CSC

Chapters 1-5

A CONTINUING EDUCATION
COURSE BY PNC LEARNING
 1 2 3 4 5
Lesson 1. Lesson 2. Lesson 3. Lesson 4. Lesson 5.
The Capital Market The Canadian The Canadian Economic Economic Policies
Securities Market Regulatory Principles
Environment

COURSE OUTLINE

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Chapter 1

The Canadian Securities

Industry

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Structure of the Canadian Securities Industry
Exchanges TSX, Montreal etc

Auction markets

Over the Counter

Bond market
or OTC or Unlisted
Markets

CDS Clearing and

Clearing and
depository
Suppliers of capital Settlement
Services

Investment Industry
Regulatory
All securities
Investment Dealers Organization of
Canada (IIROC)

Mutual Fund Mutual fund

Users of Capital Dealers (MFDA) dealers only

Canadian
Self Regulatory
Securities institute Training
Organizations
(CSI)

Canadian Investor Investment

Protection Fund guarantee (up to
(CIPF) $1m)

E.g. Ontario
Provincial
Securities
Regulators
Commission 4
Investment Dealers

Investment
Banks
dealers
Agents Principal
Credit Trust
union companies Earn profit when
Earn a
they buy and
commission on
sell securities at
sale
a markup
Insurance
companies
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Functions of Financial Intermediaries

Transfer capital from

• Primary market = from corporation
suppliers to users
direct to investor (initial public offering)
through underwriting

Maintain Secondary
• Secondary market = between investors
market (Auction &
& investors
OTC)

6
Capital Market

◼ Capital is scarce, mobile and sensitive to its environment.

◼ Source of capital is savings of retail and institutional investors.
◼ Foreign investment in Canada tends to concentrate on petroleum & gas, mining and smelting,
manufacturing.
◼ Fed gov: T-Bills, marketable bonds, Canada Savings Bonds (CSB), Canada Premium Bonds (CPB)

2. Business:
1. Individual: for day-to-day 3.
Users Of Capital for operation, Government:
consumptions maintenance, development
expansion

7
3 key components of financial industry:

Instruments

Market

Intermediaries

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Financial instruments

◼ Advantages: Formal, legal documents, standard features, many types

◼ Debt instrument, equity, investment funds , derivatives (derived from an underlying instrument such as stock, index)
◼ Equity : Stocks (common & preferred)

Auction market vs Dealer market:

◼ Prices are publicly shown to clients via system for auction market.
- The
- ON
unlisted
requires
Dealer market: equity marke
unlisted
- Dealer acts t : Much
equity be
as market - Large in smaller
reported
maker for a transaction volume
through
particular volume comparing to
Canadian
security Stock
Unlisted
market.
Board Inc.
Mostly junior
(CUB)
issues.
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 Stock exchanges
(Auction market):

3. Canada Trading 5. Winnipeg

4. Montreal
1. TSX: 2. TSX Venture: & Quotation Commodity
Exchange (ME):
System (CNQ): Exchange:

Senior equities Junior equities for Agricultural

Financial future
and some debt Junior equities emerging futures and
and options
instrument company options

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Trading system:

◼ Quotation and trading reporting system (QTRS):

◼ mechanism for dealers to post prices for negotiation not trading. Trades are reported later. It's the way NASDAQ
operates
◼ Alternative Trading System (ATS) or Proprietary Electronic Trading System (PETS) or Non-SRO-Trading
System (NETS):
◼ privately own computerized network allowing brokers to facilitate their institutional investors.
◼ CanDeal: Allows institutional investors an access to federal bond bid and offers.
◼ CBID: Operates 2 distinct retail and institutional market for fixed income products
◼ CanPX: provides data of real-time bid and offer prices and hourly trade of Gov, provincial bonds,
◼ T-Bills and some corp bonds

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Chapter 2

The Canadian Securities

Market

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Role of financial intermediaries => Underwrite new
securities in a primary
market

=> Buy securities with

1. Principal anticipation to resell them
at profits

=> In secondary market,

buy securities in block,
keep in inventory and
Investment resell to its clients to
dealer/houses make profit from spread

=> In secondary market,

act on behalf of clients in
buy/sell transactions

2. Agent/Broker

Source of income: Main:

35% from commission

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Investment dealer/houses continued

◼ Three types of the firm 1. Integrated

firm: CIBC
Capital Market

3. Retail firm: 2. Institutional

TD Bank firm:

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Other financial intermediaries
1. Bank
• Schedule I: Canadian Bank, no more than 20% shareholding of foreign investors, full range of services
• Schedule II: Foreign bank with branches, full range of services, but normally focus on commercial
banking Schedule III: Foreign bank branch, limited services due to single branch presence
2. Trust company:
• Similar services as bank, plus being a trustee for individual estate

3. Credit union:
• Similar services as bank but for members/social groups

4. Insurance:
• Life, Non-life products, deposit, cheque, segregated funds, Investment rule" Prudent portfolio approach"
• => Demutualization = the process of changing policyholders to shareholders

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Chapter 3

The Canadian Regulatory

Environment

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Regulators:

◼ Regulation of securities business is a provincial responsibilities. 13 securities regulators work together under
"Canadian Securities Administrator CSA" to co-ordinate and harmonize regulations across Canada with aims to
protect investors and support fair & efficient market.

Federal Level: Provincial Level:

• 1. Office of the Superintendent of • Credit Union Deposit Insurance
Financial Institutions (OSFI) supervises Corporation insures upto $100,000 of
"Federally regulated" financial deposit for credit union in each province
institutions
• 2.Canada Deposit Insurance Corporation
(CDIC) insures deposit of upto $100,000
per depositor in each member institution.
(term of deposit <= 5 years)

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Self-Regulatory-Organization (SRO)
3 Market Regulation
Services Inc (RS) -
1. IIROC 2. MFDA joint-venture
between IDA and
TSX

6. Montreal
4. TSX 5. TSX Venture
Exchange

7. WCE

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Self-Regulatory-Organization continued

Canadian • Protect upto $ 1mil of

• 1. General account including securities (margin) and
Investor cash balances, short sales, options, foreign currency
• 2. Separate account RRSP ie. one for daughter and
Protection Fund another for son
• Clients have 180 days to file a claim to CIPF after the

(CIPF) -IIROC insolvency

MFDA Investor • Insure upto $ 1mil of

• 1. General account
Protection • 2. Separate account including RRSP

Corporation
(MFDA IPC)
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 Arbitration
◼ Role of arbitration
◼ Arbitration is a method of dispute resolution.
◼ An investor and an investment dealer have a dispute and cannot decide what to do.
To be eligible for arbitration:

1. Must be an attempt to
solve dispute

2. Claim is less than $

500,000

3. The event must occur

after the specified time

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Investments
◼ Ombudsman for Banking Services and Investments (OBSI)
◼ An independent organization that investigate customer complaints against financial services providers
all IAs must be registered with
MFDA / IIROC via National
Registration Database (NRD)
1. Registration:
which is single electronic
registration for all jurisdiction
across Canada

Prospectus must be Full, true

3 ways to protect investor 2. Disclosure of facts and plain disclosure with on-
going disclosure, if any

3. Enforcement of the laws

and policies

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 The Principles of Securities Legislation

Window Front
• Director, senior officers dressing: • Confirm transactions w/o running:
or officers dealing with trading
underwriting of a • Buy or sell securities to • Taking the opposite side
company has a fiduciary make prices higher at of the market to client, or
obligation not to reveal the end of trading effect trading of IA's own
information to outsiders. account before effecting
a trade for a client

Fiduciary
Bucketing:
duty

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Statutory right of investor

1. Right to withdrawal:
• 2 biz day after receipt or deemed receipt of a prospectus

2. Right to rescission:
• cancel the purchase of securities in case the
prospectus provide "misrepresentation" (untrue statement) 180
days after transaction date
3. Right of action for damage
• Pursue criminal offence to those who sign a certificate for a
prospectus 23
Chapter 4

Economic Principles

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Economic Principles
◼ Microeconomic: analyze market behavior of individual and firms in their decision towards price/production
◼ Macroeconomic: focus on performance of the economy as a whole: interest rate, inflation, labor

3 Decision makers in the economy

Individual: To maximize satisfaction

Business: To maximize profits

Government: For well-being of

country
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Economic growth
◼ Measured by GDP which is the total output (in the country) of the economy in the
given period of time
◼ two approaches to measure GDP
◼ 1. Expenditure approach
◼ GDP = C + I + G + (X-M)
◼ 2. Income approach
◼ GDP = Income from all sources
◼ Nominal GDP is a dollar value of goods and services produced in a country in a given
period of time of which inflation factor has not been yet removed
◼ -Real GDP is a dollar value of goods and services valued at the same prices as the base
year

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Factors affect economic growth

2. Increase in
1. Increase in capital 3. Technological
population stock/resources progress
and productivity

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Business cycle:
◼ Fluctuations of output and employments
◼ Stages
1. Expansion 2. Peak 3. Recession/Contraction
• Economy is steadily expanding • Final stage of expansion • Inflation rises
• Inflation is stable • Inventory is piling up • Business activity declines
• Demand and inventory are rising • Labor and product shortages • Stock price falls
• Investment is increasing • Wage is increasing • Falling employment, increasing lay-
• Employment is steady • Interest rates rises and bond prices off
• Profits are rising fall
• Profit is dampen

4. Trough 5. Recovery
• Recession continues • Renewed buying of housing, cars
• Excess capacity • Lay-off is over
• Inflation falls • Production starts but unemployment
• Interest rate is low is still high
• Bond market rallies

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Economic indicators:

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