This might have some utility for those transitioning to financial services from a different industry, in particular, those moving from military service. I have kept it as succinct as I can while maintaining utility; a full sheet could be filled for each point on the sheet so take it for what it is: a memory jogger or a crib card for some last minute revision before an interview. For a good overview of the City I recommend 'Know The City' by Christopher Stoakes. If people like then and find it useful then let me know and I will add some more.

1. THE FINANCIAL SYSTEM – A QUICK REVISION
BANKING
Commercial: Retail or Wholesale
Wholesale deals: bilateral, between 2 parties or syndicated
(between a group of banks). Latter helps to spread risks. Banks
borrow short term and lend/invest long term.
LIBOR: London Inter-Bank Offered Rate.
Acquisition finance: M&A activity.
Equipment leasing: bank gets a tax allowance, may give some to
lessee.
Export finance: bridges the gap between exporting and
getting paid (started during mercantilist era)
Corporate banks: act for companies
Note: servicing debt is tax deductible so debt may be more
attractive than raising capital through other means
Regulatory capital: must hold, e.g. Basel III. ‘Dead money’.
MONEY Money is a: medium capital exchange / portable /
uniform / fungible (mutually interchangeable) / divisible /
accessible.
Money is a medium of trust (i.e. trust that money for goods in
future will be broadly same as money for the same goods now).
Helicopter money (must be irreversible) : fiscal stimulus
through:
tax rebates, coupons, cheques, or,
Central bank financing. Create new money, buy bonds on
secondary market, give cash to treasury
Cash flow: the oil of business.
RETAIL FINANCE
High Street banking: everyday banking.
Private banking: for high net-worth individuals.
Islamic banking: usually for Muslims of high net-worth. Islamic
faith bans gambling (Maisir) and speculation (Gharar). So what:
no highly leveraged debt/derivatives is permitted So what:
subject buys assets, sells on with a mark up (profit allowed).
London is a large centre for Islamic banking. Singapore is bigger.
US unlikely to be a rival in this market.
Microfinance: Popular in poor countries. High transaction costs.
Peer-to-peer: new. Age of internet helps.
MARKET PARTICIPANTS
Institutional investors – Buy Side
insurance companies | pension providers (defined benefit vs.
defined contributions) | sovereign wealth funds | investment
intermediaries
Unit trusts: Open ended: issue as many units as you wish
Closed ended: limited to how many units issued. Investment
trust: public company
Institutional investors may be system risks: e.g. AIG (held more
CDS than anyone else in market)
BOND MARKETS
Bond: a tradable loan - Market $40trn, US: $15trn. Trades on
secondary market. Used by sovereigns, states, & local
govt.(municipals/munis),
Coupon: interest on bond. Value depends on interest rates and
their projections. Longer period usually = higher interest rates
as higher risk. Pay more in turbulent markets.
Securitisation turns loans into bonds.
Sovereign bonds: only source of income besides tax (for UK).
Financial instruments often priced on govt. bonds.
Zero coupon (no interest): bond issued at discount to face value
| redeemed at face value.
Junk bonds: below investment grade. V high risk.
Commercial paper: to address short term needs.
EQUITY MARKETS
Bid = buy, Offer = sell.
Market makers: quote continuous price for stock
Liquidity: measure of how efficiently shares can be traded. Less
liquid = bigger bid/offer spread.
Thin market: shows prove moves very quickly.
Efficient markets: price doesn’t move much when trading
in/out of stock (because sufficient liquidity).
Block/program trade: covers large trades & reduce price
moves
Short: think stock is over-valued so borrow share, deliver for
settlement, buy for lower price.
Dark pools: (ECNs): trade large blocks of stock off-exchange.
HF trading: automated trading. Potential threat to liquidity?
Clearing: each party’s recode of trading must be the same.
Clearing is the process that tallies these up.
CURRENCY MARKETS +$1trn per day, 30% of trade in London.
Companies may want to borrow in home currency and convert
to local currency.
NETTING: Counterparty/Herstatt risk. Settle at end of day (pay
difference).
Spot market: settle now. Cable trade: £ - $. Carry trade: borrow
strong currency, buy weak currency, ride the rise = profit.
Govts may use own reserves to buy own currency if it weakens –
intervention in markets. Widely discouraged.
FX scandal: shared info on who was netting, transfer rates, and
mid-market rates. Collusion at FIX point.
MARKETS
Emerging markets/frontier markets: Frontier markets are even
less developed (and therefore higher risk) than emerging
markets. - BRICs (Brazil, Russia, India, China) - MINTS (Malaysia,
Indonesia, Nigeria, Turkey)
Offshore financial areas: Shell companies - Tax havens | OECD:
created blacklist in 1995
Global financial integrity needed to tackle cross border flows
(estimated > $1trn pa)
International financial centres: where they are now due to
trading history, cluster of enablers (finance, bankers, lawyers,
sovereign protection (law), shipping and reinsurance.
DERIVATIVES - a bet on something, derived from…
Derivatives of bonds, shares, currencies and more. It is a
forward transaction: deal now, deliver later (Hedging). Used for
speculation. Derivatives: achieve a much bigger position than
possible by buying underlying element (stock etc.):
Amplification effect (V powerful and v risky). Reduces
transaction costs, add liquidity.
Swaps: change one asset for another, e.g. interest/currency;
fix/float depending on view of the future. Helps fix expenses.
On assets, tax, equity, total return, property etc.
ISDA: International Swap Dealers Association (approx. 50% in
London)
Currency swap: raise funds in one currency, trade in another,
reverse later at same XR.
Matching trade: equal on both sides.
Credit Default Swaps: (think of the film ‘The Big Short’).
Premium paid for protection against a default. Enables insurers
to gain access to banking market.
Option: right to buy but not the obligation.
Synthetic exposure: gearing, leverage.
If hold underlying shares then called a covered option.
Forward: take delivery of ‘X’ at date ‘Y’. Agreed price of
commodities.
Future: standardised forward, traded on-exchange. Smooth’s
out spikes in demand. Trade for amount ‘X’ of quality ‘Y’.
Stock Index Futures (SIF): quick, efficient, cheap. Dynamic
hedging: using SIF to buy time to unwind a position.
DEFAULT:
Argentinian style – full default, not paying anything
Greek style – a haircut, not paying everything back as promised.
Value default – inflate debt away, makes it less in real terms.
Political default – reduce spending so do not fulfil political
promises.
SECURITISATION
Makes capital of bond market available to the banking market.
Makes retail finance cheaper.
Special purpose vehicle: sell bonds, use income to buy loan
book, bank is still collection point.
Tranched home loans: sell mortgage, securitise it. Then don’t
care whether it is repaid or not as the debt is sold on and it is
someone else’s problem. Therefore: encouraged to sell loans to
anyone. Eventually unwound when banks became suspicious of
each others credit standing and stopped lending to each other.
Synthetic securitisation.
Credit Default Swap. Pool securities and launched a new
security. Then make a security of a security…
Asset backed security (backed by underlying asset)
Mortgage backed security (backed by underlying mortgage)
BANK OF ENGLAND Purpose: set monetary policy & ensure
financial stability, inch price stability (inflation)
controls interest rates and money supply.
Usually: interest rates leads to market leads to bond price
and, therefore, a bond yield
A strong £ = expensive exports.
Inflation asset values but decreases real debt
If, for example, the US devalues the $ then debt falls in real
value as will all $ deposit values.
Buys some short-term UK govt bonds and bankers acceptances
to introduce money (liquidity) into markets.
MORAL HAZARD
Encouraging reckless behaviours by providing safe guards (e.g.
government intervention to stabilise) - organisations
determined ‘too big to fail’ encouraged to gain size so they were
too big to fail thereby ensuring a government safety net, and
therefore institutions could take more risk.
REGULATION
Glass-Steagall. 1930s. Separates commercial & investment
banks. Banks always asked for exemptions, it became a ‘paper
tiger’; repealed in 1990s.
Dodd-Frank Act. Transparency of markets, bring derivatives
onto exchange, resolution regime, end ‘too big to fail’, increase
international standards.
Volker rule. Restricts proprietary (prop) trading.
Basel I: addresses credit risk and risk weighting
Basel II: allowed additional risks to be taken on
Basel III in response to financial crisis, focuses on risk of a bank
run, more risk sensitive, boosted capital requirements, (must
hold minimum and core capital), European wide bank regulation
system established.
Basel IV: to standardise capital requirements through
standardising how banks define risk.
UK REGULATION
Prudential Regulation Authority. Supervises 1700 banks,
building societies, credit unions, insurers, major investment
firms. Sets expectation on duty of responsibility.
1 Discussion paper 2. Consultation paper 3. Policy statement 4.
Supervising statement 5. Statement of policy
2012 Financial Services Acts: Strengthen accountability
OTHER ECONOMIC DEPARTMENTS
Treasury: set economic policy and determine fiscal policy
Trade department: insurance company supervision
FCA: Regulates Fin products, can set min product standards.
Market regulation and bank supervision, enforcement actions
and customer protection.