stock Exchange and the Tokyo Exchange, it features efficiency in trading, as it can locate the most up-to-date quotes regardless of where the market is in the U.S.
The Chicago Board Options Exchange
The CHICAGO BOARD OPTIONS EXCHANGE (CBOE) revolutionized options trading by creating standardized, listed options in 1973. Before 1973, options were individually tailored and traded "over-thecounter" by a few put/call dealers. CBOE established a secondary market where options could be traded. The growth in the use of options propelled CBOE to become the world's largest options exchange, and the second largest securities exchange in the U.S. Today, CBOE captures the largest share of the U.S. options market by trading 700,000 option contracts daily accounting for over 47 percent of trading in equity options, over 95 percent of index options trading and over 65 percent of all options trading.
Today, options are traded on five U.S. exchanges: the Chicago Board Options Exchange, the American Stock Exchange, the New York Stock Exchange, the Pacific Stock Exchange and the Philadelphia Stock Exchange. Although there are five U.S. exchanges that trade standardized options, options have become a global contagion trading on over 50 exchanges worldwide.
Country Specific Exchanges (National Exchanges)
Various countries throughout the world have national exchanges that provide trading arenas for that specific country. Some of these countries include:
AUSTRALIA: Australia Stock Exchange (ASX) is the nation-wide exchange.
AUSTRIA: Vienna Stock Exchange is the national exchange; Telecommand is the OTC exchange.
BELGIUM: Brussels is the main exchange, with branches in Antwerp and Liege.
CANADA: Toronto and Montreal exchanges are linked together, with branches in Vancouver and Alberta.
DENMARK: Copenhagen Stock Exchange.
FRANCE: Paris is the center of all equity trading in France.
GERMANY: Frankfurt is the main exchange.
ITALY: Milan is the main exchange, and there are several regional exchanges.
JAPAN: Tokyo and Osaka are the main exchanges.
MEXICO: Mexico City is the national exchange.
NETHERLANDS: Amsterdam Stock Exchange is the national exchange.
NORWAY: Oslo Stock Exchange (OSE) is the national exchange, with branches in Bergen and Trondheim.
SPAIN: Madrid is the main exchange, with branches in Bilbao, Barcelona, and Valencia.
SWEDEN: Stockholm is the national exchange.
SWITZERLAND: Zurich is the main exchange, with branches in Geneva and Basle.
UNITED KINGDOM: London Stock Exchange (LSE) is the main exchange for equity trading in the U.K. and the Republic of Ireland. Branches are in Manchester, Birmingham, Glasgow, Leeds, and Belfast in the U.K., and Dublin in Ireland.
Corporate actions.
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