CISI CMP Securities cheat sheet

Primary market: issuer raises new capital via IPOs, rights issues, and bond issuance; proceeds go to the issuer. Secondary market: investors trade existing securities among themselves; proceeds go to the seller, not the issuer.

Order-driven (quote-driven) distinction: on an order-driven venue, a central limit order book matches buy and sell orders by price then time priority. On a quote-driven venue, a market maker posts firm bid and offer prices and trades against them.

Market maker obligation: continuously quote a two-way price within a defined size and spread tolerance; profit comes from the bid-offer spread, not from directional exposure.

Settlement cycle conventions: equities in many markets settle T+2; government bonds often T+1. Fails to settle trigger buy-ins and mandatory reporting in most regimes.

Clearing vs settlement: a central counterparty (CCP) interposes itself between counterparties and novates trades, managing counterparty risk; settlement is the actual exchange of cash for securities.

Exchange vs MTF vs OTC: a regulated market is a multilateral venue with listing/admission standards; an MTF is multilateral without listing requirements; OTC trading is bilateral and not exchange-executed.

Participant roles: broker acts as agent for a commission; dealer acts as principal trading for its own book; custodian safekeeps assets and processes corporate actions; investment manager exercises discretion under a mandate.

Price and yield relationship for fixed-coupon bonds: prices move inversely to yields. If yield rises above the coupon, the bond trades at a discount; if yield falls below the coupon, at a premium.

Indices and benchmarks: a price index excludes dividends; a total return index reinvests them. A stock split or rights issue requires an index divisor adjustment to avoid a false market move.

Three core conduct outcomes: fair treatment of customers, market integrity, and effective competition. Rules are typically drafted as high-level principles supported by detailed conduct rules.

Client categorisation: retail, professional (per se or elective), and eligible counterparty. Categorisation determines disclosure, best execution, and appropriateness obligations; retail receives the highest protection.

Suitability vs appropriateness: suitability (know your client, risk tolerance, objectives) applies to advised and discretionary business; appropriateness (knowledge and experience) applies to execution-only non-complex products.

Best execution: firms must take all sufficient steps to obtain the best possible result for clients, considering price, cost, speed, likelihood of execution and settlement, size, and nature of the order.

Conflicts of interest: identify, prevent, or manage; disclose only as a last resort. Personal account dealing, gifts and inducements, and outside business interests require pre-clearance and registers.

Market abuse: insider dealing, unlawful disclosure of inside information, and market manipulation. Inside information is precise, non-public, and price-sensitive; suspicious transaction reports (STORs) are filed without tipping off the client.

Record keeping and reporting: transaction reports to the regulator, client order records, and communications retention (commonly five years). MiFID-style regimes require telephone recording where orders are received.

Anti-money laundering: risk-based customer due diligence, beneficial ownership identification for legal entities, enhanced due diligence for PEPs and high-risk jurisdictions, and ongoing monitoring with suspicious activity reporting.

Senior management responsibility: allocation of prescribed responsibilities, fitness and propriety assessments, and personal accountability for breaches within a controlled function.

Equities: residual claim on earnings and assets, voting rights, unlimited upside, and lowest ranking in liquidation. Preference shares rank ahead of ordinary shares for dividends and capital but usually carry no votes.

Bonds: contractual coupon and principal repayment, ranking ahead of equity. Key risks are credit (default), interest rate (duration-driven price sensitivity), inflation, and liquidity.

Duration as sensitivity: modified duration approximates the percentage price change for a 1% change in yield; a duration of 5 implies roughly a 5% price fall for a 1% yield rise.

Money market instruments (T-bills, commercial paper, CDs) have maturities up to one year and are quoted on a discount or yield basis; they carry low credit and interest rate risk relative to bonds.

Derivatives: futures are exchange-traded, standardised, and margined daily; forwards are OTC and bespoke; options confer a right, not an obligation, with the buyer paying a premium; swaps exchange cash flow streams.

Collective investment schemes: open-ended funds price at net asset value (NAV) and issue/redeem on demand; closed-ended funds trade on exchange at a market price that may differ from NAV (premium or discount).

Hedge fund characteristics: leveraged, performance-fee structures, restricted redemption, and strategies such as long/short equity, global macro, and event-driven.

Foreign exchange: spot settles typically T+2; forward rates are driven by the interest rate differential between the two currencies (covered interest parity), not by a directional forecast.

Structured products combine a bond with a derivative payoff; capital protection is only as good as the issuer's credit, and autocall or barrier features can terminate or reduce the return early.

Know your client: capture objectives, time horizon, risk tolerance, financial circumstances, and any restrictions before recommending. A recommendation must be consistent with the documented profile.

Risk profiling: a scored questionnaire maps to defensive, balanced, growth, or aggressive allocations. Record the rationale; if a client insists on a higher-risk product, document the override.

Risk vs reward disclosure: explain potential loss, liquidity, leverage, and currency exposure in terms the client understands. Past performance is not a reliable indicator of future results.

Product disclosure: a key information document (or equivalent) gives costs, risk indicator, and scenario performance. Costs must be aggregated and disclosed before the transaction.

Dealing process: obtain client instruction, check it against mandate limits and available cash or holdings, execute, allocate fairly, confirm promptly, and reconcile. Errors are corrected and logged.

Order types: market order prioritises execution certainty; limit order prioritises price certainty but may not fill; stop-loss converts to a market order once a trigger price is reached.

Client money and assets: client money is segregated from firm money in designated accounts; assets are held in custody with reconciliations and no rehypothecation without consent.

Valuation and reporting: periodic statements show holdings, valuations, transactions, and charges. Complaints are logged, acknowledged promptly, and resolved within defined timeframes with escalation rights.

Vulnerable customers and capacity: identify diminished capacity or distress, adapt communication, and avoid high-pressure selling. Record the adjustments made and the basis for any decision.

Advisory vs discretionary vs execution-only: advised business requires a personal recommendation; discretionary requires a signed mandate granting authority; execution-only requires the client to initiate the trade and the product to be non-complex.

Suitability report content: the recommendation, why it fits the client's objectives and risk profile, the costs involved, and any alternatives considered.

Inducements: research and non-monetary benefits must be minor and capable of enhancing service quality; otherwise they must be paid away or disclosed and consented to.

Aggregation and allocation: when orders for several clients are aggregated, the allocation must be fair and recorded; client orders take precedence over proprietary orders in the same instrument.

Trade confirmation content: instrument, price, quantity, charges, venue, execution time, and settlement date. Confirmations are issued promptly after execution.

Complaint handling: acknowledge promptly, investigate independently, respond within the regulatory deadline, and inform the client of the right to escalate to the ombudsman or regulator.

Conflicts in dealing: front-running client orders, trading ahead of research, and allocating favourable fills to proprietary accounts are prohibited. Maintain a restricted list and wall-crossing records.

Client onboarding: verify identity, assess appropriateness, agree the mandate and fee schedule, and provide terms of business before conducting business.

Integrity of the market: do not trade on inside information, do not create a false or misleading impression of supply, demand, or price, and do not distort the benchmark-setting process.

Personal account dealing: pre-clear trades, avoid short-term trading for profit, avoid dealing in restricted or research-covered stocks, and hold for a minimum period where policy requires.

Gifts and hospitality: register all benefits, apply monetary thresholds, and refuse benefits that could compromise independence or create an obligation to a counterparty.

Confidentiality: client information is shared only on a need-to-know basis or with consent, subject to legal or regulatory disclosure requirements.

Whistleblowing: firms must provide protected channels, protect the identity of the reporter, and prohibit retaliation.

Ethical decision framework: identify the conflict, consider the client's best interests, consult policy and compliance, document the decision, and escalate where uncertain.

Trade lifecycle: execution, confirmation/affirmation, clearing, settlement, and post-settlement reconciliation. Each stage has its own control and reporting obligation.

Corporate actions: dividends, rights issues, bonus issues, stock splits, and mergers require entitlement calculation at the record date and notification to clients before the election deadline.

Rights issue economics: the theoretical ex-rights price equals (market value before the issue plus proceeds from new shares) divided by the total shares after the issue.

Custody controls: segregation of client assets, dual authorisation for transfers, periodic reconciliation of holdings to statements, and independent oversight of the reconciliation function.

Collateral and margin: variation margin settles daily mark-to-market moves; initial margin covers potential future exposure. Haircuts reflect the volatility and liquidity of the collateral.

Operational risk: failed trades, settlement mismatches, and corporate action errors are logged, root-caused, and remediated; key controls are tested and evidenced.

Costs reduce net return: entry, exit, ongoing management, performance fees, and transaction costs compound against the client. Disclose the total cost of ownership.

Performance measurement: time-weighted return removes the effect of cash flows and measures the manager; money-weighted return reflects the investor's actual experience.

Benchmark comparison: alpha is the excess return over a risk-adjusted benchmark; a high return with higher volatility may not represent superior skill.

Tax wrappers: pension and ISA-type wrappers shelter income and gains within limits; the tax treatment depends on the client's residence and the wrapper rules.

Capital gains and income: realised gains are taxed on disposal, dividends and interest are taxed as income, and allowances and holding periods vary by jurisdiction.

Equity valuation: price-earnings ratio equals price divided by earnings per share; a high multiple implies expected growth or low perceived risk.

Dividend discount model: value equals next dividend divided by (required return minus growth rate); the model requires growth below the required return to be valid.

Bond pricing: price equals the present value of coupons and principal discounted at the yield; accrued interest is added to the clean price to give the dirty price.

Yield measures: current yield equals coupon divided by price; yield to maturity accounts for the time value of all cash flows and assumes reinvestment at that yield.

Credit analysis: assess issuer leverage, interest cover, cash flow stability, and the seniority of the claim. A credit rating is an opinion, not a guarantee.

Portfolio risk: diversification reduces unsystematic risk; systematic (market) risk remains. Beta measures sensitivity to market moves; correlation drives the benefit of diversification.

Authorisation: firms must be authorised or registered to carry on regulated activities; the scope of permission defines which activities and instruments are permitted.

Passporting and cross-border: an authorised firm may serve clients in another jurisdiction under an equivalence or passporting regime, subject to local conduct and marketing rules.

Capital and prudential requirements: firms must hold sufficient regulatory capital, maintain liquidity, and report prudential returns; breaches are notifiable to the regulator.

Approved persons: individuals performing controlled functions must be fit and proper, trained, and supervised; changes in role are notified to the regulator.

Regulatory reporting: periodic financial and transaction reporting, notification of material changes, and prompt reporting of breaches and complaints data.

Enforcement: the regulator can impose fines, restrictions, public censure, or withdraw authorisation; cooperation and remediation are mitigating factors.

Client money rules: hold in a designated client bank account, perform daily or regular reconciliations, and do not use client money for firm purposes.

Custody assets: hold in a segregated nominee account, obtain client consent for any use, and keep records that identify each client's entitlement.

Complaint handling: log, acknowledge, investigate, and respond within the regulatory time limit; inform the client of escalation to the ombudsman if unresolved.

Redress and compensation: compensation schemes cover eligible claimants up to defined limits; firms must inform clients of the scheme and its scope.

Vulnerability and forbearance: identify and support clients in financial difficulty, record adjustments, and avoid aggressive collection or sales practices.

Trading venue types: regulated market, multilateral trading facility, and organised trading facility. Each has different transparency and execution obligations.

Order book mechanics: price priority first, then time priority. Hidden or iceberg orders display only part of the quantity; dark pools execute without pre-trade transparency.

Circuit breakers and auctions: price limits and volatility auctions pause or slow trading to prevent disorderly moves; opening and closing auctions concentrate liquidity.

Clearing and CCP: the CCP novates trades, collects margin, and manages a default fund; its failure would be systemic, so it is subject to strict prudential oversight.

Short selling: covered short sales require locate and borrow arrangements; naked short selling is restricted, and net short positions above thresholds are disclosed to the regulator.

Benchmarks: administrators must govern the benchmark, control inputs, and manage conflicts; manipulation of submissions is a serious market abuse offence.

Client first: the client's interests take precedence over the firm's proprietary trading and over personal interests; disclose and manage any conflict that cannot be avoided.

Competence: only advise or deal within your knowledge and authorisation; refer complex or unfamiliar products to a specialist.

Confidentiality and data protection: collect only necessary data, secure it, and share only with consent or legal basis; report breaches promptly.

Record keeping and audit trail: document advice, instructions, and rationale so that decisions can be reconstructed and defended.

Speaking up: report suspected misconduct through internal channels or the regulator; retaliation against reporters is prohibited.

Complex vs non-complex: non-complex products are liquid, transparent, and have publicly available pricing; complex products require an appropriateness assessment before execution-only dealing.

Leverage and margin: leveraged products magnify both gains and losses; clients must understand margin calls and the risk of losing more than the deposit.

Illiquidity: property, private equity, and some bonds may be hard to sell quickly; match illiquid assets to clients with long horizons and adequate cash reserves.

Concentration risk: a single stock or sector position can dominate portfolio outcomes; diversification across issuers, sectors, and geographies reduces idiosyncratic risk.

Currency risk: unhedged foreign assets add exchange-rate exposure; the client's spending currency should drive the hedging decision.

Product governance: manufacturers define a target market and review products; distributors must ensure the product reaches the intended target market.

IPO process: due diligence, prospectus, bookbuilding, pricing, allocation, and listing. The prospectus must disclose risks, financials, and use of proceeds.

Rights issue vs placing: a rights issue offers existing holders a pre-emptive right to subscribe, usually at a discount; a placing sells to selected investors, often faster but dilutive without pre-emption.

Share buybacks: reduce shares outstanding and can support the price; subject to volume limits, disclosure, and shareholder approval.

Short selling mechanics: borrow the stock, sell, and later buy back to return; the cost is the borrow fee, and a short squeeze can force losses.

Market indices and rebalancing: index inclusion or exclusion triggers passive fund flows; rebalancing dates create predictable demand and liquidity effects.

Price discovery: bid-offer spread widens with volatility and illiquidity; the mid price is the average of the best bid and best offer.

Transaction reporting: report specified details of executed transactions to the regulator promptly; errors must be corrected and resubmitted.

Surveillance: monitor for layering, spoofing, wash trades, marking the close, and insider dealing patterns; alerts are investigated and escalated.

Inside information controls: maintain insider lists, restrict access, and manage wall-crossings with written agreements and records.

STOR/STR: file a suspicious transaction or activity report with the regulator without informing the client (no tipping off).

Record retention: keep order and transaction records, communications, and compliance records for the required period and produce them on request.

Fair, clear, and not misleading: marketing must balance risk and reward, avoid exaggeration, and state the basis of any comparison.

Cost disclosure: aggregate all charges, including transaction costs and ongoing fees, and show them before the client commits.

Periodic reporting: provide valuations, transactions, and charges at agreed intervals; make statements understandable to a retail client.

Complaint escalation: inform clients of internal review, ombudsman, and regulator routes, and of any time limits that apply.

Vulnerability: adapt communication, allow representatives, and record the support provided; do not use high-pressure tactics.

Risk types: market, credit, liquidity, operational, and conduct risk. Each requires identification, measurement, monitoring, and mitigation.

Limits: set position, concentration, and counterparty limits; breaches are escalated and remediated, not ignored.

Stress testing: model adverse scenarios (rate shocks, spread widening, redemption waves) and hold sufficient capital and liquidity buffers.

Three lines of defence: business owns risk, compliance/risk provides oversight, and internal audit provides independent assurance.

Business continuity: maintain backup systems, test recovery plans, and document incident response and client communication.

Yield curve shapes: normal (upward sloping), inverted (downward sloping), and flat. An inverted curve often signals expected rate cuts or recession.

Credit spread: the extra yield over a government benchmark compensating for default and liquidity risk; spreads widen in stress.

Interest rate risk: longer maturity and lower coupon mean higher duration and greater price sensitivity to rate changes.

Inflation-linked bonds: principal or coupon adjusts with an inflation index, protecting real returns but exposing the holder to real yield changes.

Repo: a sale and repurchase agreement, economically a secured loan; the haircut protects the cash lender against collateral price falls.

Independence: avoid arrangements that bias recommendations; disclose commissions, rebates, and any interest in the product.

Client interest vs firm interest: if a product pays the firm more, that must not drive the recommendation; document the rationale.

Competence and training: maintain CPD, know the product suite, and refer unfamiliar products to specialists.

Confidentiality: protect client data, share only with consent or legal basis, and report breaches.

Speak-up culture: report suspected misconduct, protect reporters, and prohibit retaliation.

Futures vs forwards: futures are standardised, exchange-traded, and margined daily; forwards are bespoke and OTC, carrying counterparty risk.

Options: the buyer pays a premium for the right, not obligation, to buy (call) or sell (put) at the strike; the seller bears the obligation.

Hedging: use derivatives to offset an exposure, not to speculate; the hedge ratio and basis risk determine effectiveness.

Swaps: exchange interest or currency cash flows; an interest rate swap converts fixed to floating exposure (or vice versa).

Counterparty risk: OTC derivatives require collateral and credit assessment; central clearing reduces but does not eliminate risk.

Open-ended funds: price at NAV, issue and redeem on demand, and may suspend redemptions in extreme stress.

Closed-ended funds: trade on exchange, price may differ from NAV, and capital is fixed at launch.

Fees: initial, annual management, and performance fees; performance fees must be disclosed and aligned with the client's interests.

Diversification: funds pool investor money across many holdings, reducing idiosyncratic risk but not market risk.

Regulatory status: UCITS-type structures offer diversification and liquidity rules; non-UCITS may be more concentrated or illiquid.

Spot FX: settles typically T+2; forward rates reflect the interest rate differential (covered interest parity).

Carry trade: borrow low-yield currency, invest in high-yield currency; profits are eroded by adverse exchange moves.

Commodities: exposure via futures, ETFs, or producer equities; storage, contango, and backwardation affect returns.

Hedging currency: match the hedge to the client's spending currency; over-hedging creates new risk.

Liquidity: FX is deep for major pairs; emerging market pairs and commodities can gap in stress.

P/E ratio: price divided by earnings per share; compare within sector and against growth expectations.

Dividend discount model: value equals next dividend divided by (required return minus growth); growth must be below required return.

Book value and P/B: useful for banks and asset-heavy firms; less useful for asset-light technology firms.

Earnings quality: check cash conversion, one-off items, and accounting policies; high reported profit with weak cash flow is a warning.

Corporate actions: splits, bonus issues, and rights issues change share count and price; adjust historical data before comparison.

Asset allocation: the mix of asset classes drives most of the return variability; strategic allocation sets long-term weights, tactical tilts adjust short-term.

Diversification: combine assets with low correlation to reduce unsystematic risk; systematic risk remains.

Rebalancing: restore target weights periodically or on threshold breaches; rebalancing enforces discipline and controls drift.

Risk tolerance: map the client's capacity and willingness to risk to an allocation; document the rationale.

Liquidity: hold sufficient cash and liquid assets to meet near-term needs without forced selling.

Order types: market (execution certainty), limit (price certainty), stop (trigger to market), and stop-limit (trigger to limit).

Best execution factors: price, cost, speed, likelihood of execution and settlement, size, and nature of the order.

Venue selection: consider liquidity, transparency, and execution quality; document the execution policy and monitor it.

Slippage: the difference between expected and executed price; wider in illiquid or volatile markets.

Algorithmic trading: execution algorithms slice orders to reduce market impact; they must be monitored and controlled.

Settlement cycle: equities often T+2, government bonds often T+1; fails trigger buy-ins and reporting.

Custody: segregate client assets, reconcile regularly, and obtain consent for any use of assets.

Corporate actions: calculate entitlements at the record date and notify clients before election deadlines.

Collateral: haircuts reflect volatility and liquidity; variation margin settles daily mark-to-market moves.

Operational risk: log and root-cause fails and errors; test key controls and evidence results.

Client categorisation: retail, professional, and eligible counterparty; retail receives the highest protection.

Suitability vs appropriateness: suitability for advised and discretionary business; appropriateness for execution-only non-complex products.

Best execution: take all sufficient steps to obtain the best possible result, considering price, cost, speed, and likelihood of execution.

Conflicts: identify, prevent, or manage; disclose only as a last resort.

Market abuse: insider dealing, unlawful disclosure, and manipulation; file suspicious transaction reports without tipping off.

Client money: hold in a designated client bank account, reconcile regularly, and do not use for firm purposes.

Custody assets: hold in a segregated nominee account and keep records identifying each client's entitlement.

Compensation schemes: cover eligible claimants up to defined limits; inform clients of scope.

Vulnerability: identify and support clients in difficulty; record adjustments and avoid high-pressure tactics.

Complaints: log, acknowledge, investigate, and respond within the regulatory time limit; inform clients of escalation routes.

Client first: the client's interests take precedence over proprietary and personal interests; manage conflicts.

Competence: advise only within your knowledge and authorisation; refer complex products to specialists.

Confidentiality: protect client data and share only with consent or legal basis.

Record keeping: document advice, instructions, and rationale so decisions can be reconstructed.

Speak up: report suspected misconduct and protect reporters from retaliation.

Complex vs non-complex: non-complex products are liquid, transparent, and publicly priced; complex products require an appropriateness assessment.

Leverage: magnifies gains and losses; clients must understand margin calls and the risk of losing more than the deposit.

Illiquidity: match illiquid assets to clients with long horizons and adequate cash reserves.

Concentration: diversify across issuers, sectors, and geographies to reduce idiosyncratic risk.

Currency risk: unhedged foreign assets add exchange-rate exposure; the client's spending currency drives hedging.

Equity valuation: P/E, dividend discount, and P/B models; compare within sector and against growth.

Bond pricing: present value of coupons and principal at the yield; accrued interest added to clean price.

Yield measures: current yield (coupon/price) and yield to maturity (accounts for all cash flows and reinvestment).

Credit analysis: leverage, interest cover, cash flow stability, and seniority; ratings are opinions, not guarantees.

Portfolio risk: diversification reduces unsystematic risk; beta measures market sensitivity; correlation drives diversification benefit.