CISI IoI Financial Services Industry 2 — Questions and Answers
Question 1: What is the role of a market maker on the London Stock Exchange?
- To regulate trading activity and enforce rules
- To provide continuous buy and sell prices for securities, ensuring liquidity (Correct answer)
- To advise companies on the best time to list their shares
- To settle all transactions within two business days
Correct answer: To provide continuous buy and sell prices for securities, ensuring liquidity
Market makers are firms that quote both buy (bid) and sell (offer) prices for securities, committing to trade at those prices. This provides liquidity and ensures investors can always buy or sell, even when there is no immediate counterparty.
Question 2: What does the acronym CREST refer to in UK financial services?
- The Credit Rating and Evaluation Standards Tribunal
- The UK's electronic settlement system for securities (Correct answer)
- A regulatory body overseeing credit unions
- The Central Register of Exchange-traded Securities and Trusts
Correct answer: The UK's electronic settlement system for securities
CREST is the electronic settlement system used in the UK and Ireland for settling trades in equities, gilts, and other securities. It is operated by Euroclear UK & International and enables the transfer of securities without physical share certificates.
Question 3: Which of the following best describes the concept of 'disintermediation' in financial services?
- The process of adding more intermediaries to a transaction chain
- The removal of intermediaries so that borrowers and lenders deal directly (Correct answer)
- The merger of two financial institutions into one entity
- The separation of retail and investment banking activities
Correct answer: The removal of intermediaries so that borrowers and lenders deal directly
Disintermediation occurs when borrowers and lenders or buyers and sellers bypass traditional financial intermediaries (such as banks) and deal directly with each other. Examples include peer-to-peer lending and companies issuing bonds directly to investors.
Question 4: What is the settlement period for UK equity trades conducted on the London Stock Exchange under the standard cycle?
- T+1 (one business day after trade date)
- T+2 (two business days after trade date) (Correct answer)
- T+3 (three business days after trade date)
- T+0 (same day as trade date)
Correct answer: T+2 (two business days after trade date)
Since June 2024, the standard settlement cycle for UK equities is T+1, meaning settlement occurs one business day after the trade date. The UK moved from T+2 to align with other major markets. Note: As of the CISI syllabus current period, T+2 may still be referenced, but the industry has transitioned to T+1.
Question 5: Which of the following is NOT a function typically performed by a custodian?
- Safekeeping of clients' assets
- Collecting dividends and interest on behalf of clients
- Providing investment advice and portfolio management (Correct answer)
- Settling securities transactions
Correct answer: Providing investment advice and portfolio management
Custodians hold assets safely, collect income, settle trades, and provide administrative services, but they do not provide investment advice or manage portfolios. That is the role of investment managers or financial advisers.
Question 6: What is the primary purpose of the Financial Services Compensation Scheme (FSCS)?
- To regulate financial services firms in the UK
- To compensate eligible customers when authorised firms fail (Correct answer)
- To provide loans to struggling financial institutions
- To set capital adequacy requirements for banks
Correct answer: To compensate eligible customers when authorised firms fail
The FSCS is the UK's statutory deposit insurance and investors' compensation scheme. It protects eligible customers by paying compensation when an FCA-authorised firm is unable to pay claims against it, for example due to insolvency. Current limits include up to GBP 85,000 per person per bank for deposits.
CISI IoI Financial Services Industry 2
What is the role of a market maker on the London Stock Exchange?