Part 4 - Financial Instruments and Market Infrastructure

List the main differences between Securities and Derivatives from a legal perspective (2022)

Securities:

= negotiable financial instruments that represent rights held by the investor over the issuer. These rights may include:

• ownership rights

• creditor rights

Regulated as transferable financial instruments, that do not need formal notification to the issuer

Derivatives:

= financial contracts whose values is derived from an underlying asset, rate, index or event → no direct ownership of an underlying asset

• Create bilateral obligations (rights and duties for both parties)

• Can be traded on exchanges (standardised) or OTC (customised)

What are the characteristics of securities, which differentiate them from loans? (2025)

Securities:

• tradable on markets

• standardised

• liquid (can be sold anytime)

• publicly disclosed and rated

• many holders (investors)

• require a prospectus

Loans:

• not tradable on markets

• tailor-made/bilateral

• illiquid

• private

• typically one lender (bank)

• use a credit agreement

What is the difference between primary and secondary markets for trading in securities? (2020 – p.7)

Primary market is where new securities are issued for the first time (investors buy directly from issuer to raise capital) → issuer raises capital

Secondary market is where existing securities are traded between investors after issuance (no new capital raised) → provides liquidity

What does OTC (Over the Counter) trading mean? (2023 + 2024)

Over the Counter trading:

• Trading that occurs directly between 2 parties, outside of a formal exchange

• Contracts are bilateral and customised (not standardised)

• Less transparent → prices not publicly displayed

• Less regulated than exchange trading

• Common for derivatives, bonds, and certain currencies

Exchange trading:

Exchange = standardised, transparent, centralised. OTC = flexible, private, bilateral.

Explain the role of Central Clearing Counterparties (CCPs) in the trade of securities and derivatives (2022 + 2023)

Central Clearing Counterparties = interposes itself between buyer and seller, becomes the buyer to every seller and seller to every buyer, guaranteeing that trades settle even if 1 party defaults

→ facilitates multilateral netting & reduces counterparty risk through a process called novation, where original contracts are replaced with 2 separate contracts involving the CCP