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London Exchange guide for private

Learn more about our markets Contents Background

London Group recognises the essential role that private investors have Background 01 to play in the financial markets and we are committed to providing this core constituency with the information, tools and incentives they need to improve their Securities 02 interaction with the stock .

Exchange Traded Funds 06

Exchange Traded Products 10 We have been working hard to ensure private We cannot act alone in improving the investor investors have to the broadest range of landscape but over the last year the UK Book for retail bonds 15 classes – from international equities, to Government has made two bold and widely retail bonds, ETFs and exchange traded applauded decisions: to abolish stamp duty on , as well as a large and growing the purchase of AIM shares and to allow these range of derivatives – within the most efficient, shares to be included in ISAs. These were moves transparent infrastructure. we, alongside a wide range of and industry associations, campaigned heavily for. We want to encourage UK private investors to become aware of the opportunities available to is proud of the them, especially in light of a resurgent UK IPO achievements, together with the UK government market. Individuals play a crucial part in and actors, it has accomplished in providing and liquidity to UK listed bringing more private investors to the financial . , particularly SMEs, do markets. We will continue to innovate and work not have adequate access to funding, so it is hard to help guarantee further opportunities vital private investors are able to fully contribute for this vital investor group. to growth and job creation through .

“We want to encourage UK private investors to become aware of the opportunities available to them, especially in light of a resurgent UK IPO market.”

ii–05 Heading to go here 01 London Stock Exchange guide for private investors Equity Securities

Equity Securities

As of August 2014, there are around 1300 Main Market companies and 1100 AIM quoted companies on London Stock Exchange. For the trading of these securities, London Stock SEAQ Exchange operates several trading services: SEAQ is London Stock Exchange’s non-electronically “Operating several executable quotation service that allows Market Makers to provide firm quotes in AIM securities that are not traded on trading services for Trading Services for SETSqx SETS or SETSqx. It is not available for new securities. Several trading smaller securities services operated Equity Securities SEAQ is underpinned by guaranteed liquidity provision by >797 SETSqx (Stock Exchange Electronic Trading Service – quotes by London Makers throughout the trading day, ensuring the ensures that as a market and crosses) is a trading service specifically designed for Exchange All of London Stock Exchange’s trading services operate provision of two-way in at least one EMS. securities less liquid than those traded on SETS. SETSqx within the Rules of London Stock Exchange. operator, London Stock combines a periodic electronic book with standalone — Suitable for less liquid instruments that would be more The Rules of London Stock Exchange can be found at non-electronic quote-driven market making providing reliant on quotes Exchange provides www.londonstockexchange.com/traders-and-brokers/ guaranteed liquidity in at least one Exchange Market Size — Only registered Market Makers can directly participate on rules-regulations/rules-regulations.htm (EMS) throughout the trading day. screen in the formation process choice to companies, The allocation of a to a trading service is an — There is no maximum spread regime or CCP provision. are scheduled at 9.00am, 11.00am, 3.00pm and their advisers, liquidity important factor in ensuring that a security is supported A minimum of 2 registered Market Makers are required. 4.35pm1. Electronic orders can be named or anonymous on by the trading service that is most appropriate for its submission and, for most securities, executions providers and the liquidity profile. Operating several trading services for More information on the SEAQ trading service will be centrally cleared. smaller securities ensures that as a market operator, can be found at: www.lseg.com/setsqx wider market.” London Stock Exchange provides choice to companies, — Provides investors a choice of being able to trade their advisers, liquidity providers and the wider market. against Market Maker firm quotes, or submitting orders into the auctions Accessing the market — Where there are no matched closing auction orders, the SETs closing price is set by the mid of the Market Makers How do access the market? What are the different ways of accessing the collective Best Bid Offer To access the market as a private investor, you have to market for equity securities? SETS is London Stock Exchange’s flagship electronic order — Provision of the closing auction and the follow-up place your orders through a . A directory of Retail Service Provider network (“RSP”) book, trading FTSE 100, FTSE 250, FTSE Small Cap index Closing Price Crossing Session allows order book London Stock Exchange Member Firms can be found at The RSP network is a service that is used by the majority constituents as well as liquid AIM, Irish and London users the opportunity to trade at the day’s actual the following link: of retail in the UK. It facilitates the interaction of Standard Listed securities. closing price www.londonstockexchange.com/exchange/prices-and- retail brokers and Market Makers / liquidity providers. markets//tools-and-services/find-a-/ The RSP is a Request for Quote network where upon — Suitable for less liquid instruments that are more reliant These are underpinned by the provision of Market Maker locate-a-broker-search.html transmission of your buy or sell request through your on Market Maker quotes electronically executable quotes throughout the trading stockbroker, a number of Market Makers are polled. Market day, providing liquidity in at least one Exchange Market — Investors can participate in the price formation process What are the different types of stockbroker? Makers then return their quote to your stockbroker, who Size (EMS). by trading in the auctions Advisory selects the best price. You then have a period of up to — Provides investors the ability to access prices in less An advisory service is where your stockbroker will provide 30 seconds to decide whether to deal.. Where there are no matched closing auction orders, the liquid securities. you with advice and, subject to your requirements conduct closing price is set by the mid of the Best Bid Offer. (“DMA”) trades on your behalf only with your prior consent. DMA services allow you to interact, via a web interface to ——Highly accessible to trading participants More information on the SETSqx trading service can be Execution Only your broker, directly with the SETS electronic order book ——Order book users can place order types such as ‘limit’ found at: www.lseg.com/setsqx These stock brokers execute trades based on your or SETSqx auction service. DMA gives you more control of and ‘immediate or cancel’ directly onto the order book, instruction. An execution only service generally provides your order as it is placed in the central order market and allowing them to participate directly in the price internet based dealing, or on the phone. Many execution is available for execution by all market participants. formation process only stock broking firms also provide . DMA services allow participants to also interact with ——Provision of the closing auction and the follow-up SETS auctions. Closing Price Crossing Session allows order book Discretionary users the opportunity to trade at the day’s actual In a discretionary service, based on your requirements, closing price. your stockbroker can execute trades on your behalf without your prior approval. More information on the SETS trading service can be found at: www.lseg.com/sets

1 From 15 September 2014.

02–03 London Stock Exchange guide for private investors • Equity Securities 02–03 London Stock Exchange guide for private investors • Equity Securities Equity Securities

Different types of ETPs Exchange Traded Funds

Market Data Key terms Exchange Traded Funds (ETFs) are instruments which track an index. Indices can be country or region specific and based on emerging markets, developed markets, , Pre trade and post trade data for all of London Stock Auction markets and many other . These instruments give investors instant Exchange’s trading services are available for private A period where no automatic execution takes place in diversification as one unit represents an investment in multiple companies and sectors. investors. Data is available on a real time or delayed order to concentrate available liquidity. During an auction ETFs are listed on-exchange and are traded like shares. Market Makers are committed to basis. call period, orders can be entered, modified or deleted. provide two-way prices throughout the trading day. Following the auction call period an auction uncrossing What is the difference between Level 1 takes place. The auction uncrossing generates the auction and Level 2 data? uncrossing price. Most ETFs are passive instruments which means they UCITS Level 2: Includes full depth of the book with all quotes, Closing auction aim to replicate the performance of the index Because -based ETFs rely on the swap counterparty to orders and Level 1 data including trades, open price, The closing auction sets the closing price in a SETS >797 rather than outperform it. Other key features include: deliver the returns of the underlying index, this represents a close price, uncrossing price plus , best price security. The closing auction call period starts at 4.30pm equity ETFs across ——Professionally managed degree of counterparty risk. Counterparty risk is also present plus volume for -based ETFs, due to the that may and the closing auction ends at 4.35pm, subject to 30 countries, ——Open-ended 30-second random period(s) and any price or market 16 regions and occur. Under UCITS, an ETF’s commitment may ——UCITS compliant – regulated like funds Level 1: Includes best price and volume, value traded order extensions. 25 sectors not exceed 10% of its (NAV) which means the per security, indicative uncrossing volume, opening ——Low tracking error maximum exposure to counterparty risk is limited to 10%. Closing Price Crossing Session (CPX) prices, trade high and low individual trades, closing ——Free of UK stamp duty when traded on the ETFs are also collateralised and some are over-collateralised A 5-minute trading session that follows the closing prices, order book VWAP, all trades VWAP, cumulative to mitigate counterparty risk. The is typically volumes, uncrossing price and volume, Post Trade and auction. Trades can be executed at the closing auction made up of like shares and must cover at least 90% ——Can trade in multiple Off Book data. price. of an ETF’s NAV. Securities held as collateral are marked-to- ——Providers are authorised by the Financial Conduct Exchange Market Size (EMS) market ensuring the value does not fall below the regulatory Authority (FCA) How do I access Level 1 or Level 2 data? The minimum quote size at which Market Makers are limit. Collateral levels can range between the 90% minimum Private investors generally access London Stock obliged to trade. EMS is set by London Stock Exchange for ——No exit fees. and above 100% (over-collateralisation). Investors can Exchange market data through a Stockbroker or each security. find out about an ETF’s collateral policy by through a market information vendor. For a helpful overview of ETFs please visit contacting the . Cash-based ETF investors are also Executable quote www.londonstockexchange.com/etfvideoresources protected under UCITS collateralisation requirements. A Market Maker’s two-sided, electronically executable SETS The collateral is ring-fenced so that investor assets are order book quote displaying , price and size. segregated to provide protection if ETF providers fail. Firm quote Different types of ETFs A Market Maker’s two-sided, non-electronically executable SETSqx or SEAQ book quote displaying identity, price There are two types of ETFs: “Pre trade and post trade and size. Cash-based (physical ETFs) Market Maker A cash-based ETF physically holds the shares of constituent data for all of London Firms that quote both a buy and sell price in a security. companies of the underlying index being tracked. Stock Exchange’s Market Makers are bound by obligations set out in the rules Swap-based (synthetic ETFs) of the London Stock Exchange. A swap-based ETF does not hold shares of constituent trading services are Opening auction companies of the index being tracked but instead replicates The opening auction sets the opening trading price in a the performance of the index via a swap arrangement. The ETF available for private SETS security. The opening auction call period starts at holds a basket of securities unrelated to the index and enters 7.50am and the opening auction ends at 8.00am, subject into a swap agreement with a counterparty who undertakes investors. ” to 30-second random period(s) and any price extensions or to deliver the performance of the index to the ETF and it will market order extensions. in turn deliver the returns of its basket to the counterparty. All ETFs are open-ended which means that the issuer can create or redeem units in the fund according to investor demand.

04–05 London Stock Exchange guide for private investors • Equity Securities 04–05 London Stock Exchange guide for private investors • Exchange Traded Funds Exchange Traded Funds Exchange Traded Funds

bn Benefits of ETFs Structure of swap-based ETFs Structure of cash-based ETFs £135 Cost-efficiency Swap-based ETFs do not hold securities of constituent These ETFs are units of a fund which holds a designed to track the total ETF value ETFs have low management fees in comparison to companies which make up the index being tracked, but performance of an underlying index. The creation process for these ETFs starts with traded in 2013 actively managed unit trusts / mutual funds and are much they are backed by physical assets. The ETF issuer instead an authorised participant or a Market Maker buying securities from the open market cheaper than buying the underlying assets to obtain the enters into a swap agreement with a counterparty who which reflect the composition of the benchmark index. These securities are deposited equivalent level of exposure. Diversification – ETFs are not is tracking the returns of the index and the two will swap with a custodian which will hold them and issue the authorised firm / Market limited to European blue- companies. Investors can the returns on the assets they hold. Maker with ETFs. These ETFs are then traded on London Stock Exchange where gain exposure to domestic and international sectors and private investors can buy and sell them through their broker. markets which may otherwise be difficult to access This arrangement allows the ETF issuer to access markets in a cost-effective way. overseas or international sectors which could otherwise The redemption process is the reverse. The authorised participant / Market Maker will be difficult or costly to reach. The swap counterparty will buy ETFs from the open market and swap these for the related underlying securities Flexibility also benefit from the agreement in the same way. with the and these securities can then be sold on the open market. ETFs can be used on their own to gain exposure to an index or in combination with other investment products to form investment strategies within a portfolio. Liquidity Traded like shares, ETFs can be as liquid as the Capital markets Investors underlying securities they represent. Market Makers quote two-way prices with tight spread requirements 4 Investors can buy and sell set by the Exchange. ETFs through their broker. Simplicity ETFs are traded during the regular trading hours just A fund purchases a basket of securities Broker like shares. which does not reflect the index it is tracking. Transparency Components of the underlying are fully visible to the investor. produce a factsheet for their ETFs which state what investors are being exposed to. Tracking Capital markets performance is also published. London Stock Exchange Fund Investor-owned assets Basket performance increase 1 The authorised participant / Assets out of which ETFs are created, by , is the from £100 to £105 ETF Market Maker buy securities exclusive of ETF holders. Even in the case of from the market. insolvency by the ETF manager, administrator or issuer, these assets are protected. Authorised participants / ETF Market Maker

Fund pays Counterparty counterparty £5 pays fund £7 2 Authorised participant / ETF Market Maker assembles 3 The custodian bank holds a basket of securities which the basket of securities will replicate the performance and gives the authorised of the underlying index and participant / ETF Market transfers them to a designated Maker ETFs which can then custodian bank. be traded on-exchange. Swap counterparty Return of index performance increase from £100 to £107 ETF custodian

06–07 London Stock Exchange guide for private investors • Exchange Traded Funds 06–07 London Stock Exchange guide for private investors • Exchange Traded Funds Exchange Traded Funds

Exchange Traded Products

Portfolio construction: As with any investment product, ETFs carry a number Exchange Traded Products (ETPs) such as Exchange Traded Commodities (ETCs) and Exchange of risks. Most ETFs are index tracking funds, meaning the Traded Notes (ETNs) are listed exchange traded securities structured as notes which track the choosing and using ETFs performance of an ETF will rise and fall with the underlying performance of an underlying index or a single . They trade on London Stock index which may be complex and/or volatile, exposing Exchange’s Main Market ensuring a high level of regulatory oversight. These securities trade ETFs are leading the charge in a new democratic world of investors to . Investors’ capital is at risk, and and settle like ordinary shares with Market Makers providing continuous liquidity on both investment where investors are increasingly taking control you may not get back the amount originally invested. sides of the order book. With these instruments, investors can gain exposure to the of their own portfolio. Why? Firstly because they are simple Investors may be exposed to counterparty risk resulting performance of various commodities, indices and even currencies. There are a variety of ETPs to trade. Just like regular shares, ETFs can be purchased from the use of securities lending in physical ETFs, or from on London Stock Exchange offering access to previously difficult and expensive-to-reach through a UK stock broker using a dealing account, the use of an OTC performance swap with an investment ISA or SIPP. The second reason is diversification. ETFs are bank for synthetic ETFs. If the index or the constituents of intrinsically diverse. For example, instead of building your the index are denominated in a different to that own portfolio of UK equities, and paying costs and fees of the ETF, investors are exposed to currency risk from What are ETPs? on multiple securities, you can purchase a single ETF that fluctuations. Simple products. Sophisticated provides exposure to the top 100 UK companies through strategies. the FTSE 100 index. Accessing the market Exchange Traded Products Not only are the vehicles themselves diverse, but with a product range spanning different market sectors, regions, Investors can access the market via a broker: themes, commodity baskets or fixed income strategies, and Execution-only brokers will buy or sell according to the whole risk spectrum from government bonds to single Exchange Traded Commodities Exchange Traded Notes Exchange Traded Currencies investor instructions providing no investment or trading country emerging markets, ETF investors can easily create a advice. Advisory brokers provide advice and execute well diversified core portfolio. Furthermore, with both income trading decisions made by the investor. paying (distributing) ETFs and growth (capitalising) ETFs available, they can capture both growth and income. Discretionary brokers will execute trades on investors’ ETPs such as ETCs and ETNs are structured as ETPs ETFs behalf and may also make investment decisions without securities but unlike conventional bonds these instruments ETFs can also be used tactically to take advantage of investors’ prior approval. pay no interest and are not rated. ETPs can give investors Type of Notes linked to the Open-ended index term trends. The combination of core and satellite a means of diversifying investment portfolios without security performance of tracking funds Some brokers offer a Direct Market Access (DMA) commodities, indices, allocations means that investors can build a portfolio the need to: service whereby member firms of London Stock Exchange currencies and to suit their specific views and investment budget. Small ——enter into swap agreements or forward , can directly submit customer orders to the order book portfolios can be built with a handful of ETFs, and larger UCITS Non-UCITS compliant UCITS compliant via their own systems. ——take physical delivery of the underlying commodity, or portfolios with very specific exposures can achieve Collateral No regulatory collateral UCITS collateral 1  ——hold securities which constitute the underlying index. even greater diversification. DMA allows sophisticated investors to take greater control UCITS (Undertakings for requirements – some ETPs requirements the Collective Investment over their trades by enabling them to place buy and sell in Transferable Securities) are fully collateralised and As the ETP market has developed, it has expanded The third major factor is cost. Passive ETFs are significantly orders directly on London Stock Exchange’s order books products are governed some are unsecured by the UCITS IV Directive beyond the original commodity instruments (ETCs), and cheaper than actively managed products and Total Expense and execute with other market participants. (2009/65/EC). The Directive now includes notes (ETNs) and currencies (Currency ETCs). Ratios (TERs) typically range between 0.15% and 0.85% per introduces a number of requirements/safeguards year. This TER is the annual charge that includes costs Further information that funds must meet to It is important to note that ETPs are different to ETFs Collateralisation such as custody fees, marketing costs and index licensing be authorised as UCITS For a full list of ETFs available on London Stock Exchange, (e.g. segregated assets and in a number of ways. ETPs such as ETCs and ETNs are not costs. On top of this, investors will be charged a brokerage please visit http://www.londonstockexchange.com/ limited liability between There are number of ways ETPs can be collateralised sub-funds, increased funds and therefore lie outside of the remit of UCITS – the fee in the same way as when buying shares. traders-and-brokers/security-types/etfs/downloads/ transparency, investment Undertakings for Collective in Transferable and this will to a degree depend on the underlying. etfsforprivateinvestorsguide.pdf diversification limits, robust risk management). Securities.1 Importantly though, the TER is not a true measure of the In ETPs where the underlying is a physical commodity such Total Cost of (TCO). Although all ETFs share the as gold or other precious metals, the physical commodity same aim – to track an index as cost effectively and precisely itself can be used as collateral secured in a custodian vault. as possible – some do it much better than others. Tracking difference and tracking error are two measures that describe In cases where the underlying is perishable or is impractical how precisely and consistently the ETF tracks its benchmark. to hold, for example grains or crude oil, collateralisation As anything less than the index performance is a cost to you, may be in the form of matching contracts (futures and it is important to look at these variables. The bid/ask spread swaps) purchased from commodity counterparties held will also impact performance as the difference between by the collateral manager in a pledge account. buy and sell price is key to your trading cost. Some can be backed by other assets such as bonds and UCITS funds held in a segregated account.

08–09 London Stock Exchange guide for private investors • Exchange Traded Funds 08–09 London Stock Exchange guide for private investors • Exchange Traded Products Exchange Traded Products Exchange Traded Products

D

Different types of ETPs Single commodity m Short and leveraged ETPs Aluminium, , gold, platinum, , £995 An investor can gain both short and leveraged exposure Commodity ETCs, Currency ETCs nickel, zinc, corn, soya beans, wheat, “It is more value traded in to a variety of different asset classes through tactical use and ETNs – including short and crude oil, natural gas leveraged ETFs of short and leveraged ETPs. Short and leveraged ETP and ETPs in 2013 leveraged products exposures include equities, fixed income, commodities cost-effective and currencies. Short ETPs provide negative exposure to Commodity sector the performance of a benchmark. Therefore an investor to trade ETPs Agriculture, energy, grains, livestock, industrial holding a short ETP will profit if the value of an underlying The term ETP is an umbrella term that metals, precious metals, soft commodities benchmark goes down. Leveraged ETPs are designed to encompasses ETFs, ETCs (commodities and provide exposure to a multiple of the performance of a than physical >350 currencies) and ETNs. In the following note we benchmark. For example, a 3× or −3× leveraged ETP will be will briefly outline the key characteristics of ETPs listed on Commodity broad designed to reflect three times the daily percentage change assets.” London Stock ETCs, ETNs and short and leveraged ETPs. All commodities, ex-agriculture, ex-energy in a given unleveraged underlying benchmark (before fees). Exchange Both and short positions can be leveraged.

Exchange Traded When investors purchase short and leveraged ETPs they Commodities and Currencies Foreign exchange should be aware of the effects of compounding. Short and Sterling, , US , Canadian leveraged ETPs are typically reset on a daily basis which means that a stated factor should apply to the ETNs Commodity ETCs are designed to give exposure to an Dollar, , Dollar, returns of that day. Compounding is when the gains and individual commodity or a basket of commodities. They Swedish Kroner, Norwegian Kroner, losses from one period are added to the base from which the Unlike ETCs, ETNs are generally issued by and 1  are subject to a different regulatory treatment to ETFs , , Chinese A futures is an next period’s returns are calculated. Compounding could hold no assets. An bank will agree to pay the agreement to purchase and are not governed by UCITS rules. This allows them , Indian a commodity at an agreed have both positive and negative effects, depending on how return of a reference benchmark (less fees), meaning ETNs to provide exposure to a variety of commodities, covering price, with delivery and the benchmark moves. The effects of compounding are are entirely reliant on the creditworthiness of the issuing payment to take place at a precious metals, energy, agriculture and industrial specified point in the future. magnified when investments are held for longer entity. They are not restricted by the UCITS diversification metals sectors. These are the exposures available through London local listings. 2 Bank of International periods of time. requirements therefore allowing them to provide exposures Settlements Triennial not otherwise permitted under UCITS rules. Survey 2013. Commodity ETCs are typically structured in two ways

3 Forward contracts are – physically or synthetically. Physical commodity ETCs similar to futures contracts are backed by a specific quantity of a commodity and aim however they are private to provide exposure to commodity spot prices. In contrast, transactions and do not Volatility trade on-exchange unlike synthetic commodity ETCs do not hold a physical under- the latter. This means Short term futures, mid term futures forward contracts can be lying asset; instead they track futures indices which are tailored to meet the needs constructed to simulate a continuous exposure to of the contracting parties 1 (e.g. delivery dates returns. and size). Commodity broad The currency ETC structure has also been used to offer S&P GSCI Index TR, Commodity Index TR investors access to currencies, whether as currency pairs bn or a . The most traded currency pairs are the US Dollar against the Euro (EUR/USD), the Japanese Commodity sector Yen (USD/JPY) and the British Pound (GBP/USD) with these £26 Agriculture, energy, grains, livestock, three currencies making up just half of all foreign exchange industrial metals, precious metals, transactions.2 Currency ETCs typically track forward indices soft commodities which are constructed to simulate a continuous exposure value traded across to currency forwards returns.3 all ETPs in 2013 Single commodity Gold

These are the exposures available through London local listings.

10–11 London Stock Exchange guide for private investors • Exchange Traded Products 10-11 London Stock Exchange guide for private investors • Exchange Traded Products Exchange Traded Products Order Book for retail bonds (ORB)

Different types of ETPs London Stock Exchange’s electronic Order book for Retail Bonds was launched in February 2010 in response to growing private investor demand for easier access to trading bonds. It offers a cost-effective, transparent and efficient platform for concentrating on-screen liquidity and Benefits of ETPs ETPs in your portfolio facilitating in a wide range of UK fixed income securities.

Choice and ease of access to markets ETPs offer investors diversification, providing access The range of ETPs trading on London Stock Exchange to various global markets and sectors through a single covers a wide spectrum of markets such as agriculture, security traded just like ordinary shares, as well as Benefits of ORB Creating an electronic energy, livestock, metals and foreign exchange. Investors potential tax advantages. market in the UK can use ETPs to gain exposure to markets which are >60 Open and transparent market model for more than 60 gilts trading in retail-size otherwise difficult and complex to reach. Issuers produce factsheets for their instruments and these Many investors have traditionally gained exposure to fixed are generally available on issuers’ websites. Factsheets will and over 100 The new order book brings transparency to the bond Cost-efficiency income markets by buying units in managed bond funds, typically contain information on investment objectives, corporate bonds market in three ways: all participants simultaneously (tradable in but a growing number of private investors are becoming It is more cost effective to trade ETPs than physical assets access executable prices and have equal opportunity to collateralisation, trading parameters, key features of the denominations of increasingly knowledgeable about debt securities and are to attain the same level of exposure. Holding physical assets trade at the best available price; everyone can see the price product and details of the corresponding index or commodity. £1,000 or less) seeking to take a more active role in managing their assets. can be costly, impractical and in some cases impossible discovery process through our and third-party data feeds; for most investors. and all private investors are able to see prices on-screen Investors will incur a management fee usually expressed Acknowledging this trend we were inspired to create a bond and trade bonds in a similar way as they currently do for Liquidity in basis points or a percentage of the return. The rate will market for private investors using the wide range of debt equity shares. These instruments are traded on-exchange with Market vary across different issuers and individual instruments. securities already admitted to our markets. In fact there are Makers committed to providing two-way prices. This means Investors are advised to understand fully the investment Regulation and market supervision over 10,000 listed bonds available on our systems but up investors should always be able to see a tradable price objectives and mechanisms of an ETP before undertaking All securities admitted to trading on the electronic Order until the introduction of the ORB none were traded on our for an instrument. to subscribe for these instruments. If in doubt, investors book for Retail Bonds are approved by the UK electronic order books. should consult their broker. Portfolio diversification and flexibility Authority and admitted to the Main Market, which is ETPs can be used on their own or in combination with other classified as an EU . This ensures a high Instead, transactions in bonds were typically agreed in the investment vehicles to form an investment strategy suited level of regulatory oversight and offers the benefits of the over-the-counter (OTC) market between counterparties and to individual investment needs. Investors can trade in Accessing the market transparency afforded by the Authority’s the details of the trade then reported. This means that the and out of ETPs as easily as ordinary shares giving investors disclosure and continuing obligations regimes; and all secondary market for retail bonds was fragmented and Investors can access the market via a broker and there greater flexibility and control when cash extraction or trading is subject to London Stock Exchange’s highest private investors found it difficult to access the bonds they are a number of services available: a change in portfolio weighting is required. standards of market supervision and monitoring by our would like to include in their investment portfolios. Execution-only brokers will buy or sell according to investor experienced market surveillance team. Individual Accounts (ISAs) and Self instructions providing no investment or trading advice. Invested Personal (SIPPs) qualification Improved liquidity Some ETPs qualify for inclusion in ISAs and SIPPs providing Advisory brokers provide advice and execute trading The centralised trading mechanism concentrates liquidity a shelter for profits from capital gains taxation. decisions made by the investor. while dedicated Market Makers provide two-way prices throughout the trading day. All other registered member Tradable in multiple currencies Discretionary brokers will execute trades on investors’ participants are also able to enter orders into the order Some ETPs trade in multiple currencies – Sterling, Euro behalf and may also make investment decisions without book, giving private investors the opportunity to take or and the US Dollar. Investors can avoid currency risk if their investors’ prior approval. make a price in a security. base currency is one of these three. Some brokers offer a Direct Market Access (DMA) service Tax Efficient whereby member firms of London Stock Exchange can The bonds can be held in a tax-efficient wrapper such as an Unlike conventional debt instruments, ETPs are non- directly submit customer orders to the order book via their ISA or a SIPP and thus be protected against both income interest bearing so investors will incur capital gains tax only own systems. DMA allows sophisticated investors to take tax and capital gains. There is also no stamp duty paid on when the ETC or ETN is sold, allowing investors to better greater control over their trades by enabling them to place bond or gilt purchases; all bonds currently admitted on manage their tax . buy and sell orders directly on London Stock Exchange’s ORB are flagged as exempt from STDR. order books and execute with other market participants. Stamp exemption There is no stamp duty payable on purchases in the secondary market. Investors should seek their own Further information professional tax advice on the implications of subscribing For a full list of ETPs available on London Stock Exchange, and disposing of ETPs under the law of their jurisdiction. please visit http://www.londonstockexchange.com/ Tax legislation may change. traders-and-brokers/security-types/etfs/downloads/ etpforprivateinvestors.pdf

12=13 London Stock Exchange guide for private investors • Exchange Traded Products 12-13 London Stock Exchange guide for private investors • Order Book for retail bonds (ORB) Order Book for retail bonds (ORB) Order Book for retail bonds (ORB)

Key features of the ORB Retail Bonds in Accessing the electronic order book your portfolio Order book for Retail Bonds

——Open and transparent market structure for trading in Retail-size’ denominations Types of broker retail-size bonds Under the Directive, the regulatory regime Execution-only brokers will only buy or sell bonds ——Electronic order-driven model distinguishes between ‘wholesale’ bonds, which are tradeable according to your instructions, providing no investment or in units of £100,000 or greater, and ‘retail’ bonds which are trading advice. This allows you to select the bonds in which ——Dedicated Market Makers quoting bid and offer prices tradable in smaller size, often in denominations of £1,000 for you wish to trade and simply direct your broker to execute in a range of bonds throughout the trading day. example. Most bonds are typically ‘wholesale’ bonds and are the trade for you. ——Possibility for registered members to enter orders into therefore not accessible to private investors because of the Advisory brokers provide advice and also execute the the book (through which private investors may access large size of the denominations in which they must be trading decisions you make. the market) traded. These bonds are allowed some exceptions from the ——Trading day starts at 8.00 followed by continuous disclosure rules and are usually marketed to institutional Discretionary brokers will buy and sell bonds on your trading until market close at 16.30. investors including fund managers and asset managers behalf and may also have the authority to make investment decisions without your prior approval. ——Standardised minimum price movement, also known as The aim of the ORB is to make a wider selection of ‘retail- the ‘tick size’, for all order book bonds at 0.01 size’ bonds available. 44 dedicated new bonds have already Direct Market Access ——All order book trades are reported automatically and been issued onto the ORB which are available in manageable You may also wish to choose a broker who offers Direct published immediately. trading sizes, some as small as £100 or even £1. These bonds Market Access (DMA), a service whereby London Stock are subject to enhanced disclosure requirements and are Exchange Members are able to submit directly customer The unit in which each is tradable follows usually marketed through an extended book-build to retail orders to the order book via their own systems. the trading denomination specified in the particular bond’s investors via their stock brokers. DMA allows sophisticated private investors to take greater prospectus documentation. For “ORB dedicated” bonds this In keeping with the aims of transparency and accessibility, control of their trades by enabling them to place buy and is typically £100 although other retail bonds may be all of the prospectus documentation, which previously sell orders directly on London Stock Exchange’s order books tradable in multiples of £1,000 or £10,000. For gilts, the could be rather difficult to access, is now available for all and execute with other market participants. standard lot size on the ORB is £1, meaning that gilts can ORB bonds and can be downloaded for free from London be traded in multiples of whole pounds. Stock Exchange website. There is also a free 15-minute Contact Us delayed pricing service where investors can see bid/offer prices, last trade information and make use of a variety of If you would like to know more about trading bonds on All trades on the ORB are executed on a “clean” basis, innovative charting and analytical tools. London Stock Exchange’s markets please contact your i.e., excluding accrued interest. At the time of settlement, broker or email the ORB team at: however, the buyer will pay the “dirty” price, which is equal For further investor education, we have developed [email protected] to the “clean” price plus the accrued interest (i.e. a pro-rata a dedicated site for private investors at share of the next coupon payable by the issuer). www.londonstockexchange.com/bondsmadeeasy where “ORB has proved popular there is a range of resources available for free, including The standard settlement timetable for corporate bonds on guides to the mechanics of bonds and dedicated with a wide range of the order book is T+3. In keeping with the market standard, fact-sheets on pricing and accrued interest calculations. the settlement timetable for all gilt securities is T+1. Diversification on ORB investors, providing Following its establishment in February 2010, large UK household names tapped the ORB market, including easier access to an , Lloyds TSB and National Grid. Since then, attractive asset class.” the market has evolved and an increasingly diverse range of issuers has been approaching the retail bond space, thereby increasing the opportunities for investors and fostering the development of the market. Investors can benefit from diversification of their corporate bond portfolio and spread their exposure across a range of maturities, industries and risk. They can choose among almost 180 retail denominated issues on the platform which include government gilts, corporate and supranational bonds.

14-15 London Stock Exchange guide for private investors • Order Book for retail bonds (ORB) 14-15 London Stock Exchange guide for private investors • Order Book for retail bonds (ORB)

Contact information

For further information, please contact

Equity Trading Services Email; [email protected] Website; www.lseg.com/tradingservices

Exchange Traded Funds Email; [email protected] Website; www.londonstockexchange.com/etfs

Exchange Traded Products Email; [email protected] Website; www.londonstockexchange.com

Order Book for retail bonds (ORB) Email; [email protected] Website; www.londonstockexchange.com

16–17 London Stock Exchange guide for private investors 04–17 London Stock Exchange Retail offerings www.londonstockexchange.com

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