Ch 1: Financial Markets Flashcards
Define financial market
financial market is where buyers / sellers come together to transfer financial risks, products or currency, usually adhering to a standard set of protocols or regulations
A central market place provides:
- price discovery
- liquidity
- ability to offset risk
- efficient resource allocation
- competition
- information
2 major market types
- OTC
2. Exchange traded
Exchange traded characteristics
- one centralised exchange or with clearing house as principle
- subject to binding rules & conditions
- standardised products
- do not provide flexibility (compared with OTC)
- sometimes require approval of responsible minister
- liquidity
OTC characteristics
- flexible
- product structure, settlement terms and dealing method can be tailored specifically to the client’s needs
ASX Group
- market operator, clearing house and payments system facilitator
- monitors compliance with operating rules and promotes adherence to corporate governance
- relies on subsidiaries to monitor & enforce compliance:
- ASX: manages primary, secondary and derivative services. Encompasses ASX & ASX 24 (previously SFE)
- ASX Clearing COrporation: manages ASX’s clearing services. Encompasses ASX Clear (previously ACH); and ASX Clear (Futures) (previously SFE Clearing Corporation)
- ASX Settlement Corporation - manages settlements, encompasses ASX Settlement and Austraclear
- ASX Compliance - monitors compliance
ASX 24 (previously SFE)
- interst rates, equities, commodities, options, energy & environment
- Aus & NZ
Primary vs Secondary Market
Primary:
- products or instruments traded for the first time
Secondary:
- buying or selling products that have alraedy been issued
Types of financial markets in Aus (6)
- FX
- ST money market
- LT Debt mkt
- equities
- Commodities market
- Derivatives
ST money market
- define
- issued by
- participants
ST money market
- define: interest rate securities with maturity < 1 yr
- issued by: govt, corps, banks to fund ST borrowing requirements
- participants: mainly banks
LT debt market
- define
LT debt market (interest rate market)
- define: participants can buy/sell (boorow / lend) money. Maturity normally > 1 yr
Equity market
- ownership of part of an asset
- represent a claim on a company and could be in the form of ordinary shares, pref shares, convertible notes and rights issues
Private equity
investment in small to medium private companies
Differences between debt & equity markets
- Equities: organised through exchange and through its broker members
- Bulk of debt is issued OTC
- Future returns of equity holder are less certain than those of a debt security holder
- Equity investors have potential for much higher return but also greater risk of loss
- Equity capital: owner’s interest, comprised of capital permanently invested (excludes loans) togetehr with undistributed profits. Risk capital.
Commodities market
- raw or primary products produced by industries such as mining and agriculture
- traded in bulk based on price rather than features or who produced
Derivatives
- value is derived from underlying instrument
- Can be traded via contracts bilaterally agreed or via licensed exchange
- risk is transferred, agreed maturity, settlement is obligatory, cash or physical settle, ETD or OTC,
- eg swaps, FRAs, futures (incl CFDs), forwards
Financial market participants (8)
- financial institutions
- funds management & insurance companies
- corporates and similar organisations
- brokers
- government
- individuals
- direct participants
- indirect participants
Financial institutions
- Banks vs NBFIs
- NBFIs comprise all other financial servicews - eg building societies, credit unions, finance companies, unit trusts…
Banks
- accept deposits and create credit for the household and buisness sectors, and together with RBA, run the payments system
- Banking Act 1959 -> authorised deposit taking institution
Government - participation in financial markets
Government - participation in financial markets
- statutory authorities
- Commonwealth government and its agenciews
- RBA
RBA
- define
- role
- participates in:
- overseas liquidity through:
RBA
- define: Aus central bank, acts as banker and financial agent for fed govt
- role: supervises payments system and manages MP in order to contribute to the stability of the Australian economy and to the welfare of people
- participates in: cash, debt markets, FX and manages Australia’s international reserves
- overseas liquidity through: exchange accounts
Commonwealth govt:
- participates through:
- Role
- Sovereign wealth funds
Commonwealth govt:
- participates through: RBA, AOFM (part of Cwlth Tsy) and commercial banks
- Sovereign wealth funds: investment managers for a country’s domestic and FX surpluses. Preserve and enhance the public’s investable assets over very long time frames
State statutory authorities
- 2 types
State statutory authorities
- 2 types
1. Central financing authorities (eg QTC)
2. Operating authorities (eg Sydney Water).
All are established under state legislation
Types of direct participation (2)
Types of participation (2)
- intermediaries
- end users (price takers)
Four major functions of direct financial markets participants
- intermediation
- portfolio management
- risk management
- proprietary trading
