IOC: Financial Services Industry

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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

Equity market (stocks and shares)

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