TOPIC 1 INTRODUCTION TO FINANCIAL MARKETS & INSTITUTIONS

Transcription

1 TOPIC 1 INTRODUCTION TO FINANCIAL MARKETS & INSTITUTIONS 1. Capital demand 2. Capital supply 3. Securities & transactions on markets 4. Financial market participants

2 FLOW OF FUNDS MATRIX Source: Federal Reserve of the United States, European Central Bank Financial assets held in USD bn Liabilities & Equities in USD bn Households & Non Profit Organizations Non financial Businesses Federal, State & Local Governments Financial Sectors Financial markets: place where demand & supply for capital meet and match. Rest of the World 67,992 20,945 4,870 85,034 22,764 14,154 54,376 21,967 87,578 17,276 Net position Suppliers demanders demanders «neutral» Financial assets held in EUR bn Liabilities & Equities in EUR bn 21,141 19,295 4,904 63,630 21,562 6,871 28,781 12,267 62,494 19,777 INTRODUCTION TO FINANCIAL MARKETS PR. D. FOLUS 2

3 1. CAPITAL DEMAND 1.1. CORPORATE FINANCING Investing Euro area corporate financing Q4 Source : ECB Monthly Bulletin, June Financing > Project A > Project B > Project C > Short term loans % > Short term debt securities. 0.5 % > Long term loans % > Long-term debt securities % > Shares : unquoted shares & other equity % quoted shares. 18.3% Banks Investors (private equity & exchanges) Strategy needs finance to create value Corporate value is reflected through securities INTRODUCTION TO FINANCIAL MARKETS PR. D. FOLUS 3

4 1.2. PUBLIC ORGANIZATIONS FINANCING Public national bodies: o Central government (sovereign) o Local governments o Social Security Entities supported by the State: o SNCF, RATP o AFD Debt securities Bank loans Securities, other than shares, Euro area Source: ECB, International bodies: o World Bank o EIB, ERDB INTRODUCTION TO FINANCIAL MARKETS PR. D. FOLUS 4

5 2. CAPITAL SUPPLY 2.1. WHO ARE THE SUPPLIERS? Households: o School o Medical care o Unemployment o Retirement Institutional investors: o Investment funds o Mutual funds o Hedge funds o Insurance companies o Pension funds o Employee savings Individual or collective savings Social redistribution INTRODUCTION TO FINANCIAL MARKETS PR. D. FOLUS 5

6 Share example ( Security vs cash: Cash: o No transaction cost o Availability o Hazards: fire, theft Security: o Safe (no hazards) o Transaction cost o Financial return o Financial risk INTRODUCTION TO FINANCIAL MARKETS PR. D. FOLUS 6

7 Bond Example Source: o Nominal value o Fixed coupon o Redemption date INTRODUCTION TO FINANCIAL MARKETS PR. D. FOLUS 7

8 2.2. FINANCIAL STAKEHOLDER RISK & RETURN Economic risk: o Strategic choices o Operational & pure risks o Credit & counterparty risks o Market risks: commodities, FX, IR Financial risk: o Gearing level o Coverages & hedges Risks Sales Cash flow Net earnings Company Assets Debt Equity Dividend to shareholders G Lenders: contractual return = r + default risk premium (spread) Shareholders: anticipated return = r + risk premium INTRODUCTION TO FINANCIAL MARKETS PR. D. FOLUS 8

9 Stock Index example o Dow Jones I.A. o Created 1884 o Published from 1896 o Historical return o Volume INTRODUCTION TO FINANCIAL MARKETS PR. D. FOLUS 9

10 3. SECURITIES & TRANSACTIONS ON MARKETS 3.1. WHAT CAN WE TRADE ON MARKETS? Securities on domestic markets: o Shares (stocks) o Bonds, notes, bills o Hybrid securities Securities on international markets: o Euro-bonds, euro-notes o Foreign bonds (yankee bonds, samurai bonds, bulldog bonds) o Depositary receipts (for shares) Financial derivatives Currencies (FOREX) Exchange traded products (= fund shares) INTRODUCTION TO FINANCIAL MARKETS PR. D. FOLUS 10

11 3.2. PRIMARY vs SECONDARY MARKET PRIMARY MARKET (ISSUANCE) Initial Public Offering (IPO) of new/existing shares Secondary Offering of new/existing shares Corporate bond issuance State bond issuance Companies Investment bank Primary dealer State Ex. in 2014: o TMX Group IPOs: 27.2 $bn o TMX Group SOs: 18.8 $bn o LSE Group Bond issurance: $bn Stock Exchange securities cash Broker / bank Investors INTRODUCTION TO FINANCIAL MARKETS PR. D. FOLUS 11

12 CAPITAL RAISED BY SHARES Source: 2014 Market highlights, WFE INTRODUCTION TO FINANCIAL MARKETS PR. D. FOLUS 12

13 SECONDARY MARKET (TRADING) Functions: o Savings liquidity o Economic risk-bearing allocation o Interest rate revelation o Pricing of securities Data: o Capitalization o Value of trades INTRODUCTION TO FINANCIAL MARKETS PR. D. FOLUS 13

14 3.3. TRANSACTIONS: SPOT vs FORWARD SPOT TRANSACTION: Price & quantity today negotiated (t) Immediate delivery & settlement: o t+2 in Europe o t+3 in the US, Japan Prerequisites: o Buyer keeps cash before deal o Seller owns security before deal FORWARD TRANSACTION: Price & quantity today negotiated (t) Delivery & settlement are forwarded: o More than t+2 in Europe o More than t+3 in the US, Japan Ways: o Market facility o Financial derivative INTRODUCTION TO FINANCIAL MARKETS PR. D. FOLUS 14

15 4. FINANCIAL MARKET PARTICIPANTS Buyer BANK/BROKER A BANK/BROKER B Seller Call center Internet Counter Supports : economists, analysts, engineer Front : traders, sales MARKET Exchange / OTC Supports Front Middle : tickets control & traders limits control Middle Back : deliverysettlement registration, accounting Post-trade Clearing Delivery-settlement Custody Back INTRODUCTION TO FINANCIAL MARKETS PR. D. FOLUS 15

16 4.1. TYPES OF MARKETS ORGANIZED EXCHANGE o Governmental authorization o Supervisor: SEC, FCA, AMF o Securities are standardized o No intuitu personae Þ Everybody can access the exchange: o NYSE G o Euronext o CME o OVER THE COUNTER MARKET o No governmental authorization o Open rules o Ad hoc transactions, customized contracts o Intuitu personae Þ Not everybody can access the market: o I.R. markets o F.X. markets INTRODUCTION TO FINANCIAL MARKETS PR. D. FOLUS 16

17 QUOTATION SERVICE 1. Market rules (regulatory approved) 2. Listing securities on cash markets: o Equities o Bonds o ETPs & Funds 3. Listing derivatives: o Financials o Commodities 4. Offering MTF: o Regulated.. BondMatch o Non-regulated EEM, SmartPool, AtomX 5. Sending information TRANSACTION SERVICE 1. Trading platform: o Regulated market UTP o Others... TCS 2. Guaranteeing full termination of operations: o Registration o Delivery vs payment 3. Guaranteeing full termination of commitments: o Derivatives clearing o DSO facility clearing INTRODUCTION TO FINANCIAL MARKETS PR. D. FOLUS 17

18 4.2. FINANCIAL MARKET FIRMS Market «jobs»: o Issues: IPO s, security sales o Orders: brokers, dealers o Investment Exchanges: traditionnal(lse ) vs ECN (Chi-c ) o Post-trade (clearing, settlement, custody): Euroclear, Clearstream o Evaluation & rating o Portfolio management Investment services providers (EU): o Banks o Investment companies Year 2014 : 634,000 bn security transactions settled 28,000 bn security held In France, Central Securities Depository INTRODUCTION TO FINANCIAL MARKETS PR. D. FOLUS 18

19 4.3. MARKET SUPERVISION IN EUROPE European level: o Directives: Markets in Financial Instruments Directive (MiFID) o European Securities & Markets Authority (ESMA) Domestic bodies: SEC, FCA, AMF, BaFin France: o Monetary & Financial Code o Banque de France o Autorité des marches financiers (AMF): o Financial operations, financial information o Financial products (# 12,000) o Markets & infrastructures (# ) o Asset management companies (# 600) and financial advisors (# 5,000) o AMF 2014 key data: workforce # 450, budget # 90 M INTRODUCTION TO FINANCIAL MARKETS PR. D. FOLUS 19