IOC: Financial Services Industry
Introduction
Wholesale/Professional Market
| Equities | Insurance |
| Bonds | Investment banking |
| Foreign exchange | Custodian banking |
| Fund Management | International banking |
| Derivatives, options/swaps/futures |
Retail
| Retail banking | Investment services - execution only/wealth mgt |
| Insurance | Financial Planning |
| Pensions |
Multi-lateral trading facilities
- Rivals to traditional stock exchange
- AKSA crossing networks/matching engines
Bond markets
Larger size/volume than equity - smaller volume of trades
$84 Trillion - 70% domestic, 30% International
| NYSE/NYSE Euronext | $13.6 Trillion US + $2.7 Trillion Europe |
| NASDAQ | $4.5 Trillion |
| London | $2.5 Trillion |
Foreign Exchange (Forex)
Largest market daily turnover - $4 Trillion Daily
Over the counter OTC
Distributed trading - no central clearing
Prices - Exchange strength - supply/demand - more demand rise in value
Market for companies to deal in the in/outflow
UK main centre - geographic advantage 38%, US 18%
Derivatives
Complex - instrument for currencies/interest rates/equities/credit risks
Exchange traded and OTC - Europe largest
Chicago Mercantile exchange CME - largest exchange
OTC ~ 4x size of exchange
Interest rate derivative contracts - interest rate swaps - Euro/US dollar mainly
Insurance markets
Manage risk
Names - liable to full extent of wealth
Corporate entities - limited liability
Names - join forming syndicate - syndicate "writes insurance"
premiums - payout = profit -> names
Lloyds - complex risk - casualty, property, energy, motor, aviation, marine, re-insurance
- innovative - unusual specialist complex risks
Industrial Participants
Retail Banks
| take deposits | retail customers + business |
| lend | |
| payment/money transfers |
Consolidation + integration - investments + pensions + insurance
Savings institutions
Building society
UK only 19 Century
Demutulisation 1980 -> companies
Deposit + mortgages
Owned by people borrowing/saving with them - members
Investment Banks
- Corporate finance/advisory - primary market/take overs/ mergers & acquisitions
- Banker for - governments, institutions, corporates
- Treasury dealing - foreign currency - protection against interest rates/exchange rate - financial engineering
- Investment management - pension funds/charity/collective investment schemes
- Securities trading - equities/bonds/futures
Tend to specialise in one area
International banks
Cross border transactions
- Trade
- exporter wants payment before shipping
- Importer wants proof of shipment before paying
- SWIFT Society of World wide Interbank Financial Telecommunications - electronic payment system
- Payment of goods, flow of trade
Insurance Companies
- Risk management
- Protection planning - financial advice
- Premium paid in exchange for cover
- Money invested in shares/bonds - (release investment) used to pay claims
- Market investment products - structured products
- guaranteed stock market bonds
Pension Funds
Large long term investments in shares/bonds/cash - properties
Fund managers
AKA Investment/Asset management
Management of investment portfolios - for institutions/private $118 trillion
- Conventional Funds - pensions/mutual funds & Insurance
- Alternative Funds - Hedge funds/private equity/exchange traded/sovereign wealth funds
- Private wealth funds
- London leading centre
Run portfolio of investments for others
Customers - Pension funds/Insurance companies/unit trusts/OEICs Open Ended Investment Companies/Wealthy individuals
- Investment managers
- Institutional fund managers - unit trusts/companies/insurance
- Private client fund managers - wealthy individuals
Charge small % of value of fund for managing it
- Investment schemes
- can include hedge funds
- for companies/charities/local governments/institutes
Stockbrokers
- Arrange trades on behalf of clients
- May advise (charge fees) or be execution only (commission on transactions)
- May look after assets - charge custodial/management fees
Custodian banks
look after portfolios of shares/bonds
- Hold assets for safe keeping
- Arrange settlement - purchase/sales of securities
- Collect income - dividends (equities)/interest (bonds)
- Info on companies - AGM
- Manage cash transactions
- Perform foreign exchange
- Provide regular report on actions
Mostly divisions of investment banks - dominated by small number - global custodians
Trade and professional bodies
Facilitates cross firm development
Enables efficient market
| International Capital Markets Association ICMA | Bonds |
| Futures and Options Association | Derivatives |
| International Swaps and Derivatives Association ISDA | |
| Investment Management Association IMA | Fund managers |
| Association of British Insurers ABI | Insurance Companies |
| Association of Private Client Investment Managers and StockBrokers APCIMS | Investment Managers |
| British Bankers Association BBA | Banks |
| Tax Incentivised Savings Associations TISA | Investment Funds |
Third Party Administrators
- Investment admin on behalf of others
- Specialise in investments
- Outsourcing enabling focus on core business
Investment Distribution Channels
Financial Advisor
- Survey clients (Fact find) - financial position, preferences & objectives
- Advise on actions & products
- Independent
- Comprehensive fair analysis - unbiased, unrestricted
- Restricted
- Only one firms products - Employer
Platforms
Online service - intermediaries use to view/admin clients investment portfolio
Tools to view/analyse + choose products + normally arrange custody
- Platform
- Fund supermarket - one stop shop range of Unit trusts/OEIC - all vendors
- Wraps- more comprehensive - more comprehensive Unit trusts/OEIC/ISA/Pensions/Insurance bonds - more products - holistic view of all assets - automate back office
Available directly to investors and financial advisors
Main advantage - distribute fund manager groups products to financial advisors
Charge for service/commission from provider
Execution only
Customer responsible - no advise
- Must record
- No advise given
- Made clear not responsible for product suitability