financial institutions and financial markets intro

8/6/2019 Financial Institutions and Financial Markets INTRO

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Financial Institutions

and

Financial Markets

Forex Banking


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Business ENTITIES

Business entities include nonfinancial and

financial enterprises.

Nonfinancial enterprises manufacture products

(e.g., cars, steel, computers) and/or provide non-

financial services (e.g., transportation, utilities,computer programming).

In a developed nation (e.g., USA), financial

enterprises are popularly referred to as financialinstitutions.

In India, Financial Institutions are institutions

specified in the Com

panies Act.


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Public Financial Institutions SECTION 4A

(1) Each of the financial institutions specified in this sub-section shall be regarded,

for thepurposes of this Act, as a public financial institution, namely :-

(i) The Industrial Credit and Investment Corporation ofIndia Limited, a company

formed and registered under the Indian Companies Act, 1913 (7 of 1913);

(ii) The Industrial Finance Corporation ofIndia, established under section 3 of the

Industrial Finance Corporation Act, 1948 (15 of 1948);

(iii) The Industrial Development Bank ofIndia, established under section 3 of theIndustrial Development Bank ofIndia Act, 1964 (18 of 1964);

(iv) The Life Insurance Corporation ofIndia, 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 Com panies Act still not

updated)

Source: http://www.mca.gov.in/Ministry/actsbills/pdf/Companies_Act_1956_Part_1.pdf


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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 sharecapital of such institution is held or controlled by the

Central Government.


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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 CentralGovernment 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


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Financial Institutions in a Developed Country

(USA Example)

Transforming financial assets acquiredthrough 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.


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Financial Institutions in a Developed Country

(USA Example)

Assisting in the creation of financial assets for theircustomers, and then selling those financial assets to

othermarket participants.

Providing investment advice to other market

participants.

Managing the portfolios of othermarket participants.

LIST Depository Institutions (commercial banks,

savings and loan associations, savings banks, and creditunions), insurance com panies, pension funds; and

finance companies.


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Financial Markets

Am

echanism

for the exchange/trading offinancial products under a policy framework.

Participants:

Borrowers (issuers of securities)

Lenders (buyers of securities), and

Financial intermediaries.

Lenders and borrowers differ in regard to term

sofrisk, return, and term of maturity.


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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 (searchcosts and information costs)


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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


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Global Financial Markets: Classification

Internal Market

(also called national

market)

External Market

(also called International

market, offshore market, and

Euromarket)

Domestic

Market

Foreign

Market


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From the perspective of a given country,financial markets can be either internal (alsocalled 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 thosesecurities are subsequently traded.

The foreign market Where the securities ofissuers not domiciled in the country are sold andtraded. (regulatory authorities impose norms)


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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


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The External Market (also called theInternational Market, or Offshore Marketand popularly Euromarket)

Allows trading of securities with twodistinguishing features:

(a) At issuance securities are offeredsimultaneously to investors in a num ber of

countries, and(b)They are issued outside the jurisdiction of any

single country.


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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, theEuropean Investment Bank, and the Asian

Development Bank)


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Globalization of Financial Markets: Contributory Factors

Deregulation or liberalization ofmarkets and

the activities of market participants in key

financial centers of the world

Technological advances formonitoring worldmarkets, executing orders, and analyzing

financial opportunities; and

Increased Institutionalization of financialmarkets.

financial institutions and financial markets intro

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