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Glossary

Underwriting

Underwriting in the securities market means the services for organising the issue of securities and their placement in the primary market. Such services are provided to the issuer by an underwriter, a professional participant or a group of professional participants in the securities market which can be licensed investment companies and/or investment banks. In case of a large issues of securities, their underwriting is carried out by a syndicate of financial institutions.

Functions of the underwriter:
• preparation of securities issue;
• execution of transactions on placement of securities issue;
• support of prices for placed securities;
• further analytical and research support for securities.

Types of underwriting used internationally:
• Firm commitment underwriting means that the underwriter undertakes to buy back from the issuer and resell all securities offered for initial public offering. Thus, the underwriter assumes all financial risks in the event of a failure to place an issue.
• Best effort underwriting means that the underwriter undertakes to place the maximum possible amount of new issue, while all risks associated with non-placement of securities are transferred to the issuer. Therefore, the cost of this type of underwriting is lower compared to underwriting based on firm commitments.
• All-or-none underwriting means that the underwriter undertakes to place the entire issue in full. In case of default, the contract with the underwriter is terminated.
• Stand-by underwriting means that the underwriter undertakes to buy back the remaining non-taken part of the issue for subsequent placement.
• Underwriting with the issuer’s advance payment means that the issuer first takes credit resources from the underwriting bank to be repaid from the funds received from the placement of securities. Underwriting without the issuer’s advance payment does not bind the parties to the underwriting contract with the terms of financial dependence.
• Competitive underwriting means that the issuer enters into a contract with one of the competing underwriters who has offered the best price and other terms and conditions.

Advantages:
• The risks are shared by the parties to the contract;
• Saving time for market participants;
• Experience and qualifications of professional market participants;
• Placement of securities among a wide range of investors;
• High efficiency of the placement of securities;
• An opportunity to form a liquid market for such an issue.
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