Index
A
Accepting cash
advantages of, 82
disadvantages of, 83
Accounting
procedures, 68
rules, 64
team, 70
Act for Establishment of Cabinet Office, 197
Active investment management, 16
Actively managed fund, 16
Adequate escalation process, 92
Administration Agreement, 181
Administration services, 175
Administrator, 59
importance for, 47
Agricultural and soft commodities, 131
AIFM, See Alternative investment fund manager (AIFMs); UK Alternative Investment Fund Manager (AIFM)
Alternative investment fund manager (AIFMs), 32–34
application of, 214
framework, 214
scope of, 32
transparency, 200
transparency information, 201
types of, 40
Antimoney laundering (AML) regulations, 35
Assets
performance, 27
process, 19
securities, derivatives, alternatives, 19–20
forms of, 23
portfolio of, 174
transaction, workflow for, 73
unchanging portfolio of, 3
values, growth of, 25
Association of Luxembourg Funds Industry (ALFI), 36
Australian Securities and Investment Commission (ASIC), 31
B
Bank for International Settlement (BIS), 94
Basle Committee, 94
Barrier options, 158
Bearer securities, 2
Beneficial ownership, 144
Bretton Woods Agreement, 125
British Bankers Association, 160
British Pounds (GBP), 157
Broker/third-party agreements, 62
Building society, 136
Business continuity process (BCP), 104
capabilities, 105
Business models, 33
C
Call/Put option, 123
general structure of, 3
overview, 11
Caps and floors, 158
Cash management, 72
and collateral, 96
Cash market index, 139
Cash movements, 61
Central counterparty (CCP), 152
advantages of, 83
disadvantages of, 83
Chicago Board of Trade (CBOT), 125
Chicago Board Options Exchange (CBOE), 128
Chicago Mercantile Exchange (CME), 125
Chinese commodity futures exchanges, 127
Clearing broker, 146
Clearing houses, 144
categories of, 138
financial support for, 138
organization, 131
role of, 137
Clearing members, 137
Client
advantage for, 86
disadvantage, 86
support team, 105
Closed fund, 15
Collars, 158
Collateral process, 90
Collective investment, 2
types of, 12
investment company, 12
partnership, 12
unit trust, 12
Commission Regulation, 214
Commodity Exchange (COMEX), 125
Commodity futures contracts, 131
Commodity Futures Trading Commission (CFTC), 31
Common funds, 12
Companies
trusts, partnerships, common funds, 37
Comprehensive legal agreement, 129
Conflict resolution exercise, 105–107
background, 105–106
exercise, 107
Conservative strategy, 133
Contracts
liquidity in, 125
Contracts for differences (CFD), 159–160
advantages and disadvantages in, 160
broker-dealer, 159
Conventional financial markets, 6
Conventional funds, 6
Corporate actions, 89
CRD rules, 217
Credit risk exposure, 140
Creeping risk, 95
Currency swap, 157
Custodians, 72
act, 46
role of, 46
settlement, details/ positions, 61
Custody fees, 73
Custody services, 46
Customer services, 117
D
Daily variation margin amount, 144
Dalian Commodity Exchange, 127
Data errors, 99
Day-light exposure, 81
Dependence subcomponent, 170
Derivatives, 119–171
exchange traded futures and options, 120–150
basic trading and hedging strategies, 131–136
arbitrage trading, 133
fixed rate mortgages, 135–136
gearing, 133
hedging, 133
market direction (using futures), 132
potato farmers, 134
speculating (using options), 132–133
trading, 132
definitions, 120–124
at-the-money, 123
derivatives, 121
forwards, 121
futures contract, 121–122
in-the-money, 123
long and short options, 124
option, 122–123
options on futures, 124
out-of-the-money, 123
swap, 122
equity index futures, 130–131
commodity futures, 131
futures and option contract specifications and diversity, 129–130
product range, 129–130
tick size, 129
futures fair pricing theory, basics of, 138–140
equity index futures fair pricing, 139–140
history of, 124–129
financial futures markets, emergence of, 125–126
first options exchanges, 127–128
first traded futures exchange, 125
futures and options exchanges today, 128–129
futures exchanges in Asia, 127
futures exchanges in Europe, 126–127
investment management, usage of futures and options, 147–150
derivatives use in asset allocation, basic illustration of, 148–149
hedging, 149–150
income enhancement, 149
index tracker funds, 150
pension funds, 147–148
market structure, 136–138
role of clearing house, 137–138
role of exchange, 136–137
settlement and margining, 140–146
collateral, 144
initial margin, 140–141
interest, 141
intraday margin, 142
margining customers, 145
margin offsets, 143
single currency margining and settlement, 145–146
SPAN margin system, 142–143
spot month margin, 142
variation margin (settlements), 143–144
treasury management, 146
interest rate calculations, 146
markets, 167
OCC stans, See OCC stans
Disclosure Statements Inspection Division, 197
Discretionary programs, 86
Distribution funds, 67
Documentation
and agreements, 53
DSC Portfolio Ltd, 52
E
EEA firms, 34
Effective date, 156
Effective treasury management function, 146
Emerging markets, 1
Entity
type of, 174
Equalization accounting, 51
Equalization reserve, 51
Equity and index option buyers, 141
Equity index contract, 130
commodity futures, 131
Equity investment management
flexible tools for, 147
Equity option and stock index, 128
Equity sector, 185
recommendations, 35
EU legislation, 214
European Central Bank, 33
European Development Finance Institution, 33
European Energy Exchange (EEX), 126
European Fund and Asset Management Association (EFAMA), 36
European Investment Bank, 33
European market, 126
European Options Exchange in Amsterdam (EOE), 128
European Securities Market Association (ESMA), 32
EU-wide harmonized framework, 33
Exchange members, 137
Exchange traded futures, 129
standardization of, 152
Exchange traded futures and options
contract specifications and diversity, 129–130
product range, 129–130
tick size, 129
definitions, 120–124
at-the-money, 123
derivatives, 121
forwards, 121
futures contract, 121–122
in-the-money, 123
long and short options, 124
option, 122–123
options on futures, 124
out-of-the-money, 123
swap, 122
history of, 124–129
financial futures markets, emergence of, 125–126
first options exchanges, 127–128
first traded futures exchange, 125
futures and options exchanges today, 128–129
futures exchanges in Asia, 127
futures exchanges in Europe, 126–127
Exchange traded futures contracts, 121
Exchange traded options, 123
Exchange-traded products, 152
Executive Bureau, 197
Exit fees, 29
Expected Shortfall (ES), 169
Expert funds, 13
F
Fair pricing theory, basics of, 138–140
equity index futures fair pricing, 139–140
calculation of, 139
FATCA, See Foreign Account Tax Compliance Act (FATCA); US Foreign Account Tax Compliance Act (FATCA)
Financial advisers and investors, 15
definition, 32
online regulatory reporting system, 205
transparency reporting, 199
Financial Services and Markets Act 2000, 136
Financial Stability Board, 202
Financing leverage, 45
Fixed interest payments, 135
Foreign currencies, 83
Foreign exchange services, 72
Forward contract, 121
confirmation, 162
Fraud and money laundering, 99
Fraud in finance, 107–109
Free of payment, 81
FTSE futures contracts, 149
FTSE100 futures contract, 147
FTSE index future, 178
Full-scope UK AIFMs, 199–200
Full service administrator, 60
Fund, 12
accounting, 179
and valuations, 177
accounting records, 62
and custody environment
future changes and challenges in, 117–118
fund accounting and valuations, 48
fund operation, 48
notes, 173–181
transfer agency, 48
assets, 46
benchmark, 26
centers, 44
clients trading, 145
compliance, 180
custodian, 46
and administrator, 131
customers, 146
investment association categorization of, 185–186
locations, 18
management, 3
operating structure of, 174
owners, 45
performance, 25
portfolio, 148
records, 43
shares
redemption price of, 5
structures for, 17
top 10 performances, 223
types of, 37
Fund, day-to-day operation of, 55–92
accuracy and timeliness, importance of, 88–89
actions required, 89
asset servicing, 58–60
benefits and entitlements, 87
borrower default, 81
certificates of deposit, 83
collateral, 82–83
custodian/intermediary, role of, 88
custody and depositary, 70–73
day-light exposure, 81–82
discretionary (or managed) program, 86–87
equities, 84
fund operations, 60–62
global custody, 73–78
life cycle of derivatives transactions, 74–75
life cycle of settlement of OTC derivatives, 77–78
settlement of on-exchange derivatives, 75–77
government bonds, 83
implications for collateral, 89
income and expense, 66
investment capital, 57
investment process, 57
irrevocable letters of credit (L/CS), 84
lenders’ rights, 87
manufactured dividends, 87–88
margin and collateral, 66
market inefficiencies, 82
nondiscretionary program, 86
on-exchange pricing and valuation issues, 65
operating the pool, 87
performance fee calculation, 67–68
management information, 67–68
prime brokers/global custodians, role of, 85
process workflow, 56–57
repurchase agreement (REPO), 89–92
compliance, 91–92
margin calls and collateral management, 90–91
securities lending relationship structure, 90
securities, 83
lending and borrowing, 78–79
securities lending
agreements, 84
characteristics of, 79
precautions and controls, 81
risks, 81
uses of, 80
settlement delays, 82
transfer agency, 68–70
subscriptions and redemptions, 68–70
valuation and accounting, 62–65
valuation checklist, 65–66
Fund entity
types of, 173
advantages for, 148
Fund of funds, 37–38
Fund structures
Alternative Investment Fund Manager (AIFMs), 32–34
Alternative Investment Managers Directive (AIFMD), 32–34
companies, trusts, partnerships, common funds, 37
documentation and agreements, 53
EEA firms, 34
fund administration, 47–48
fund of funds, 37–38
hedge funds, 41–46
fund jurisdictions, 44
key players in operation of a fund, 44–46
open ended and closed funds, 43–44
money laundering, 35–36
multimanager funds, 38–39
other structures, 39–40
prime broker/brokers, 49–53
outsourcing, 53
2.8 setting up a fund, 49–53
principles and recommendations, 36–37
alternative investment funds, 40–41
retail/mutual fund custodian, 46–47
undertaking for collective investments in securities directive (UCITS), 34–35
Futures Associations of China, 220
definition of, 121
depends value of, 139
options on, 124
specifications, 121
standardized nature of, 121
Futures markets
development of, 124
users of, 135
FX exposures, 145
FX services, 72
G
GABRIEL reporting, 205
access to, 205
full-scope UK AIFMs, 206
ongoing responsibility, 208
schedule, 208
small authorized UK AIFMs, 206
small registered UK AIFMs, 206
submitting transparency reports using, 209–210
types-initial action required in, 207–208
General ledger (G/L), 62
G7 government bonds, 11
Global custodians, 80
Global Master Securities Lending Agreement (GMSLA), 90
Government bonds, 83
Government treasury bills, 144
Group of Thirty, 79
Growth fund, 28
H
fund jurisdictions, 44
key players in operation of a fund, 44–46
manager, 22
open ended and closed funds, 43–44
Hedging tools, 133
Hedging transaction, 134
High-low diversification, 174
High market liquidity, 165
High market volatility, 142
High-quality securities, 83
High Yield bonds, 10
Hong Kong Futures Exchange (HKFE), 127
Hong Kong Monetary Authority (HKMA), 31
Human error, 98
I
Identifiable risks, 103
Inadequate technology/systems, 98
Income collection, 71
Index tracker funds, 150
Industry awareness
lack of, 98
Inhouse system, 145
Initial margin, 140
Instead sukuk holders, 21
Intercontinental Exchange Inc (ICE), 126
Interest Rate Guarantee (IRG), 158
Interest rate swaps (IRS), 155–158
common OTC option types, 158
contracts for differences (CFD), 159–160
credit default swap (CDS), 159
currency swap, 157
OTC options, 158
total return swap, 159
type of, 157
International Monetary Market (IMM), 126
International Petroleum Exchange (IPE), 126
master documents, 161
International transactions, 68
Intraday exposure, 85
Intraday margins, 142
Intrinsic value, 123
Investment, 1–29
asset classes
securities, derivatives, alternatives, 19–20
collective investment schemes (CIS), 12
environment, 1–5
globalization of, 4
investment management fees and costs, 28–29
annual management fees, 29
initial and exit fees, 29
performance fees, 29
investment management process, 12–14
islamic investment funds, 5–12
investment objectives, 7–12
meaning of investor, 9
offering/placement, meaning of, 8–9
unit/share of AIF, meaning of, 9
performance, 24
performance ratios, 27–28
alpha ratio, 27
beta ratio, 28
sharpe ratio, 28
Treynor ratio, 28
portfolio management, 22–24
process of, 1
regulation of, 2
risk vs. reward, 24–27
strategies, 20–21
unregulated funds, 14–19
using derivatives, 21–22
Investment Association, 19
Investment capital, 19
Investment committee, 16
Investment Company Act of 1940, 47
Investment Company Institute (ICI), 19
Investment Company with Variable Capital (ICVC), 13
Investment decisions, 57
Investment fund products, 6
Investment Funds sourcebook (FUND), 200
Investment industry, 173
agreement, 37
fees and costs, 28–29
annual management fees, 29
initial and exit fees, 29
performance fees, 29
usage of futures and options, 147–150
derivatives use in asset allocation, basic illustration of, 148–149
hedging, 149–150
income enhancement, 149
index tracker funds, 150
pension funds, 147–148
Investment performance, 24
Investment restrictions, 50
Investment strategy, 12
bottom up style, 12
management style, 12
active, 12
passive, 12
top down style, 12
Investor
disadvantages for, 86
Investors, 2
ISLA Global Master Securities Lending Agreement, 85
Islamic bonds, 21
Islamic finance
environment, 5
key feature of, 6
rules and guidelines, 6
Islamic funds, See Islamic investment funds
Islamic investment funds, 5–12
investment objectives, 7–12
meaning of investor, 9
offering/placement, meaning of, 8–9
unit/share of AIF, meaning of, 9
Islamic mutual funds, 6
J
Jersey domiciled fund, 4
Jersey investment funds, 15
K
Key personnel
loss of, 99
Key risk indicators (KRIs), 101
L
Legal Entity Identifier Regulatory Oversight Committee (ROC), 202
Legal risk, 85
Lender
advantages for, 86
disadvantage, 81
Lent security, 87
Letters of credit (L/CS)
advantages of, 84
disadvantages of, 84
Life cycle
derivatives trade, 75
Liquid exchange traded futures and options markets, 129
Liquidity policy, 36
Liquid securities, 12
Loans
of securities, 81
Local central bank, 141
Local government agencies, 138
Local operating unit solutions (LOUs), 202
London Commodity Exchange (LCE), 126
London International Financial Futures Exchange (LIFFE), 126
London Metal Exchange (LME), 126
London’s futures exchanges, 138
London Traded Option Market (LTOM), 128
Long-short fund, 43
M
Madoff’s Ponzi scheme, 46
Management, 98
Margin and treasury management, 146
Margin calls, 66
Margining process, 75
of option contracts, 141
Market, 1
information, 73
makers, 125
firms, 33
Market structure, 136–138
role of clearing house, 137–138
role of exchange, 136–137
Market volatility, 142
MarkitSERV, 162
Mark-to-market, 143
Master/feeder funds, 39
Monetary Authority of Singapore (MAS), 31
Money laundering, 35–36
Multimanager funds, 38–39
Mutual fund, 27
investment objective, 19
manager, 22
N
National Stock Exchange of India (NSE), 127
Natural resources, 1
frequency of, 62
New York Mercantile Exchange (NYMEX), 125
Nikkei Index futures, 148
Nominee process, 46
Nondiscretionary lending, 86
Non-EEA AIFs, 34
Novation, 137
O
OCC rules, 169
OCC’s margin methodology, 168
OCC stans, 168–169
methodology, 168–169
general features, 168–169
intraday withdrawal and deposits of collateral, 169
OECD member, 14
Offshore funds, 49
On-exchange derivatives, 75
post settlement phase of, 77
On-exchange markets, 65
Online confirmation and affirmation systems, 161
Online system service, 162
Open-ended Investment Company (OEIC), 13
examples of, 93
management, 100
policy, 100
Operations process, 95
Operations team
role of, 60
Organization, 197–198
Osaka Stock Exchange (OSE), 127
Outsourcing, 53
Overseas management company, 51
clearing, 166
credit derivatives, 164
derivatives valuation and accounting, 165
interest rate swaps (IRS), 155–158
common OTC option types, 158
contracts for differences (CFD), 159–160
credit default swap (CDS), 159
currency swap, 157
OTC options, 158
total return swap, 159
forward rate agreement (FRA), 154–155
forwards, 154–154
settlement of, 160–165
confirmations, 161–163
event calendar, 164
post trade environment, 163–164
settlement issues, 164–165
products, settlement of, 160–165
confirmations, 161–163
event calendar, 164
post trade environment, 163–164
settlement issues, 164–165
product, types of, 152
SWAPS, 155
trading, 166
valuation, 165
P
Passive fund, 29
Payment date, 156
PB services, 49
PD Regulation, 9
PE funds
invests, 65
valuations for, 65
Pension funds, 147
manager, 148
Performance, 24
fees, 29
calculation of, 67
vs. benchmark, 26
Performance ratios, 27–28
alpha ratio, 27
beta ratio, 28
sharpe ratio, 28
Treynor ratio, 28
Perimeter Guidance Manual (PERG), 203
Plus repurchase agreements, 138
Poor relationship management, 98
management, 22–24
pricing and valuation, 73
trade capture, 61
Portfolio specific haircut (PSH), 169
Practitioner-based committees, 136
Pricing controls and policy, 63
Pricing models, 63
Pricing policy, 63
Primary reconciliation process, 47
global custodian, 85
outsourcing, 53
proprietary systems, 55
for securities, 176
2.8 setting up a fund, 49–53
Principal on-exchange products, 75
Process team, 106
Product suitability, 117
Profit-focused commercial organizations, 136
Property fund, 178
Prospectus/offering memorandum/scheme, 15
Prudential Regulatory Authority (PRA), 31
Puttable and callable swaps, 158
Q
Quaint expressions, 8
R
Real Estate Investment Trusts (REITs), 40
Recognised Investment Exchanges (RIE), 136
Recognised Overseas Investment Exchanges (ROIE), 136
Reconciliations process, 95
Redemptions, 70
Registration, 137
Regulation
of funds, 31
and fund structures, 31–53
Alternative Investment Fund Manager (AIFMs), 32–34
Alternative Investment Managers Directive (AIFMD), 32–34
documentation and agreements, 53
EEA firms, 34
fund administration, 47–48
fund of funds, 37–38
fund structures, companies, trusts, partnerships, common funds, 37
hedge funds, 41–46
fund jurisdictions, 44
key players in operation of a fund, 44–46
open ended and closed funds, 43–44
money laundering, 35–36
multimanager funds, 38–39
other structures, 39–40
prime broker/brokers, 49–53
outsourcing, 53
2.8 setting up a fund, 49–53
principles and recommendations, 36–37
regulation and directives, 31–32
regulation, overview of, 31
alternative investment funds, 40–41
retail/mutual fund custodian, 46–47
undertaking for collective investments in securities directive (UCITS), 34–35
Regulatory authorities, 4
Regulatory compliance, 180
Regulatory environment, 18
Remuneration policy, 36
Reporting transparency information, 208
Reset dates, 156
Restricted investor funds, 69
alternative investment funds, 40–41
characteristics of, 40
Retail/mutual fund custodian, 46–47
Risk, 93–118
conflict resolution exercise, 105–107
background, 105–106
exercise, 107
of fraud in finance, 107–109
fund administration and custody environment
future changes and challenges in, 117–118
glossary of, 110–116
operational risk, 93–96
risk scenario analysis, 105
risks faced by fund and administrator can assist fund to manag risks, 93
self-assessment and measuring risk, 102–105
subjective vs. quantitative analyses in identifying risks, 101
terminology, 110
types of, 96–101
risk logs/incident reports, 100
risks and management of risks, cased studies and illustrations of, 100
managing operational risk, 100
risks faced by an administrator and custodian, 97–100
Risk array, 142
Risk management, 180
credit/counterparty risk, 181
market risk, 180
policy, 36
process, 62
structures, 100
Risk scenario analysis, 105
Risk terminology
glossary of, 189–196
Risk vs. reward, 24–27
S
“Screen based trading” systems, 136
Securities and Exchange Surveillance Commission (SESC), 31
Securities and payment settlement systems, 47
Securities Association of China, 220
Securities Law of People’s Republic of China, 219
Securities settlement process, 103
Securities transactions, 74
Self-assessment, 101
challenge, 103
and measuring risk, 102–105
key content of, 55
Service provision, 55
Settlement and margining, 140–146
collateral, 144
initial margin, 140–141
interest, 141
intraday margin, 142
margining customers, 145
margin offsets, 143
single currency margining and settlement, 145–146
SPAN margin system, 142–143
spot month margin, 142
variation margin (settlements), 143–144
Settlement risk, 85
Shanghai Commissioner Office, 219
Shanghai Futures Exchange, 127
Sharpe ratios, 28
Singapore Exchange (SGX), 127
Singapore International Mercantile Exchange (SIMEX), 127
Single currency margining, 145
Single-factor sub-portfolios, 170
Small authorized UK AIFMs, 199–200
Small registered UK AIFMs, 199–200
Society for Worldwide Interbank Financial Telecommunication (SWIFT), 46
Source-investment association, 187
Specific investment strategy, 147
“Spot” transaction, 121
Stakeholders register, 68
Standard ISDA document, 161
Standard portfoilo analysis of risk (SPAN) system, 141
Standard risks, 97
Stock index, 132
futures, 147
Stock market portfolio, 133
Stress test component, 170
Strike Price, 123
Structured and fund management, 4
Structured contingency, 1
Subjective vs. quantitative analyses in identifying risks, 101
Subscription and redemption process
life cycle of, 68
Supervision sourcebook (SUP), 200
Swap
definition of, 122
Sydney Futures Exchange (SFE), 127
System for Theoretical Analysis and Numerical Simulations (STANS), 141
methodology, 168
T
Tax-exempt money market funds, 20
Termination date, 156
Thomson Reuters, 6
Tokyo Financial Exchange (TFE), 127
Tokyo International Financial Futures Exchange (TIFFE), 127
Tokyo Rubber Exchange (TRE), 127
Tokyo Stock Exchange (TSE), 127
Total expense ratio (TER), 25
Toxic assets, 64
Trading
and accounting systems, 145
basic rule of, 132
and hedging strategies, 131–136
arbitrage trading, 133
fixed rate mortgages, 135–136
gearing, 133
hedging, 133
market direction (using futures), 132
potato farmers, 134
speculating (using options), 132–133
trading, 132
Traditional assets, 20
Transaction
details of, 60
team, 68
Transparency reporting requirements, 200–203
form of transparency information reports, 201
frequency of, 203–204
first transparency reports, 204–205
small authorized UK AIFM, 204
identifying AIFM and the AIFs, 201–202
more information on, 211–212
in relation to different fund structures, 202–203
feeder AIFs, 202–203
funds of funds, 203
reporting to FCA, 200–201
reporting transparency information to FCA, 205–209
GABRIEL reporting, 205
missed or late transparency reporting, 210
transparency information to be reported, 201
transparency reporting requirement-quarterly reporting period ending, 211
Treasury bond future, 126
Treasury management, 146
interest rate calculations, 146
U
UK domiciled fund, 4
UK Financial conduct Authority (FCA), 8
UK investment management company, 50
UK phenomenon, 1
UK stock market
pension fund manager’s analysis of, 147
funds, 33
investors, 34
regime, 33
Unique risks, 95
Unregulated exchange-traded fund, 14
Unregulated fund, 15
type of, 14
Unregulated funds, 14–19
US Foreign Account Tax Compliance Act (FATCA), 7
US regulation, 40
US retail investors, 50
US taxable investors, 50
US Treasury Bonds, 10
V
Valuation
and accounting processes, 56
checklist, 65
point, 51
policy, 36
in practice, 64
process, 63
Variation type process, 77
Venture capital, 65
Volcker rule, 32
Voting rights, 89
W
Withholding tax (WHT)
deduction of, 88
Workflow
kind of, 4
Z
Zhengzhou Commodity Exchange, 127
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