Help me -securities law

Straight-through Processing (STP)

Straight-through Processing ("STP") is a mechanism that automates the end-to-end processing of transactions of the financial instruments. It involves use of a single system to process or control all elements of the work-flow of a financial transaction, including what is commonly known as the Front, Middle, and Back office, and General Ledger. In other words, STP can be defined as electronically capturing and processing transactions in one pass, from the point of first ‘deal’ to final settlement.

Direct Market Access (DMA)

Direct Market Access (DMA) is a facility which allows brokers to offer clients direct access to the exchange trading system through the broker’s infrastructure without manual intervention by the broker. Some of the advantages offered by DMA are direct control of clients over orders, faster execution of client orders, reduced risk of errors associated with manual order entry, greater transparency, increased liquidity, lower impact costs for large orders, better audit trails and better use of hedging and arbitrage opportunities through the use of decision support tools / algorithms for trading. Presently, DMA facility is available for institutional investors.

Fund of funds: A "fund of funds" (FOF) is an investment strategy of holding a portfolio of other investment funds rather than investing directly in shares, bonds or other securities. This type of investing is often referred to as multi-manager investment. A fund of funds allows investors to achieve a broad diversification and an appropriate asset allocation with investments in a variety of fund categories that are all wrapped up into one fund.

 Exchange traded Funds: An exchange-traded fund (ETF) is an investment fund traded on stock exchanges, much like stocks. An ETF holds assets such as stocks, commodities, or bonds, and trades close to its net asset value over the course of the trading day. Most ETFs track an index, such as the S&P 500 or MSCI EAFE. ETFs may be attractive as investments because of their low costs, tax efficiency, and stock-like features.

DIFFERENCE:

1. An ETF is typically a basket of stocks that tracks something, say the S&P 500. You can   buy and sell it at ANY time of day, even multiple times if you choose. A fund of funds invests in other mutual funds which themselves invest in other things, and can only be traded at the end of the trading day.

2.  An ETF is a fund that has been securitised (that is something that has been turned into an instrument that is traded on a stock exchange). As someone said like an index (eg FTSE100) or a commodity (like Gold) or a basket (like Water sector). The underlying instrument cannot be traded like a share.
A fund of funds is is a managed collection of funds which are not normally available to the public. Such as a hedge fund. A hedge fund cannot be sold direct to the public partly beacuase of compliance rules and possibly size of minimum investment

To understand the correct meaning of Credit watch it is very imp to understand the meaning of Credit rating:

MEANING OF CREDIT RATING

When a company plans for public issue of its securities it approaches credit rating agencies to give rating to their issue for the sake of creating public confidence in their issue of securities.

A grading of a borrower's ability to meet financial obligations in a timely manner. Credit ratings are set by independent agents like CRISIL for companies, individuals, and specific debt issues.

MEANING OF CREDIT WATCH

Notice from a credit rating agency to a security issuer that a negative factor has arisen in the agency's (credit rating agency) review of the issuer's credit rating. If the issuer does not take steps to explain or lighten the negative factor, the credit watch may be the first step toward a reduction in the issuer's rating (means de-grading the issue rating).

For example, a credit rating agency may discover a dramatic drop in an issuer's liquidity ratio, which increases the likelihood of default on a debt. It would then send a credit watch to the issuer.

In simple words credit watch is a kind of written warning to the issuer company to remove the negative factor as explained in the example above.

Trusts this helps

3.“Investment in mutual fund is risky”. Comment

Every type of investment, including mutual funds, involves risk.  Risk refers to the possibility that you will lose money (both principal and any earnings) or fail to make money on an investment.  A fund's investment objective and its holdings are influential factors in determining how risky a fund is.  Reading the prospectus will help you to understand the risk associated with that particular fund. 

Generally speaking, risk and potential return are related. This is the risk/return trade-off.  Higher risks are usually taken with the expectation of higher returns at the cost of increased volatility.  While a fund with higher risk has the potential for higher return, it also has the greater potential for losses or negative returns.  The school of thought when investing in mutual funds suggests that the longer your investment time horizon is the less affected you should be by short-term volatility.   Therefore, the shorter your investment time horizon, the more concerned you should be with short-term volatility and higher risk.

Defining Mutual fund risk

Different mutual fund categories as previously defined have inherently different risk characteristics and should not be compared side by side. A bond fund with below-average risk, for example, should not be compared to a stock fund with below average risk. Even though both funds have low risk for their respective categories, stock funds overall have a  higher risk/return potential than bond funds.

Of all the asset classes, cash investments (i.e. money markets) offer the greatest price stability but have yielded the lowest long-term returns. Bonds typically experience more short-term price swings, and in turn have generated higher long-term returns. However, stocks historically have been subject to the greatest short-term price fluctuations—and have provided the highest long-term returns.  Investors looking for a fund which incorporates all asset classes may consider a balanced or hybrid mutual fund.  These funds can be very conservative or very aggressive.  Asset allocation portfolios are mutual funds that invest in other mutual funds with different asset classes.  At the discretion of the manager(s), securities are bought, sold, and shifted between funds with different asset classes according to market conditions.

Mutual funds face risks based on the investments they hold. For example, a bond fund faces interest rate risk and income risk.  Bond values are inversely related to interest rates.  If interest rates go up, bond values will go down and vice versa.  Bond income is also affected by the change in interest rates.  Bond yields are directly related to interest rates falling as interest rates fall and rising as interest rise.  Income risk is greater for a short-term bond fund than for a long-term bond fund.

Similarly, a sector stock fund (which invests in a single industry, such as telecommunications) is at risk that its price will decline due to developments in its industry. A stock fund that invests across many industries is more sheltered from this risk defined as industry risk.

Following is a glossary of some risks to consider when investing in mutual funds.

·         Call Risk. The possibility that falling interest rates will cause a bond issuer to redeem—or call—its high-yielding bond before the bond's maturity date.

·         Country Risk. The possibility that political events (a war, national elections), financial problems (rising inflation, government default), or natural disasters (an earthquake, a poor harvest) will weaken a country's economy and cause investments in that country to decline.

·         Credit Risk. The possibility that a bond issuer will fail to repay interest and principal in a timely manner. Also called default risk.

·         Currency Risk. The possibility that returns could be reduced for Americans investing in foreign securities because of a rise in the value of the U.S. dollar against foreign currencies. Also called exchange-rate risk.

·         Income Risk. The possibility that a fixed-income fund's dividends will decline as a result of falling overall interest rates.

·         Industry Risk. The possibility that a group of stocks in a single industry will decline in price due to developments in that industry.

·         Inflation Risk. The possibility that increases in the cost of living will reduce or eliminate a fund's real inflation-adjusted returns.

·         Interest Rate Risk. The possibility that a bond fund will decline in value because of an increase in interest rates.

·         Manager Risk. The possibility that an actively managed mutual fund's investment adviser will fail to execute the fund's investment strategy effectively resulting in the failure of stated objectives.

·         Market Risk. The possibility that stock fund or bond fund prices overall will decline over short or even extended periods. Stock and bond markets tend to move in cycles, with periods when prices rise and other periods when prices fall.

·         Principal Risk. The possibility that an investment will go down in value, or "lose money," from the original or invested amount.

SOURCE-https://www.open-ira.com/Education_Center/3c_Mutual_Fund_Risk.htm

   Credit Watch

An announcement made by a rating agency which indicates that a company's credit rating is under review. When a rating agency makes this type of announcement it is usually followed by a credit downgrade.



Read more: https://www.investorwords.com/7093/credit_watch.html#ixzz1Uika4WR1

ESTABLISHING A RATING SYSTEM

The following factors need to be considered in establishing a rating system.

• Need for clear definitions of the rating categories
  
  
  
  The rating categories must be clearly differentiated to facilitate choices. Extreme ratings should be avoided (e.g., "failure") because the controversy associated with those ratings discourages their use.

   

• Odd versus even number of categories
  
  
  
  There should be an even number of categories to prevent the tendency of raters to opt for the middle category.

   

• Numeric, alphabetical or descriptttive categories
  
  
  
  To facilitate the statistical analysis of performance trends, numeric codes with corresponding descriptttions must be used. However, to verify the ratings, a different type of code (preferably alphabetical) should be used for the overall rating of the programme or project.

Source :- https://www.undp.org/evaluation/documents/mec13-15.htm

4. Abhishek purchases 7.40% GOI 2012 for face value of 10lacs @ 101.80 i.e., Abhishek pays 101.80 for every unit of government security having a face value of 100.Last interest payment date was October 3, 2009.The settlement is due on March 3, 2010.What is the amount to be paid by Abhishek?  

Ans: Principal Amount Payable = Rs (1000000*101.80/100)= Rs. 10,18,000/-

Interest Payable = Rs (1000000*7.40%)*150/360=Rs 30833

Total Amount Payable = Rs (10,18,000+30,833)=Rs 10,48,833/-

Note: For Government dated securities, the day count is taken as 360 days for a year and 30 days for every completed month.

Question of similar nature was given in June 2009 CS Executive Examination [Question 5(b).]

Find attched the solution of that paper.

“Investment in mutual fund is risky”. Comment

Ans.) Mutual Fund is a Mechanism for pooling of resources by issuing units to the investors and investing funds in securities in accordance with the objectives as disclosed in offer document.

Thus Mutual fund includes the benefit of professional management and diversification of funds in a broad section of industries but it may face the following risk, leading to a non satisfactory performance.

Risks involved in Mutual Funds
(i) Excessive diversification of portfolio, losing focus on the .securities of the key segments.
(ii) Too much concentration on blue-chip securities which are high priced and which do not offer more than average return.
(iii) Necessity to effect high turnover through liquidation of portfolio resulting in large payments of brokerage and commission.
(iv) Poor planning of investment with minimum returns.
(v) Unresearched forecast on income, proms and government policies.
(vi) Fund managers being unaccountable for poor results.
(vii) Failure to identify clearly the risk of the scheme as distinct from risk of the market.

Check Out the Attachment "Securities Law Solution of Previous Exams". Hope you will find the answers here.