INVESTMENTS 1

TOPIC 1
OVERVIEW OF CANADIAN
SECURITIES INDUSTRY
Mainly regulated by province – securities commissions have power to create and enforce laws
Self Regulatory Organizations (SRO’s) – Investment Industry Regulatory Organization of
Canada (IIROC).
Major participants in the industry:
- Suppliers of Capital (Investors) - Canadian Securities Institute
- Investment Dealers - Canadian Investor Protection Fund
- Users of Capital (Borrowers) - Provincial Regulator
- Markets - Clearing & Settlement
- SRO’s
INVESTMENT DEALERS ROLE AS A
FINANCIAL INTERMEDIARY
Financial Intermediary – any organization that facilitates the trading or movement of financial
instruments that transfer capital between suppliers and users of capital.
Investment Dealers (ID) act on behalf of clients as ‘Agents’ and sometimes act as ‘Principals’.
ID 2 main functions:
1. ID transfers capital from suppliers to users through the underwriting and distribution of new securities
- Primary Market. Initial Public Offering.
2. ID also maintain Secondary Markets - previously issued or outstanding securities are traded.
Types of ID
1. Retail Firms (include full service investment dealers (Discount Brokers)).
2. Institutional Firms (serve exclusively institutional clients (Pension Funds, Mutual Funds)).
3. Integrated Firms (participate in both retail and institutional markets).
ORGANIZATION WITHIN
FIRMS
FRONT MIDDLE BACK
OFFICE OFFICE OFFICE
• Portfolio • Compliance • Trade
management • Accounting Settlement
• Trading • Audits
• Sales • legal
• Marketing
 PRINCIPLE AND AGENCY FUNCTIONS OF
AN INVESTMENT DEALER
PRINCIPLE AGENCY TRANSACTIONS
TRANSACTIONS
- Investment Dealers may own the securities as - As an agent, the dealer does not own title to
part of their inventory (SP-BP=Profit). the securities at any time.
- Underwriting – principals will purchase new - Profit = Commission for each transaction
securities from government body or company
for a specified price using their own capital…
then sell it at a profit in the primary market.
- Secondary trading of non-equity securities
(fixed-income products)…dealers buy
securities, hold them and then sell them.
- The dealer is likely to act as principle for most
secondary trading of debt securities.
SERVICES PROVIDED BY
INVESTMENT DEALERS
By participating in the secondary market Investment Dealers :
- Provide informed advice about the terms and features for new issues in the primary
market
- They add liquidity to the market
- They sometimes act as market makers
- They sometimes buy listed stocks as principals
- The secondary market liquidity they add can also enhance the primary market by
making sure purchasers of newer securities can sell them at reasonable prices
THE CLEARING SYSTEM
- Exchange members will buy and sell different listed stocks in a day. Designated
clearing system handle the daily settlement process between members
- Securities in Canada are cleared through CDS Clearing and Depository Services.
- CDS is not a financial intermediary…just a partner to dealers that operate in
securities markets. CDS operates CDSX – a facility for clearing and settling trades
in debt and equity securities in Canada and cross-border activities.
- Marketplaces such as TSX, TSX Venture Exchange and alternative trading systems
reports to CDSX. Participants with access typically include Banks, Investment
Dealers and Trust Companies.
- Central clearing system uses a process called Netting to establish and confirm a
credit or debit position. This process reduces the amount of cash that has to change
hands among various members each day.
OTHER FINANCIAL INTERMEDIARIES:
CHARTERED BANKS
- Most important player in the Canadian Securities Industry. Primary function –
accept and safeguard deposits…lend those deposits to users in the form of loans.
- Operate under the Bank Act – sets out operating rules and restrictions for banks
(revised every 5 years).
- Bank Act designates a bank either Schedule I, Schedule II or Schedule III. Most
Canadian Banks are Schedule I.
- Canadian Banks offer a large variety of services. Savings deposits are eligible for
deposit insurance, provided by Canada Deposit Insurance Corportation (CDIC).
- Barriers that inhibit information sharing across a banks various business units are
know as Firewalls.
CHARTERED BANKS CONT…
Schedule I
- Banks that are not a subsidiary of a foreign bank and are considered domestic
banks even if they have foreign shareholders
- Voting shares of Large banks must be widely held and subject to no more than
20% ownership by any individual or group.
- In Medium size banks where shareholder equity is between $2bn - $12bn, a
single shareholder can own up to 65% of voting shares – the other 35% must be
publicly traded.
- In Small banks with shareholder equity below $2bn, shares can be held by one
person or organization.
CHARTERED BANKS CONT…
Schedule II
- Incorporated and operate in Canada as federally regulated foreign bank subsidiaries,
and are owned by a foreign parent, e.g. CitiBank Canada, AMEX Bank of Canada and
BNP Paribus (Canada).
- By law, may engage in all types of business permitted to a Schedule I bank.
- Most of their revenue is derived from retail banking and electronic financial services
Schedule III
- Federally regulated foreign bank branches of foreign institutions, authorized under the
Bank Act to conduct business in Canada.
- Tend to focus on corporate and institutional finance and investment banking.
OTHER FINANCIAL
INTERMEDIARIES
Credit Unions & Caisses Populaires
- Wide variety of services. Often cater to member-savers from common interest groups e.g.
neighborhoods, ethnic-origin lines, employment, etc.
- Federally governed by Cooperative Credit Associations Act (CCAA).
Trust & Loan Companies
- Act as a trustee in charge of corporate and individual assets such as property, stocks and
bonds.
- Federally and provincially incorporated and authorized in Canada to engage in a trust
business.
- Offer broad range of services often overlapping Chartered banks – most larger trust
companies are subsidiaries of Schedule I banks.
OTHER FINANCIAL
INTERMEDIARIES
Insurance Companies
- Two main lines of Business 1. Life Insurance. 2. Property & Casualty Insurance
Life Insurance – Health & Disability, Term & Whole Life, Pension Plans, RRSP,
Annuities
Property & Casualty Insurance – Home, Auto & Commercial Business
Underwriting is most important aspect of Canadian Insurance business (evaluate
risk and contractual responsibility vs premium).
Re-insurance – exchanging risk between insurance companies to better facilitate
risk management.
Key Federal Legislation governing Insurance Companies is Insurance Companies
Act.
OTHER FINANCIAL
INTERMEDIARIES
Investment Funds – Companies or trusts that sell shares or units to the public and
invest the proceeds in a diverse portfolio.
- Closed-end funds – issue shares at start-up or other infrequent periods
- open-end funds (Mutual Funds) – continually issue shares to investors and redeem
them on demand.
Savings Banks (Alberta Treasury Branches) – Provide services to Albertans.
Consumer Finance companies – make loans direct to consumers who are unable to
get a loan from their bank
Sales Finance Companies – purchase installment purchase contracts from retailers
and dealers at a discount.
OTHER FINANCIAL
INTERMEDIARIES
Pension Plans
Canadian Pension Plan (CPP) and Quebec Pension Plan (QPP), covers all Canadian
workers. Other workplace sponsored retirement plans and trusteed pension plans
also included.
FINANCIAL MARKET TRENDS
Financial Technology
- Financial Technology companies (FINTECH) – changing the role of traditional
financial services for a variety of banking and financial products
ROBO-ADVISORS
- provides clients with goal-based online investment management. Portfolios are
created using algorithms based on modern portfolio theory. Advisor support is offered
to varying degrees, typically online or by phone. Portfolios are built with exchange-
traded funds. Portfolios are regularly rebalanced.
Shifting Demographics
- Reshaping the Canadian economy, aging demographic with high importance on
monitoring the growth of Canadians over 65yrs.