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Imarticus
Learning
www.imarticus.org
Overview of
Financial Systems
Agenda
In this session, you will learn about:
• Introduction to Financial System
• Structure of Financial System
• Functio...
What is a
Financial System?
Introduction
Barter System
Rules that regulate the exchange
Items to tradeBuyer Seller
What is a Financial System?
What is a financial system?Q
Components of a Financial System
A Financial System is a system that brings together Financial Participants,
Markets, Prod...
Goal of Financial System
The primary goal of a financial system is
accelerated growth of an economy.
Role of Financial System
It plays an important role in the growth of the economy by
Influencing economic performance and e...
Financial Markets Infrastructure
Financial market infrastructure that is resilient and effective has
many benefits:
• Enha...
Functions of Financial System
Functions of a Financial System
Facilitate the flow of funds
in order to finance
investments...
How Financial System Works?
Funds
Borrowers
Spenders
Households
Business firms
Governments
Foreigners
Financial
markets
In...
Structure of
Financial System
Financial System
Structure of the Modern Financial System
Financial
Market
Financial
Instruments
Financial
Participants
Fi...
Financial System
Money MarketCapital Market FX Market
Derivatives
Market
Structure of Financial System
Primary
Market
Seco...
Financial System
BondsStocks
Insurance &
Pension
Govt.
securities
Debentures
Structure of Financial System
Foreign
Exchang...
Financial System
Structure of Financial System
Stock
Exchanges
Retail
Investors
Insurance
& Pension
Co’s
Registrars
Cleari...
Financial System
Financial Regulators
Banks:
Reserve
Bank of India
Banks: Federal
Reserve
& Pension Co’s
Banks: Bank
of En...
Financial Services Offered
Financial System
Market
Making
Asset
Management
Specialized
Financial
Solutions
Mergers &
Acqui...
Financial Market
What is Financial Market?
A market where investors and borrowers can trade in financial securities,
commodities and other ...
Features of Financial Market
The market comprises of exchanges
which are:
• Physically located
• Virtual / Online
PRICING ...
Functions of Financial Market
Financial markets have five major economic functions:
Price Discovery Liquidity
Reduction of...
Importance of Financial System
FINANCIAL MARKETS 2010
Vital to the functioning of the industry as the instruments help rai...
Pricing in Financial Market
• In Financial Markets having transparent pricing, regulations, costs and fees
and market forc...
Financial Market
Capital
Market
Money
Market
Primary
Market
Secondary
Market
Types of Financial Markets
Issuance of
Equity...
Top Financial Centers as of 2013
New York
London
Hong Kong
Singapore
Zurich
Tokyo
Seoul
Boston
Beijing
Mumbai
ANZ Report
Types of
Financial Markets
Types of Financial Markets
Quote
Driven
Market
Order
Driven
Market
Capital
Market
Money
Market
Primary
Market
Secondary
Ma...
Order Driven Market
• Buyers and sellers display the prices and quantities at which they wish to
buy or sell a particular ...
Example:
NSE
Order Driven Market
DISADVANTAGES
An order driven market may
not have the same degree of
liquidity as a quote...
• A market in which prices are determined from bid and ask quotations
provided by market makers, dealers or specialists.
•...
Quote Driven Market
Order Execution is guaranteed in a
quote driven market because
market makers are required to
meet the ...
A unique type of market which combines the features of both quote driven and order driven markets.
QUOTE
DRIVEN
Hybrid Mar...
Order and Quote Drive Market
ORDER DRIVEN MARKETS QUOTE DRIVEN MARKETS
V/S
• Counterparty is Unknown • Counterparty is Kno...
Capital Market
Capital Market
Capital Market is a market where long term securities like bonds and equities are traded.
Maturities are mo...
Importance of Capital Market
A market that works as a conduit for demand and supply of debt and equity capital.
SAVERS/
IN...
Importance of Capital Market
FINANCIAL MARKETS 2010
Vital to the functioning of the industry as the instruments help raise...
Structure of Capital Market
CAPITAL MARKET
PRIMARY MARKET SECONDARY MARKET
IPO EQUITY DEBT
Money Market
Introduction
Financial
Market
Capital Market Money Market
Raising of
long term capital
Transfer of liquidity
What is a Money Market?
Money
=
Liquidity
The market where financial instruments with high liquidity
and very short maturi...
What is a Money Market?
A market for short term financial assets
that are close substitutes for money, and
facilitates the...
Features of Money Markets
Institutions
IndividualsGovernment
Bodies
Not a Place;
It is a System
Telephone or Fax
Short ter...
Role of the Money Market
Financial Mobility
Demand and
Supply
Promotes Liquidity
and Safety
Economy in
Use of Cash
Instruments of the Money Market
TREASURY BILLS 1
COMMERCIAL PAPERS2
CALL/NOTICE
3
REPURCHASE AGREEMENTS
4
CERTIFICATES OF ...
Major Players in the Money Market
ISSUERS LENDERS
• Government
• Banks
• Financial
Institutions
• Corporates
• Mutual Fund...
Participants of Money Market
Merchant
Banks
Cash
Management
Programs
Financial
Institutions
Federal &
State
Government
Age...
Functions of Money Market
Functions
Financing
Trade
Financing
Industry
Profitable
Investment
Self
Sufficiency
of
Commercia...
Structure of the Indian Money Market
Indian Money Market
Sub Markets
Call Money
Market
364-day
Bill Market
Bill Market CDs...
Primary Market
Primary Market
COMPANY
A
(Unlisted)
Investors
PRIMARY MARKET
The primary market is that
part of the capital market
that de...
Primary Market
STOCK EXCHANGE
COMPANY
A
(Unlisted)
PRIMARY MARKET
SECONDARY MARKET
Investors
• Companies, governments or
p...
Features of Primary Market
The primary market is that
part of the capital market
that deals with the issuance
of new secur...
Why Companies Go for IPOs?
Did You Know?
Source: Forbes
Data for 2014
Secondary Market
Secondary Market
CAPITAL APPRECIATION
Goal
COMPANY INVESTOR BINVESTOR A
PRIMARY MARKET SECONDARY MARKET
Shares
$
Shares
$
...
Secondary Market
STOCK EXCHANGE
COMPANY
A
COMPANY
B
COMPANY
C
COMPANY
D
Investor Investor
BROKER
Buying Order Selling Orde...
Secondary Market
Exchanges such as the New York Stock Exchange, London Stock
Exchange and NASDAQ provide a centralized, li...
Other Markets
Other Markets
OTHER MARKETS
Commodity
Markets
Futures
Markets
Derivatives
Markets
Foreign Exchange
Markets
Insurance
Marke...
Participants in
Financial Markets
Financial Participants
Financial System
Depositories
Brokers
and
Dealers
Depository
Participants
Issuers Investors
Lead
Ma...
ONES WITH
SURPLUS FUNDS
ONES WITH
DEFICIT FUNDS
Invest in assets
to gain more
profit
Sell assets
to get
financing
Sell Sid...
Participants of the Financial Market
Clearing
Agents
Lead
Managers
Issuers
Investors
Custodians
Depositories
Broker
Dealer...
Issuers
Develop
securities
Register
securities
Sell
securities
Obligations of the issue
Reporting financial conditions,
ma...
Issuers
Domestic International
Governments
Private
Corporations
Investment
Trusts
Issuers include
Issuers can be
Investors
GOAL:
CAPITAL
GAINS
Rely on
fundamental
analysis for
investment
decisions
Lead Managers
COMPANY
A
(Unlisted)
Investors
Lead
Manager
IPO!!!
End to End process is managed by lead managers with an ob...
Lead Managers
Lead
Manager
Book
Runners
Under-
writers
Merchant
Bankers
Investment
Bank
Known by Many Names The Issuer Com...
Functions of Lead Manager in an IPO
Preparation of IPO documents
Approved from Regulatory Body : for Example SEBI in India...
Brokers and Dealers
Structure of the Financial Industry
A
broker/dealer
is the catalyst
for financial
transactions
Buyer
B...
Brokers and Dealers
TRADING SECURITIES
Corporations Individuals
BROKER/DEALERSCLIENTS
Broker / Agent
Dealer/ Principal
Functions of Brokers and Dealers
Functions of a dealer/broker
Advisory and
investment
management services
Executing orders...
Depositories
INVESTORS DEPOSITORIES
Securities
Certificated or un-certificated (dematerialized) form
Easy transfer of owne...
Features of Depositories
• Depository holds securities in accounts for its clients
• A Depository transfers securities bet...
More on Depositories
Types
National International
EXAMPLES
MAY BE FOR A SPECIFIC TYPE
OF SECURITY
SELL
SECURITY
Clearing Agents
SELLER BUYERCLEARING AGENT
PAYMENT
PAYMENT
BUY
SECURITY
Clearing Agents
Clearing
Corporation
Buyer Seller
BuyerSeller
Novation
• In the United States,
stock clearing can be
done ...
Trustee
BOND ISSUER BOND HOLDERSTRUSTEE
Trust Deed
Contractual obligations
of borrowers and lenders
Bond Issue
A Trustee i...
Trustee
A Trust Deed contains the following information
Restriction imposed on
the borrower, usually
referred to as the
co...
Registrars
A Registrar is an institution or
organization that is responsible
for keeping records of
bondholders and shareh...
Custodians
A custodian bank, or simply custodian, is a specialized
financial institution responsible for safeguarding a fi...
Regulatory Agencies
Real Life Regulators
Introduction
Financial Regulators
SingaporeIndiaUS UK Hong Kong Brazil
Financial System
Financial
Market
Financial
Instruments
Financia...
What are Regulatory Agencies?
• Federal and state governments have a myriad of agencies
in place that regulate and oversee...
Functions of Regulatory Agencies
Supervise the
functions of all
market
participants
• Federal and State Government have ag...
Major Regulatory Agencies Globally
Federal Reserve
Bank of New York ,
USA
Securities and
Exchange
Commission,
USA
Commodit...
Major Regulatory Agencies In India
SEBI
The Indian stock market is regulated by the
Securities and Exchange Board of India (SEBI).
Some of the most important...
Investment Bank
What is an Investment Bank?
An investment bank is a global financial institution that assists corporations
and governments...
Functions of an Investment Bank
Investors
Investment Bank
Clients
Raising capital
Investment banks act as intermediaries b...
Clients of an Investment Bank
Corporations
Financial
Institutions
Government
Agencies
Pension
Funds
Hedge Funds
Clients of an Investment Bank
SIZE
Size is an asset for investment
banks.
Investment
Bank
Matters
The more connections the...
Commercial vs. Investment Banks
The line between the two is quickly disappearing.
The banking sector is split into two fun...
Commercial vs. Investment Banks
Investment banks don’t
take deposits from
retail customers.
Many countries maintain
comple...
Other Features
Pre-underwriting
counseling
Distribution of
securities
Post issuance
advisory
End to end assistance
These B...
Structural Roles in an Investment Bank
FRONT OFFICE MIDDLE OFFICE BACK OFFICE
Financial
Analysis
Sales
Sales
Trading
Tradi...
Organizational Divisions
Investment Bank
Investment
Banking
Merchant
Banking
Equity
Fixed
Income
Operations
Prime
Services...
Role of an Investment Bank
CAPITAL PROVIDERS
Money Managers
Hedge Funds
Pension Funds
Insurance Co.
Mutual Funds
High Net ...
Role of an Investment Bank
CAPITAL USERS
Corporations
Municipalities
Governments
INVESTMENT BANKS
• Provide strategic advi...
Services Covered by Investment Banks
Investment Banking Division
Corporate
Finance
Capital
Markets
M&A,
Restructuring
Real...
Corporate Finance
Corporate Finance is their core competency.
• Focus is on specific industry or region
• Market and sell ...
Sales and Trading
Sales and Trading
Disseminate firm’s
strategy and research
products to
institutional clients
Market IPOs...
Merchant Banking
Merchant Banking
Banking Services
Consultancy
Services
• Identify investment opportunities
• Work on the ...
Equity Capital Markets
Analyze equity
market
conditions for
corporate
issuers
Determine
feasibility of
equity offerings
th...
Client Services
Client services look
after transactions in
all the markets –
IPO, secondary,
Convertible debt or
even pref...
Real Estate
Provide a variety of investment banking
services with real estate as the underlying
asset
Perform various fina...
Mergers and Acquisitions
• Perform qualitative and quantitative analyses in order to evaluate and
recommend various financ...
Sell Side and Buy Side of IB
Sell Side (Need Capital) Buy Side (Have Capital)
• Sell side firms usually require capital
an...
Interplay Between Sell and Buy Side
Sell Side
Buy Side
INVESTMENT BANKING
COMMERCIAL BANKING
ASSET MANAGEMENT
HEDGE FUNDS
...
Thanks You
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Overview of Financial System

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Financial market infrastructure that is resilient and effective has many benefits:
* Enhances the stability of the financial system.
* Reduces transaction costs in the economy
* Promotes the efficient use of financial resources
* Improves financial market liquidity and facilitates the conduct of monetary policy

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Overview of Financial System

  1. 1. Imarticus Learning www.imarticus.org Overview of Financial Systems
  2. 2. Agenda In this session, you will learn about: • Introduction to Financial System • Structure of Financial System • Functions of Financial System • Types of Financial Markets • Capital Markets • Money Markets • Primary Markets • Secondary Markets • Participants in Money Markets • Regulatory Agencies • Investment Banks
  3. 3. What is a Financial System?
  4. 4. Introduction Barter System Rules that regulate the exchange Items to tradeBuyer Seller
  5. 5. What is a Financial System? What is a financial system?Q
  6. 6. Components of a Financial System A Financial System is a system that brings together Financial Participants, Markets, Products, and Services. PARTICIPANTS MARKETS PRODUCTS SERVICES FINANCIAL SYSTEM
  7. 7. Goal of Financial System The primary goal of a financial system is accelerated growth of an economy.
  8. 8. Role of Financial System It plays an important role in the growth of the economy by Influencing economic performance and economic welfare. This is achieved by financial infrastructure, in which entities with funds allocate those funds to those who have potentially more productive ways to invest those funds. Predominantly channels funds between lenders and borrowers, which encourages the movement of funds in an economy.
  9. 9. Financial Markets Infrastructure Financial market infrastructure that is resilient and effective has many benefits: • Enhances the stability of the financial system. • Reduces transaction costs in the economy • Promotes the efficient use of financial resources • Improves financial market liquidity and facilitates the conduct of monetary policy Financial Markets Infrastructure
  10. 10. Functions of Financial System Functions of a Financial System Facilitate the flow of funds in order to finance investments by corporations, governments and individuals. Play the role of intermediaries and thus determine the flow of funds. Monitor and regulate the participants in the financial system.
  11. 11. How Financial System Works? Funds Borrowers Spenders Households Business firms Governments Foreigners Financial markets Indirect Finance Direct Finance Funds Funds Funds Financial Intermediaries Lenders Savers Households Business Governments Foreigners Funds
  12. 12. Structure of Financial System
  13. 13. Financial System Structure of the Modern Financial System Financial Market Financial Instruments Financial Participants Financial Regulator Financial Services The financial system of an economy consists of five main components.
  14. 14. Financial System Money MarketCapital Market FX Market Derivatives Market Structure of Financial System Primary Market Secondary Market Treasury Bills Certificate of Deposit Call/Notice Money Financial Market Financial Instruments Financial Participants Financial Regulator Financial Services Commercial Papers Debt Market Equity Market
  15. 15. Financial System BondsStocks Insurance & Pension Govt. securities Debentures Structure of Financial System Foreign Exchange Derivatives Warrants Money Market Instruments Commodities Financial Market Financial Instruments Financial Participants Financial Regulator Financial Services
  16. 16. Financial System Structure of Financial System Stock Exchanges Retail Investors Insurance & Pension Co’s Registrars Clearing Houses Brokers Investment Banks Retail / Corporate Banks Mutual/Hedge Funds Government Depository Custodian Financial Market Financial Instruments Financial Participants Financial Regulator Financial Services
  17. 17. Financial System Financial Regulators Banks: Reserve Bank of India Banks: Federal Reserve & Pension Co’s Banks: Bank of England / FCA India US UK Financial Market Financial Instruments Financial Participants Financial Regulator Financial Services Markets: Securities & Exchange Board of India Markets: Securities Exchange Commission Markets: FCA / Prudential Regulatory Authority
  18. 18. Financial Services Offered Financial System Market Making Asset Management Specialized Financial Solutions Mergers & Acquisition Research & Advise Underwriting Sales & Trading Financial Market Financial Instruments Financial Participants Financial Regulator Financial Services
  19. 19. Financial Market
  20. 20. What is Financial Market? A market where investors and borrowers can trade in financial securities, commodities and other financial instruments at prices that reflect the market demand and supply. Investor Shares Cash FINANCIAL MARKET Company
  21. 21. Features of Financial Market The market comprises of exchanges which are: • Physically located • Virtual / Online PRICING ECONOMIC GROWTH
  22. 22. Functions of Financial Market Financial markets have five major economic functions: Price Discovery Liquidity Reduction of Transaction Costs Regulating Intermediaries Settlement of Transactions
  23. 23. Importance of Financial System FINANCIAL MARKETS 2010 Vital to the functioning of the industry as the instruments help raise long term capital. $ 1643 Trillion
  24. 24. Pricing in Financial Market • In Financial Markets having transparent pricing, regulations, costs and fees and market forces determine the price. • Investors have access to a large number of financial markets and exchanges representing a vast array of financial products. MARKET DEMAND MARKET SUPPLY Prices External Socio- Political Factors
  25. 25. Financial Market Capital Market Money Market Primary Market Secondary Market Types of Financial Markets Issuance of Equity Issuance of Debt Equity Debt Commodity Market FX Market
  26. 26. Top Financial Centers as of 2013 New York London Hong Kong Singapore Zurich Tokyo Seoul Boston Beijing Mumbai ANZ Report
  27. 27. Types of Financial Markets
  28. 28. Types of Financial Markets Quote Driven Market Order Driven Market Capital Market Money Market Primary Market Secondary Market
  29. 29. Order Driven Market • Buyers and sellers display the prices and quantities at which they wish to buy or sell a particular security. • Buyers and sellers trade with each other without the intermediation of dealers. • Key feature is that the counterparties are unknown. • Most order driven markets are auction markets. SELLER BUYER 20 Shares Available at Rs 100 each Cash DEALER
  30. 30. Example: NSE Order Driven Market DISADVANTAGES An order driven market may not have the same degree of liquidity as a quote driven market. Order execution is not guaranteed. ADVANTAGES The biggest advantage of an order driven market is transparency, since the order book is displayed for investors who wish to access this information.
  31. 31. • A market in which prices are determined from bid and ask quotations provided by market makers, dealers or specialists. • Also known as a price driven market in which market makers or dealers ‘quote’ the prices at which the public market participants are trading. • Market makers provide a bid quote (to buy) and an ask quote (to sell). • Market makers or dealers earn profit from the spread between the two quotes and the turnover of the shares. • Here the counterparties are Known. Quote Driven Market BUYER MARKET MAKER /DEALER Bid quoteAsk quote SELLER
  32. 32. Quote Driven Market Order Execution is guaranteed in a quote driven market because market makers are required to meet the bid and ask prices they quote. Once the player quotes the prices, it means that they will have to buy and/or sell the underlyer. Orders are placed to only Buy or only Sell the underlyer. QUOTE DRIVEN MARKET ORDER DRIVEN MARKET v/s Example: Bloomberg
  33. 33. A unique type of market which combines the features of both quote driven and order driven markets. QUOTE DRIVEN Hybrid Market ORDER DRIVEN HYBRID MARKET Predominantly a order driven market Also takes quotes from the participants via a specified specialist incases of low liquidity Examples
  34. 34. Order and Quote Drive Market ORDER DRIVEN MARKETS QUOTE DRIVEN MARKETS V/S • Counterparty is Unknown • Counterparty is Known • Displays all of the bid and ask quotes. • Orders detail the quantity & price at which the share may be traded • No guarantee of order execution • Price Transparency • Focuses only on the bid and ask quotes of market makers. • Orders only share the Price of the security. • Guarantee of order execution. • No Price Transparency
  35. 35. Capital Market
  36. 36. Capital Market Capital Market is a market where long term securities like bonds and equities are traded. Maturities are more than a year. Companies, governments or public sector institutions can issue equities or bonds. The capital market functions through the stock exchange market To channel the money provided by savers and depository institutions (banks, credit unions, insurance companies, etc.) to borrowers and investees through a variety of financial instruments (bonds, notes, shares) termed as securities. Goal
  37. 37. Importance of Capital Market A market that works as a conduit for demand and supply of debt and equity capital. SAVERS/ INSTITUTIONS CAPITAL MARKETS BORROWERS MONEY SECURITIES
  38. 38. Importance of Capital Market FINANCIAL MARKETS 2010 Vital to the functioning of the industry as the instruments help raise long term capital.
  39. 39. Structure of Capital Market CAPITAL MARKET PRIMARY MARKET SECONDARY MARKET IPO EQUITY DEBT
  40. 40. Money Market
  41. 41. Introduction Financial Market Capital Market Money Market Raising of long term capital Transfer of liquidity
  42. 42. What is a Money Market? Money = Liquidity The market where financial instruments with high liquidity and very short maturities are traded.
  43. 43. What is a Money Market? A market for short term financial assets that are close substitutes for money, and facilitates the exchange of money in the primary and secondary market. “ ”
  44. 44. Features of Money Markets Institutions IndividualsGovernment Bodies Not a Place; It is a System Telephone or Fax Short term: 1 day -1 year Over the Counter and Wholesale Money Markets Duration of Funds Location Mode of Transaction Type of Trade Major Players
  45. 45. Role of the Money Market Financial Mobility Demand and Supply Promotes Liquidity and Safety Economy in Use of Cash
  46. 46. Instruments of the Money Market TREASURY BILLS 1 COMMERCIAL PAPERS2 CALL/NOTICE 3 REPURCHASE AGREEMENTS 4 CERTIFICATES OF DEPOSITS 5 The Money Market doesn’t deal with cash but with substitutes of cash
  47. 47. Major Players in the Money Market ISSUERS LENDERS • Government • Banks • Financial Institutions • Corporates • Mutual Funds • Foreign Institutional Investors • Banks INTERMEDIARIES • Central Bank • Dealers
  48. 48. Participants of Money Market Merchant Banks Cash Management Programs Financial Institutions Federal & State Government Agencies Trading Companies Retail Banks Central Banks
  49. 49. Functions of Money Market Functions Financing Trade Financing Industry Profitable Investment Self Sufficiency of Commercial Banks Support to Central Bank
  50. 50. Structure of the Indian Money Market Indian Money Market Sub Markets Call Money Market 364-day Bill Market Bill Market CDs CPs Commercial Bills Treasury Bills Unorganized Money MarketOrganized Money Market • Reserve Bank of India • Scheduled Commercial Banks • Lenders • Development Banks • Investment Institutions • Regional Rural Banks • Foreign Banks • State Finance Corporations • DFHI • Indigenous Bankers • Domestic Money • Nidhis & Chit Funds • Traders & Friends • Brokers & Dealers
  51. 51. Primary Market
  52. 52. Primary Market COMPANY A (Unlisted) Investors PRIMARY MARKET The primary market is that part of the capital market that deals with the issuance of new securities. Also referred to as the Initial Public Offering (IPO) market. Origination Underwriting Distribution One of the main functions in the issuance of new securities to investors is called underwriting. Dealers earn a commission that is built into the price of the security offering, though it can be found in the prospectus. RAISING CAPITAL OR FUNDS Goal FUNCTIONS IPO!!!
  53. 53. Primary Market STOCK EXCHANGE COMPANY A (Unlisted) PRIMARY MARKET SECONDARY MARKET Investors • Companies, governments or public sector institutions can issue equities or bonds through a new issue. • This is typically done through a syndicate of securities dealers. • Later these issued securities are traded on the secondary market. Investors Dealers IPO!!!
  54. 54. Features of Primary Market The primary market is that part of the capital market that deals with the issuance of new securities. This is the market where a long term security is traded for the first time. 1 The primary market is that part of the capital market that deals with the issuance of new securities. In an IPO the securities are issued to the investors directly, thereby the issuer is sharing its ownership with the investors2 The primary market is that part of the capital market that deals with the issuance of new securities. Funds thus raised is used for setting up new business or expanding the existing business 3 The primary market is that part of the capital market that deals with the issuance of new securities. This market doesn’t include the long term loans from banks or other lenders. 4
  55. 55. Why Companies Go for IPOs?
  56. 56. Did You Know? Source: Forbes Data for 2014
  57. 57. Secondary Market
  58. 58. Secondary Market CAPITAL APPRECIATION Goal COMPANY INVESTOR BINVESTOR A PRIMARY MARKET SECONDARY MARKET Shares $ Shares $ Also known as Aftermarket, a secondary market is a financial market where previously issued financial instruments are brought and sold (traded). It is a market where investor purchases securities from other investors and not directly from the issuer. Secondary market caters to variety of assets like loans, stocks, derivatives , centralized, fragmented, liquid and illiquid assets.
  59. 59. Secondary Market STOCK EXCHANGE COMPANY A COMPANY B COMPANY C COMPANY D Investor Investor BROKER Buying Order Selling Order BROKER Listed Companies on Stock Exchange The prices in the secondary market is regulated by the market forces.
  60. 60. Secondary Market Exchanges such as the New York Stock Exchange, London Stock Exchange and NASDAQ provide a centralized, liquid secondary market for the investors who own stocks that trade on those exchanges. Most bonds and structured products are traded “over the counter”
  61. 61. Other Markets
  62. 62. Other Markets OTHER MARKETS Commodity Markets Futures Markets Derivatives Markets Foreign Exchange Markets Insurance Markets
  63. 63. Participants in Financial Markets
  64. 64. Financial Participants Financial System Depositories Brokers and Dealers Depository Participants Issuers Investors Lead Managers Custodians Financial Market Financial Instruments Financial Participants Financial Regulator Financial Services Registrars
  65. 65. ONES WITH SURPLUS FUNDS ONES WITH DEFICIT FUNDS Invest in assets to gain more profit Sell assets to get financing Sell SideBuy Side Participants of the Financial System Financial System
  66. 66. Participants of the Financial Market Clearing Agents Lead Managers Issuers Investors Custodians Depositories Broker Dealers Registrars Depository Participants
  67. 67. Issuers Develop securities Register securities Sell securities Obligations of the issue Reporting financial conditions, material developments Operational activities as required by the regulations of their jurisdictions Responsibilities of Issuer
  68. 68. Issuers Domestic International Governments Private Corporations Investment Trusts Issuers include Issuers can be
  69. 69. Investors GOAL: CAPITAL GAINS Rely on fundamental analysis for investment decisions
  70. 70. Lead Managers COMPANY A (Unlisted) Investors Lead Manager IPO!!! End to End process is managed by lead managers with an objective to raise the required funds for the Company
  71. 71. Lead Managers Lead Manager Book Runners Under- writers Merchant Bankers Investment Bank Known by Many Names The Issuer Company can appoint more then one lead manager to manage big IPOs. The Reliance Power IPO came in Jan 2008 had 10 Book Running Lead Managers. (PS: THE RELIANCE POWER IPO SOLD OUT IN 1 MINUTE!!)
  72. 72. Functions of Lead Manager in an IPO Preparation of IPO documents Approved from Regulatory Body : for Example SEBI in India Raising funds for the Company Post subscription operational issues Issuance of Shares
  73. 73. Brokers and Dealers Structure of the Financial Industry A broker/dealer is the catalyst for financial transactions Buyer Broker Broker Seller Stock Exchange Investor Broker /Dealer Exchanges Regulatory Bodies
  74. 74. Brokers and Dealers TRADING SECURITIES Corporations Individuals BROKER/DEALERSCLIENTS Broker / Agent Dealer/ Principal
  75. 75. Functions of Brokers and Dealers Functions of a dealer/broker Advisory and investment management services Executing orders and settlement Research Distribution of financial products Liaison with Stock Exchanges
  76. 76. Depositories INVESTORS DEPOSITORIES Securities Certificated or un-certificated (dematerialized) form Easy transfer of ownership through a book entry rather than the transfer of physical certificates. A depository is a specialist financial organization holding securities such as shares either in certificated or un-certificated (dematerialized) form.
  77. 77. Features of Depositories • Depository holds securities in accounts for its clients • A Depository transfers securities between accounts • The transfer of funds or securities happens without the actual handling of funds or securities • Both the Banks and the Depository are accountable for the safe keeping of funds and securities respectively Functions Just Like a Bank INVESTORS DEPOSITORIES SECURITIES IN A CENTRALIZED LOCATION Investor A Investor B Investor C Transfer securities between accounts
  78. 78. More on Depositories Types National International EXAMPLES MAY BE FOR A SPECIFIC TYPE OF SECURITY
  79. 79. SELL SECURITY Clearing Agents SELLER BUYERCLEARING AGENT PAYMENT PAYMENT BUY SECURITY
  80. 80. Clearing Agents Clearing Corporation Buyer Seller BuyerSeller Novation • In the United States, stock clearing can be done by The Depository Trust & Clearing Corporation or Fedwire. • In Europe, securities clearing is offered by EMCF, LCH. Clearnet, SIX x-clear and EuroCCP. AGENCIES INVOLVEDExchange OTC Transactions
  81. 81. Trustee BOND ISSUER BOND HOLDERSTRUSTEE Trust Deed Contractual obligations of borrowers and lenders Bond Issue A Trustee is required when a bond is to be issued
  82. 82. Trustee A Trust Deed contains the following information Restriction imposed on the borrower, usually referred to as the covenant Creditors protection with regards to future additional borrowing by borrower Interest payment terms – coupon rate and when payable Assets to be pledged as security Principal repayment terms Rights of creditors in case of default Bondholders details who are many and dispersed Hence, a Trustee is appointed to protect and enforce the rights of the bondholders as contained in the Trust Deed.
  83. 83. Registrars A Registrar is an institution or organization that is responsible for keeping records of bondholders and shareholders. What does a Registrar do?
  84. 84. Custodians A custodian bank, or simply custodian, is a specialized financial institution responsible for safeguarding a firm's or individual's financial assets. A custodian is not necessarily engaged in "traditional" commercial or consumer/retail banking. Global custodians safe keep assets for their clients in multiple jurisdictions around the world, using their own local branches or other local custodian banks GLOBAL CUSTODIAN
  85. 85. Regulatory Agencies
  86. 86. Real Life Regulators Introduction
  87. 87. Financial Regulators SingaporeIndiaUS UK Hong Kong Brazil Financial System Financial Market Financial Instruments Financial Participants Financial Regulator Financial Services Markets: Securities & Exchange Board of India Market regulators are also known as market watch dogs. Securities & Exchange Commission
  88. 88. What are Regulatory Agencies? • Federal and state governments have a myriad of agencies in place that regulate and oversee financial markets and companies. • These agencies each have a specific range of duties and responsibilities that enable them to act independently of each other while they work to accomplish similar objectives. To provide investor protection and to ensure smooth functioning of financial markets.
  89. 89. Functions of Regulatory Agencies Supervise the functions of all market participants • Federal and State Government have agencies in place that regulate the functioning of financial markets. • These agencies are formed to supervise the functioning of all market participants to maintain the reliability of the financial system. To build confidence in investors To ensure financial stability To mitigate the financial crimes To protect investors
  90. 90. Major Regulatory Agencies Globally Federal Reserve Bank of New York , USA Securities and Exchange Commission, USA Commodity Futures Trading Commission, USA Federal Financial Markets Service (Russia) (FFMS)
  91. 91. Major Regulatory Agencies In India
  92. 92. SEBI The Indian stock market is regulated by the Securities and Exchange Board of India (SEBI). Some of the most important functions of SEBI to regulate the Indian stock market are: 1. Specifying rules and regulations 2. Providing licenses to dealers and brokers 3. Auditing the performance of various stock exchanges: 4. Controlling mergers, acquisitions and take-overs of the companies 5. Prohibiting unfair trade practices in the market
  93. 93. Investment Bank
  94. 94. What is an Investment Bank? An investment bank is a global financial institution that assists corporations and governments in raising capital by underwriting and acting as the agent/underwriter in the issuance of securities. Investment Banks serve as a bridge between large corporations and investors.
  95. 95. Functions of an Investment Bank Investors Investment Bank Clients Raising capital Investment banks act as intermediaries between companies who want to raise money and investors that want to invest money. Mergers and Acquisitions Market Research Trading
  96. 96. Clients of an Investment Bank Corporations Financial Institutions Government Agencies Pension Funds Hedge Funds
  97. 97. Clients of an Investment Bank SIZE Size is an asset for investment banks. Investment Bank Matters The more connections the bank has within the market, the more likely it is to profit by matching buyers and sellers, especially for unique transactions.
  98. 98. Commercial vs. Investment Banks The line between the two is quickly disappearing. The banking sector is split into two fundamental divisions: Investment banking and Commercial banking. VS Banks that are in the commercial and investment banking space include: • Deutsche Bank • Citibank • BNP Paribas
  99. 99. Commercial vs. Investment Banks Investment banks don’t take deposits from retail customers. Many countries maintain complete institutional separation between the commercial banks and investment banks. VS
  100. 100. Other Features Pre-underwriting counseling Distribution of securities Post issuance advisory End to end assistance These Banks have their own trading desks. Because investment banks have external clients but also trade their own accounts, a conflict of interest can occur if the advisory and trading divisions don’t maintain their independence. CHINESE WALL Client Companies Investing Public Corporate Finance Dept. Sales and Trading Dept. Research Dept.
  101. 101. Structural Roles in an Investment Bank FRONT OFFICE MIDDLE OFFICE BACK OFFICE Financial Analysis Sales Sales Trading Trading Risk Control Negotiations Verifications Following of Portfolios Administrative functions Book keeping Payment Orders Operational Control Reporting MARKETS REVENUE GENERATION
  102. 102. Organizational Divisions Investment Bank Investment Banking Merchant Banking Equity Fixed Income Operations Prime Services Asset Management Finance Administration
  103. 103. Role of an Investment Bank CAPITAL PROVIDERS Money Managers Hedge Funds Pension Funds Insurance Co. Mutual Funds High Net Worth Individuals INVESTMENT BANKS Capital Raised Provide ideas on how/ when to use capital – Research Understand client’s needs & build relationships - Sales Execute transactions in the marketplace based on the client’s investment strategy - Trading Maximized Valuation on Investment Seeking returns
  104. 104. Role of an Investment Bank CAPITAL USERS Corporations Municipalities Governments INVESTMENT BANKS • Provide strategic advice on how to optimize their business and on raising capital - Advisory, Equity / Debt Capital Market • Build interest with capital providers seeking to invest- Equity / Debt Capital Market, Sales, Research • Execute the capital raising process - Debt Origination, Equity Origination, Sales, Trading Seeking returns
  105. 105. Services Covered by Investment Banks Investment Banking Division Corporate Finance Capital Markets M&A, Restructuring Real Estate Financial Services Project Finance Mergers & Acquisitions Private Investments
  106. 106. Corporate Finance Corporate Finance is their core competency. • Focus is on specific industry or region • Market and sell a company’s product • Analyze potential advisory and transactional assignments for clients • Evaluate the company’s financial needs and assist in raising the appropriate type of capital that best suits those needs • Everything from capital investment decisions to investment banking falls under the domain of corporate finance MAXIMIZING SHAREHOLDER VALUE THROUGH LONG-TERM AND SHORT-TERM FINANCIAL PLANNING AND THE IMPLEMENTATION OF VARIOUS STRATEGIES GOAL
  107. 107. Sales and Trading Sales and Trading Disseminate firm’s strategy and research products to institutional clients Market IPOs and secondary offerings to providers of capital Provide actionable investment ideas to portfolio managers at client firms Develop and nurture relationships at all levels of client organizations Provide feedback to capital markets and corporate finance divisions on market dynamics, investor concerns and deal pricing
  108. 108. Merchant Banking Merchant Banking Banking Services Consultancy Services • Identify investment opportunities • Work on the analysis and evaluation of equity investments • Execute investment and financing transactions • Monitor the performance of existing investments • Evaluate alternatives for lower financing costs and sale of existing investments FUNCTIONS
  109. 109. Equity Capital Markets Analyze equity market conditions for corporate issuers Determine feasibility of equity offerings through- liquidity, Balance Sheet impact, Cost of Capital Analysis and relative public market valuations Assist equity capital markets and corporate finance to present corporate clients with strategic equity alternatives Assess the quality of institutional and retail demand of equity offerings in order to effectively price transactions
  110. 110. Client Services Client services look after transactions in all the markets – IPO, secondary, Convertible debt or even preferred stock. Work in close contact with Equity and Fixed Income divisions Protect the firm from operational and financial due diligence For IPOs and High Yield offerings create valuations, cash flow models and earnings projections. Identify company and industry specific investment merits to develop marketing strategy to facilitate sale of an issue Prepare road show presentation for institutional asset managers
  111. 111. Real Estate Provide a variety of investment banking services with real estate as the underlying asset Perform various financial analyses and valuations on real estate advisory, sell side, buy side and financing for developers, institutions and corporate clients Identify and evaluate potential investment opportunities for the company
  112. 112. Mergers and Acquisitions • Perform qualitative and quantitative analyses in order to evaluate and recommend various financial alternatives. • Execute divestitures, acquisitions, recapitalizations and joint ventures. • Corporate restructuring is also one of the focus area. Daimler- Benz & Chrysler merged to become Daimler Chrysler Tata buying Jaguar xxx & Not one word! Merger of equals Acquiring Lesser Entity FUNCTIONS
  113. 113. Sell Side and Buy Side of IB Sell Side (Need Capital) Buy Side (Have Capital) • Sell side firms usually require capital and hence ‘sell’ their products and services in order to gain capital. • Sell side is selling research, advice and securities it created for the companies and investors. • Whenever you see a report that advises you to buy, sell, or hold the stock, that’s coming from the sell side of the business. Investment banks falls in the category of the sell side. • Buy side firms usually have money, and hence are able to ‘buy’ the products and services. • Buy side consists of institutions such as hedge funds, mutual funds, pension funds, and insurance companies that are buying large quantities of securities for money management purposes. • Their goal is to make investments that align with investors’ expectations. Vs.
  114. 114. Interplay Between Sell and Buy Side Sell Side Buy Side INVESTMENT BANKING COMMERCIAL BANKING ASSET MANAGEMENT HEDGE FUNDS MUTUAL FUNDS PENSION FUNDS INSURANCE COMPANIES INSTITUTIONAL INVESTORS RETAIL INVESTORS
  115. 115. Thanks You For More Information Visit http://imarticus.org/

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