Financial Instruments and Markets
Core Concepts
Financial instruments under MiFID II include transferable securities (shares, bonds), money market instruments, units in collective investment schemes (CIS), derivatives (options, futures, swaps, forwards), and emission allowances. Candidates must understand the characteristics of each: equities confer ownership and voting rights; bonds are debt instruments with coupon and principal; derivatives derive value from underlying assets and can be exchange-traded or OTC. Market structures include primary markets (IPOs, bond issuance) and secondary markets (trading venues). Key concepts: liquidity, price discovery, market makers, and the role of the Bulgarian Stock Exchange (BSE) and its main indices (SOFIX, BGBX40). Traps often involve distinguishing between financial instruments and other products (e.g., insurance policies, commodities), the classification of structured products, and the definition of 'transferable securities' (e.g., shares in closed-ended investment companies). Also, the difference between regulated markets and systematic internalises (SIs). Candidates should know the trading mechanisms (continuous trading, auctions) and the tick size regime. Another trap: the treatment of derivatives on commodities and the 'ancillary activity' exemption test.
Worked Example / Rule of Thumb
A company issues shares on the BSE. These are transferable securities and must be admitted to trading on a regulated market. If the same company issues a bond that is not listed, it may still be a financial instrument but not admitted to trading. Rule of thumb: admission to trading on a regulated market brings additional transparency and reporting obligations.
Key Points
- Financial instruments include transferable securities, money market instruments, CIS units, derivatives, and emission allowances.
- Equities = ownership; bonds = debt; derivatives derive value from underlying.
- BSE operates regulated market; SOFIX and BGBX40 are key indices.
- Distinguish regulated markets, MTFs, OTFs, and systematic internalisers.
- Primary vs secondary markets: issuance vs trading.
- Ancillary activity exemption for commodity derivatives has specific tests.