Final Exam

backing away

when a market maker fails to execute orders at its quoted prices

stopping stock

when a designated market maker guarantees to execute a customer's order at a specified price

net basis transaction

when a BD brings a security into its inventory to fill a pre-existing customer order at a different price (dealers profit is the difference in prices)

riskless principal transaction

when a BD brings a security into its inventory to fill a pre-existing customer order at the same price with a markup

not-held order

specifies the action (buy/sell), amount, and security, but RR decides time and price (good for one day)

immediate-or-cancel order

require the immediate execution of as much of the order as possible (allow for partial execution)

fill-or-kill order

must be immediately executed in their entirety or cancelled (good for one day)

all-or-none order

fill the entire order by EOD or cancel (no partial fills)

loan consent agreement

allows BD to lend securities purchased to another customer to facilitate a short sale

hypothecation agreement

allows BD to use the securities purchased on margin as collateral to borrow funds from a bank

maintenance call

issued when a long margin account's equity falls below minimum maintenance level (25%) and you can't use SMA

marginable securities

securities you can buy on margin; includes exchange-listed securities (inc. ETFs) but excludes OTC equities

payment date

T+3 aka S+2 for securities purchased in cash or margin accounts

same-day substitution

when an investor purchases and sells the same securities on the same day in a restricted account

debit balance

the amount a customer owes a BD in a margin account

credit balance

the Reg T deposit in a margin account (customer’s cash contribution)

SMA

line of credit created when equity exceeds 50% of market value in a margin account (use it to lose it)

portfolio-based margin account

can be opened by anyone who has been approved to engage in uncovered options positions; permits greater use of leverage, reduces margin calls, and required margin is generally based on greatest loss that may occur in a portfolio

combined margin account equity

LMV + CR - SMV - DR

death documents

 affidavit of domicile, notarized copy of death certificate, copy of will or court appointment, state inheritance waiver

DK notice

filed by firms that "don't know" about a trade; may occur if one side of the trade send a confirmation to the other firm but doesn't receive one in returnE

EMMA

provides primary market disclosure information related to municipal securities 

RTRS

where BDs report transactions in municipal securities

CAT system

central repository that receives, consolidates, and retains the data over the lifecycle of trades and orders for all eligible securities (not municipal securities)

TRACE

system providing transparency in the corporate bond market

DRS system

allows investors to hold securities in book-entry form (linked with the DTC)

settlement

simultaneous delivery and payment by the two parties involved in a transaction

cash settlement

settlement occurs on the trade date

regular-way settlement

settlement is T+1; ex-dividend date is the same day as the record date and that's when the stock price is reduced by the amount of the dividend

seller’s option settlement

used if settlement can't be completed on a regular-way (T+1) or same day basis; settlement occurs more than 1 business day after the trade

sinking fund

savings accounts that help the issuer pay for an outstanding bond issue; associated with TERM BOND offerings

electronic communication networks

used by investors who want to trade anonymously

DVP / RVP account

third party bank or institution used to provide delivery of securities / funds

PSA model

standard model for estimating the prepayment rate for mortgage backed securities, excluding CMOs

CMO interest

fully taxable (not GSA which is triple tax free)

ARS

use auction process to reset interest rates on securities

VRDO

have a put feature permitting the holder to sell the securities back to the issuer or third party

OFAC list

if you discover a client is on this list, immediately contact the US treasury

Rule 145

required company to provide written disclosures to shareholders in connection with previously listed corporate actions like M&A; excludes stock splits, dividends, and the resulting changes in par value

SLMA (Sallie Mae)

provides liquidity to student loan makers by purchasing federally sponsored student loans; also lends funds directly to educational institutions

structured product

may be linked to individual securities, commodities, foreign currencies, or indexes; underwritten by most major financial services institutions and are registered as securities with the SEC. Not bank deposits so not insured by the FDIC

eurodollars

US dollars on deposit in foreign banks, not just in Europe

closed end funds

sell at market price + commission (not NAV)

municipal securities sold at a discount

discount taxed as ordinary income

moral obligation bonds

state legislature must approve a municipality before they can make payments on moral obligation bonds

bond buyer

computes the revenue bond index which is the average yield of 25 revenue bonds with 30 year maturities

bond buyer index

produces and tracks the daily and weekly yields and prices of U.S. municipal bonds

debit call spread

bull spread; buy a lower-strike call option and simultaneously sell a higher-strike call option with the same expiration date

credit call spread

bear spread; sell a call option at a lower strike price and buy a call option at a higher strike price with the same expiration date

debit put spread

bear spread; buy a higher-strike put option and sell a lower-strike put option with the same expiration date

credit put spread

bull spread; sell a higher-strike put option and buy a lower-strike put option with the same expiration date

covered call

options strategy where you own shares of a stock and sell call options against them to generate immediate cash flow

covered put

sell a stock short and simultaneously sell a put option on that same stock

even stock split

aggregate contract value stays the same, but the number of contracts gets multiplied by the amount of the split and the strike price decreases

odd stock split

aggregate contract value stays the same, and the number of contracts stays the same, but number of shares increases by the ratio; and then get the adjusted strike price to maintain the contract value the same

reverse split

stays as 1 contract, aggregate amount stays the same but strike price increases; strike price is not adjusted for a cash dividend on ex-dividend date

good faith deposit

sum of money given to an issuer of a new municipal bond issue along with a syndicate’s bid; not required in the secondary market

redemption of mutual fund shares

shares must be received within 7 days

exploratory programs

riskiest oil and natural gas program

total takedown

largest portion of the undewriting spread in a municipal securities issue; includes additional takedown + concession

1035 exchange

exchange of variable contract assets; relevant look-back period is 36 months

long combination

purchase of a call and a put on the same stock with different expiration dates and or strike prices; expecting volatility

soft dollar arrangement

means of paying brokerage firms for their services through trade commissions; services must benefit the clients (like paying for a conference)

regulation NMS

national market system; applies to listed equity trades; requires BD to provide clients with the best price available for equity trades available for electronic execution

collars

created when you own stock and sell a covered call and buy a protective put

when-issued transaction

purchase ofa new issue prior to settlement with the issuer;

mortgage-backed pass-through certificate

most common security issued by government agencies; excellent credit quality and slightly higher return than treasuries; often used to supplement retirement income

parity

price of convertible bond is equal to the value of the shares you can convert into

mutual fund expenses

INCLUDE operating expenses, management fees, 12b-1 fees, administrative fees; EXCLUDE sales load

mgmt fees are typically the largest expense

straddle

either buying or selling both a call or aput on the same underlying security with the same expiration and strike prices (ex: buying a call and a put on a Sep 50 call)

grounds for statutory disqualification

1) expulsion or suspension from membership or participation in any SRO or foreign equivalent of an SRO

2) assocation with any person who has been subject to an order of the SEC

3) having been convicted within the last 10 years of any felony or securities-related misdemeanor

4) having willfully made any statement that was false or misleading with regard to any material fact in any SRO application, report, or proceeding

strategic asset allocation

attempts to maintain the assigned allocation over a long period and is more passive in nature than tactical asset allocation

laddering

diversifying a bond portfolio by staggering maturity dates of the bonds to manage interest rate risk

tactical asset allocation

active management strategy where an investor or manager temporarily shifts portfolio weightings away from a long-term baseline mix to catch short-term market opportunities or avoid near-term losses

alternative minimum tax

method of calculating a return to ensure that wealthy taxpayers pay at least a minimum amount of tax; certain income and deductions are considered tax preference items and become taxable and non-deductive (like private use municipal bond interest, but not public use municipal bond interest)

TRACE-eligible securities

include USD denominated foreign corporate bonds, foreign sovereign bonds, foreign government bonds, US corporate bonds, US debt securities and GSEs

allocation of orders

retail order > group order > designated order > member order

agreement of limited partnership

defines the responsibilities of the limited and general partners in a partnership

certificate of limited partnership

establishes a partnership and gives the business life q

subscription agreement

document through which an individual “applies” to become a limited partner

offering memorandum

used as a disclosure document in private placements in lieu of a prospectus

municipal revenue bond resolution

contract between issuer and bondholder which specifies the rights of the boldholders and the provision to protect the bondholders’ interest; specifies rate covenants, sinking-fund provisions, restrictions on sales of additional bonds, etc. (NOT YTM of bonds)

trustee-to-trustee transfer

not a taxable event; direct movement of retirement assets from one financial institution or custodian to another

importers

buy FX calls

exporters

buy FC puts

secondary market account

must publish the same POP according to the MSRB

net revenue pledge

deducts all maintenance and operation expenses before arriving at net revenues (doesn’t deduct debt expenses before getting to net revenue)

bond volatility rankings

independently produced ratings that attempt to quantify how sensitive a given bond’s NAV is to changes in the economy like interest rates or currency fluctuations; no standardized scale

limit orders

specify price; may be executed at limit price or better

cancel and rebill

process used if RR executes a transaction but uses the wrong account number (e.g., a margin account rather than an IRA); transfers the transaction to the correct account number with the permission of the principal (rather than placing it in the error account)

WSP

includes the policies and procedures governing all aspects of a firm’s business as well as identifying those responsible for implementing the procedures

business continuity plan

procedures that must be followed in the event of an emergency or significant business disruption

substantial user policy

if the holder of an industrial revenue bond is a substantial user of the facility, then the federal tax exemption of the interest earned does not applydi

dividend payout ratio

= (Common Dividend) / (EPS)

advance-decline index

measurement of advancing stocks vs declining stocks over a specified period; good indicator of strength of bull or bear market

indenture

contains all the agreements and covenants pertaining to a bond issue along with the provisions for the application and allocation of funds of a revenue bond

CDOs

typically not suitable for retail investors; pooled individual loans with different maturities and credit risk

margin disclosure document

describes the different risks associated with margin accounts, including the fact that you can lose more funds than you deposit, that the firm can force the sale of securities in your account, that the firm can sell your securities without contacting you, that you’re not entitled to choose which securities are liquidated in order to meet a margin call, that in-house maintenance may change without prior written notice, and that you’re not entitled to an extension of time in a margin call

pref. price fluctuations

price of pref is inversely related to interest rates; price is typically less volatile than common stock for the same company

grey market

includes stocks that are unlisted and not quoted in the OTC market