Free CISI CMP Sec/Deriv Practice Questions: Securities Industry

CISI means Chartered Institute for Securities & Investment. CMP means Capital Markets Programme, and this page is for the Securities/Derivatives unit. Use this focused CISI CMP Securities/Derivatives page as a short practice test for Securities Industry. The items are original Finance Prep sample exam questions built for scenario-based practice, not trivia, puzzle questions, official CISI questions, copied live-exam content, or exam dumps.

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Sample questions

These are original Finance Prep practice questions aligned to this topic area. They are not official CISI questions, copied live-exam content, or exam dumps. Use them to preview question style and explanation depth before continuing with topic drills, mixed sets, and timed mock exams in Finance Prep.

Question 1

Topic: Securities: the Financial Services Industry

A UK pension fund is participating in a sterling corporate bond issue and expects to trade the bond after launch.

Decisive facts:

• The issuer wants an institution to arrange the offer to wholesale investors and manage the syndicate.
• The pension fund wants tradable two-way prices in the secondary market.
• The pension fund will hold the bond through a nominee account and needs income and corporate action processing.
• The trade must settle through recognised market infrastructure on a delivery-versus-payment basis.

Which statement best describes the wholesale participants supporting this activity?

• A. An investment bank arranges the issue, market makers support secondary liquidity, a custodian safekeeps the bond and processes income, and clearing/settlement infrastructure completes delivery against payment.
• B. The pension fund manager must personally perform underwriting, market making, custody, clearing, and settlement because wholesale intermediaries are not used for institutional bond trades.
• C. A retail adviser arranges the bond issue, the registrar provides two-way secondary prices, the issuer safekeeps the pension fund’s holding, and settlement occurs when the first coupon is paid.
• D. A custodian underwrites the issue, the central securities depository decides the coupon, a market maker records legal ownership for all investors, and the exchange provides nominee custody.

Best answer: A

What this tests: Securities: the Financial Services Industry

Explanation: Wholesale capital markets rely on specialised participants. In a new corporate bond issue, an investment bank or syndicate manager typically arranges distribution to institutional investors and may underwrite or place the securities. In secondary trading, market makers or dealer firms help liquidity by quoting bid and offer prices and committing capital. Custodians safeguard client assets, often through nominee arrangements, and handle income collection and corporate action administration. Clearing and settlement infrastructure supports post-trade processing, including delivery-versus-payment so securities and cash move together. The pension fund is the investor, not the provider of all market infrastructure services.

• Retail advisers serve retail client advice needs; they do not normally manage wholesale bond issuance or provide institutional market liquidity.
• Custodians, CSDs, market makers, and exchanges each have distinct functions; underwriting, coupon setting, ownership records, and custody are not interchangeable.
• Institutional investors may trade directly or through dealers, but they do not replace the wholesale infrastructure used for issuance, liquidity, custody, clearing, and settlement.

These roles align with issuance, liquidity provision, custody, and settlement support in wholesale securities markets.

Question 2

Topic: Securities: the Financial Services Industry

An investment manager buys 200,000 listed shares for a pension fund through a broker.

Trade path:

• The order is matched on a regulated electronic order book.
• The matched trade is sent to a central counterparty, which novates the trade and calculates the clearing members’ net obligations.
• Settlement takes place through a securities settlement system on a delivery-versus-payment basis.
• After settlement, the pension fund’s global custodian holds the shares in a nominee account and administers income and corporate actions.

Which statement best explains why these infrastructure roles are separated?

• A. Each function manages a different stage and risk: execution and price formation, counterparty risk and netting, cash-and-securities transfer, and safekeeping with asset administration.
• B. The settlement system sets the market price because delivery-versus-payment is the mechanism that creates price discovery.
• C. The central counterparty performs the main safekeeping role because novation means it holds the pension fund’s securities after settlement.
• D. The trading venue remains responsible for legal ownership of the shares until the custodian decides whether the pension fund should keep them.

Best answer: A

What this tests: Securities: the Financial Services Industry

Explanation: Market infrastructure roles are separated because they perform different functions and control different risks. A trading venue brings buyers and sellers together and supports price formation through its trading rules and order-matching process. A clearing system, often involving a central counterparty, manages post-trade obligations, novation, netting, and counterparty risk between clearing members. A settlement system completes the exchange of securities and cash, commonly using delivery versus payment to reduce principal risk. A custodian then safekeeps assets for the investor, maintains records, and administers income and corporate actions. Keeping these roles distinct supports specialisation, operational control, risk management, and accountability across the trade lifecycle.

• Treating the trading venue as responsible for legal ownership confuses execution with post-trade asset holding.
• Treating the central counterparty as the long-term holder of the investor’s securities confuses clearing with custody.
• Treating delivery-versus-payment as price discovery confuses settlement mechanics with trading venue price formation.

The facts describe distinct infrastructure functions that separate trading, clearing, settlement, and custody controls.

Question 3

Topic: Securities: the Financial Services Industry

A securities firm is preparing a simple split of one morning’s activity between retail and wholesale transaction value. For this exercise, retail activity is business with individual/private clients; wholesale activity is business with corporate issuers, banks, governments or institutional investors.

Morning activity:

What is the estimated wholesale transaction value for the morning?

• A. £54.2 million
• B. £47.0 million
• C. £6.4 million
• D. £47.8 million

Best answer: D

What this tests: Securities: the Financial Services Industry

Explanation: Retail financial-services activity in capital markets is centred on individuals and private clients, even where the instrument is a listed share or investment trust. Wholesale activity is conducted with professional or institutional participants, such as corporate issuers, company treasury desks, insurers, pension funds, banks and governments. The product alone is not decisive; the counterparty and nature of the business matter. The online equity orders and investment trust orders are retail because they are placed by individual or private clients: £4.0 million plus £2.4 million, or £6.4 million. The wholesale activity comprises the insurance company’s bond trade, the non-financial company’s Treasury bill purchase and the multinational issuer’s Eurobond underwriting. Adding those values gives £12.0 million + £0.8 million + £35.0 million = £47.8 million.

• £54.2 million includes both retail and wholesale activity, so it is the total transaction value rather than the wholesale value.
• £47.0 million excludes the company treasury desk transaction, but corporate treasury activity is wholesale.
• £6.4 million captures only the individual and private-client flow, so it is the retail value.

The wholesale items are the insurance company bond trade, the company Treasury bill purchase and the Eurobond underwriting participation, totalling £47.8 million.

Question 4

Topic: Securities: the Financial Services Industry

A buy-side investment manager has executed a purchase of listed shares for a fund through an agency broker.

Trade details:

• Shares bought: 8,000
• Price: 375p per share
• Broker commission: £90
• Ignore taxes and other charges.

The fund’s appointed custodian controls the fund’s cash and securities for settlement. What is the most appropriate next practical step?

• A. Instruct the broker to arrange only a cash movement of £29,910 because commission reduces the purchase cost.
• B. Instruct the custodian to settle a delivery-versus-payment purchase: receive 8,000 shares and pay £30,090.
• C. Ask the issuer’s registrar to issue 8,000 new shares and pay £30,090 to the company.
• D. Ask the exchange to transfer 8,000 shares into the fund’s account and pay £30,000.

Best answer: B

What this tests: Securities: the Financial Services Industry

Explanation: In a secondary-market share purchase, the broker executes the trade, but the investment manager normally gives settlement instructions to the fund’s custodian. The custodian then arranges for cash to be paid and securities to be received through the settlement infrastructure. The trade consideration is 8,000 shares at £3.75, which is £30,000. For a purchase, broker commission is added to the cash cost, so the total cash settlement amount is £30,090. The issuer and registrar are not issuing new shares, and the exchange is not the party that holds the fund’s assets for settlement.

• Treating the trade as a new issue confuses a secondary-market purchase with a primary-market share issue.
• Asking the exchange to transfer assets gives the exchange a settlement and custody role it does not normally perform.
• Subtracting commission from a purchase cost reverses the treatment; commission increases the buyer’s cash outflow.

The custodian is the party that should be instructed to settle the fund’s purchase, and the cash to pay is £30,000 plus £90 commission.

Question 5

Topic: Securities: the Financial Services Industry

A securities firm’s operations team is reviewing a draft client-service note before it is sent to new analysts.

Draft note:

Trade lifecycle for listed shares
1. The exchange admits members and matches buy and sell orders.
2. The clearing system becomes involved after execution and works out each participant's obligations.
3. The settlement system transfers securities and cash on settlement date.
4. The custodian holds clients' securities and maintains asset records.
Proposed conclusion: These roles could normally be performed as one function because they all process the same trade.

Which action is best supported by the draft note?

• A. Revise the conclusion to state that the roles are separate because each manages a different stage and risk in the trade lifecycle.
• B. Keep the conclusion but add that clearing and settlement are the same process carried out before execution.
• C. Keep the conclusion because the exchange is responsible for execution, clearing, settlement, and custody once a trade is matched.
• D. Revise the conclusion to state that the custodian is the main risk manager because it holds the securities after settlement.

Best answer: A

What this tests: Securities: the Financial Services Industry

Explanation: Market infrastructure divides the trade lifecycle into specialised roles. A trading venue or exchange brings orders and quotes together and supports execution and price formation. Clearing follows execution and determines obligations; where a central counterparty is used, it also manages counterparty risk through processes such as novation, margining and default management. Settlement is the legal completion of the trade through transfer of securities and cash, often on a delivery-versus-payment basis. Custody is the ongoing safekeeping, recordkeeping and asset-servicing role after securities are held for investors. The draft’s numbered stages broadly describe separate functions, so the proposed conclusion is not supported. The note should emphasise clear accountability, operational controls and risk separation across the trade lifecycle.

• Treating the exchange as responsible for the whole lifecycle ignores the different roles of clearing houses, settlement systems and custodians.
• Making the custodian the main risk manager overstates safekeeping and asset-record functions.
• Equating clearing with settlement misses the distinction between calculating obligations and completing the cash-and-securities transfer.

The listed stages show distinct functions: execution, clearing obligations, settlement transfer, and custody safekeeping.

Question 6

Topic: Securities: the Financial Services Industry

An operations analyst at a custody bank is reviewing a client request before replying.

Client instruction note:

• Client: pension fund manager
• Request: “Please buy 50,000 shares of Orion plc today on the London market.”
• Current relationship: custody and settlement services only; no dealing mandate
• Client also has an appointed executing broker
• No trade confirmation or matched settlement instruction has been received

What is the best supported next action for the custody bank?

• A. Ask the clearing house to find a seller and execute the purchase for the pension fund manager.
• B. Tell the client to place the order through its executing broker, and process custody and settlement only after valid trade instructions are received.
• C. Ask the company registrar to transfer the shares immediately into the custody bank’s nominee account.
• D. Enter the order directly into the exchange order book because the custody bank will hold the shares after settlement.

Best answer: B

What this tests: Securities: the Financial Services Industry

Explanation: Market infrastructure roles are distinct. A custodian safeguards assets, administers holdings and supports settlement, often through nominee arrangements. It does not automatically have authority to execute trades for a client. A broker or exchange member is normally responsible for receiving and executing an order in the market. Once the broker has executed the trade, the custodian can act on proper settlement instructions and then hold the securities for the client. A clearing house may stand between market counterparties after a trade is matched, and a registrar maintains the issuer’s register, but neither replaces the broker’s execution role in this scenario.

• Direct exchange entry is not supported because a custody mandate does not itself provide dealing authority or exchange-member execution access.
• Referring the request to a clearing house confuses post-trade clearing with finding a counterparty and executing an order.
• Registrar involvement before an executed trade confuses maintenance of registered ownership records with the trading and settlement process.

The custody bank’s role is safekeeping and settlement support, while the appointed broker is the appropriate party to execute the market order.

Question 7

Topic: Securities: the Financial Services Industry

A UK growth company plans to raise £80 million by issuing new ordinary shares to institutions.

Decisive facts:

• The funds will finance an acquisition.
• The shares are being issued by the company, not sold by an existing shareholder.
• Management needs help with pricing, timing, investor demand and documentation.
• The company wants the issue placed with investors and may seek underwriting support if demand is weak.

Which market participant is the single best fit for this requirement?

• A. A custodian holding securities in a nominee account
• B. A central securities depository processing settlement entries
• C. An execution-only broker providing exchange trading access
• D. An investment bank acting as placing agent and underwriter

Best answer: D

What this tests: Securities: the Financial Services Industry

Explanation: Capital raising is a primary-market activity. The company is issuing new ordinary shares to obtain funds, so the most relevant participant is an investment bank or similar corporate finance intermediary that can structure the offer, advise on pricing and timing, arrange investor demand and potentially underwrite the issue. A broker is more directly associated with trading access in the secondary market. A custodian safeguards assets and administers holdings after securities are acquired. A central securities depository supports settlement and record-keeping after trades or issues are processed, but it does not lead the capital-raising transaction.

• An execution-only broker is relevant to buying or selling securities on a trading venue, not arranging a new issue for the company.
• A custodian is relevant to safekeeping, nominee registration and corporate action administration, not raising new share capital.
• A central securities depository is relevant to post-trade settlement and securities records, not advising on pricing or underwriting the issue.

A primary-market share issue for capital raising is typically arranged by an investment bank that can advise, place the shares and provide underwriting support.

Question 8

Topic: Securities: the Financial Services Industry

A trainee in a wholesale markets team reviews the following desk note. What is the best supported interpretation of the activity recorded?

• A. Market-infrastructure activity
• B. Primary-market activity
• C. Secondary-market activity
• D. Investment-management activity

Best answer: C

What this tests: Securities: the Financial Services Industry

Explanation: The classification depends on the economic role of the transaction. Secondary-market activity is trading in securities that have already been issued, normally between investors, dealers, brokers, or other market participants. Here, the bond is existing, the price is agreed with another dealer, and the seller receives the cash proceeds. The issuer receives no funds and no new securities are created, so the transaction is not a capital-raising issue. The presence of a pension scheme and investment manager does not change the classification, because the note records execution of a market trade rather than portfolio construction or advice. Clearing and settlement are involved after the trade, but they support completion of the transaction rather than define its main activity.

• Primary-market activity would involve issuing new securities and raising funds for the issuer.
• Investment-management activity would centre on portfolio allocation, mandate management, or investment decisions rather than the execution classification.
• Market-infrastructure activity covers systems such as clearing and settlement, but those are only supporting post-trade processes here.

The note records a purchase of an already-issued bond between market participants, with no new capital raised for the issuer.

Question 9

Topic: Securities: the Financial Services Industry

An induction pack for capital-markets trainees contains 25 short prompts. It is being screened for opening Securities technical-unit content on broad financial-services industry structure and market infrastructure.

Screening rule: Keep prompts about broad sectors, market participants, exchanges, clearing and settlement infrastructure. Remove prompts whose main focus is detailed regulation, tax, or private-client advice.

Each prompt is in one category only.

Based on the screening rule, how many prompts should be kept?

• A. 20
• B. 16
• C. 13
• D. 9

Best answer: C

What this tests: Securities: the Financial Services Industry

Explanation: Opening financial-services industry coverage focuses on broad market structure: who the main participants are and how market infrastructure supports issuance, trading, clearing and settlement. It does not require detailed FCA rule analysis, tax computations, or private-client suitability advice. Applying the screening rule, retain the 7 prompts on issuers, investors and intermediaries and the 6 prompts on exchanges, clearing houses and settlement systems. The total kept is 7 + 6 = 13.

• 9 would undercount by excluding one of the broad in-scope categories.
• 16 incorrectly includes the 3 tax calculation prompts, which are outside this broad industry-structure scope.
• 20 incorrectly includes private-client suitability material, which belongs to advice-focused content rather than market infrastructure.

The retained prompts are the 7 on broad market participants plus the 6 on high-level market infrastructure.

Question 10

Topic: Securities: the Financial Services Industry

A wholesale bond market maker starts the day with no inventory in a quoted corporate bond.

Quoted price: 99.20-99.35 per £100 nominal

During the morning:

• A pension fund sells £5,000,000 nominal to the market maker at the bid price.
• An insurer buys £3,500,000 nominal from the market maker at the offer price.

Ignore accrued interest and fees. Which outcome best describes the market maker’s support of market liquidity?

• A. It is short £1,500,000 nominal and earns £5,250 gross spread on the matched amount by standing ready to buy and sell.
• B. It is long £1,500,000 nominal and earns £5,250 gross spread on the matched amount by standing ready to buy and sell.
• C. It is long £1,500,000 nominal and loses £5,250 because it bought at the bid and sold at the offer.
• D. It has no inventory and earns £7,500 gross spread because the full £5,000,000 sale was matched immediately.

Best answer: B

What this tests: Securities: the Financial Services Industry

Explanation: A wholesale market maker supports liquidity by quoting two-way prices and using its balance sheet to absorb temporary order imbalances. Here, it buys £5,000,000 nominal from one investor and sells £3,500,000 nominal to another, leaving a long inventory of £1,500,000 nominal. The bid-offer spread is 99.35 - 99.20 = 0.15 per £100 nominal. The spread is earned only on the matched £3,500,000 nominal: £3,500,000 × 0.15 / 100 = £5,250. The remaining long position is inventory risk that the market maker may later sell or hedge.

• A short position would arise only if the market maker had sold more nominal than it bought.
• Buying at the bid and selling at the offer is the normal source of gross dealing spread, not a loss before inventory revaluation.
• Applying the spread to the full £5,000,000 ignores that £1,500,000 remains unmatched in dealer inventory.

The market maker bought more nominal than it sold and earns the 0.15 price spread only on the £3,500,000 nominal that was matched.

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