Chapter 1 | The Canadian Securities Industry

SECTION 1: THE CANADIAN INVESTMENT MARKETPLACE

1. Describe the relationships between the major participants in the Canadian securities industry.

• Suppliers and users of capital trade financial instruments through financial markets such as stock exchanges and money markets.

• Investment dealers (also called brokers) act as intermediaries by matching investors with the users of capital. Each side of a transaction has its own dealer who matches the trades through the markets.

• Trades and other transactions are cleared and settled through organizations such as CDS Clearing and

Depository Services Inc. and banks. Clearing is the process of confirming and matching security trade details; settlement is the irrevocable moment when cash and securities are exchanged.

• The SROs set and enforce rules that govern market activity and monitor the markets to ensure fairness and transparency.

• The Canadian Investor Protection Fund and similar organizations provide insurance against dealer insolvency.

• Provincial regulators oversee the markets and the SROs.

• The Canadian Securities Institute and similar organizations provide education for industry participants.

2. Distinguish among the three categories of investment dealers including how they are organized.

• Retail firms include full-service investment dealers and self-directed brokers (also known as discount brokers). Full-service retail firms offer a wide variety of products and services for the retail investor. They also provide various levels of advice, depending on the financial and wealth management concerns of their investor clients. Self-directed brokers, on the other hand, are considered the do-it-yourself approach to investing. They execute trades for clients at reduced rates, but they do not provide investment advice.

• Institutional firms are investment dealers that serve exclusively institutional clients, organizations that trade large volumes of securities. Institutional clients include pension funds and mutual funds, and may be domestic or foreign institutional firms. In Canada, foreign firms account for about one-third of all institutional clients. Foreign firms include affiliates of many of the major U.S. and European securities dealers.

• Integrated firms offer products and services across the industry and participate fully in both the retail and institutional markets. Most integrated firms underwrite all types of federal, provincial, and municipal debt, as well as corporate debt and equity issues. They are active in secondary markets, including the money market, as well as on all Canadian stock exchanges and some foreign exchanges.

Front Office

Performs all staff functions pertaining directly to portfolio management activities

• Portfolio management, Trading, Sales, Marketing

Middle Office

Performs functions critical to the efficient operation of the firm

• Compliance, Accounting, Audits, Legal

Back Office

Settles the firm’s security transactions

• Trade settlement

3. Explain the difference between principal and agency transactions.

PRINCIPAL TRANSACTIONS

• Investment dealers may own the securities as part of their inventory.

• Underwriting

• Maintaining an inventory of already issued securities.

AGENCY TRANSACTIONS

• Broker

SERVICES PROVIDED BY INVESTMENT DEALERS

• They provide informed advice about the terms and features for new issues in the primary market, based on their knowledge of current conditions in the secondary markets.

• They add liquidity to the market with relative ease by making transactions from their inventory, rather than waiting for simultaneous matching buy-sell orders from other investors.

• They sometimes act as market makers and carry out market making duties by taking positions in assigned listed stocks to enhance market liquidity and smooth out undue price distortions.

• They sometimes buy listed stocks as principals, thus accumulating large blocks of shares, becoming more competitive in serving their larger institutional clients.

• The liquidity they add to the secondary market enhances the primary market by assuring that buyers of new securities will be able to sell their holdings at reasonable prices.

• Investment dealers also trade from their own account to make a profit.

THE CLEARING SYSTEM

• In Canada, securities are cleared through CDS Clearing and Depository Services.

• Participants with access to the clearing and settlement system primarily include banks, investment dealers, and trust companies.

• The netting process compiles each firm’s clearing settlement sheets and informs each member of the securities or funds it must deliver to balance its account.

4. Distinguish among the roles of the various financial institutions.

CHARTERED BANKS

All chartered banks in Canada operate under the Bank Act.

• Schedule I : 23 banks, Savings deposits are eligible for deposit insurance, which is provided by the Canada Deposit Insurance Corporation (CDIC). Firewalls between services.

• Schedule II : Incorporated and operate in Canada as federally-regulated foreign bank subsidiaries.

• Schedule III : Federally-regulated foreign bank branches of foreign institutions that have been authorized under the Bank Act to do banking business in Canada.

CREDIT UNIONS AND CAISSES POPULAIRES

• The federal legislation governing credit unions is the Cooperative Credit Associations Act (CCAA).

TRUST AND LOAN COMPANIES

• Trust companies act as a trustee in charge of corporate and individual assets such as property, stocks, and bonds.

INSURANCE COMPANIES

Insurance Companies Act

• Life insurance : Health and disability insurance ,Term and whole life insurance, Pension plans, Registered retirement savings plans, Annuities

• Property and casualty insurance : Home, Auto, Commercial business

OTHER FINANCIAL INTERMEDIARIES

• Investment funds

• The Alberta Treasury Branches (ATB Financial)

• Consumer finance companies

• Sales finance companies

• Pension plans

5. Discuss the trends affecting the financial services industry in Canada and globally.

FINANCIAL TECHNOLOGY

Fintech

• Online loans

• Electronic wallets

• Automated financial planning software

ROBO-ADVISORS

• They provide clients with goal-based online investment management.

• Portfolios are created using algorithms based on modern portfolio theory and on online client questionnaires.

• A telephone call with an advisor verifies that the computer-generated portfolio is suitable for the client.

• Advisor support is offered to varying degrees, typically online or by phone.

• Portfolios are built primarily with exchange-traded funds.

• Portfolios are regularly rebalanced.

• Financial planning may be offered in varying degrees.

• Service may be provided to the end client as well as to intermediaries such as advisors and employers.

• Competitive positioning is based on the client experience, which typically encompasses the following services:

• Portfolio management is optimized with tools such as tax-efficient rebalancing across account types.

SHIFTING DEMOGRAPHICS

Aging population in Canada

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