Market Circuit Breakers — A Post-Brexit Reminder

With post-Brexit vote market turmoil, it’s good to remember that the Securities Exchange Commission requires trading halts across US markets in the event that stocks fall more than specified percentages in one day. Continue reading

stop-634941_1280With post-Brexit vote market turmoil, it’s good to remember that the Securities Exchange Commission requires trading halts across US markets in the event that stocks fall more than specified percentages in one day. This information is also important to know if you are studying for securities licensing exam such as the Series 7, Series 24, Series 26, Series 62, Series 79, and the Series 65.

A market-wide trading halt can be triggered at three thresholds. These thresholds are triggered by steep declines in the S&P 500 Index. They are calculated based on the prior day’s closing price of the Index.

• Level 1 Halt—a 7% drop in the S&P 500 prior to 3:25 p.m. ET will result in a 15-minute cross-market trading halt. There will be no halt if the drop occurs at or after 3:25 p.m. ET.

• Level 2 Halt—a 13% drop in the S&P 500 prior to 3:25 p.m. ET will result in a 15-minute cross-market trading halt. There will be no halt if the drop occurs at or after 3:25 p.m. ET.

• Level 3 Halt—a 20% drop in the S&P 500 at any time during the day will result in a cross-market trading halt for the remainder of the day.

These halts apply to securities and options trading on all the exchanges as well as the OTC market. Levels 1 and 2 trading halts are permitted just once a day.

Solomon Exam Prep has helped thousands of financial professionals pass the Series 6, 7, 63, 65, 66, 24, 26, 27, 50, 51, 52, 53, 62, 79, 82 and 99 exams.

For more information call 503 601 0212 or visit http://www.solomonexamprep.com/

FINRA qualification exam restructure update

Panel discussion May 24, 2016 at the FINRA annual conference. John Kalohn, Joe McDonald and Roni Meikle from FINRA discussed coming restructure of qualification exams. Continue reading

Panel discussion May 24, 2016 at the FINRA annual conference. John Kalohn, Joe McDonald and Roni Meikle from FINRA discussed coming restructure of qualification exams.

Goals of exam restructure:

• Respond to industry and regulatory changes
• Reduce redundancy of content across exams
• Streamline exam process
• Minimize impact and change to the registration rules
• Ensure registered reps have a solid breadth of understanding of securities industry

Another goal appears to be a desire by FINRA and member firms to expand the number of people who can and will get licensed to work in the securities industry.

Exam restructure launch date has been postponed, at least a year, till January 2018 at the earliest.

Exams slated to be retired, will not be retired till 2018 restructure launch date. These include the Series 11 (Order Processing Assistant), Series 42 (Options Representative), Series 62 (Corporate Securities Representative) and Series 72 (Government Securities Representative) exams. The panel noted that only one person had taken the Series 72 in the past year.

Anyone holding registrations that are being retired (Series 11, Series 62, Series 72) will be able to continue to hold them until they leave industry for more than 2 years.

Series 17/37/38 Exams – FINRA will retire these exams and use the UK and Canadian certifications to exempt certificate holders from the Essentials Exam.

Exams that will remain as “Top-off” exams: Series 6, 7, 22, 57, 79, 82, 86/87 and 99. Top-off exams will be shorter than current exams.

Essentials Exam features:

Essentials exam currently envisioned to be 100 questions long.

Unlike the current system, you will not need to be associated with a member firm to take the Essentials Exam. In other words, you won’t need to have a job with a broker-dealer to take the Essentials Exam.

If you pass the Essentials Exam, it will be valid for 4 years from your passing date.

Just passing the Essentials Exam will not be enough to qualify you to be a registered person with FINRA. To become a registered person, you will have to have a job with a FINRA member firm, file a U4, get finger-printed, and pass a Top-off exam.

What if you are currently registered?

Current registrants will maintain registration(s) without the need for additional testing.

Most current registrants will be considered to have passed the Essentials Exam, and it will be valid for 4 years upon leaving the securities industry.

Registrants who return to the securities industry within 2 years will regain registration without needing to take the Essentials or Top-off exam.

Registrants who return to the securities industry between 2 and 4 years later will not need to take the Essentials Exam, only the Top-off exam for the registration position.

Registrants who return to the securities industry more than 4 years later will need to take both the Essentials and the top-off exam.

Next steps:

Securities Essentials Exam is being finalized by FINRA and committee of industry representatives.

Top-off exam outlines to be released 9-12 months prior to launch date of exam restructure

Prepare CRD and other FINRA systems for new exam
structure

Create a system for persons not associated with a member to enroll and pay for the Essentials Exam

Make registration rule, fee and qualification exam filings with the SEC in 2016

FINRA says exam restructure will do the following for firms:

• Give firms an opportunity to employ new business models for onboarding staff.
• Allow firms to better gauge industry knowledge of interns and other potential employees.
• Allow non-registered staff (e.g., administrative) to take Essentials Exam.
• Create a larger pool of potential new registered persons

Impact on firms

Firms will have choices of how to onboard new reps:
• Request applicants take and pass Essentials Exam prior to making job application
• Have new hires take Essentials Exam-only initially and then take top-off qualification exam
• Have new hires take both Essentials Exam and top-off exam together

Other info related to exam restructure:

• Through CRD, firms will be able to confirm whether and when an individual passed the Essentials Exam.
• Top-off exams will retain traditional names: i.e., Series 7 exam will remain the Series 7 exam.
• Position designations in CRD will remain the same (i.e., GS will remain GS [Series 7]).
• Firms will be able to schedule the Essentials Exam for support personnel through CRD.
• Current registrants will not need to take the Essentials Exam to maintain current registrations.
• Principal exams and registrations will not be directly affected.

Principal Exams

Under the new representative-level program structure, several principal exams cover subject matter already covered on the Essentials and the Top-off exams.

Example – Series 24 Exam major topic areas include:

• Sales practice (Series 7)
• Investment banking (Series 79)
• Trading (Series 57)
• Research (Series 86/87)

As a result of this, FINRA will develop a principal exam structure that builds on the new representative-level exam structure to reduce redundancy in content and better focus on testing knowledge of and ability to apply supervisory level rules and concepts

Currency Hedging in International Investing: Smart Investing or Just Smart Marketing?

Investing internationally has never been easier, especially if you don’t want to invest directly in a foreign market. Today, US investors have an enormous range of mutual fund, ETF and ADR options from which to choose. However, when making a foreign investment it’s important to know that, unless currency hedging is employed, returns depend not only on the performance of the investment but also on the currency exchange rate. Continue reading

Currency HedgingInvesting internationally has never been easier, especially if you don’t want to invest directly in a foreign market. Today, US investors have an enormous range of mutual fund, ETF and ADR options from which to choose. However, when making a foreign investment it’s important to know that, unless currency hedging is employed, returns depend not only on the performance of the investment but also on the currency exchange rate. To understand this, imagine you buy shares in a Brazilian company. Time passes and the share price has gone up 5%. But at the same time the value of the real, the Brazilian currency, has depreciated 10%. Since the Brazilian shares, and any returns, are denominated in real, and must be converted to dollars, the value of your Brazilian investment has declined. Instead of a gain, you have a loss. This foreign exchange (“FX”) risk is the risk that the currency of a foreign investment will decline in relation to the value of the US dollar (or, said another way, that the US dollar will appreciate relative to the value of the currency of the foreign investment).

To protect against currency or exchange risk, a US investor can hedge using various FX products such as forward currency contracts, swaps and options. These products allow an investor to lock in an exchange rate and thereby minimize the effect of currency fluctuations. Recently, many ETF and mutual fund companies have begun to use FX products and strategies to reduce the effect of currency volatility in their international offerings. BlackRock’s iShares web site says that this allows investors to “take command of currency risk.” WisdomTree’s website says that by hedging currencies their ETFs allow investors to “participate more fully in the local equity returns of international markets.”  Vanguard urges “investors to consider fully hedging their portfolios’ fixed income allocation” and “investors should consider hedging at least a portion of the foreign-currency exposure within their equity allocation.”

Sounds good. But everything has a cause and effect, not to mention a cost. Is currency hedging really a good idea for investors with international investments?

A brief review of the information available online indicates the following:

• Currency hedging helps returns when the US dollar is rising. But when the dollar is falling, unhedged does better.

• Short-term changes in exchange rates are difficult, perhaps impossible, to predict. In the long run, currency swings even out.

• Studies seem to indicate that hedging reduces short-term volatility. This may be particularly beneficial for those investing in international bonds. In the long-term, however, it’s not clear that currency hedging reduces volatility, especially in equity investing.

• Hedging costs, which cuts into returns. Hedging costs more in times of economic uncertainty and stress, often exactly when hedging may be most desirable.

• Currency hedging makes it easier to track the local return of an international equity index.

• Long-term, unhedged international stock and bond portfolios perform better than hedged international stock and bond portfolios.

• Currency exposure means greater volatility and greater diversification.

• Hedged foreign investments have a higher correlation with US investments than un-hedged foreign investments.

On balance, if you are investing in foreign securities and you are concerned with short-term volatility, particularly if you are a fixed income investor, currency hedging may be for you. But if short-term volatility is not a concern, the lower returns, greater costs and reduced diversification of currency hedging may outweigh any benefit.

Studying for the FINRA Series 7 exam or the NASAA Series 65 exam?

You need to know that in times of home currency strength, the value of a foreign investment will be negatively impacted. When the dollar appreciates, US investors with overseas holdings will earn less. Conversely, if the home currency weakens, the Series 7 or Series 65 exam will expect you to know that the returns on international investments will be higher. That means that US investors with foreign holdings will see higher returns on their international assets when the US dollar depreciates.

A related question that may come up on your securities licensing exam, such as the Series 7 or Series 65, is what effect will a rising or falling US dollar have on the share price of a US company with international sales? Remember, a rising US dollar means overseas sales will be worth less since they will convert into fewer US dollars, while a falling US dollar means overseas sales will be worth more since they will convert into more US dollars.  However, if a company hedges its currency exposure, that may dampen the effect of currency fluctuations.

How might a US company with international sales hedge FX risk? A US company can do several things.  It can enter into a forward contract that locks in a specific exchange rate. This is highly effective as long as the transaction is likely to occur. It’s also low cost. A standardized and exchange-traded version of a forward is a futures contract.  An exporter can also use options to hedge currency risk.  An exporter could buy a put on a foreign currency in order to hedge FX risk.  Conversely, a US company that imports from overseas is exposed to the risk that the foreign currency will rise in value and if that happens it will cost more US dollars to pay foreign suppliers. To hedge such a risk, a US importer could buy a call on the foreign currency.

*For your Series 7 or Series 65 exam, remember the mnemonic: EPIC which stands for Exporters use Puts, Importers use Calls.

Of course, there are ways to mitigate foreign currency risk without using options or entering into forward contracts.  If you’re an exporter, you can ask your customer to pay in dollars. This transfers all exchange risk to the foreign buyer.  However, this will limit a company’s overseas sales.  Also, you can set up a foreign subsidiary and keep the foreign sales revenue overseas.


Sources and suggested links:

Currency Hedging: 5 Things You Need to Know
http://www.schwab.com/public/schwab/nn/articles/Currency-Hedging-5-Things-You-Need-to-Know

Currency Risk Does Not Belong in Your Bond Portfolio
https://www.betterment.com/resources/investment-strategy/why-international-bonds-but-not-currency-risk-belong-in-your-portfolio/

To hedge or not to hedge? Evaluating currency exposure in global equity portfolios
https://personal.vanguard.com/pdf/ISGCMC.pdf

To Hedge or Not to Hedge: Currency Hedging and International Investing
http://gersteinfisher.com/wp-content/uploads/2015/06/GF_Research_ToHedgeOrNot.pdf

Hedge of least regret: The benefits of managing international equity currency risk with a 50% hedging strategy
http://www.nylinvestments.com/polos/ME39a-071555414.pdf

Study Question of the Month – May 2016

This month’s study question from the Solomon Online Exam Simulator question database is now available! Relevant to the Series 7, 62 and 82. —ANSWER POSTED— Continue reading

This month’s study question from the Solomon Online Exam Simulator question database is now available!

***Submit your answer to info@solomonexamprep.com to be entered to win a $10 Starbucks gift card.***

Study Question

Question (Relevant to the Series 7Series 62 and Series 82): Which of the following is not true of commercial paper?

Answers:

A. It is used to cover an issuer’s short-term needs such as payroll and inventory

B. It typically matures in less than 90 days, but it can have a term as long as 397 days.

C. It is generally issued in lots of $100,000, but they can be sold at a discount in the primary market

D. Highly rated commercial paper is generally considered safe enough to be purchased by money market funds, but it is rarely purchased by retail investors.

Correct Answer: B. It typically matures in less than 90 days, but it can have a term as long as 397 days.

Rationale: Large corporations, banks, and financial firms with high credit ratings may issue commercial paper to cover short-term needs, such as payroll and inventory, and to finance general operations. Commercial paper is unsecured and issued at a discount, and typically matures in less than 90 days, although it can have a term as long as 270 days. It is generally issued in lots of $100,000, but they can be sold at discount in the primary market. Even though it is unsecured, because it is short-term and issued only by banks and large corporations with high credit ratings, commercial paper is generally considered safe enough to be purchased by money market funds, but it is rarely purchased by retail investors.

Congratulations Alexander B. this month’s Study Question of the Month winner!

***Submit your answer to info@solomonexamprep.com to be entered to win a $10 Starbucks gift card.***

Study Question of the Month – February 2016

This month’s study question from the Solomon Online Exam Simulator question database is now available! Relevant to the Series 7, 24, and 62. –ANSWER POSTED– Continue reading

This month’s study question from the Solomon Online Exam Simulator question database is now available!

***Submit your answer to info@solomonexamprep.com to be entered to win a $10 Starbucks gift card.***

Study Question

Question (Relevant to the Series 7Series 24, and Series 62): When a transaction is executed at 3:00pm Eastern Time, what are the TRACE reporting requirements (assuming the transaction is not a list or fixed offering price transaction, a takedown transaction, or an asset-backed securities transaction)?

Answers: 

A. It must be reported within 10 seconds of execution

B. It must be reported within 15 minutes of execution

C. It must be reported within 30 seconds of execution

D. It must be reported by 8:15 on the next business day

Correct Answer: B. It must be reported within 15 minutes of execution

Rationale: Transactions executed between 8:00 am and 6:15 pm must be reported to TRACE within 15 minutes of execution, and do not receive a designation.

Congratulations to Jessi B., this month’s Study Question of the Month winner!

***Submit your answer to info@solomonexamprep.com to be entered to win a $10 Starbucks gift card.***

Study Question of the Month – January 2016

This month’s study question from the Solomon Online Exam Simulator question database is now available! Relevant to the Series 7, Series 24, Series 55, and Series 62. –ANSWER POSTED– Continue reading

This month’s study question from the Solomon Online Exam Simulator question database is now available!

***Submit your answer to info@solomonexamprep.com to be entered to win a $10 Starbucks gift card.***

Study Question

Question (Relevant to the Series 7, Series 24, Series 55, and Series 62): A market maker has a listed a quote of 32.20 – 32.80, 12 x 7 for ABCD stock on NASDAQ. The market maker accepts a buy limit order from a customer for 200 shares at 32.60. What quote will the market maker have to display to comply with a SEC rules?

Answers:

A. 32.60 – 32.80, 10 x 7

B. 32.20 – 32.80, 12 x 7

C. 32.60 – 32.80, 2 x 7

D. 32.20 – 32.80, 2 x 7

Correct Answer: C. 32.60 – 32.80, 2 x 7

Rationale: The SEC requires market makers to immediately (within 30 seconds) display customer limit orders that are better than their current best quote for NMS stocks. In this case, the buy limit order is better than the market maker’s current bid (32.60 > 32.20) so the market maker must immediately display the adjusted quote.

Congratulations to David A., this month’s Study Question of the Month winner!

Study Question of the Month – December

This month’s study question from the Solomon Online Exam Simulator question database is now available! Relevant to the Series 7, Series 27, and Series 52. –ANSWER POSTED– Continue reading

This month’s study question from the Solomon Online Exam Simulator question database is now available!

***Submit your answer to info@solomonexamprep.com to be entered to win a $10 Starbucks gift card.***

Study Question

Question (Relevant to the Series 7, Series 27, and Series 52): John Johnson is interested in investing in municipal bonds, but wants to be sure he can convert his investment to cash quickly in case an unexpected expense comes up. Which of the following investments would allow John to return the investment to the issuer and receive money prior to maturity?

Answers:

A. Moral obligation bond

B. Revenue anticipation note

C. Zero-coupon bond

D. Variable-rate demand obligation

Correct Answer: D. Variable-rate demand obligation

Rationale: Variable-rate demand obligations (VRDOs) contain a put option, which gives investors the right to put the security back to the issuer at any time, at a price equal to the bond’s face value plus accrued interest. For example, assume that an investor has a VRDO with a face value of $1,000 and accrued interest of $30. The security will mature in a little under three months. Due to a pressing medical expense, the investor decides to return the VRDO to the issuer and receive the $1,030.

Congratulations Marty T., this month’s Study Question of the Month winner!

Study Question of the Month – November

This month’s study question from the Solomon Online Exam Simulator question database is now available. Relevant to the Series 6, 7, 62, 65 and 79. –ANSWER POSTED– Continue reading

This month’s study question from the Solomon Online Exam Simulator question database is now available.

***Submit your answer to info@solomonexamprep.com to be entered to win a $10 Starbucks gift card.***

Study Question

Question (Relevant to the Series 6Series 7Series 62Series 65 and Series 79): A few years back ABC Corporation issued callable bonds yielding 6%. The call price is 104, and the call protection period has ended. The bonds are trading at 105 today. Which of the following are true:

I. The current yield on these bonds is 6.3%

II. The current yield on these bonds is 5.7%

III. There is a good chance the bonds will be called

IV. There is a good chance the bonds will not be called

Answers: 

A. I and III

B. I and IV

C. II and III

D. II and IV

Correct Answer: C. II and III

Rationale: The formula for calculating current yield is the annual interest on the bond ($60) divided by the current price of the bond ($1050) which is equal to 5.7%. Because ABC can finance the debt at a lower interest rate than they are currently paying there is a good chance that they will call the bonds.

Congratulations Stephen Z., this month’s Study Question of the Month winner!

All study questions are from Solomon’s industry-leading Online Exam Simulator.

FINRA Enacts New Rule 2040 on Payments to Unregistered Persons

FINRA Rule 2040 became effective August 24, 2015. It replaces NASD Rules 2420 and 1060(b). This change affects the Series 6, 7, 24, 26, 27, 28, 62, and 82 exams. Continue reading

Exam AlertFINRA Rule 2040 became effective August 24, 2015.  It replaces NASD Rules 2420 and 1060(b).  This change affects the Series 6, 7, 24, 26, 27, 28, 62, and 82 exams.

FINRA Rule 2040 explains that an entity must register as a broker-dealer in order to receive commissions and fees for a securities transaction, unless it is a transaction that does not require registration.  FINRA does not explicitly outline which transactions do not require registration, but it states that member firms can make this determination on their own by:

  • Relying on releases, no-action letters, and interpretations from the SEC
  • Requesting a no-action letter from the SEC
  • Seeking a legal opinion

Rule 2040 further states that retired representatives may continue to be paid commissions on customer accounts if the representative and member have agreed upon the continuing payments before retirement.

Finally, Rule 2040 (c) states that members may conduct transactions with foreign finders as long as certain requirements are met, including:

  • The member firm is sure that the finder does not need to register as a broker-dealer in the U.S. and the compensation arrangement doesn’t violate foreign law
  • Neither the finder nor the customer is a U.S. citizen, and both live abroad
  • Customers receive a document disclosing the compensation paid to the finder by the member firm
  • Customers acknowledge receipt of this disclosure to the member firm in writing, which the firm retains and keeps available for inspection
  • Confirmation of each transaction indicates that a finder’s fee is being paid by written agreement

Source: Regulatory Notice 15-07

Study Question of the Month – October

This month’s study question from the Solomon Online Exam Simulator question database is now available. Relevant to the Series 7, 52, 62, 65 and 66. –ANSWER POSTED– Continue reading

This month’s study question from the Solomon Online Exam Simulator question database is now available.

***Submit your answer to info@solomonexamprep.com to be entered to win a $10 Starbucks gift card.***

Study Question

Question (Relevant to the Series 7, Series 52, Series 62Series 65 and Series 66):

The interest rate on a SLGS certificate or bond can never fall below:

Answers:

A. The Treasury rate

B. One basis point above the Treasury rate

C. One basis point below the Treasury rate

D. Zero

Correct Answer: D. Zero

Rationale: The SLGS interest rate is always one basis point below the Treasury security that has a comparable maturity, unless the Treasury rate itself equals zero, which is the floor below which the interest rate on a SLGS cannot go. In this case the Treasury rate and the SLGS rate will be equal.

 

All study questions are from Solomon’s industry-leading Online Exam Simulator.