Global Securities Operations - Q&A

Questions answered Correctly

1. Which type of mandatory event may offer investors an option of how to receive the benefit?

A Stock split

B Dividend payment

C Bonus issue

D Capital repayment

Correct

Answer:

B

Explanation: Although a dividend is usually paid in cash, a company may offer shareholders the option of

being paid in shares (scrip dividend).

Syllabus Ref: Other Investor Services, Element 4.2: Corporate Actions

Book Ref: Chapter 4, Section 5.1.1

2. Which ONE of the following would NOT normally be a customer of a global custodian?

A A private individual

B Insurance company investment manager

C Private client broker

D A market maker

Correct

Answer:

A

Explanation: Customers of a global custodian are normally institutional investors, direct market participants or

portfolio managers. There may be some High Net Worth Individual investors who use global

custodian services, but relatively few private individuals will tend to do so.

Syllabus Ref: Main Industry Participants, Element 2.1: Investors and Custody Service Suppliers

Book Ref: Chapter 2, Sections 1 and 2

3. Which ONE of the following is NOT a reason for failed settlement?

A The trade instructions are unmatched

B The purchaser is buying in

C The seller may have insufficient securities to deliver

D A counterparty may have gone into liquidation

Correct

Answer:

B

Explanation: Settlement failure may be caused by a number of factors including a counterparty going into

liquidation, a seller having insufficient securities to deliver and trade instructions being

unmatched. A firm may instigate buying in procedures after settlement has failed.

Syllabus Ref: Settlement Characteristics, Element 3.1: Pre-Settlement

Book Ref: Chapter 3, Section 4.1

4. Which ONE of the following currencies is MOST likely to be used for an exchange between two

less-quoted currencies?

A Euro

B Japanese Yen

C US Dollar

D Sterling

Correct

Answer:

C

Explanation: For transactions between two less-quoted currencies, the US Dollar may be used to calculate a

cross rate.

Syllabus Ref: Settlement Characteristics, Element 3.2: Settlement


5. What would be the accrued interest on a $500,000 nominal Eurobond with a coupon of 6%

maturing in 2020 with a pay date of 1 March if the investor had sold his holding for settlement on

6 June using the 30/360 convention?

A $7,806

B $7,917

C $7,698

D $7,785

Correct

Answer:

B

Explanation: The calculation for accrued interest using the 30/360 convention is: Accrued interest = Nominal x

Interest / 100 x No. of days / 360. The number of days using the 30/360 convention for the period

from 2 March to 6 June is 95, as each month is regarded as having 30 days. The calculation is

$500,000 * 6% = $30,000. The interest accrues at $83.33 per day - 30,000/360. The accrued

interest is therefore £83.33 multipled by the number of days in the period (95) which equals

$7,916.66.

Syllabus Ref: Securities, Element 1.1: Securities

Book Ref: Chapter 1, Section 3.3.1`

6. What does it mean if a share is traded ex-dividend?

A The share includes the price of the previous dividend

B The buyer is entitled to the declared dividend

C The seller is entitled to the declared dividend

D The dividend can be converted into shares

Correct

Answer:

C

Explanation: If a security is purchased on or after the ex-date, the seller is entitled to the declared dividend

and the security is traded as ex-dividend.



7. Who is the legal owner of shares registered by a nominee?

A Nominee

B Investor

C Beneficiary

D Registrar

Correct

Answer:

A

Explanation: As far as the issuing company is concerned, the nominee name appearing on its share register

holds legal title to the share and is, thus, the legal owner of the shares for the purposes of

benefits and for voting. However, beneficial ownership continues to reside with the underlying

client.

Syllabus Ref: Other Investor Services, Element 4.1: Safekeeping

Book Ref: Chapter 4, Section 3

8. In which document would an investment manager find details of a US custodian's control

procedures?

A CSA N181-102

B SAS 70

C SEC 17f-5

D FRAG 21

Correct

Answer:

B

Explanation: A SAS 70 report in the US verifies that a service organisation has had its control activities

reviewed by an independent auditing firm. The comparable report in the UK is a FRAG 21.

Syllabus Ref: Risk, Element 6.1: Identifying and Managing Risk


9. Under single-currency trading, which ONE of the following is considered to be a disadvantage?

A Cash reconciliation and control processes are more complicated

B Counterparty risk is higher for multiple FX transactions

C Income receipts are changed into the base currency

D Investors get poor FX rates

Correct

Answer:

B

Explanation: Potential disadvantages of employing a single-currency account structure include a higher

probability of settlement risk and counterparty risk for multiple FX transactions.

Syllabus Ref: Other Investor Services, Element 4.3: Cash Management


10. Which ONE of the following provides a definition of RFP?

A Registration day for a securities holder to claim entitlement for voting privileges

B Determination of the accountability for the exchange of monies and securities between

counterparties to a transaction

C Returning securities to a central depository for trade settlement

D A questionnaire sent to a selection of global custodians asking about services, deadlines and

costs

Correct

Answer:

D

Explanation: A Request for Proposal (RFP) is a tendering process for buyers of global financial services.

Although the size and scope of the RFP will vary from client to client, this will generally represent

a lengthy questionnaire that will request background information on the custodian's staffing and

IT capacity, its track record and experience in the custody area, the strength of its existing client

base and assets under custody, its creditworthiness and record of recent losses.



12. Which ONE of the following can be regarded as an advantage of Actual Settlement Date

Accounting (ASDA)?

A Investors under ASDA need not lobby for improved market conditions

B ASDA allows purchasers to use their funds for a few more days

C ASDA allows funds to be debited or credited for good value

D ASDA enables sellers to use the funds early

Correct

Answer:

B

Explanation: ASDA refers to accounting procedures by which the proceeds of a securities sale are credited to

the seller's account, and the costs of a securities purchase are debited from the buyer's account,

on the date that a trade actually settles. This works in favour of the purchaser as, if trade

settlement is delayed, the buyer will not need to pay cash to settle the transaction until after the

proposed settlement date.



13. What is the settlement timing for Japanese government debt?

A T+4

B T+3

C T+2

D T+1

Correct

Answer:

B

Explanation: Settlement is T+3 for Japanese equities and government debt.

Syllabus Ref: Securities, Element 1.2: Principles of Trading


14. Which ONE of the following is NOT a characteristic of bond pricing?

A Accrued interest is subject to income tax

B Bonds with an S&P rating of BBB will have a lower price than those rated AAA

C Interest on eurobonds is subject to tax in the country where payment is effected

D A dirty price of a bond excludes accrued interest

Correct

Answer:

D

Explanation: A price that includes accrued interest is known as a dirty price. A clean price excludes accrued

interest.


Book Ref: Chapter 1, Sections 3, 3.1.4 and 3.2

15. Which date named by an issuer determines an investor's benefit entitlements?

A Settlement

B Value date

C Record date

D Trade date

Correct

Answer:

C

Explanation: The record date is the date named by an issuer that determines the eligibility of a shareholder to

receive a declared benefit.



16. Which ONE of the following instruments issued by companies allows holders voting rights?

A Non-cumulative preference shares

B Convertible bonds

C Cumulative preference shares

D Ordinary shares

Correct

Answer:

D

Explanation: Voting rights are a characteristic of ordinary shares. Bonds have no voting rights attached to

them and preference shares typically have no voting rights.



17. What is the settlement period for German equities via Clearstream Banking Frankfurt if only ONE

party is German?

A T+1

B T+4

C T+3

D T+2

Correct

Answer:

C

Explanation: The settlement cycle for equities and bonds in Germany is T+3 if one party is NOT German. If

both parties are German the settlement cycle is T+2.



18. What is the settlement period for Australian equities?

A T+3

B T+2

C T+1

D T+5

Correct

Answer:

A

Explanation: The settlement cycle is T+3 for both Australian equities and bonds.



19. Which ONE of the following types of gilt is exempt from tax when held by non-resident investors?

A Index-linked gilts

B Gilts held on a FOTRA basis

C Gilt strips

D Gilts maturing in less than five years

Correct

Answer:

B

Explanation: Interest from gilts held on FOTRA (Free of Tax to Residents Abroad) terms is exempt from tax

when held by non-resident investors.

Syllabus Ref: Aspects of Taxation, Element 5.1: General


21. Which ONE of the following is a characteristic of a foreign exchange swap?

A It is a single transaction combining one spot deal and one forward deal

B It can be arranged with different counterparties

C Delivery of both deals takes place within two business days

D It is a transaction where each counterparty pays the other counterparty's interest obligation on a

nominal amount

Correct

Answer:

A

Explanation: A foreign exchange swap is a single transaction combining one spot deal and one forward deal

for two different delivery dates with a single counterparty. The spot deal takes place at the spot

rate and the forward deal at the forward rate. Spot transactions are for delivery within two

business days.



22. Which ONE of the following provisions would NOT be included in a custody agreement?

A Liability and standards of care

B Reporting requirements

C Choice of technology to be used

D Receipt of the assets by the global custodian

Correct

Answer:

C

Explanation: The global custodian will negotiate a separate custody agreement with each customer. It will

include the legal conditions, the responsibilities, obligations and authorities under which the

custodian will act.



23. What is the settlement period for equities in Hong Kong?

A T+3

B T+1

C T+0

D T+2

Correct

Answer:

D

Explanation: The settlement period for Hong Kong equities is T+2.



24. Which ONE of the following stock events decreases the number of shares in issue and increases

the share price?

A Bonus issue

B Demerger

C Rights issue

D Consolidation

Correct

Answer:

D

Explanation: A consolidation reduces the number of shares in issue and increases the price of each share

without affecting the overall shareholder equity.



25. Which ONE of the following is a characteristic of order-driven trading?

A Both bid and offer prices are required to be displayed

B Matching of buyers and sellers can take place via a computerised system

C Shares are bought and sold through a market maker

D Only the buyer incurs a commission charge

Correct

Answer:

B

Explanation: In an order-driven market, matching might take place either on the floor of an exchange, via a

computerised system or both (see the table in Section 11 setting out the differences between

order-driven and quote-driven trading).



Questions Unanswered(U) or answered Incorrectly

11. Which ONE of the following is NOT a characteristic of unit trusts?

A Dealing costs are much less than buying the instruments individually

B They offer diversification into specialist areas

C Pricing of units is dependant on the underlying portfolio value

D Actively managed funds generally involve lower charges than passive funds

Answer

given:

C

Correct

Answer:

D

Explanation: Actively managed funds tend to have higher charges than passive funds although they may

generate a higher level of returns.



20. Which ONE of the following is NOT a custody service provided by Euroclear Bank?

A Assistance with corporate actions

B Administration of interest, dividend and redemption payments

C Exercise of warrants and other options

D Regulatory reporting

Answer

given:

C

Correct

Answer:

D

Explanation: Euroclear Bank provides a range of custody services including: assistance with corporate

actions; administration of interest, dividend and redemption payments; and exercise of warrants

and other options.

Syllabus Ref: Main Industry Participants, Element 2.2: ICSDs and CSDs



2. Which ONE of the following securities is NEVER held on a register?

A Immobilised

B Jumbo

C Bearer

D Dematerialised

Correct

Answer:

C

Explanation: For bearer securities, there is no share register. The issuer prints certificates and these are sent

to the investor in accordance with their holding, but the holder's name does not appear on the

security. Jumbo (or Global) certificates are often held in bearer form. However, in some

instances, smaller-denomination securities certificates may be consolidated into a single, jumbo

certificate that is registered. Registered securities can be held by CSDs as dematerialised or

immobilised.



3. Which ONE of the following used prior to settlement can reduce cost and risk?

A Trade-for-trade

B Rolling settlement

C Netting

D Fixed date settlement

Correct

Answer:

C

Explanation: Netting occurs when trading partners agree to offset their positions or obligations. By doing so,

they reduce a large number of individual positions to a smaller number of positions. This can

reduce transaction costs and communication expenses but is particularly important in reducing

credit and liquidity risks.



4. Clearstream's Creation via SWIFT offers which communication service to customers?

A Stand alone access via a web portal

B Real-time suite of connectivity channels

C Telex message connection

D ISO 15022 message-based connection

Correct

Answer:

D

Explanation: There are three main ways to access Clearstream's clearing, settlement and custody services.

Creation via SWIFT offers a message-based solution using ISO 15022. CreationConnect

provides a real-time suite of connectivity channels for users to link to Clearstream.

CreationOnline provides a stand alone web portal access. Telex is possible but rarely used.

Syllabus Ref: Main Industry Participants, Element 2.3: Communications and Technology


5. An investor's stock dividend payments were recently subject to withholding tax. This can be

reclaimed as a result of:

A The investor holding non-taxpayer status

B An indemnity underwriting being signed by the investor

C An appropriate double taxation treaty being in place

D The stock issuer agreeing to bear the cost of this tax

Correct

Answer:

C

Explanation: Investors may be eligible to reclaim withholding tax in instances where the governments of the

two countries involved have signed a double taxation agreement.




procedures?

A SAS 70

B FRAG 21

C SEC 17f-5

D CSA N181-102

Correct

Answer:

A






A The share includes the price of the previous dividend

B The seller is entitled to the declared dividend

C The buyer is entitled to the declared dividend


Correct

Answer:

B





8. Which ONE of the following methods for listing shares on the LSE does NOT involve underwriting

or raising capital?

A Introduction

B Offer for sale

C Placing

D Rights issue

Correct

Answer:

A

Explanation: An introduction does not involve the issue of new shares to raise capital but is used by

companies who already have a broad spread of shareholders and wish to list on the stock

exchange.



9. Which ONE of the following is the foreign exchange price normally reported in newspapers?

A Mid-price

B Offer price

C Bid price

D Spread

Correct

Answer:

A

Explanation: The mid-price is the average of the bid and offer prices. It is normally not quoted for trading but is

reported in the financial press to illustrate how currencies are moving in relation to each other.



11. Which ONE of the following may result from the failure to reconcile open trades?

A Missed instructions for corporate actions

B Unauthorised removal of securities

C Penalties may be imposed for short selling

D Errors in updating ownership records

Correct

Answer:

C

Explanation: Failure to reconcile open trades can affect many areas and one of the risks is that traders open

new positions when previous trading positions are not complete. In some markets there will be

penalties for short selling.



12. Which ONE of the following details is MOST likely to appear in a custody agreement between an

institutional investor and a global custodian?

A Code of practice certification

B Currency fluctuation exclusion provisions

C Professional indemnity insurance requirements

D Disaster recovery arrangements

Correct

Answer:

D

Explanation: A custody agreement is likely to address a range of issues, including the subject of business

contingency plans to cope with systemic malfunction or disaster.



13. Which ONE of the following is NOT considered part of the pre-settlement stage of the securities

cycle?

A Checking there is sufficient stock to deliver

B Investigating failed transactions

C Confirming transaction details by both parties

D Matching delivery instructions

Correct

Answer:

B

Explanation: A number of procedures and checks must be conducted pre-settlement. These include matching

the trade instructions supplied by each counterparty to ensure that the details they have supplied

for the trade correspond, and conducting checks to ensure that the seller has sufficient securities

to deliver and that the buyer has sufficient funds to cover the purchase cost. The investigation of

failed transactions takes place post-settlement.



14. Which ONE of the following markets has a settlement cycle of T+2 for both equities and debt?

A India

B Japan

C Australia

D South Korea

Correct

Answer:

A

Explanation: India has a settlement cycle of T+2 for both equities and debt.




A Nominee

B Investor

C Beneficiary

D Registrar

Correct

Answer:

A




client.



16. Which ONE of the following is considered an advantage of straight-through processing?

A Transaction confirmation information arrives faster

B Non-standard communication

C Legacy systems resulting from mergers

D Maintains existing settlement cycles

Correct

Answer:

A

Explanation: Straight-through processing (STP) is the automated passage of a financial transaction from

execution to settlement without manual intervention. One advantage of STP is its ability to

improve efficiency which results in transaction confirmations arriving faster.


Book Ref: Chapter 2, Sections 4 and 4.1

17. What would be the accrued interest on £500,000 6% Treasury 2013 with a pay date of 1

March/September 2011 if the investor sold his holding for settlement on 6 June 2011 using the

actual/actual convention?

A £ 7,950

B £ 8,031

C £ 8,082

D £ 7,973

Correct

Answer:

A

Explanation: The calculation for accrued interest using the actual/actual convention is: Accrued interest =

Nominal x coupon for the period x days of accrual/days in the coupon period. The number of

days on the coupon period is 183 days and the actual number of days in the period from 2 March

to 6 June is 97. Therefore: £500,000 X 3 /100 = coupon for the period of £15,000, The coupon for

the period of £15,000is then divided by the number of the days in the period (183) and then

multiplied by the number of days in the coupon period (97), so £15,000 x 97 /183 = £7,950.82.



18. Which ONE of the following is NOT a reason for market participants to borrow securities?

A To cover short positions

B To cover failure of settlements

C To support derivative activities

D To increase the size of their portfolio

Correct

Answer:

D

Explanation: It may be necessary to borrow securities to: cover a settlement fail; support derivative activities;

and cover short positions. A market participant would not, however, borrow securities in order to

increase the size of their portfolio.



19. Which ONE of the following stages of the settlement process typically only involves the broker?

A Positioning of cash and securities

B Settlement instructions

C Investigation of failed trades

D Trade execution

Correct

Answer:

D

Explanation: In the trade execution stage, the broker executes client's order with counterparty broker. The

broker also sends a confirmation to the investment manager to agree the trade before

instructions are passed to the custodian.



20. Which ONE of the following payment clearing systems requires members to hold an account at

the Bank of England?

A Fedwire

B TARGET

C CHIPS

D CHAPS

Correct

Answer:

D

Explanation: CHAPS (the Clearing House Automated Payment System) provides real-time gross settlement

services in Sterling. CHAPS members must hold a Sterling settlement account at the Bank of

England.



21. Which ONE of the following is the US numbering system for securities?

A SEDOL

B CUSIP

C ISIN

D ISO

Correct

Answer:

B

Explanation: A CUSIP (Committee on Uniform Security Identification Procedures) number is used to identify

securities issued in the US and Canada. SEDOL is the Stock Exchange Daily Official List number

used in the UK. The International Organisation for Standardisation (ISO) has introduced

International Securities Identification Numbers (ISINs) as an international system.



23. Which ONE of the following is NOT part of the role performed by a global custodian?

A Share issuance to raise finance

B Performance measurement

C Risk analysis

D Securities lending

Correct

Answer:

A

Explanation: Some investors use their global custodians to provide a wide suite of services, including

securities lending, and performance and risk analysis on the investor's portfolio. However, the

role of a custodian does not include raising capital for companies.



24. Which ONE of the following is usually a right of holders of preference shares?

A The right to a fixed amount as a dividend

B The right to receive payment before creditors if a company goes into liquidation

C The right to share in the profits of the company

D The right to vote at shareholder meetings

Correct

Answer:

A

Explanation: Preference shareholders have no voting rights; they are typically paid a fixed dividend per share,

which is established at the time of issue and does not increase with rising profits of the company;

and, although they do take preference over ordinary shareholders for payments following

liquidation, creditors of the company would receive payment before preference shareholders.






A $7,785

B $7,806

C $7,917

D $7,698

Correct

Answer:

C






$7,916.66.




A T+2

B T+1

C T+3

D T+0

Correct

Answer:

A




30. An investment manager has a portfolio with assets in the US and UK markets at a value of

US$750 million. What is the 'Ad Valorem' fee charged at a rate of 1 basis point?

A $7,500,000

B $750,000

C $75,000

D $7,500

Correct

Answer:

C

Explanation: The fee paid by the investment manager will be: $750,000,000 x 0.01 / 100 = $75,000.



32. How does trading take place on the NASDAQ exchange?

A Order-driven and market makers

B Computerised quote-driven

C Open outcry

D Order-driven only

Correct

Answer:

A

Explanation: The NASDAQ exchange uses a hybrid trading system where market makers compete with the

order-driven system.



33. Which SEC Rule associated with the legal separation of custody and investment applies to US

investors?

A 7a-2

B 17f-5

C 12d-5

D 21a-7

Correct

Answer:

B

Explanation: The legal separation of custody and investment is frequently referred to by its clause number

within the custody industry. The two SEC Rules are 17f-5 and 17f-7.



36. If a trading screen price is quoted as GBP/USD 1.6415-19, what is the offer price for buying GBP

1.00?

A US$ 1.6396

B US$ 1.6415

C US$ 1.6434

D US$ 1.6419

Correct

Answer:

D

Explanation: The last two digits of the price represents the offer price component of the main price.



38. When can American-style covered warrants be exercised?

A At any time on or before their expiry date

B Only on their expiry date

C Only on a specified date before their expiry date

D Two business days before their expiry date

Correct

Answer:

A

Explanation: American-style covered warrants can be exercised at any time on or before their expiry date.

European-style covered warrants can only be exercised on their expiry date.



39. What occurs at the same time a trade is registered with a central counterparty?

A Tender

B Delivery

C Exercise

D Novation

Correct

Answer:

D

Explanation: A central counterparty interposes itself between the counterparties to a trade, becoming the

buyer to every seller and the seller to every buyer. As a result, buyer and seller interact with the

central counterparty and remain anonymous to each other. This process is known as novation.



40. What did the Basel II Accord seek to do?

A Explicitly address the problem of operational risk

B Increase the level of settlement standards globally

C Set specific targets for the introduction of multilateral netting arrangements

D Improve reporting of accounting standards

Correct

Answer:

A

Explanation: The Basel Committee was established to identify sources of risk and formulate strategies for the

protection against risk in the banking industry. The three primary areas addressed by Basel II are

credit risk, market risk and operational risk.




A Cumulative preference shares

B Convertible bonds

C Non-cumulative preference shares

D Ordinary shares

Correct

Answer:

D





42. What is the main purpose of a FRAG 21 report?

A A review of compliance with SEC rules for safe custody procedures

B A summary of settlement performance with CSDs and ICSDs

C A report on a custodian's policy on dealing with settlement risk

D An independently audited record of a custodian's internal controls

Correct

Answer:

D

Explanation: In the UK, a FRAG 21 report is an independently audited record of the internal controls employed

by investment custodians.




the share price?

A Demerger

B Consolidation

C Rights issue

D Bonus issue

Correct

Answer:

B






Accounting (ASDA)?

A Investors under ASDA need not lobby for improved market conditions

B ASDA allows funds to be debited or credited for good value

C ASDA enables sellers to use the funds early

D ASDA allows purchasers to use their funds for a few more days

Correct

Answer:

D








45. Which ONE of the following is a characteristic of covered warrants?

A Maturities typically over several years

B No new shares issued on exercise

C Restricted liquidity

D Issued by a company over its own shares

Correct

Answer:

B

Explanation: When a covered warrant is exercised there is no issue of new shares; an equivalent value

payment is made to the warrant holder in cash.



46. 'Ad Valorem' fees levied by global custodians are based on:

A The transaction volume per market

B The number of transactions (only)

C The value of assets held and number of transactions undertaken

D The value of assets held (only)

Correct

Answer:

D

Explanation: An 'Ad Valorem' fee is also known as a basis point fee, and is calculated on the value of the

assets held with the custodian. A transaction fee will be charged according to the number of

settlement transactions that the custodian processes on behalf of the client.



48. Which ONE of the following countries imposes few limits on the percentage of foreign ownership,

except in the case of television companies?

A UK

B US

C France

D Hong Kong

Correct

Answer:

D

Explanation: Many countries put up barriers to foreign investors, despite being committed to free movement of

capital. Hong Kong has few restrictions except for television broadcasting companies.


Book Ref: Chapter 6, Appendix A

49. Omgeo's Oasys system operates as an international:

A Clearing system

B Settlement system

C Payment system

D Trade confirmation system

Correct

Answer:

D

Explanation: Oasys, operated by Omgeo provides a centralised matching and communication system.




A Bonds with an S&P rating of BBB will have a lower price than those rated AAA

B A dirty price of a bond excludes accrued interest

C Accrued interest is subject to income tax

D Interest on eurobonds is subject to tax in the country where payment is effected

Correct B

Answer:


interest.




1. In what form are US equities normally held by institutions?

A Immobilised form

B Dematerialised form

C Bearer form

D Registered certificated form

Answer

given:

B

Correct

Answer:

A

Explanation: US securities held by institutions are predominantly in immobilised form - about 85 per cent of all

shares are immobilised at the Depository Trust Company (DTC).


Book Ref: Chapter 2, Sections 3.2 and 3.3

10. Which ONE of the following forms of settlement enables the offset of positions between the same

parties?

A Bilateral netting

B Continuous net settlement

C Real-time gross settlement

D Trade-for-trade settlement

Answer

given:

B

Correct

Answer:

A

Explanation: Netting occurs when trading partners agree to offset their positions or obligations. Bilateral

netting offsets trades between the same two counterparties in the same security. Continuous net

settlement covers all trades in the same security by any number of counterparties. Trade-for-

trade settlement, or gross settlement, is where each trade is settled separately and

independently of each other. Real-time gross settlement (RTGS) is the continuous gross

settlement of individual trades with no netting of positions.



22. Which ONE of the following would be classed as a Yankee bond?

A A US Dollar bond issued in the US by a US company

B A US Dollar bond issued in Europe by a US company

C A US Dollar bond issued in Europe by a European company

D A US Dollar bond issued in the US by a European company

Answer

given:

B

Correct

Answer:

D

Explanation: A Yankee bond is a US Dollar bond issued in the US by a foreign issuer.



26. Who is responsible for instructing how proxy votes are to be cast?

A The beneficial owner

B The nominee

C The custodian

D The registered owner

Answer

given:

D

Correct

Answer:

A

Explanation: The investor, or beneficial owner, makes the decision on how to cast proxy votes.



28. The Continuous Linked Settlement (CLS) system is unable to reduce the settlement risk caused

by which ONE of the following?

A Legal jurisdiction

B Differences in time zones

C Operating procedures

D Interbank settlement

Answer

given:

B

Correct

Answer:

D

Explanation: The CLS initiative is a real-time global settlement system designed to eliminate settlement risk

and to reduce the systemic liquidity risk in the foreign exchange market. It cannot reduce delays

caused by language difficulties.



29. The International Securities Identification Number (ISIN) system was designed to overcome

which ONE of the following?

A Regulatory restrictions

B Confusion over securities classification

C Problems with defaulting parties

D Barriers to cross-border communication

Answer

given:

B

Correct

Answer:

D

Explanation: The ISIN numbering convention was introduced to harmonise the array of country-specific

numbering systems that had grown up at the domestic level.



31. At what rate would an investor pay additional income tax on dividend income that exceeds the

higher rate tax limit in 2010/11?

A 32.5%

B 22.5%

C 42.5%

D 10%

Answer

given:

D

Correct

Answer:

A

Explanation: In the 2010/11 tax year, investors will pay a total of 42.5% tax on dividend income that exceeds

the higher rate income tax limit (currently £150,000). But because the first 10% of the tax due on

this dividend income is already covered by the tax credit, in practice, the investor will pay 32.5%

tax on the gross amount of dividend income falling into this higher rate tax band.



34. When a global custodian performs all the services itself, what documentation is required?

A A service level agreement for each area of service offered

B A custody agreement and a subcustody agreement

C A custody agreement only

D A service level agreement and a subcustody agreement

Answer

given:

A

Correct

Answer:

C

Explanation: The custody agreement is with the customer and if a global custodian contracts with a

subcustodian there must be a contract for that. The service level agreement sets out the detailed

specification for the service offered.



35. Which ONE of the following is NOT a valid Euroclear Bank settlement method?

A Linked settlement

B Bridge settlement

C External settlement

D Internal settlement

Answer

given:

B

Correct

Answer:

A

Explanation: There are three ways that settlement can take place within Euroclear Bank: Internal, Bridge and

External.



37. Which ONE of the following is an advantage of using a bank's own branches for custody services

overseas?

A Ability to provide the best service

B Ability to provide the most competitive price

C Flexibility of choice

D Common technology

Answer

given:

A

Correct

Answer:

D

Explanation: The most obvious benefit should be the common technology as the use of own branches limits

choice and may not offer the best service or price.


Book Ref: Chapter 2, Sections 2.1.1 and 2.1.2

47. Which ONE of the following activities usually takes place in the post-settlement stage of the

securities cycle?

A Execution of client instructions

B Matching of trade instructions

C Buying in procedures

D Transfer of ownership

Answer

given:

D

Correct

Answer:

C

Explanation: The post-settlement stage entails management of failed transactions and the subsequent

accounting of trades. This therefore covers buying in, which may be instigated against a firm who

has failed to settle a transaction. Execution of client instructions takes place at the trading stage.

The pre-settlement stage includes matching of trade instructions and the transfer of ownership

takes place at the settlement stage.




1. Which ONE of the following is NOT a characteristic of unit trusts?

A They offer diversification into specialist areas

B Dealing costs are much less than buying the instruments individually

C Actively managed funds generally involve lower charges than passive funds

D Pricing of units is dependant on the underlying portfolio value

Correct

Answer:

C

Explanation: Actively managed funds tend to have higher charges than passive funds although they may

generate a higher level of returns.



2. Which ONE of the following would be classed as a Yankee bond?

A A US Dollar bond issued in the US by a US company

B A US Dollar bond issued in the US by a European company

C A US Dollar bond issued in Europe by a US company

D A US Dollar bond issued in Europe by a European company

Correct

Answer:

B

Explanation: A Yankee bond is a US Dollar bond issued in the US by a foreign issuer.



3. Which ONE of the following is a characteristic of a Real Estate Investment Trust (REIT)?

A It is subject to tax on capital gains

B It provides capital growth only

C It is restricted only to commercial property

D It can provide exposure to overseas property assets

Correct

Answer:

D

Explanation: Real estate investment trusts (REITs) are listed investment trusts through which investors

purchase exposure to investments in the real estate sector. A pool of investors' money is

invested in real estate assets. Listed real estate trusts have been available on the Australian

Stock Exchange since the 1970s. REITs have also attracted strong money flows in recent years

in the US (in parallel with the unlisted property fund marketplace), Hong Kong, Japan, Taiwan,

the Netherlands and a range of other jurisdictions.



4. How does the Nouveau SystŠme de Cotation (NSC) trading system used by Euronext operate?

A Hybrid

B Open outcry

C Quote-driven

D Order-driven

Correct

Answer:

D

Explanation: Trading on Euronext is via the Nouveau SystŠme de Cotation (NSC), which is an order-driven

system.



5. How does trading take place on the NASDAQ exchange?

A Order-driven only

B Open outcry

C Computerised quote-driven

D Order-driven and market makers

Correct

Answer:

D

Explanation: The NASDAQ exchange uses a hybrid trading system where market makers compete with the

order-driven system.



6. What is the settlement period for French bonds?

A T+5

B T+3

C T+2

D T+1

Correct

Answer:

B

Explanation: The settlement cycle for French bonds is at T+3.



8. What is the periodic interest rate declared on a bond known as?

A Gilt-edge

B Coupon

C Yield to maturity

D Dividend

Correct

Answer:

B

Explanation: The periodic interest payments made to investors holding bonds is known as the coupon.



9. Which ONE of the following methods for listing shares on the LSE does NOT involve underwriting

or raising capital?

A Placing

B Offer for sale

C Introduction

D Rights issue

Correct

Answer:

C

Explanation: An introduction does not involve the issue of new shares to raise capital but is used by

companies who already have a broad spread of shareholders and wish to list on the stock

exchange.



10. What is the settlement period for Australian equities?

A T+3

B T+2

C T+1

D T+5

Correct

Answer:

A

Explanation: The settlement cycle is T+3 for both Australian equities and bonds.






A $7,785

B $7,698

C $7,917

D $7,806

Correct

Answer:

C






$7,916.66.




A Cumulative preference shares

B Ordinary shares

C Convertible bonds

D Non-cumulative preference shares

Correct

Answer:

B





13. Which ONE of the following characteristics applies to bonds?

A Bonds are a form of short-term security

B A convertible bond allows the owner to exchange it for other securities in the future

C An owner of a bearer bond appears on the records of the issuer

D An unsecured bond is backed by collateral and the full credit of the issuer

Correct

Answer:

B

Explanation: A convertible bond is a bond that gives the holder the right, but not the obligation, to convert the

bond into a specified number of underlying shares of the issuing company. Unsecured bonds are

not backed by collateral; a holder of a bearer bond is not registered as the owner; and bonds can

be classified as short, medium or long maturity.



14. Which ONE of the following is a feature of over-the-counter (OTC) trading?

A Pricing is transparent

B OTC instruments have a low liquidity risk

C Instruments can be tailored to the specific needs of a buyer

D Disputes can be settled by the FSA

Correct

Answer:

C

Explanation: Instruments are often tailored to the specific needs of a buyer and therefore cannot be traded

easily. Disputes may go to a court for settlement. Pricing is more complex than for on-exchange

transactions.



15. What is the settlement timing for Japanese government debt?

A T+4

B T+1

C T+2

D T+3

Correct

Answer:

D

Explanation: Settlement is T+3 for Japanese equities and government debt.



16. Which ONE of the following is the London Stock Exchange's numbering code?

A CUSIP

B SEDOL

C ISO

D ISIN

Correct

Answer:

B

Explanation: SEDOL (or Stock Exchange Daily Official List) is the London Stock Exchange's numbering code.



17. What is an ISIN used for?

A As the US code for identifying each security

B As the UK code for identifying each security

C As the stock ticker to identify a security traded on a market

D As the international code for identifying each security

Correct

Answer:

D

Explanation: ISINs (International Securities Identification Numbers) were introduced by the International

Organisation for Standardisation (ISO) to allocate each security in each country a unique

number. Each security in the US is identified by a CUSIP number and the UK uses SEDOL

numbers.



18. Which ONE of the following is the US numbering system for securities?

A SEDOL

B ISO

C CUSIP

D ISIN

Correct

Answer:

C

Explanation: A CUSIP (Committee on Uniform Security Identification Procedures) number is used to identify

securities issued in the US and Canada. SEDOL is the Stock Exchange Daily Official List number

used in the UK. The International Organisation for Standardisation (ISO) has introduced

International Securities Identification Numbers (ISINs) as an international system.



20. Which ONE of the following products is normally classed as a discount bond?

A Convertible bond

B Index-linked bond

C Eurobond

D Zero coupon bond

Correct

Answer:

D

Explanation: Discount bonds are issued at a price that represents a discount to the redemption price at

maturity. Zero coupon bonds represent one form of discount security.


Book Ref: Chapter 1, Sections 3.1.6

22. Which ONE of the following is usually a right of holders of preference shares?

A The right to receive payment before creditors if a company goes into liquidation

B The right to a fixed amount as a dividend

C The right to vote at shareholder meetings

D The right to share in the profits of the company

Correct

Answer:

B

Explanation: Preference shareholders have no voting rights; they are typically paid a fixed dividend per share,

which is established at the time of issue and does not increase with rising profits of the company;

and, although they do take preference over ordinary shareholders for payments following

liquidation, creditors of the company would receive payment before preference shareholders.



23. Which ONE of the following is a characteristic of covered warrants?

A No new shares issued on exercise

B Issued by a company over its own shares

C Maturities typically over several years

D Restricted liquidity

Correct

Answer:

A

Explanation: When a covered warrant is exercised there is no issue of new shares; an equivalent value

payment is made to the warrant holder in cash.



24. Which ONE of the following is a characteristic of order-driven trading?

A Matching of buyers and sellers can take place via a computerised system

B Both bid and offer prices are required to be displayed

C Shares are bought and sold through a market maker

D Only the buyer incurs a commission charge

Correct

Answer:

A

Explanation: In an order-driven market, matching might take place either on the floor of an exchange, via a

computerised system or both (see the table in Section 11 setting out the differences between

order-driven and quote-driven trading).



25. Which ONE of the following is a characteristic of warrants?

A They give the holder the obligation to buy the underlying share

B They must be held until expiry date

C They can be traded on an exchange

D They are traded at the strike price

Correct

Answer:

C

Explanation: Warrants can be bought and sold on exchanges in the same way as equities. However, instead

of owning a part of the company, the warrant gives the holder the right, but not the obligation, to

buy (or sell) the underlying share at a point in the future (up to the expiry date of the warrant) and

at a predetermined price (the strike price). The price at which a warrant trades in the market,

though, will be related to the current share price and the expectation of what the share price will

do before the warrant expires.



26. What is the settlement period for UK Gilts?

A T+0

B T+2

C T+3

D T+1

Correct

Answer:

D

Explanation: The settlement cycle for Gilts is T+1.



27. What would be the accrued interest on £500,000 6% Treasury 2013 with a pay date of 1

March/September 2011 if the investor sold his holding for settlement on 6 June 2011 using the

actual/actual convention?

A £ 8,082

B £ 8,031

C £ 7,973

D £ 7,950

Correct

Answer:

D

Explanation: The calculation for accrued interest using the actual/actual convention is: Accrued interest =

Nominal x coupon for the period x days of accrual/days in the coupon period. The number of

days on the coupon period is 183 days and the actual number of days in the period from 2 March

to 6 June is 97. Therefore: £500,000 X 3 /100 = coupon for the period of £15,000, The coupon for

the period of £15,000is then divided by the number of the days in the period (183) and then

multiplied by the number of days in the coupon period (97), so £15,000 x 97 /183 = £7,950.82.



28. When an individual buys bonds in the UK, why must the dirty price be calculated separately from

the clean price?

A The registrar must know if the trade date is after or before the ex-date

B Accrued interest may be subject to capital gains tax

C The dirty price only gives a simple calculation of the true market value

D Accrued interest is subject to income tax laws

Correct

Answer:

D

Explanation: The transaction price quoted for a debt security excluding accrued interest is the clean price and

a price quoted that includes accrued interest is the dirty price. Under UK tax law, the clean price

and accrued interest must be quoted separately for accounting and tax declaration purposes, as

the capital value will be subject to capital gains tax rules, whereas any accrued interest will be

taxed under income tax rules.




A Interest on eurobonds is subject to tax in the country where payment is effected

B Bonds with an S&P rating of BBB will have a lower price than those rated AAA

C A dirty price of a bond excludes accrued interest

D Accrued interest is subject to income tax

Correct

Answer:

C


interest.



30. What is the settlement period for French equities?

A T+2

B T+1

C T+5

D T+3

Correct

Answer:

D

Explanation: Settlement for French equities is on a T+3 basis via Euroclear France.



31. When is a warrant said to be in-the-money?

A When the share price is higher than the strike price

B When the share price is the same as the strike price

C When the premium price is the same as the strike price

D When the share price is lower than the strike price

Correct

Answer:

A

Explanation: A warrant is said to be in-the-money if the share price is higher than the strike price and out-of-

the-money if the share price is lower than the strike price.



32. Which ONE of the following NEVER requires a register to be altered to transfer ownership?

A Registered stocks

B Bearer stocks

C CREST stocks

D Immobilised stocks

Correct

Answer:

B

Explanation: A bearer security is a security where no registration of ownership is required and proof of

ownership lies in physical possession of the security certificate. Change of ownership for bearer

stocks is therefore the transfer of the certificate from the old owner to the new owner. There is no

register to be altered.



33. Which ONE of the following is suitable for investors wishing to hold foreign company shares but

who wish to receive dividends in their local currency?

A Convertible preference shares

B Debentures

C Warrants

D Depositary receipts

Correct

Answer:

D

Explanation: Depositary receipts are traded in the local market and dividends are paid in local currency. The

securities are held on deposit with the bank or depository.




A T+3

B T+0

C T+2

D T+1

Correct

Answer:

C




35. Which ONE of the following would NOT be paid before preference shareholders when a

company goes into liquidation?

A Subordinated loan stocks

B Fixed-rate bonds secured on the assets of the company

C Floating rate bonds secured on the assets of the company

D Ordinary shareholders

Correct

Answer:

D

Explanation: Ordinary shareholders are the last to be paid out of any proceeds from the liquidation of a

company.



36. Which ONE of the following is the trading system used by the London Stock Exchange?

A NETS

B SETS

C SEATS

D NSC

Correct

Answer:

B

Explanation: Trading on the London Stock Exchange is via SETS (the Stock Exchange Electronic Trading

System).



37. When can American-style covered warrants be exercised?

A Two business days before their expiry date

B Only on a specified date before their expiry date

C Only on their expiry date

D At any time on or before their expiry date

Correct

Answer:

D

Explanation: American-style covered warrants can be exercised at any time on or before their expiry date.

European-style covered warrants can only be exercised on their expiry date.



38. Which ONE of the following markets has a settlement cycle of T+2 for both equities and debt?

A Japan

B Australia

C India

D South Korea

Correct

Answer:

C

Explanation: India has a settlement cycle of T+2 for both equities and debt.



39. The International Securities Identification Number (ISIN) system was designed to overcome

which ONE of the following?

A Problems with defaulting parties

B Confusion over securities classification

C Barriers to cross-border communication

D Regulatory restrictions

Correct C

Answer:

Explanation: The ISIN numbering convention was introduced to harmonise the array of country-specific

numbering systems that had grown up at the domestic level.




7. Which type of preference share gives holders the right to receive additional dividends?

A Participating

B Convertible

C Cumulative

D Redeemable

Answer

given:

C

Correct

Answer:

A

Explanation: Participating preference shares give holders the right to participate in, or receive, additional

dividends over and above the fixed percentage dividend.



19. On which UK market can shares in small companies be listed and traded?

A SETS

B SWX Europe

C AIM

D AMEX

Answer

given:

A

Correct

Answer:

C

Explanation: The shares of small companies are listed and traded on the LSE's Alternative Investment Market

(AIM).



21. What is the settlement period for German equities via Clearstream Banking Frankfurt if only ONE

party is German?

A T+3

B T+1

C T+2

D T+4

Answer

given:

C

Correct

Answer:

A

Explanation: The settlement cycle for equities and bonds in Germany is T+3 if one party is NOT German. If

both parties are German the settlement cycle is T+2.




2. Which ONE of the following activities is NOT regarded as a custody service?

A Funds transference

B Tax validation

C Safekeeping services

D Dividend collection reporting

Correct

Answer:

A

Explanation: Transference of funds is part of the main function of clearing and settlement operations.



3. Which ONE of the following is an advantage of using a bank's own branches for custody services

overseas?

A Flexibility of choice

B Common technology

C Ability to provide the best service

D Ability to provide the most competitive price

Correct

Answer:

B

Explanation: The most obvious benefit should be the common technology as the use of own branches limits

choice and may not offer the best service or price.



4. Which ONE of the following benefited from implementing ISO 15022 messaging standards?

A G30

B SWIFT

C ISITC

D ERISA

Correct

Answer:

B

Explanation: SWIFT was heavily involved in the implementation of the ISO 15022 messaging standards,

introduced in November 2002, which established a common format for securities-related

messages. Subsequently, it has also been active in promoting adoption of the newer and more

flexible ISO 20022 standard messaging over its network, which ultimately is likely to be the

successor to ISO 15022 standard financial services messaging.



6. Which ONE of the following services does the CreationOnline package provide?

A Validation of instructions

B Regulatory reporting

C Portfolio valuations

D Pricing information

Correct

Answer:

A

Explanation: Clearstream's clearing, settlement and custody services can be accessed through the

CreationOnline package. This includes instruction validation.



7. Which ONE of the following is NOT a valid Euroclear Bank settlement method?

A Bridge settlement

B External settlement

C Linked settlement

D Internal settlement

Correct

Answer:

C

Explanation: There are three ways that settlement can take place within Euroclear Bank: Internal, Bridge and

External.



8. Who normally employs a subcustodian?

A A local custodian

B A reciprocal custodian

C A regional custodian

D A global custodian

Correct

Answer:

D

Explanation: A subcustodian is employed by a global custodian as its local agent to provide settlement and

custody services for assets that it holds on behalf of investor clients in a foreign market.



9. Which ONE of the following details is MOST likely to appear in a custody agreement between an

institutional investor and a global custodian?

A Disaster recovery arrangements

B Currency fluctuation exclusion provisions

C Professional indemnity insurance requirements

D Code of practice certification

Correct

Answer:

A

Explanation: A custody agreement is likely to address a range of issues, including the subject of business

contingency plans to cope with systemic malfunction or disaster.



10. Which ONE of the following provides a definition of RFP?

A Registration day for a securities holder to claim entitlement for voting privileges

B A questionnaire sent to a selection of global custodians asking about services, deadlines and

costs

C Determination of the accountability for the exchange of monies and securities between

counterparties to a transaction

D Returning securities to a central depository for trade settlement

Correct

Answer:

B



a lengthy questionnaire that will request background information on the custodian's staffing and

IT capacity, its track record and experience in the custody area, the strength of its existing client

base and assets under custody, its creditworthiness and record of recent losses.



11. Which ONE of the following would NOT normally be a customer of a global custodian?

A Insurance company investment manager

B A market maker

C Private client broker

D A private individual

Correct

Answer:

D

Explanation: Customers of a global custodian are normally institutional investors, direct market participants or

portfolio managers. There may be some High Net Worth Individual investors who use global

custodian services, but relatively few private individuals will tend to do so.


Book Ref: Chapter 2, Sections 1 and 2

12. Which ONE of the following is considered an advantage of straight-through processing?

A Non-standard communication

B Transaction confirmation information arrives faster

C Legacy systems resulting from mergers

D Maintains existing settlement cycles

Correct B

Answer:


execution to settlement without manual intervention. One advantage of STP is its ability to

improve efficiency which results in transaction confirmations arriving faster.



13. Which ONE of the following is the name of the communication system operated by Clearstream?

A CHIPS

B CEDCOM

C CATS

D CREATION

Correct

Answer:

D

Explanation: The communication system operated by Clearstream is called CREATION.


Book Ref: Chapter 2, Sections 3.3 and 3.4.2

14. Computer-to-computer linkages reducing human error are benefits of:

A Multilateral netting

B Delivery versus payment

C Straight-through processing

D SWIFT messaging

Correct

Answer:

C

Explanation: Straight-through processing is the automated passage of a financial transaction from execution to

settlement without manual intervention. The ability for data to move from a client to custodian

mainframe without re-keying data creates a timely, efficient and relatively risk-free process.



16. In what form are US equities normally held by institutions?

A Immobilised form

B Registered certificated form

C Dematerialised form

D Bearer form

Correct

Answer:

A

Explanation: US securities held by institutions are predominantly in immobilised form - about 85 per cent of all

shares are immobilised at the Depository Trust Company (DTC).


Book Ref: Chapter 2, Sections 3.2 and 3.3

17. Which ONE of the following depositories handles US corporate stock?

A FED

B DTC

C FICC

D ASTC

Correct

Answer:

B

Explanation: The Depository Trust Company (DTC) provides depository services for corporate stocks and

registered bonds. The Federal Reserve Bank (FED) provides depository services for the majority

of US Government bonds and securities issued by federal agents and mortgage-backed

securities. The Fixed Income Clearing Corporation (FICC) clears US Government debt securities.

ASTC is the Australian Stock Exchange Settlement and Transfer Corporation.



19. Which ONE of the following institutions would an institutional investor employ for the safe keeping

of financial instruments?

A Custodian

B Retail bank

C Broker

D Investment bank

Correct

Answer:

A

Explanation: When an institutional investor invests in securities it will commonly employ the services of a

custodian to administer these securities by performing a number of services including providing

safekeeping of the investor's assets in the local market. The other institutions also do this but it is

not their primary specialism.



20. Which ONE of the following provisions would NOT be included in a custody agreement?

A Choice of technology to be used

B Liability and standards of care

C Receipt of the assets by the global custodian

D Reporting requirements

Correct

Answer:

A

Explanation: The global custodian will negotiate a separate custody agreement with each customer. It will

include the legal conditions, the responsibilities, obligations and authorities under which the

custodian will act.



21. Which ONE of the following is NOT part of an ICSD's historical role?

A Local client base

B Cross-border activity

C Collateral management

D Settlement

Correct

Answer:

A

Explanation: International Central Securities Depositories (ICSDs) have a different role to Central Securities

Depositories (CSDs) in national markets.



22. Clearstream's Creation via SWIFT offers which communication service to customers?

A Real-time suite of connectivity channels

B Telex message connection

C ISO 15022 message-based connection

D Stand alone access via a web portal

Correct

Answer:

C

Explanation: There are three main ways to access Clearstream's clearing, settlement and custody services.

Creation via SWIFT offers a message-based solution using ISO 15022. CreationConnect

provides a real-time suite of connectivity channels for users to link to Clearstream.

CreationOnline provides a stand alone web portal access. Telex is possible but rarely used.



23. Which ONE of the following is NOT part of the role performed by a global custodian?

A Share issuance to raise finance

B Risk analysis

C Performance measurement

D Securities lending

Correct

Answer:

A

Explanation: Some investors use their global custodians to provide a wide suite of services, including

securities lending, and performance and risk analysis on the investor's portfolio. However, the

role of a custodian does not include raising capital for companies.



24. Which ONE of the following would you least expect to find in an RFP?

A Organisational structure

B Pricing structure

C Subcustodian network

D Safekeeping

Correct

Answer:

A


Although the size and scope of the RFP will vary from client to client, the core elements tend to

be:

• background of the custodian;

• service capacity;

• account, reporting and settlement processing;

• safekeeping;

• cash management and FX;

• subcustodian network;

• pricing structure; and

• value added services.



25. In the mid-1970s which event had far-reaching affects for global custodians?

A The US government restricted US banks to custodian functions in their own country

B Scottish banks entered the global custody business

C US pension funds became custodians of their own funds

D ERISA legislation became law

Correct

Answer:

D

Explanation: In the mid-1970's the US Government passed the Employment Retirement Income Security Act

(ERISA). This specified that US pension funds could not act as custodians of the assets held in

their own funds.



26. Which ONE of the following is NOT a custody service provided by Euroclear Bank?

A Assistance with corporate actions

B Exercise of warrants and other options

C Administration of interest, dividend and redemption payments

D Regulatory reporting

Correct

Answer:

D

Explanation: Euroclear Bank provides a range of custody services including: assistance with corporate

actions; administration of interest, dividend and redemption payments; and exercise of warrants

and other options.



27. When a global custodian performs all the services itself, what documentation is required?

A A custody agreement and a subcustody agreement

B A custody agreement only

C A service level agreement for each area of service offered

D A service level agreement and a subcustody agreement

Correct

Answer:

B

Explanation: The custody agreement is with the customer and if a global custodian contracts with a

subcustodian there must be a contract for that. The service level agreement sets out the detailed

specification for the service offered.



28. Which ONE of the following securities is NEVER held on a register?

A Dematerialised

B Bearer

C Immobilised

D Jumbo

Correct

Answer:

B

Explanation: For bearer securities, there is no share register. The issuer prints certificates and these are sent

to the investor in accordance with their holding, but the holder's name does not appear on the

security. Jumbo (or Global) certificates are often held in bearer form. However, in some

instances, smaller-denomination securities certificates may be consolidated into a single, jumbo

certificate that is registered. Registered securities can be held by CSDs as dematerialised or

immobilised.




1. Which ONE of the following is NOT considered a benefit of straight-through processing

practices?

A Reduce counterparty risk

B Increase cross-border third party settlements

C Reduce settlement fails

D Speed up transaction confirmation information

Answer A

given:

Correct

Answer:

B


execution to settlement without manual intervention. STP is important for its ability to improve

efficiency, reduce risk and fails and can also eliminate the need for cross-border third party

settlements.



5. Which of the following would you not expect to see included in a subcustody agreement?

A Subcustodians will usually be banks in the foreign country concerned

B Agreements will comply with the local market regulations

C Subcustody agreements are used between the global custodian and the subcustodian

D Detailed specifications on standards of service

Answer

given:

A

Correct

Answer:

D

Explanation: Detailed specifications on standards of service would be contained ina SLA.



15. Which ONE of the following is SWIFT's message type category 5?

A Financial Trading (FX, Loans, SWAPS etc)

B Financial Trading (Securities)

C Financial Institution Transfers

D Documentary Credits and Guarantees

Answer

given:

C

Correct

Answer:

B

Explanation: SWIFT message type 5 relates to Financial Trading (Securities).



18. What additional role could a bank that provides domestic custody in its own country undertake?

A ICSDs

B Subcustodians

C CSDs

D Pension funds

Answer

given:

C

Correct

Answer:

B

Explanation: A bank offering custody in its own country may act as subcustodian for an overseas global

custodian.




1. What did the Basel II Accord seek to do?

A Improve reporting of accounting standards

B Explicitly address the problem of operational risk

C Increase the level of settlement standards globally

D Set specific targets for the introduction of multilateral netting arrangements

Correct

Answer:

B

Explanation: The Basel Committee was established to identify sources of risk and formulate strategies for the

protection against risk in the banking industry. The three primary areas addressed by Basel II are

credit risk, market risk and operational risk.



2. Which SEC Rule associated with the legal separation of custody and investment applies to US

investors?

A 17f-5

B 12d-5

C 21a-7

D 7a-2

Correct A

Answer:

Explanation: The legal separation of custody and investment is frequently referred to by its clause number

within the custody industry. The two SEC Rules are 17f-5 and 17f-7.



3. Which ONE of the following is an example of operational risk being realised?

A A participant code is wrongly entered on a manual SWIFT message

B A bond does not perform its intended hedge against interest rate movements perfectly

C A counterparty goes into default with open transactions

D A country which has issued locally denominated bonds to foreign investors devalues its currency

Correct

Answer:

A

Explanation: Operational risk is defined by the Basel Committee as 'the risk of loss resulting from inadequate

or failed internal processes, people and systems, or from external events'. A wrongly entered

SWIFT code would therefore be an example of operational risk. A bond not performing a hedge

is a realisation of market risk. Devaluation of a currency is effectively defaulting on payments on

the bonds and is therefore credit risk, as is a counterparty going into default with open

transactions.



6. Which ONE of the following may result from the failure to reconcile open trades?

A Missed instructions for corporate actions

B Unauthorised removal of securities

C Penalties may be imposed for short selling

D Errors in updating ownership records

Correct

Answer:

C

Explanation: Failure to reconcile open trades can affect many areas and one of the risks is that traders open

new positions when previous trading positions are not complete. In some markets there will be

penalties for short selling.



7. What is the risk of a direct or indirect loss resulting from an inadequate or failed internal process

known as?

A Systemic risk

B Counterparty credit risk

C Operational risk

D Issuer risk

Correct

Answer:

C

Explanation: The risk of a direct or indirect loss resulting from an inadequate or failed internal process is

known as operational risk.




procedures?

A SAS 70

B SEC 17f-5

C CSA N181-102

D FRAG 21

Correct

Answer:

A





13. What countermeasure might address the safekeeping risk resulting from poor cash

management?

A Improving intra-day credit limits

B Employing electronic communication links

C Carrying out periodic price checks

D Employing critical settlement date accounting

Correct

Answer:

A

Explanation: Setting intra-day credit limits and ensuring these are not exceeded is a way of addressing cash

management problems.



14. Which ONE of the following is associated with market risk?

A External or internal fraud

B Default by counterparty

C Damage to reputation

D Volatility of prices

Correct

Answer:

D

Explanation: Volatility of prices, particularly if settlement is delayed or fails, is associated with market risk.

Default by a counterparty is regarded as credit risk while fraud and reputational damage are

considered operational risks.



15. Which ONE of the following countries imposes few limits on the percentage of foreign ownership,

except in the case of television companies?

A France

B UK

C US

D Hong Kong

Correct

Answer:

D

Explanation: Many countries put up barriers to foreign investors, despite being committed to free movement of

capital. Hong Kong has few restrictions except for television broadcasting companies.



16. What is the main purpose of a FRAG 21 report?

A A summary of settlement performance with CSDs and ICSDs

B A review of compliance with SEC rules for safe custody procedures

C A report on a custodian's policy on dealing with settlement risk

D An independently audited record of a custodian's internal controls

Correct

Answer:

D

Explanation: In the UK, a FRAG 21 report is an independently audited record of the internal controls employed

by investment custodians.




4. Which ONE of the following types of risk is associated with credit risk?

A Basis risk

B Issuer risk

C Liquidity risk

D Price level risk

Answer

given:

A

Correct

Answer:

B

Explanation: Issuer risk is associated with credit risk. It is the risk of default when one firm holds debt

securities issued by another institution.



5. Which ONE of the following is NOT a requirement for eligible securities depositories under SEC

Rule 17f-7?

A Provide periodic reports to the regulator in its jurisdiction

B Maintain records that identify the assets of participants

C Operate a central handling system of securities regulated by the appropriate authority in its own

country

D Keep its assets separated from the assets of participants

Answer

given:

C

Correct

Answer:

A

Explanation: Under SEC Rule 17f-7, eligible securities depositories must provide periodic reports to

participants and undergo periodic examinations by regulatory authorities or independent

accountants.



9. Which ONE of the following categories of service-related risk includes the risk of poor cash

management?

A Operational

B Credit

C Safekeeping

D Trade and Settlement

Answer

given:

A

Correct

Answer:

C

Explanation: The risk of poor cash management has been identified as a cause of safekeeping risk.



10. In Brazil, which ONE of the following sectors has a 20% limit on foreign ownership?

A Energy companies

B Air transportation

C Mass communications

D Food manufacturers

Answer

given:

C

Correct

Answer:

B

Explanation: The upper aggregate limit on the foreign ownership of investments in air transportation in Brazil is

20%.



11. Which ONE of the following is considered to be a key cause of settlement risk?

A Failure to transfer money on time

B Delayed income collection

C Late reporting to client

D Inaccurate pricing information

Answer

given:

A

Correct

Answer:

D

Explanation: Inaccurate pricing information is considered to be a key cause of settlement risk. Delayed income

collection, failure to transfer money on time and late reporting to client are all considered to be a

cause of safekeeping risk.



12. Which ONE of the following must a US investor consider under SEC Rule 17f-5 prior to

depositing assets with foreign custodians?

A Data protection requirements

B Regulatory audits

C Recovery of assets

D Internal procedural controls

Answer

given:

A

Correct

Answer:

C

Explanation: Under SEC Rule 17f-5, prior to holding assets with a foreign custodian, a US investor must

consider: access to books and records; recovery of assets; currency convertibility; and

expropriation of assets.




1. An investor's stock dividend payments were recently subject to withholding tax. This can be

reclaimed as a result of:

A The stock issuer agreeing to bear the cost of this tax

B An appropriate double taxation treaty being in place

C The investor holding non-taxpayer status

D An indemnity underwriting being signed by the investor

Correct B

Answer:

Explanation: Investors may be eligible to reclaim withholding tax in instances where the governments of the

two countries involved have signed a double taxation agreement.



2. At what rate would an investor pay additional income tax on dividend income that exceeds the

higher rate tax limit in 2010/11?

A 10%

B 32.5%

C 42.5%

D 22.5%

Correct

Answer:

B

Explanation: In the 2010/11 tax year, investors will pay a total of 42.5% tax on dividend income that exceeds

the higher rate income tax limit (currently £150,000). But because the first 10% of the tax due on

this dividend income is already covered by the tax credit, in practice, the investor will pay 32.5%

tax on the gross amount of dividend income falling into this higher rate tax band.



3. Which ONE of the following types of gilt is exempt from tax when held by non-resident investors?

A Index-linked gilts

B Gilts held on a FOTRA basis

C Gilts maturing in less than five years

D Gilt strips

Correct

Answer:

B

Explanation: Interest from gilts held on FOTRA (Free of Tax to Residents Abroad) terms is exempt from tax

when held by non-resident investors.



4. What is the primary purpose of the 'matching rules' under the capital gains tax regime?

A To offset capital losses against equivalent capital gains

B To separate taxable assets from non-taxable assets

C To quantify the level of top-slicing relief

D To determine the order for applying acquisitions to a sale

Correct

Answer:

D

Explanation: The matching rules must be followed to identify which acquisitions should be allocated to a trade

based on prescribed priority rules.



6. What is the current rate of tax credit on UK dividends?

A 22%

B 20%

C Nil

D 10%

Correct

Answer:

D

Explanation: When a UK company pays a dividend it carries a tax credit as the dividend is paid to

shareholders from profits on which the company has already paid tax. The current rate of tax

credit is 10%.




5. An investor buys bonds with ten years to maturity in the secondary market at a price of 85. The

investor sells the bond five years later at a price of 90. What is the tax treatment?

A The market discount is taxable as 50% capital gains and 50% ordinary income

B The market discount is taxable as capital gains

C The market discount is treated as a capital loss

D The market discount is taxable as ordinary income on an accreted basis

Answer

given:

B

Correct

Answer:

D

Explanation: Market discount must be declared, on an accreted basis, as ordinary taxable income in the year

a bond is sold or redeemed.





A The buyer is entitled to the declared dividend

B The seller is entitled to the declared dividend

C The share includes the price of the previous dividend


Correct

Answer:

B





2. Which ONE of the following is a requirement for designated nominee holdings?

A Each investor's holding is in the nominee name with a unique identifying code

B The nominee is responsible for identifying each client's holding from one registration

C All investors in the same stock are registered under one holding

D Investor's holdings are registered with the firm's own holdings

Correct

Answer:

A

Explanation: Designated nominee holdings are where each client's holding is registered separately in the

nominee company's name with an additional unique identifying code for each individual client.



3. Which type of mandatory event may offer investors an option of how to receive the benefit?

A Bonus issue

B Dividend payment

C Capital repayment

D Stock split

Correct

Answer:

B

Explanation: Although a dividend is usually paid in cash, a company may offer shareholders the option of

being paid in shares (scrip dividend).



4. Securities lending provides which ONE of the following?

A Cost effectiveness

B Liquidity

C Tax efficiency

D Security

Correct

Answer:

B

Explanation: For a borrower who may have sold short, there is a need to borrow securities to close its position.

The existence of liquid markets reduces the risks of failed settlement.



5. ABC plc announces a capitalisation issue of 3 for 5 shares. How many additional shares would

an investor who holds 1000 shares receive?

A 500

B 1000

C 300

D 600

Correct

Answer:

D

Explanation: An investor with 1000 shares will receive three new shares for every five held. Therefore, 1000 /

5 x 3 = 600.



6. How frequently must all safe custody investments held physically by a UK firm be reconciled?

A At least twice in a period of 12 months

B Annually

C Last business day of each quarter

D Every month

Correct

Answer:

A

Explanation: In the UK, a firms is required to reconcile all safe custody investments that it physically holds at

least once every six months, or twice in a period of 12 months but at least five months apart.




the share price?

A Consolidation

B Bonus issue

C Demerger

D Rights issue

Correct

Answer:

A





8. An investment manager has a portfolio with assets in the US and UK markets at a value of

US$750 million. What is the 'Ad Valorem' fee charged at a rate of 1 basis point?

A $7,500,000

B $750,000

C $75,000

D $7,500

Correct

Answer:

C

Explanation: The fee paid by the investment manager will be: $750,000,000 x 0.01 / 100 = $75,000.




A Nominee

B Registrar

C Investor

D Beneficiary

Correct

Answer:

A




client.



10. Who, if anyone, has the benefits of legal ownership of the securities under a securities lending

arrangement?

A No-one as the securities act as collateral

B No-one, as the securities become non-classified

C The lender

D The borrower

Correct

Answer:

D

Explanation: Legal title to on-loan securities passes from the lender to the borrower for the duration of the

loan.



11. Under single-currency trading, which ONE of the following is considered to be a disadvantage?

A Counterparty risk is higher for multiple FX transactions

B Investors get poor FX rates

C Cash reconciliation and control processes are more complicated

D Income receipts are changed into the base currency

Correct

Answer:

A

Explanation: Potential disadvantages of employing a single-currency account structure include a higher

probability of settlement risk and counterparty risk for multiple FX transactions.



12. Which date named by an issuer determines an investor's benefit entitlements?

A Settlement

B Trade date

C Record date

D Value date

Correct

Answer:

C

Explanation: The record date is the date named by an issuer that determines the eligibility of a shareholder to

receive a declared benefit.



14. Which ONE of the following is NOT a reason for market participants to borrow securities?

A To support derivative activities

B To cover failure of settlements

C To cover short positions

D To increase the size of their portfolio

Correct

Answer:

D

Explanation: It may be necessary to borrow securities to: cover a settlement fail; support derivative activities;

and cover short positions. A market participant would not, however, borrow securities in order to

increase the size of their portfolio.



15. 'Ad Valorem' fees levied by global custodians are based on:

A The value of assets held (only)

B The transaction volume per market

C The value of assets held and number of transactions undertaken

D The number of transactions (only)

Correct A

Answer:

Explanation: An 'Ad Valorem' fee is also known as a basis point fee, and is calculated on the value of the

assets held with the custodian. A transaction fee will be charged according to the number of

settlement transactions that the custodian processes on behalf of the client.



17. What does it mean if a share is traded cum-dividend?

A The dividend can be converted into shares

B The share includes the price of the previous dividend

C The buyer is entitled to the next dividend payment

D The seller is entitled to the next dividend payment

Correct

Answer:

C

Explanation: If the security has been purchased before the ex-date the purchaser is entitled to the dividend

(this is called the cum-dividend) as they will be on the register on record date.



18. Who is responsible for instructing how proxy votes are to be cast?

A The beneficial owner

B The nominee

C The custodian

D The registered owner

Correct

Answer:

A

Explanation: The investor, or beneficial owner, makes the decision on how to cast proxy votes.



19. Which ONE of the following is considered to be a disadvantage when operating multi-currency

accounts?

A Separate custody and banking services

B Securities trading on DvP settlement

C Administrative complexity of reconciliation process

D Difficulties of generating cash flows in foreign currencies

Correct

Answer:

C

Explanation: One potential disadvantage of a multi-currency arrangement is that it adds to the complexity of

reconciliation and control processes as a result of maintaining accounts in multiple currencies.



20. How often are UK firms required to reconcile safe custody investments which they do not

physically hold themselves?

A Every 25 business days

B Every six months

C Every year

D Whenever it is deemed necessary by the firm

Correct

Answer:

A

Explanation: For UK firms, reconciliations are required at least every 25 business days, of safe custody

investments which a custodian is accountable for but does not physically hold.



23. Which ONE of the following strategies would normally be considered to cover a short position?

A Hedging

B Securities lending

C Arbitrage

D Repo

Correct

Answer:

B

Explanation: Securities lending is generally used as a strategy to cover short positions.




13. Institutions lend securities for which ONE of the following reasons?

A To earn income

B To support derivatives activities

C To cover short positions

D To cover settlement fails

Answer

given:

C

Correct

Answer:

A

Explanation: For the lender, the main benefit of lending out securities is to generate income.



16. Which ONE of the following is NOT a requirement of the rules applying to the use of mandates?

A The safeguarding of any client documents held

B An up-to-date list of conditions requested by the client

C A record of the identity of the client

D A procedure for the receipt of instructions

Answer

given:

B

Correct

Answer:

C

Explanation: Firms are required to maintain appropriate records and internal controls to prevent the misuse of

mandated authorities granted by the client. Records of the client's identity are required under the

FSA Money Laundering Regulations.



21. ABC plc announces a 1 for 5 rights issue when the market price of its shares is 90 pence. The

rights shares are priced at 60 pence. What is the theoretical ex-rights price?

A 60 pence

B 90 pence

C 18 pence

D 85 pence

Answer A

given:

Correct

Answer:

D

Explanation: The calculation of the theoretical ex-rights price is: ((no. of shares held x cum-rights price) + (no.

of rights shares x rights share price)) / total no. of shares held after the rights issue. Therefore,

((5 x 90p) + (1 x 60p)) / 6 = 85 pence.



22. Which ONE of the following would the risk assessment of a custodian NOT be expected to

cover?

A Disaster recovery procedures

B Other activities undertaken

C Financial strengths

D Marketing practice

Answer

given:

B

Correct

Answer:

D

Explanation: In conducting a risk assessment of the custodian, firms should give due consideration to the

following criteria: the expertise and market reputation of the custodian; the arrangements for

holding and safeguarding an investment; an appropriate legal opinion regarding the level of

protection afforded to custody assets in the event of the insolvency of the custodian or a

subcustodian it employs; procedures for disaster recovery and to ensure technology resilience;

current industry standard reports; whether the custodian is regulated, and by whom; the capital or

financial resources of the custodian; and any other activities undertaken by the custodian and,

where relevant, any affiliated company.




1. Which ONE of the following is NOT a characteristic of forward rates?

A They reflect the differential between spot rates at the time of the deal

B Forward rates are quoted at a premium, or a discount, to the spot rate

C Forward rates are calculated such that arbitrage opportunities are removed

D They reflect the differential between interest rates at the time of the deal

Correct

Answer:

A

Explanation: The forward rate reflects the interest rate differentials between the currencies at the time the deal

is done. The forward rate will be calculated such that the investor will not profit from the

arrangement, ie, no opportunity of arbitrage. Forward rates are not quoted outright but at a

premium, or discount, to the spot rate.



2. If a trading screen price is quoted as GBP/USD 1.6415-19, what is the offer price for buying GBP

1.00?

A US$ 1.6396

B US$ 1.6434

C US$ 1.6415

D US$ 1.6419

Correct

Answer:

D

Explanation: The last two digits of the price represents the offer price component of the main price.



3. Which ONE of the following is NOT used for matching settlement instructions?

A Title of security

B Counterparty account number

C Trade conditions

D Client title

Correct

Answer:

D

Explanation: Trade confirmation and trade instructions are very similar and additional elements for a trade

instruction are name and account number of the party sending the instruction and transaction

reference.



5. Which ONE of the following is a real-time gross settlement system for the euro?

A CHIPS

B Fedwire

C CHAPS

D TARGET

Correct

Answer:

D

Explanation: Trans-European Automated Real-time Gross Settlement Express Transfer (TARGET) is the real-

time gross settlement system for the euro. CHAPS is an electronic credit transfer system for

sterling payments. CHIPS is a computerised network for the transfer of US dollar payments.

Fedwire is the electronic transfer of funds system for the Federal Reserve.



6. Which ONE of the following is the term used for the settlement of trades denoted as T+n?

A Rolling settlement


C Real-time gross settlement

D Fixed settlement

Correct

Answer:

A

Explanation: Rolling settlement is when settlement occurs on a specific number of business days after the

trade date, i.e. T+n. In the UK, for example, settlement occurs three days after trade date, which

is commonly denoted as T+3.



7. Which ONE of the following activities usually takes place in the post-settlement stage of the

securities cycle?

A Matching of trade instructions

B Transfer of ownership

C Execution of client instructions

D Buying in procedures

Correct

Answer:

D

Explanation: The post-settlement stage entails management of failed transactions and the subsequent

accounting of trades. This therefore covers buying in, which may be instigated against a firm who

has failed to settle a transaction. Execution of client instructions takes place at the trading stage.

The pre-settlement stage includes matching of trade instructions and the transfer of ownership

takes place at the settlement stage.



8. Which ONE of the following is a description of securities in physical form?

A Dematerialised

B Immobilised

C Issued in book entry

D Uncertificated

Correct

Answer:

B

Explanation: When a depository accepts certificated securities, these will typically be immobilised, such that

they no longer need to be delivered physically from one counterparty to another. In practice, the

certificated security remains in the vaults of the CSD throughout the transaction (hence it is

immobilised).



9. Which ONE of the following forms of settlement covers all trades in the same security by any

number of counterparties?

A Bilateral netting

B Multilateral netting

C Rolling settlement

D Continuous net settlement

Correct

Answer:

B

Explanation: Multilateral netting extends bilateral netting to cover all trades in the same security by any

number of counterparties.



10. What is the latest date an interest claim can be made following actual settlement date under

ICMA recommendations?

A 15 days

B 7 days

C 30 days

D 90 days

Correct

Answer:

C

Explanation: Under ICMA recommendations, a claim for loss of interest will not be paid if more than 30

calendar days have elapsed since the actual settlement date.



11. A buyer was due to pay £500,000 for shares but due to a computer processing problem his

payment arrived three days late. If the seller pays a 5% overdraft rate, what amount can the

seller claim?

A £212.28

B £205.48

C The claim must be written off

D £254.82

Correct

Answer:

B

Explanation: If a buyer has caused a trade settlement to fail, the seller will normally make an interest claim for

the loss of interest on the net amount they would have received had settlement happened on

time. Claims under $100 are written off to prevent more money being spent on the administration

of a claim than the claim is worth. The calculation will be: Claim amount = net amount x overdraft

rate/100 x no. of calendar days/365 = £500,000 x 5/100 x 3/365 = £205.48.



12. At which stage of the settlement process is the custodian first notified of a transaction?


B Settlement instructions


D Trade execution

Correct

Answer:

B

Explanation: Once a trade has been agreed between the broker and investment manager, the custodian then

receives settlement instructions.




Accounting (ASDA)?

A ASDA allows funds to be debited or credited for good value

B ASDA enables sellers to use the funds early

C Investors under ASDA need not lobby for improved market conditions

D ASDA allows purchasers to use their funds for a few more days

Correct

Answer:

D








14. Which ONE of the following currencies is MOST likely to be used for an exchange between two

less-quoted currencies?

A Euro

B Japanese Yen

C Sterling

D US Dollar

Correct

Answer:

D

Explanation: For transactions between two less-quoted currencies, the US Dollar may be used to calculate a

cross rate.



15. Which ONE of the following stages of the settlement process typically only involves the broker?


B Trade execution


D Settlement instructions

Correct

Answer:

B

Explanation: In the trade execution stage, the broker executes client's order with counterparty broker. The

broker also sends a confirmation to the investment manager to agree the trade before

instructions are passed to the custodian.



16. Which ONE of the following systems operates on a multilateral netting basis for the transfer of

US dollar payments?

A CHAPS

B CHIPS

C TARGET

D Fedwire

Correct

Answer:

B

Explanation: The Clearing House Interbank Payments System (CHIPS) is a computerised network for the

transfer of US dollar payments and operates on a multilateral netting basis. CHAPS is an

electronic credit transfer system for sterling payments; Fedwire is the electronic transfer of funds

system for the Federal Reserve; and TARGET is a real-time gross settlement system for the

euro.



17. Which ONE of the following payment clearing systems requires members to hold an account at

the Bank of England?

A TARGET

B CHIPS

C Fedwire

D CHAPS

Correct

Answer:

D

Explanation: CHAPS (the Clearing House Automated Payment System) provides real-time gross settlement

services in Sterling. CHAPS members must hold a Sterling settlement account at the Bank of

England.



18. When is Delivery versus Payment (DvP) effective?

A Two parties can use the same technology

B Simultaneous exchange of securities and payment takes place

C Buying and selling of assets are transacted in real time

D A bank acts as custodian for both buyer and seller

Correct

Answer:

B

Explanation: DvP effectively is the simultaneous exchange of securities and cash between buyer and seller.



19. Which ONE of the following is NOT considered part of the pre-settlement stage of the securities

cycle?

A Matching delivery instructions

B Confirming transaction details by both parties

C Investigating failed transactions

D Checking there is sufficient stock to deliver

Correct

Answer:

C

Explanation: A number of procedures and checks must be conducted pre-settlement. These include matching

the trade instructions supplied by each counterparty to ensure that the details they have supplied

for the trade correspond, and conducting checks to ensure that the seller has sufficient securities

to deliver and that the buyer has sufficient funds to cover the purchase cost. The investigation of

failed transactions takes place post-settlement.



20. Omgeo's Oasys system operates as an international:

A Payment system

B Trade confirmation system

C Clearing system

D Settlement system

Correct B

Answer:

Explanation: Oasys, operated by Omgeo provides a centralised matching and communication system.



21. What occurs at the same time a trade is registered with a central counterparty?

A Tender

B Novation

C Exercise

D Delivery

Correct

Answer:

B

Explanation: A central counterparty interposes itself between the counterparties to a trade, becoming the

buyer to every seller and the seller to every buyer. As a result, buyer and seller interact with the

central counterparty and remain anonymous to each other. This process is known as novation.



22. Which ONE of the following was NOT one of the main reasons for the development of TARGET?

A To increase efficiency of cross-border payments

B To provide depository services for publicly-traded securities

C To serve the needs of an EU-unified money market

D To settle euro payments on an RTGS basis safely and reliably

Correct

Answer:

B

Explanation: Trans-European Automated Real-time Gross Settlement Express Transfer (TARGET) is the real-

time gross settlement system for the euro. It ensures same day payment finality in central bank

money. It also supported the creation of a unified money market in the euro zone and the delivery

of a single monetary policy.



23. Which accounting process posts value for a trade on the date it settles?

A Real-time Settlement Systems

B Delivery versus Payment

C Contractual Settlement Date Accounting

D Actual Settlement Date Accounting

Correct

Answer:

D

Explanation: Actual Settlement Date Accounting assumes that the trade takes place on the day it settles,

rather than when it was contracted to do so.



24. The Continuous Linked Settlement (CLS) system is unable to reduce the settlement risk caused

by which ONE of the following?

A Operating procedures

B Differences in time zones

C Legal jurisdiction

D Interbank settlement

Correct

Answer:

D

Explanation: The CLS initiative is a real-time global settlement system designed to eliminate settlement risk

and to reduce the systemic liquidity risk in the foreign exchange market. It cannot reduce delays

caused by language difficulties.



26. What is the role of TARGET?

A It is the electronic trade confirmation system aiming at world standardisation

B It is the electronic credit transfer system for sterling and euro banks

C It is the central counterparty clearing system for Europe

D It is the real-time gross settlement system for the euro

Correct

Answer:

D

Explanation: TARGET (Trans-European Automated Real-time Gross Settlement Express Transfer) is the real-

time gross settlement system for the euro.



27. What is the interest claim threshold under ISITC guidelines?

A $500

B $100

C $200

D $300

Correct

Answer:

D

Explanation: Under ISITC guidelines, the claims threshold is $300. Netting and bulking of claims under $300

are at the discretion of the counterparties.



28. ICMA has rules governing procedures in which ONE of the following areas?

A Interest claims for fixed income securities

B Multilateral netting of equity transactions

C Pre-settlement trade confirmations

D Buy-ins and sell-outs

Correct

Answer:

A

Explanation: The International Capital Market Association (ICMA) has rules and recommendations relating to

interest claims for fixed income products. The International Securities Association for Institutional

Trade Communication (ISITC) has a comparable set of guidelines for equities.



29. The electronic transfer of sterling payments is made using which ONE of the following systems?

A CHIPS

B CHAPS

C TARGET

D Fedwire

Correct

Answer:

B

Explanation: The electronic transfer of sterling payments is made using CHAPS (the Clearing House

Automated Payment System).



30. What happens under Free of Payment settlement?

A Non-simultaneous exchange of cash and securities

B Continuous exchange of cash and securities during the day

C Batched exchanges of cash and securities at specified times

D Both cash and securities are exchanged at the same time

Correct

Answer:

A

Explanation: Free of Payment settlement is where there is a separate, non-simultaneous exchange of cash

and securities between counterparties.



31. If a failed trade is outstanding for too long, who bears any additional costs when 'buying in'?

A The purchaser and the original seller

B The purchaser only

C The alternative seller

D The original seller only

Correct

Answer:

D

Explanation: With buying in the purchaser 'buys in' from an alternative seller and any additional costs are

passed on to the original (offending) seller.



32. Which ONE of the following is a characteristic of a foreign exchange swap?

A It is a single transaction combining one spot deal and one forward deal

B Delivery of both deals takes place within two business days

C It is a transaction where each counterparty pays the other counterparty's interest obligation on a

nominal amount

D It can be arranged with different counterparties

Correct A

Answer:

Explanation: A foreign exchange swap is a single transaction combining one spot deal and one forward deal

for two different delivery dates with a single counterparty. The spot deal takes place at the spot

rate and the forward deal at the forward rate. Spot transactions are for delivery within two

business days.



33. When a failed trade is outstanding for too long, who bears any additional costs of 'selling out'?

A The alternative purchaser

B The seller

C The original purchaser

D The seller and the original purchaser

Correct

Answer:

C

Explanation: Selling out entails the seller 'selling out' to an alternative purchaser with any additional costs

being passed on to the original (offending) purchaser.



34. Which ONE of the following forms of settlement enables the offset of positions between the same

parties?

A Real-time gross settlement


C Bilateral netting

D Trade-for-trade settlement

Correct

Answer:

C

Explanation: Netting occurs when trading partners agree to offset their positions or obligations. Bilateral

netting offsets trades between the same two counterparties in the same security. Continuous net

settlement covers all trades in the same security by any number of counterparties. Trade-for-

trade settlement, or gross settlement, is where each trade is settled separately and

independently of each other. Real-time gross settlement (RTGS) is the continuous gross

settlement of individual trades with no netting of positions.



36. Which ONE of the following is NOT a reason for failed settlement?

A A counterparty may have gone into liquidation

B The seller may have insufficient securities to deliver

C The purchaser is buying in

D The trade instructions are unmatched

Correct

Answer:

C

Explanation: Settlement failure may be caused by a number of factors including a counterparty going into

liquidation, a seller having insufficient securities to deliver and trade instructions being

unmatched. A firm may instigate buying in procedures after settlement has failed.



37. At what rate are non-deliverable forwards settled?

A Spot rate

B Forward rate

C Cross rate

D Mid rate

Correct

Answer:

A

Explanation: In a non-deliverable forward, the exchange rate is set for some date in the future, but at that date

the quoted currency is not exchanged. Instead, the rate is compared against the prevailing spot

rate. The profit or loss is calculated as if a reverse transaction had been completed. This is the

amount that is settled.



38. Which ONE of the following is an advantage of rolling settlement over account settlement?

A It limits the number of outstanding trades on settlement date

B Credit risk is increased due to the time between trade and settlement

C Failed trades cannot be re-presented until the next account date

D It creates unequal levels of settlement activity

Correct

Answer:

A

Explanation: One of the main advantages of rolling settlement is that it limits the number of outstanding trades

thus reducing aggregate market exposure.



39. Which ONE of the following used prior to settlement can reduce cost and risk?

A Netting

B Rolling settlement

C Fixed date settlement

D Trade-for-trade

Correct

Answer:

A

Explanation: Netting occurs when trading partners agree to offset their positions or obligations. By doing so,

they reduce a large number of individual positions to a smaller number of positions. This can

reduce transaction costs and communication expenses but is particularly important in reducing

credit and liquidity risks.



40. Which ONE of the following is NOT a characteristic of FX transactions prices?

A A price quote uses a three-letter acronym for both currencies

B The bid price is the price at which the quoting bank will buy the first (base) currency

C The offer price is usually quoted with four digits

D Forward rates are quoted at a premium, or discount, to the spot rate

Correct

Answer:

C

Explanation: A price quote will use three-letter acronyms to denote both the base currency and quoted

currency. The first price is the bid price, which is what an investor would obtain if they were

buying the second currency with the first. The second price is the offer price, which is the amount

of the second currency required to purchase a unit of the first currency. The offer price has only

two digits quoted as the spread is normally less than 1%. Forward rates are not quoted outright

but at a premium or discount to the spot rate.



41. Which ONE of the following is the foreign exchange price normally reported in newspapers?

A Mid-price

B Bid price

C Spread

D Offer price

Correct

Answer:

A

Explanation: The mid-price is the average of the bid and offer prices. It is normally not quoted for trading but is

reported in the financial press to illustrate how currencies are moving in relation to each other.



42. The matching of trade instructions takes place at which ONE of the following stages of the

securities cycle?

A Administration

B Trading

C Settlement

D Pre-settlement

Correct

Answer:

D

Explanation: As soon as a trade has been executed, certain procedures and checks must be undertaken

before actual settlement. This forms the pre-settlement (clearance) process and will include

matching of trade instructions.



43. What does a book-entry transfer of ownership involve?

A The alteration of an electronic record

B The movement of certificates between CSDs

C The manual updating of a central register

D The issue of certificates to CSDs

Correct

Answer:

A

Explanation: A book-entry transfer of ownership involves the alteration of an electronic record.


Book Ref: Chapter 3, Sections 3.3.5


4. Compared to fixed date settlement, rolling settlement is subject to a lower level of:

A Replacement risk

B Systemic risk

C Issuer risk

D Regulatory risk

Answer

given:

B

Correct

Answer:

A

Explanation: One disadvantage of fixed date settlement is that the market value of the security may move

significantly during the settlement period creating a sizeable replacement risk (the risk that non-

defaulting parties will incur a loss when replacing unsettled contracts) in instances of trade

failure.



25. What is the G3O's recommended final settlement date for cash transactions?

A T+2

B T+1

C T+3

D T+0

Answer

given:

A

Correct

Answer:

C

Explanation: The Group of Thirty (G30) recommended that final settlement of cash transactions should occur

on T+3. In reviewing its recommendations in 2003 it specified that, in order to minimise

counterparty risk and market exposure associated with securities transactions, the goal should

be ultimately to further shorten the securities settlement cycle.



35. How long does a party have to dispute an interest claim under ICMA rules?

A 52 days

B 15 days

C 30 days

D 7 days

Answer

given:

C

Correct

Answer:

B

Explanation: Under ICMA rules, a party has 15 days to dispute an interest claim or 30 days to pay it.




1. Which ONE of the following methods of settlement poses the greatest risk?

A Real-time gross settlement (RTGS)

B Delivery versus Payment (DvP)

C Netting

D Free of Payment transfer

Correct

Answer:

D

Explanation: If a market does not have a DvP system, 'free of payment' transfer of securities must occur,

which means that the cash countervalue will be settled separately, with the inherent risk of

default by one party.



2. A custodian is charging an annual Ad Valorem fee of 15 basis points on a portfolio of assets with

a market value of ?30 million. What will this fee be?

A ?4,500

B ?450,000

C ?450

D ?45,000

Correct

Answer:

D

Explanation: The fee paid will be: ?30,000,000 x 0.15 / 100 = ?45,000.



3. ERISA legislation led to which ONE of the following consequences?

A Remittance of overseas dividends to a secure local vault

B Opening of the US market to UK banks

C Unification of pension funds with their administrators

D Pension funds could not act as custodians of their own assets

Correct

Answer:

D

Explanation: The Employee Retirement Income Security Act (ERISA) was passed in the US in the mid-1970s

and was designed to increase the protection given to US pension fund members. The Act

specified that US pension funds could not act as custodians of the assets held in their own funds.

Instead, these assets had to be held in the safekeeping of another bank. ERISA went further to

specify that only a US bank could provide custody services for a US pension fund.



4. ABC plc has a current share price of £3.90 per share. What would be the share price following a

3 for 1 stock split?

A £1.30

B £11.70

C £3.90

D £0.98

Correct

Answer:

A

Explanation: In a stock split, the total number of issued shares is increased but without affecting the overall

shareholder equity and so the share price will therefore fall. An investor with 1,000 shares would

have an existing holding valued at £3,900. After the stock split he would hold 3,000 shares

valued at £3,900 = £1.30 per share.



5. Which ONE of the following is NOT a characteristic of bond coupons?

A The rate is always quoted as the gross amount

B US Government Treasury bonds pay a semi-annual coupon

C It is the rate of interest paid on the market value

D It may be paid after the deduction of tax

Correct

Answer:

C

Explanation: The coupon rate is the rate of interest paid on the nominal value (or face value) of the bond not

the market value.



6. Which ONE of the following corporate events requires shareholders to purchase the shares?

A Scrip dividend

B Bonus issue

C Rights issue

D Consolidation

Correct

Answer:

C

Explanation: A company will issue shares to existing shareholders to purchase via a rights issue as a way of

raising money. Consolidations, bonus issues and scrip dividends do not raise money from

shareholders.



7. By which method is transfer of title for bearer securities usually carried out by CSDs?

A Certified transfer

B Physical transfer of certificate

C Stock transfer and certificate

D Book-entry transfer

Correct

Answer:

D

Explanation: CSDs normally hold bearer securities in immobilised form and the transfer of legal title takes

place by electronic book-entry transfer.



8. Which ONE of the following statements is NOT a feature of programme trading?

A Trade confirmation generally occurs after the complete order has been filled

B Settlement is made for each share rather than the whole transaction

C Operational risk is reduced

D This system is used by index-tracking funds to buy or sell an index

Correct

Answer:

C

Explanation: The fund manager of an index-tracking fund will execute a programme trade to buy or sell the

stocks in an index. Settlement is the same as for a single-share transaction, although it may be

difficult to obtain all the shares in the market on the same day and trade confirmation generally

occurs after the complete order has been filled. The operational risk on these transactions will be

higher as the longer the transaction is unconfirmed, the greater the risk.



9. Which ONE of the following requires a securities transfer form to be completed to transfer

ownership?

A Registered securities in certificated form

B Stocks held in CREST

C Bearer stocks

D Stocks held in Euroclear

Correct

Answer:

A

Explanation: Both CREST and Euroclear operate book-entry transfer where only the computer records, not the

share certificates are altered. Bearer instruments have no need for a transfer form as there is no

register. Registered securities in certificated form do require a securities transfer form to be

completed in order to transfer ownership.



15. Which ONE of the following is an advantage of a designated nominee structure?

A The number of names that need to be maintained by the registrar is reduced

B Beneficial owners are more easily identifiable from the company register and the share

certificates

C Administration is simplified and risk of clerical error is reduced

D It provides greater investor anonymity than an omnibus account structure

Correct

Answer:

B

Explanation: A designated nominee structure is an alternative to the omnibus system of registration. One

advantage of this system is that each beneficial owner's holding is registered separately.



17. What is the settlement period for US equities?

A T+1

B T+2

C T+3

D T+5

Correct

Answer:

C

Explanation: Settlement timing in the US for equities is T+3.



20. Which ONE of the following is NOT a secure payment system?

A CHIPS

B TARGET

C Fedwire

D TRAX

Correct

Answer:

D

Explanation: TRAX is an electronic trade confirmation system; whereas CHIPS, Fedwire and TARGET are all

secure payment systems.



21. Which ONE of the following statements describes 'sweeping'?

A Transferring uncommitted balances into interest-bearing deposit accounts

B Analysing investments by geographic location

C Pooling balances to obtain the highest interest rate

D Tracking the income received from an investment

Correct

Answer:

A

Explanation: To avoid clients having funds sit overnight in non-interest-bearing accounts, custodians will often

offer the use of sweep accounts which allow clients to transfer (or sweep) uninvested cash into

overnight investments (or an interest-bearing deposit account) at the end of the business day.



23. Which ONE of the following statements BEST describes market risk?

A Risk of loss arising from accidental non-compliance with regulations

B Risk of loss arising from changes in the value of financial instruments

C Risk of loss resulting from failed internal procedures, people and systems

D Risk of loss caused by the failure of a counterparty to pay its obligations

Correct

Answer:

B

Explanation: Market risk is the risk of loss of earnings or capital arising from changes in the value of financial

instruments. The failure of a counterparty is known as credit risk, and loss from internal

procedures, people and systems is operational risk. Regulatory risk is a sub-category of

operational risk.



25. What happens to an investor's rights shares if they take no action by the end of the subscription

period?

A The rights shares can still be traded in the market

B The rights shares are compulsorily purchased by the issuer

C The rights shares lapse and are sold by the issuer

D The rights shares can be exchanged for cash

Correct

Answer:

C

Explanation: Entitlements to rights shares are distributed to existing shareholders who can usually elect to

either subscribe for the new shares or trade them in the market. At the end of the subscription

period those shares that have not been subscribed for will be sold by the company and surplus

proceeds distributed



26. Which ONE of the following is a characteristic of quote-driven markets?

A Shares are traded through a market maker

B Market liquidity needs to be high

C Price movements are governed by demand

D Matching of share purchases and sales is through a broker

Correct

Answer:

A

Explanation: In a quote-driven market, brokers deal with a market maker to buy and sell securities (see table

in Section 11 for a comparison of order-driven and quote-driven markets).



27. Which ONE of the following foreign exchange prices is quoted only as two digits?

A Offer price

B Mid-price

C Spread

D Spot price

Correct

Answer:

A

Explanation: The second price, the offer price, has only two digits quoted as the spread is normally less than

1%.



28. At what time (Brussels time) does Euroclear start its real-time settlement run?

A 08:00

B 04:00

C 07:30

D 14:00

Correct

Answer:

B

Explanation: Euroclear's real-time settlement process runs between 04:00 and 18:00 (Brussels time) on each

business day. Its batch process runs overnight.



29. What is the name for the system whereby all investors' holdings are registered in the same name

and the beneficial owners are not identified?

A Segregation

B Omnibus

C Nomination

D Designation

Correct

Answer:

B

Explanation: When individual clients' assets are grouped together in a single nominee registration it is known

as an omnibus account or pooled nominee holding.



30. Which ONE of the following organisations acts as the CSD for Japanese equities?

A JSCC

B Bank of Japan

C TSE

D JASDEC

Correct

Answer:

D

Explanation: JASDEC (Japan Securities Depository Centre) acts as CSD for equities. The Bank of Japan

(BOJ) acts as CSD and clearing system for Japanese Government Bonds and Treasury Bills.



31. ABC plc has a current share price of £0.46 per share. What would be the share price following a

1 for 5 consolidation?

A £2.76

B £4.60

C £0.46

D £2.30

Correct

Answer:

D

Explanation: In a consolidation, the total number of issued shares is decreased but without affecting the

overall shareholder equity and so the share price will therefore rise. An investor with 1,000

shares would have an existing holding valued at £460. After the consolidation he would hold 200

shares valued at £460 = £2.30 per share.



32. Current international messaging between global custodians is, for the most part, performed in

which way?

A Extranet

B CREST

C EUCLID

D SWIFT

Correct

Answer:

D

Explanation: SWIFT has played a central role in promoting the use of standardised and secure messaging

services and interface software within the financial services industry since its inception in 1973.

SWIFT now serves 7,600 members and participants in 200 countries.



33. Why might a government establish a double taxation treaty with another country?

A To increase the amount of tax collected from investors

B To ensure investors avoid paying tax twice

C To prevent tax being collected by other governments

D To use other governments to collect withholding tax

Correct

Answer:

B

Explanation: Most governments enter into double taxation treaties with other countries in order to prevent

income being taxed twice and to render reciprocal assistance in the prevention of tax evasion.



34. What price is quoted for a bond if it includes accrued interest?

A Bid price

B Dirty price

C Clean price

D Two-way price

Correct

Answer:

B

Explanation: When a price is quoted for a debt security that includes the accrued interest, this is known as the

dirty price.



35. If a SWIFT message is transmitted using a Category 5 message type, this indicates that the

transaction involves:

A Financial trading

B SWAPs

C Foreign currency

D Documentary credits

Correct

Answer:

A

Explanation: SWIFT message type 5 relates to securities instructions.



36. DvP can be defined as which ONE of the following?

A A system of networks between CSDs, swapping assets on the day of trade

B Rolling settlement of all trades within three days of trading

C Batched exchange of securities no longer than five days after the trade

D Simultaneous exchange of securities and cash on a continuous basis throughout the day

Correct

Answer:

D

Explanation: Delivery versus Payment (DvP) is a procedure whereby appropriate technical, legal and

contractual arrangements are in place to ensure that a transfer of securities is final if, and only if,

the corresponding transfer of funds is final. More simply, DvP involves simultaneous exchange of

securities and cash between buyer and seller.



37. A company's share price is likely to automatically fall as a result of which ONE of the following

corporate events?

A Capital repayment

B Capitalisation issue

C Conversion

D Consolidation

Correct

Answer:

B

Explanation: A capitalisation issue is a release of new shares to existing shareholders in proportion to their

existing holdings. The effect on the market price will be a reduction as there are more shares in

issue. A consolidation will increase the share price. A conversion would not automatically trigger

a price movement; although it would increase the number of shares in issue the share price is

more likely to react to market sentiment. A capital repayment will result in the nominal value of

the shares falling but will not necessarily induce a rise or fall in the share price.



38. Which ONE of the following types of voluntary corporate event results in an invitation to the

holders of the relevant securities to pay an amount in cash?

A Rights issue

B Conversion

C Hostile takeover

D Debt tender

Correct

Answer:

A

Explanation: Rights issues invite existing shareholders to purchase additional shares, usually on

concessionary terms.



39. For trade matching of an equity which ONE of the following details is NOT required?

A Settlement method

B Settlement date

C Price and currency

D Amount of accrued interest

Correct

Answer:

D

Explanation: Accrued interest is relevant to a bond, not an equity.



40. Which ONE of the following orders is most likely to be placed through a programme trade?

A An order for a basket of shares

B An order which automatically hedges the shares

C A large order which is created manually by the investment bank

D A large order of a single stock

Correct

Answer:

A

Explanation: Instead of trading individual shares, a programme order will place a whole basket of shares, eg,

FTSE 100 index stocks, or ethical stocks. Programme trades are communicated electronically,

normally via a spreadsheet created by the fund manager.



42. Which US organisation acts as a depository for corporate bonds?

A GSCC

B FED

C FICC

D DTC

Correct

Answer:

D

Explanation: The Depository Trust Company (DTC) provides depository services for corporate stocks and

bonds. The Federal Reserve Bank (FED) provides depository services for most US Government

bonds and securities issued by federal agents and mortgage-backed securities. The Fixed

Income Clearing Corporation (FICC) clears US Government debt securities. The Government

Securities Clearing Corporation (GSCC) handles US Treasury securities.



43. Which ONE of the following would be considered a value-added service which might be added to

a global custodian's bundled package?

A Proxy voting

B Safe custody

C Relaying corporate action details

D Income collection

Correct

Answer:

A

Explanation: Proxy voting would be considered a value-added service, whereas safe custody, income

collection and processing of corporate actions are all core services.



44. How is a transaction described when it is traded during the cum-benefit period but where the

seller agrees to retain a dividend payment?

A Special cum

B Special ex

C Cum

D Ex

Correct

Answer:

B

Explanation: Counterparties can agree when conducting a trade during the cum-benefit period that the

security is being sold ex-benefit. This is known as a 'special ex' transaction.



45. How are tax reclaims made under Withholding Tax?

A Tax reclaims are automatically provided under double taxation treaties

B Tax reclaims must be made in the issuer's country of origin

C The timing of claims for tax is subject to global standards

D Tax must be reclaimed in the investor's country of domicile

Correct

Answer:

B

Explanation: Withholding Tax is typically deducted at source and must be reclaimed by the investor from the

local tax authorities.



48. Which ONE of the following corporate events increases the number of shares in issue without

altering the value of an investor's holding?

A Stock split

B Conversion

C Rights issue

D Consolidation

Correct

Answer:

A

Explanation: A stock split occurs when the company converts a single share into a larger number of shares,

without any change taking place in the aggregate market value of the shares.



49. What is the settlement period for debt securities on the South Korean Stock Exchange?

A T+1

B T+0

C T+2

D T+3

Correct

Answer:

B

Explanation: On the South Korean Stock Exchange settlement for debt securities is T+0 and equities is T+2.



50. What is the role of CUSIP in identifying securities?

A It is the US standard for allocating unique numbers to each security

B It is the international standard for allocating unique numbers to each security

C It is the country code for uniquely identifying each security

D It is the UK standard for allocating unique numbers to each security

Correct

Answer:

A

Explanation: CUSIP is the "Committee on Uniform Security Identification Procedures", which allocates

identification numbers in the US. The International Organisation for Standardisation (ISO)

introduced International Securities Identification Numbers (ISINs) to allocate each security in

each country a unique number. SEDOL is the "Stock Exchange Daily Official List", which is the

UK numbering agency.




10. Which ONE of the following is the tax payable on the purchase of UK equities converted into

depositary receipts?

A Uncertificated Securities Tax

B Stamp Duty Reserve Tax

C Withholding Tax

D Stamp Duty

Answer

given:

D

Correct

Answer:

B

Explanation: HM Revenue & Customs charges Stamp Duty Reserve Tax (SDRT) at a rate of 1.5% of the

share value when shares are converted into depositary receipts.



11. A foreign investor must obtain prior written permission from the Broadcasting Authority if he

wishes to own at least what percentage of the voting rights of a Hong Kong listed television

broadcasting company?

A 3%

B 10%

C 5%

D 2%

Answer

given:

C

Correct

Answer:

D

Explanation: If a foreign investor wishes to own 2% or more of a Hong Kong television broadcasting

company's voting rights, he must obtain prior written approval from the Broadcasting Authority.



12. Which ONE of the following BEST describes a foreign exchange swap?

A The simultaneous purchase of foreign currency for one delivery date only

B A foreign currency transaction combining a number of spots and forwards

C The simultaneous purchase and sale of foreign currency for two different settlement dates

D Two separate foreign currency transactions simultaneously settled

Answer

given:

B

Correct

Answer:

C

Explanation: A foreign exchange swap is the simultaneous purchase and sale of a specified amount of foreign

currency for two different settlement dates. It is a single transaction combining two deals, one

spot and one forward.



13. Which ONE of the following is NOT normally included in an RFP?

A Account overdraft policy

B Profit/loss account

C Billing frequency

D Deadlines for settlement instructions

Answer

given:

A

Correct

Answer:

B



a lengthy questionnaire requesting a wide range of background information including details such

as deadlines for settlement instructions, account overdraft policy, and billing frequency.



14. What is the tax treatment of gilt interest received by a UK investor?

A Only gilts held on FOTRA terms are exempt from UK taxes

B There is no liability to capital gains tax or income tax

C Capital gains tax is charged on any accrued interest

D Income tax is charged on all gilt interest

Answer

given:

A

Correct

Answer:

D

Explanation: UK individual investors are taxable on interest receivable on gilts.



16. What role does HKSCC play regarding Hong Kong securities?

A It acts as a settlement centre

B It acts as a central clearing system for Japanese Government bonds

C It acts as a clearing house

D It acts as a depository

Answer

given:

C

Correct

Answer:

D

Explanation: The Hong Kong Securities Clearing Company (HKSCC) acts as the central depository for

equities. The Central Moneymarkets Unit (CMU) operated by the Hong Kong Monetary Authority

(HKMA) acts as the depository for corporate and government bonds.



18. Which ONE of the following corporate events is normally used when a company wishes to return

excess cash to shareholders?

A Capital repayment

B Bonus issue

C Conversion

D Rights issue

Answer

given:

B

Correct

Answer:

A

Explanation: A capital repayment is where a company returns money to shareholders. Bonus or capitalisation

issues increase the share capital as a way of improving liquidity whereas a rights issue is used to

raise money from shareholders to invest in the business. Holders of convertible bonds can

convert the debt into shares at specified times.



19. Which ONE of the following forms of settlement requires several trades in the same security

between the same counterparties for the same settlement date to be settled independently?

A Continuous net settlement

B Bilateral netting

C Multilateral netting

D Gross settlement

Answer

given:

B

Correct

Answer:

D

Explanation: Gross, or trade-for-trade, settlement requires each trade to be settled separately and

independently of any other. Even trades in the same security between the same counterparties

for settlement at the same time are treated separately.



22. Which ONE of the following organisations developed the TRAX electronic trade confirmation

system?

A OMGEO

B Thomson Financial Services

C International Capital Market Association

D London Stock Exchange

Answer

given:

B

Correct

Answer:

C

Explanation: The International Capital Market Association (ICMA) developed the TRAX electronic trade

confirmation system.



24. What does SEC Rule 17f-7 in the US address?

A A mutual fund's use of a foreign bank custodian

B Custody operations of mutual fund assets in the US

C Requirements for the selection of foreign depositories

D Legal and audit requirements for domestic mutual funds operations

Answer

given:

B

Correct

Answer:

C

Explanation: Rule 17f-5 addressed a fund's use of a foreign bank custodian and the subsequent rule 17f-7

addressed requirements for selecting foreign depositories.



41. Which ONE of the following is NOT a feature of depositary receipts?

A The holder is entitled to receive dividends in respect of the underlying shares

B Dividends from foreign shares are converted into and paid in dollars or sterling

C They can overcome settlement problems of foreign markets

D They are issued in a local market by a foreign company

Answer

given:

A

Correct

Answer:

D

Explanation: Depositary receipts are securities issued in a local market by an investment bank or depository.

A number of an overseas company's securities are held on deposit with the bank.



46. Which ONE of the following statements does NOT apply to the RFP?

A It is not usually a decision-making document

B Key issues should be highlighted

C Clients use it as an exercise in benchmarking

D There is no standard format for RFP submissions

Answer

given:

A

Correct

Answer:

D

Explanation: The Request for Proposal (RFP) is a formal tendering process for custody buyers. Although the

size and scope of the RFP will vary slightly from client to client, there are core elements that

would be addressed in each submission.



47. One of the potential advantages of global custodians using the services of a subcustodian is that

it:

A Improves the quality of acquired local market information

B Avoids the need to operate sweep-up facilities

C Reduces the level of due diligence required

D Lessens the credit risk of the custody services process

Answer

given:

C

Correct

Answer:

A

Explanation: A subcustodian is employed by a global custodian as its local agent to provide settlement and

custody services for assets that it holds on behalf of investor clients in a foreign market. It

effectively serves as the eyes and ears of the global custodian in the local market.



Global Securities Operations - Q&A

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