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Financial markets in USA - An introduction


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Financial markets in USA - An introduction

Financial markets in USA - An introduction

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  • 1. Seminar presented as part of course work of the subject Financial Institutions and Services by Pavan Kumar A Ch 215111012 Pradeep M 215111035 Sathyanarayanan R 215111050 Shaik Mohammad Basheer M 215111080
  • 2.  An Introduction  Capital Market  Debt Market  Money Market  Mutual funds Market  Insurance Market  Derivatives Market  Pension funds Market
  • 3.  Largest and most versatile financial system in the world  Wide range of funding options, sophisticated and innovative market  Institutions enjoy complete operational freedom in terms of products and instruments offered and also in terms of pricing  Some control measures are exercised by Federal and State authorities for the protection of the depositors and investors
  • 4.  Institutions- Network of Commercial banks, domestic and foreign investment banks, non-bank financial institutions, insurance companies, pension funds, mutual funds and savings and loan associations.  Authorities are: Comptroller of currency, the Federal Reserve Board and the Federal Deposit Insurance Corporation- regulate the commercial banks in US  Small investors protection- deposit insurance
  • 5.  The Financial crisis of 2007-08 still has its aftereffects and the economy is showing signs of recovery  There was a problem of asymmetric information between investors and borrowers in channeling savings into investments  Banks raised a large fraction of their funds through demandable deposits and invest in long term assets  The great reliance on leverage and the proprietary information that banks possessed on their borrowers induced them to take excessive risks  The trend has somewhat been reversed and competition policy has been applied much more effectively in the financial sector, thanks to some serious rethinking.
  • 6.  The United States (U.S.) is home to the largest insurance market in the world.  Over a trillion dollars in premiums written in 2003, insurance operations from the U.S. generated over 35 percent of the worldwide total  Life: In the US, the tax on interest income on life insurance policies and annuities is generally deferred. However, in some cases the benefit derived from tax deferral may be offset by a low return.  Common forms of investment contract Life Insurance in the US are whole life, universal life and variable life policies.
  • 7.                Allstate American Family Insurance American Fidelity Assurance Amica Mutual Insurance Aviva AXA Equitable Life Insurance Company Bankers Life and Casualty Conseco Farmers Insurance Group Fidelity Genworth Financial ING Group Jackson National Life John Hancock Insurance Lincoln National Corporation                MetLife Mutual of Omaha Nationwide Mutual Insurance Company Old Mutual Pacific Life Protective Life Prudential Financial Standard Insurance Company State Farm Insurance Thrivent Financial for Lutherans TIAA-CREF Transamerica Corporation UNIFI Companies United of Omaha Western & Southern Financial Group
  • 8.  Health: The United States health care system relies heavily on private health insurance, which is the primary source of coverage for most Americans  58% of Americans have private health insurance  There are also public programs such as Medicare and Medicaid, these contributed 50% of national health spending during recession  Vehicle Insurance generally in US requires drivers to carry at least liability insurance coverage to ensure that their drivers can cover the cost of damage to other people or property in the event of an accident
  • 9. Health Insurance Players 1. Roseville Insurance 2. AARP 3. Aetna 4. American Family Insurance 5. American National Insurance Company 6. Amerigroup 7. Anthem Blue Cross and Blue Shield 8. Assurant 9. Blue Cross and Blue Shield Association 10. Celtic Insurance Company, subsidiary of Centene Corporation 11. Centene Corporation 12. Cigna 13. Coventry Health Care 14. EmblemHealth 15. Fortis 16. Golden Rule Insurance Company 17. Group Health Cooperative 18. GHI Health Insurance Players 1. Health Net 2. HealthMarkets 3. Healthplus 4. HealthSpring 5. Highmark 6. Humana 7. Independence Blue Cross 8. Kaiser Permanente 9. LifeWise Health Plan of Oregon 10. Medical Mutual of Ohio 11. Molina Healthcare 12. Premera Blue Cross 13. Principal Financial Group 14. The Regence Group 15. Shelter Insurance 16. Thrivent Financial for Lutherans 17. UnitedHealth Group 18. Unitrin 19. Universal American Corporation 20. WellCare Health Plans 21. WellPoint
  • 10. Medicare         Aetna American Family Insurance Bankers Life and Casualty Conseco Mutual of Omaha Premera Blue Cross Thrivent Financial for Lutherans Kaiser Permanente Supplemental        Aflac Allstate American Fidelity Assurance Colonial Life & Accident Insurance Company Conseco Liberty National Life Insurance Company Mutual of Omaha Supplemental health        mental health insurance Family Heritage Aflac Allstate MEGA Life and Health Insurance State Farm Insurance AARP Travel       Allianz, a parent of Mondial Assistance Group Centurion Travel Assistance International Medical Group Seven Corners Travel Guard Usa-Assist Worldwide Protection
  • 11.  Home: 83% of homes were covered by owner-occupied homeowners policies, 13% of home insurance policies were covered by renter's  2.4% of homes were covered by a dwelling fire policy  For each policy, there are typically 5 classifications of coverage • Coverage A – Dwelling, • Coverage B – Other Structures, • Coverage C – Personal Property, • Coverage D – Loss of Use/Additional Living Expenses, • Additional Coverage and Exclusions  Other insurances like Accident, Casualty, Burial, sickness and unemployment insurances also prevalent
  • 12. 21st Century Insurance AccuQuote Aflac Alleghany Corporation Allied Insurance Allstate American Automobile Association American Family Insurance American Income Life Insurance Company American International Group (AIG) American Pet Insurance Company American National Insurance Company Americo Financial Life and Annuity Insurance Company Ameritas Amica Mutual Insurance Aon Corporation Assurant Assurity Auto-Owners Insurance AXA Equitable Life Insurance Company Bankers Life and Casualty Company Berkshire Hathaway California Casualty Capital Insurance Group Cincinnati Insurance Company CNA Financial Colonial Life & Accident Insurance Company Commerce Insurance Group Conseco Country Financial Chartis Chubb Corp. Encompass Insurance Company Erie Insurance Group Equitable Life & Casualty insurance Company Esurance Evergreen USA RRG Farmers Insurance Group Federated Mutual Insurance Company GAINSCO GEICO General Re Genworth Financial GMAC Insurance Guardian Life Insurance Company of America Hanover Insurance The Hartford HCC Insurance Holdings Hereford Insurance Company Horace Mann Insurance Company Infinity Property & Casualty Corporation International Fidelity Insurance Company Illinois Mutual Jackson National Life John Hancock Insurance Kemper Insurance K&K Insurance Knights of Columbus
  • 13. La Playa Insurance lgap Insurance Liberty Mutual Lincoln National Corporation Markel Corporation MassMutual Financial Group Merchants Insurance Group Mercury Insurance Group MetLife Mutual of America Mutual of Omaha Nationwide Mutual Insurance Company New Jersey Manufacturers Insurance Company New York Life Insurance Company Northwestern Mutual Ohio National OneBeacon Oxford Health Plans Pacific Life PEMCO Penn Mutual Primerica Principal Financial Group Progressive Protective Life Prudential Financial The Regence Group Reliance Insurance Company Response Insurance RLI Corp. Safe Auto Insurance Company Safeco Safeway Insurance Group Sentry Insurance Selective Insurance Seven Corners Inc Shelter Insurance Southern Aid and Insurance Company Standard Insurance Company State Farm Insurance Symetra Tri-State Consumer Insurance Company TIAA-CREF The Travelers Companies Uniguard - Headquarter in greater Seattle area United Auto Insurance Company Unitrin Direct Auto Insurance Unum Vantislife Insurance Company USAA Wawanesa Insurance USA (CA and OR) West Coast Life Western Mutual Insurance Group Western & Southern Financial Group Westfield Insurance Western Reserve Life Insurance Company White Mountains Insurance Group
  • 14.      SEC oversees the capital markets in their designated jurisdictions to ensure that investors are protected against fraud, among other duties. Primary Market: investors purchase these securities directly from issuers such as corporations issuing shares in an IPO or private placement, or directly from the federal government in the case of treasuries. USA: 125 IPO’s in 2011, 154 in 2010 , close to 200 during 2004-2007 and YTD there have been 42 IPOs priced, a +27.3% change from last year India: 37 in 2011, 64 in 2010, average 80 in 2004-2007 and 5 in 2012 Primary Markets also consists of Rights Issue and Preferential Issues
  • 15.      The U.S. Securities and Exchange Commission (frequently abbreviated SEC) is a federal agency which holds primary responsibility for enforcing the federal securities laws and regulating the securities industry, the nation's stock and options exchanges, and other electronic securities markets in the United States. Exchanges such as the New York Stock Exchange, NASDAQ and the American Stock Exchange provide a centralized, liquid secondary market for the investors who own stocks that trade on those exchanges. Many smaller issues and most debt securities trade in the decentralized, dealer-based over-the-counter markets. Many other organisations such as Financial Industry Regulatory Authority, Securities Investor Protection Corporation, Financial Crimes Enforcement Network and many other Federal agencies. The principal trade organization for securities dealers is the Securities Industry and Financial Markets Association
  • 16. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. Arizona Stock Exchange (AZX) BATS Exchange Chicago Board Options Exchange (CBOE) Chicago Board of Trade (CBOT) - Owned and operated by CME Group Inc. Chicago Mercantile Exchange (CME) - Owned and operated by CME Group Inc. Chicago Stock Exchange (CHX) Direct Edge International Securities Exchange (ISE) ISE Options Exchange ISE Stock Exchange NASDAQ Stock Market, The - Owned and operated by NASDAQ OMX Group, Inc. (formerly The Nasdaq Stock Market, Inc.) NASDAQ Market Tiers NASDAQ Global Select Market NASDAQ Global Market (formerly NASDAQ National Market) NASDAQ Capital Market (formerly NASDAQ Small Cap Market) NASDAQ Subsidiaries NASDAQ OMX PHLX - Formerly Philadelphia Stock Exchange (PHLX) NASDAQ OMX BX - Formerly Boston Stock Exchange (BSE) National Stock Exchange (NSX) New York Stock Exchange (NYSE) - Owned and operated by NYSE Euronext NYSE Alternext US - Organized as NYSE Alternext US LLC (formerly American Stock Exchange (AMEX)) NYSE Arca (formerly Pacific Exchange)
  • 17.     The New York Stock Exchange, commonly referred to as NYSE is by far the world's largest stock exchange by market capitalization of its 2317 listed companies at US$13.39 trillion as of Dec 2010.Average daily trading value was approximately US$153 billion in 2008. The NASDAQ Stock Market (National Association of Securities Dealers Automated Quotations) is the second-largest stock exchange by market capitalization in the world with 2,711 listings and total capitalization of over $4.5 trillion BSE has 5112 listings at US$ 1 trillion, volume US$231 billion while NSE has 1640 listings at US$ 985 billion, average daily trading volume US$2 trillion US Benchmark Indices are Dow Jones Industrial Average (DOW 30), NASDAQ Composite, the S&P 500 Index, and the Russell 2000 Index.
  • 18. Volume of Securities Outstanding: U.S. Capital Market Market Instrument $ trillion % of total 1 Corporate Equities 17.2 30.5% 2 Agency Securities & Mortgages 16.7 29.7% 3 Fund Shares 7.3 12.9% 4 Corporate Bonds 7.2 12.8% 5.7 10.2% 2.0 3.6% 56.3 100.0% 5 6 Treasuries and Open Market Municipal Securities Total Market Value of These Categories
  • 19. Control of Financial Assets: U.S. Capital Market Player Category $ trillion % of total 1 Households 36.7 36.3% 2 Fund Managers 16.1 16.0% 14.8 14.6% 13.1 12.9% 9.2 9.1% 5.5 5.4% 5.3 5.2% 101.1 100.0% 3 4 5 6 7 Bankers and Brokers Corporate Managers Foreign Investors Government Officials Insurance Executives Total Financial Assets of these Categories
  • 20.  Currently Market capitalization to GDP ratio is 98.2 %, declined from 130% in last decade mid.  India’s ratio is 94% and is increasing according to World Bank[3]  One-third of the World’s market capitalization is from USA  On an average, 4 corporations of US top World market capitalization list[1], Currently 6 out of 10 are there (4th quarter)  Highest Market capitalization reached Microsoft Inc. (US): price $119.94, 5,160,024,593 shares, market capitalization of $618.9 billion
  • 21.     US is about 44% of the world market with $31-35 trillion of an estimated $82.2 trillion and (diff. sources) as of Q2 2011, $822 billion average daily trading volume in the U.S. bond market Indian Debt Market is at $1.3 trillion Mostly transactions take place between broker-dealers and large institutions in a decentralized, over-the-counter (OTC) market. However, a small number of bonds, primarily corporate, are listed on exchanges. The Securities Industry and Financial Markets Association (SIFMA) classifies the broader bond market into five specific bond markets: Corporate, Government & agency, Municipal, [Mortgage backed, asset backed, and collateralized debt obligation] and Funding
  • 22.   Fluctuating interest rates are part of a country's monetary policy and bond market volatility is a response to expected monetary policy and economic changes: USA Prime rate: 3.25% , Indian banks around 10% U. S. bond market size (in trillions of dollars) Q2 2011: Category Government Municipal Agency Corporate Mortgage related Asset Backed Total  Amount 9.2 2.9 2.4 7.7 8.3 1.9 32.3 Percentage 28 9 7 24 26 6 100 Indian Bond Market consists of G-Secs :Centre-64%, State-12.5%, Public Sector Units bonds, Financial Institutions bonds, Corporate bonds and debentures--23.5%
  • 23.      Debt Market usually refers to the government bond market, because of its size, liquidity, relative lack of credit risk and, therefore, sensitivity to interest rates. Because of the specificity of individual bond issues, and the lack of liquidity in many smaller issues, the majority of outstanding bonds are held by institutions like pension funds, banks and mutual funds. In the United States, approximately 10% of the market is currently held by private individuals. The US was the leading centre in terms of value outstanding with 24% of the total 500bn in 2011 Q1. The most common American benchmark Bond Indices are the Barclays Capital Aggregate Bond Index, Citigroup BIG and Merrill Lynch Domestic Master.
  • 24.   The yield curve is the measure of "cost of funding“. The yield of a debt instrument is the overall rate of return available on the investment.
  • 25.  The market can be divided into two, that for exchange-traded derivatives and that for over-the-counter derivatives.  An exchange-traded contract such as a futures contract in Chicago Mercantile Exchange, trade in standardized derivative contracts such as options contracts and futures contracts on a whole range of underlying products.  OTC: These consist of investment banks who have traders who make markets in these derivatives, and clients such as hedge funds, commercial banks, government sponsored enterprises, etc.  Outstanding positions stand for Futures: 81 trillion, OTC: 615 trillion in the world, close to 700 trillion in all; US: 182 trillion
  • 26. CONTRACT TYPES UNDERLYING Equity Interest rate Credit Foreign exchange Commodity Exchangetraded futures Exchangetraded options OTC swap OTC forward DJIA Index future Single-stock future Option on DJIA Index future Single-share option Eurodollar future Euribor future Option on Eurodollar future Option on Euribor future Bond future Option on Bond future Currency future Option on Currency Currency swap currency future forward WTI crude oil futures Weather derivatives OTC option Back-to-back Repurchase agreement Stock option Warrant Turbo warrant Interest rate swap Forward rate agreement Interest rate cap and floor Swaption Basis swap Bond option Credit default swap Total return swap Repurchase agreement Credit default option Equity swap Commodity swap Iron ore forward contract Currency option Gold option
  • 27.    In India, Index futures, Index options, Options and futures on Individual securities, Interest rate futures, Interest rate swaps, forward rate agreements, foreign exchange contracts, exchange traded commodities, currency forwards and swaps are traded Activity in OTC markets dwarfs that of the entire exchange-traded markets, with daily value of trading estimated to be Rs. 30 billion in 2004 Foreign exchange derivatives are less active than interest rate derivatives in India similar to US. Type of Derivative with commercial bank Percentage Interest rate contracts 145 trillion Foreign exchange contracts Others Total 18 trillion 19 billion 182 trillion
  • 28.  Commodity Exchanges of USA include: • Chicago Board of Trade (CBOT) • Chicago Mercantile Exchange (CME) • Kansas City Board of Trade (KCBT) • New York Mercantile Exchange (NYMEX)- COMEX  Commodity Futures Trading Commission, an independent agency of the United States government regulates the floor of the market  In India, Total volume of commodity derivatives is still small, less than half the size of equity derivatives In 2011, MCX has taken the fifth spot among the global commodity bourses in terms of the number of futures contracts traded. Based on the latest data from Futures Industry Association (FIA), during the period between January and June this year, about 127.8 million futures contracts were traded on MCX It is regulated by the Forward Markets Commission   
  • 29.  1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. FUTURES EXCHANGES USA: CBOE Futures Exchange (CFE) (owned by Chicago Board Options Exchange) Chicago Mercantile Exchange (CME) Chicago Board of Trade (CBOT) Chicago Climate Exchange (CCE) ELX Futures (Electronic Liquidity Exchange) ICE Futures U.S. Kansas City Board of Trade (KCBT) Minneapolis Grain Exchange (MGEX) Nadex (formerly HedgeStreet) NASDAQ OMX Futures Exchange (NFX) New York Mercantile Exchange (NYMEX) and (COMEX) NYSE Liffe US OneChicago, LLC (Single-stock futures (SSF's) and Futures on ETFs) FUTURES EXCHANGES INDIA: 1. National Stock Exchange of India (NSE) 2. Bombay Stock Exchange (BSE) 3. Multi Commodity Exchange (MCX) 4. MCX Stock Exchange (MCX-SX) 5. Bharat Diamond Bourse 6. National Commodity and Derivatives Exchange (NCDEX) 7. National Multi Commodity Exchange of India (NMCE) 8. National Spot Exchange 9. Ace Derivatives & Commodity Exchange (ACE) 10. United Stock Exchange (USE)
  • 30.      The Chicago Board Options Exchange (NASDAQ: CBOE), is the largest U.S. options exchange with annual trading volume that hovered around one billion contracts at the end of 2007. CBOE offers options on over 2,200 companies, 22 stock indices, and 140 exchange-traded funds (ETFs). Options Clearing Corporation or OCC is the world's largest equity derivatives clearing organization, providing central counterparty (CCP) clearing and settlement services to 14 exchanges and platforms for options, financial and commodity futures, security futures and securities lending transactions. By acting as guarantor, OCC ensures that the obligations of the contracts they clear are fulfilled. OCC operates under the jurisdiction of both the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC).
  • 31.  Under US law, derivatives have special legal exemptions that make them a particularly attractive legal form, through which to extend credit  However, the strong creditor protections afforded to derivatives counterparties, in combination with their complexity and lack of transparency, can cause capital markets to underprice credit risk.  Derivative markets have been accused of the financial crisis 2007-2010 due to an “irrational appeal” for risk taking, and the lack of clearing obligations  Financial reforms within the US since the financial crisis have served only to reinforce special protections for derivatives, including greater access to government guarantees, while minimizing disclosure to broader financial markets
  • 32.  Usual instruments such as Certificate of Deposits, Commercial Papers, Repurchase agreements.  In US some instruments such as Eurodollar deposits, Federal funds, Federal agency short term securities, Municipal notes are available.  Others: Treasury bills, Money funds, Foreign exchange swaps, Short-lived mortgageand asset-backed securities
  • 33.  Total commercial paper outstanding $1.7807 trillion.  Asset backed securities: 2004: USD 857 billion  High participation by Government bodies, Individuals and private institutions  Very low Rates 6-month CD: 0.53% 1-year CD: Federal funds rate 0.77% 0.10%
  • 34. U.S. Treasury bills 7000.0% Other Treasury securities U.S. government agency issues Repurchase agreements 6000.0% Certificates of deposit Eurodollar CDs Commercial paper 5000.0% Bank notes1 Corporate notes2 Other assets3 Average maturity Days 4000.0% 3000.0% 2000.0% 1000.0% 0.0% -1000.0%
  • 35.  There are 3 types of U.S. mutual funds: openend, unit investment trust and closed-end.  At the end of 2010, there were 7,581 open-end mutual funds in the United States with combined assets of $11.8 trillion  At the end of 2010: Type of MF Open end Closed end UIT ETF Combined assets (trillion) 11.8 0.241 0.051 0.992
  • 36.  Mutual funds are classified by their principal investments. The four largest categories of funds are money market funds, bond or fixed income funds, stock or equity funds and hybrid funds.  Funds may also be categorized as index or actively-managed.  money market funds accounted for 24% of the assets in all U.S. mutual funds.[  bond funds accounted for 22% of the assets in all U.S. mutual funds.
  • 38.  Pension assets total 26,496 bn  US contributes 58%  Total pension assets 2010( usd billion): 15265  104% GDP  Has more than $9.838 trillion in assets as of 3103-10  The largest 200 pension funds accounted for $4.540 trillion as of 30-09-09
  • 39.          Internal Revenue Service Labor Department agency Pension Benefit Guaranty Corporation Defined benefit Defined contribution DB/DC split 60:40 Public/private sector split 79:21
  • 40.      Equity-55% Bonds-35% Cash-3% Other-7% Some plans in the US are: Defined contribution plan, Defined benefit plans, Hybrid and Cash Balance Plans, Qualified retirement plans and Non-qualified plans
  • 41.          1. rket_capitalization 2. 3. 4. /marketcapitalization-of-listed-companies-percent-of-gdp-wbdata.html 5. 6. 7. 8. 9.
  • 42.          PT_CH09.ppt 11. States 12. United_States 13. 14. 15. United_States 16. ormance%20of%20US%20Pension%20Funds_New%20I nsights%20into%20the%20Agency%20Costs%20Debate .pdf 17. nce 18.