Download Financial Institutions and Financial Markets

Financial Institutions
and
Financial Markets
Forex Banking
Business ENTITIES
• Business entities include nonfinancial and
financial enterprises.
• Nonfinancial enterprises manufacture products
(e.g., cars, steel, computers) and/or provide nonfinancial services (e.g., transportation, utilities,
computer programming).
• In a developed nation (e.g., USA), financial
enterprises are popularly referred to as financial
institutions.
• In India, Financial Institutions are institutions
specified in the Companies Act.
Public Financial Institutions – SECTION 4A
(1) Each of the financial institutions specified in this sub-section shall be regarded,
for the
purposes of this Act, as a public financial institution, namely :(i) The Industrial Credit and Investment Corporation of India Limited, a company
formed and registered under the Indian Companies Act, 1913 (7 of 1913);
(ii) The Industrial Finance Corporation of India, established under section 3 of the
Industrial Finance Corporation Act, 1948 (15 of 1948);
(iii) The Industrial Development Bank of India, established under section 3 of the
Industrial Development Bank of India Act, 1964 (18 of 1964);
(iv) The Life Insurance Corporation of India, established under section 3 of the Life
Insurance Corporation Act, 1956 (31 of 1956);
(v) The Unit Trust of India, established under section 3 of the Unit Trust of India
Act, 1963 (52 of 1963).
•ICICI merged (reverse merger) ICICI Bank and hence, lost status of FI.
•Similarly case for IFCI and IDBI. (MCA website – Companies Act still not
updated)
Source: http://www.mca.gov.in/Ministry/actsbills/pdf/Companies_Act_1956_Part_1.pdf
Public Financial Institutions – SECTION 4A
(vi) The Infrastructure Development Finance Company
Limited, a company formed and registered under this Act.
(2) Subject to the provisions of sub-section (1), the Central
Government may, by notification in the Official Gazette,
specify such other institution as it may think fit to be a
public financial institution;
Provided that no institution shall be so specified unless (i) It has been established or constituted by or under any
Central Act, or
(ii) Not less than fifty-one per cent of the paid-up share
capital of such institution is held or controlled by the
Central Government.
Public Financial Institutions – Companies Bill 2009
Section 2 (zzt) “public financial institution” means any
financial institution—
(i) which is established or constituted by or under any
Central or State Act; or
(ii) in which not less than fifty-one per cent. of the paid-up
share capital is held or controlled by the Central
Government or any State Government or both by the
Central Government and any State Government or
Governments or by the State Governments, and which is
notified by the Central Government as such under this Act;
Source: http://www.mca.gov.in/Ministry/actsbills/pdf/Companies_Bill_2009_24Aug2009.pdf
Financial Institutions in a Developed Country
(USA Example)
• Transforming financial assets acquired
through the market and constituting them into a
different, more widely preferable, type of asset –
which becomes their liabilities (function
performed by financial intermediaries)
• Exchanging of financial assets on behalf of
customers.
• Exchanging of financial assets for their own
accounts.
Financial Institutions in a Developed Country
(USA Example)
• Assisting in the creation of financial assets for their
customers, and then selling those financial assets to
other market participants.
• Providing investment advice to other market
participants.
• Managing the portfolios of other market participants.
• LIST – Depository Institutions (commercial banks,
savings and loan associations, savings banks, and credit
unions), insurance companies, pension funds; and
finance companies.
Financial Markets
• A mechanism for the exchange/trading of
financial products under a policy framework.
• Participants:
• Borrowers (issuers of securities)
• Lenders (buyers of securities), and
• Financial intermediaries.
• Lenders and borrowers differ in regard to terms
of risk, return, and term of maturity.
Financial Markets
• Economic Function of Financial Markets
•
•
•
•
•
Creation of a financial asset
Exchange of a Financial Asset
Price Discovery
Liquidity
Reduction in the cost of transaction (search
costs and information costs)
Financial Markets: Classification
•BY NATURE OF CLAIM
•Debt Market
•Equity Market
•BY MATURITY OF CLAIM
• Money Market
•Capital Market
•BY SEASONING OF CLAIM
•Primary Market
•Secondary Market
•BY DELIVERY (Immediate or Future)
• Cash or Spot Market
•Derivative Market
•BY ORGANIZATIONAL STRUCTURE
• Auction Market
•Over-the-Counter Market
•Intermediated Market
Global Financial Markets: Classification
Internal Market
(also called national
market)
Domestic
Market
Foreign
Market
External Market
(also called International
market, offshore market, and
Euromarket)
Global Financial Markets: Classification
• From the perspective of a given country,
financial markets can be either internal (also
called national market) or external.
• National (internal) market is composed of two
parts: the domestic market and the foreign market.
• The domestic market – Where issuers domiciled
in a country issue securities and where those
securities are subsequently traded.
• The foreign market – Where the securities of
issuers not domiciled in the country are sold and
traded. (regulatory authorities impose norms)
Global Financial Markets: Classification
• Nicknames have developed to describe the
various foreign markets.
• Foreign market in the USA is called the
Yankee market
• Japan – The Samurai Market
• UK – the Bulldog Market
• Netherlands – Rembrandt Market
• Spain – Matador Market
Global Financial Markets: Classification
• The External Market (also called the
International Market, or Offshore Market
and popularly Euromarket)
• Allows trading of securities with two
distinguishing features:
(a) At
issuance
securities
are
offered
simultaneously to investors in a number of
countries, and
(b) They are issued outside the jurisdiction of any
single country.
Global Financial Markets: Classification
• Households
• Business Entities (Corporations and partnerships)
include nonfinancial and financial enterprises
• National governments
• National government agencies
• State and local governments
• Supranationals (such as the World Bank, the
European Investment Bank, and the Asian
Development Bank)
Globalization of Financial Markets: Contributory Factors
• Deregulation or liberalization of markets and
the activities of market participants in key
financial centers of the world
• Technological advances for monitoring world
markets, executing orders, and analyzing
financial opportunities; and
• Increased Institutionalization of financial
markets.