OVERVIEW

OF THE

FINANCIAL ENVIRONMENT

WHY IS THE FINANCIAL ENVIRONMENT REQUIRED

The Savings and Investment Function

Eg.Contingency Planning, Saving for future Financial Goals, Corporate Reserves, Investing as per Fund Objective >> CA/SA, FD, CD, CP, Mutual Funds
Eg. Liquidity has to be provided to Investors in Financial products >> Stock Trading, Open Ended Mutual Fund Eg.Payment functions even where available money may be less than required >>Credit Cards, Debit Cards, Loans, Cheque facility, Telegraphic Transfer

Liquidity Function

Payment Function

WHY IS THE FINANCIAL ENVIRONMENT REQUIRED CONT..

Risk Mitigation Function

Eg.Risk is inherent is day to day transactions the same has to be mitigated >> Guarantee, Letter of Credit, Insurance
Eg. FED lays down certain monetary policies like CAR, CRR, SLR, which needs the Financial Environment Support to be implemented.

Policy Function

WHO NEEDS THE FINANCIAL ENVIRONMENT

Financial Institutions (including Foreign Institutional Investors)

Eg. Mutual Funds, Insurance, Banks (ABN Amro, Morgan Stanley) Eg Pfizer, Infosys, Microsoft, Google Eg Service Class, Businessman, Farmers Eg Central and State Government, Municipal Corp, Tax Dep't.

Corporations

Individuals

Government

HOW DOES THE FINANCIAL ENVIRONMENT WORK

The financial Environment facilitates the flow of funds either directly or indirectly from

the areas of surplus areas of deficit.

The Funds Flow Equations happens at both Economy and Global Level.

Financial System

Financial Institutions

FInancial Markets

Fianancial Instruments

Financial Services

Regulatory

Primary

Secondary

Debt Instruments

Market Supporting Systems : Trading, Broking, Settlement

Credit Rating

Custodial & Depository Services

Factoring and Forfieting

Intermediary Organized
Banking Non- Banking

Equity Instruments Unorganized

Risk Management

Wealth Management

Derived Instruments Capital Markets Money Markets Derived Markets Merchant Banking
Systems Instruments Insurance Investement Banking Leasing Hire Purchase

Non- Intermediary

Mutual Funds

Others

Trading & Settlement

Price Determination Process

Financial System

Financial Institutions

FInancial Markets

Fianancial Instruments

Financial Services

Regulatory Intermediary

Banking

Non - Banking

Non- Intermediary Others

Financial System

Financial Institutions

FInancial Markets

Fianancial Instruments

Financial Services

Primary

Secondary

Organized

Unorganized

Capital Markets

Money Markets

Derived Markets

Systems

Instruments

Trading & Settlement

Price Determination Process

Financial System

Financial Institutions

FInancial Markets

Fianancial Instruments

Financial Services

Debt Instruments
Equity Instruments

Hybrid Instruments Derived Instruments

Financial System

Financial Institutions

FInancial Markets

Financial Services

Fianancial Instruments

Market Supporting Systems : Trading, Broking, Clearing, Settlement

Risk Management

Custodial & Depository Services

Credit Rating

Factoring and Forfieting

Wealth Management

Merchant Banking

Mutual Funds

Insurance

Consultancy : Investement Banking

Leasing

Hire Purchase

FINANCIAL ENVIRONMENT : CLASSIFICATION BY FINANCIAL INSTITUTIONS

Financial System

Financial Institutions

FInancial Markets

Fianancial Instruments

Financial Services

Regulatory Intermediary

Banking

Non - Banking

Non- Intermediary Others

REGULATORY FINANCIAL INSTITUTIONS

The regulatory bodies in USA

Securities Exchange Commision SEC and Federal Bank FED

The regulatory bodies in Italy

Commissione Nazionale per le Societa e la Borsa Bank of Italy BOI

The regulatory bodies in Saudi Arabia

SAMA Saudi Arabian Monetary Agency (Central Bank handles both the Banking and Financial Markets)

The regulatory bodies in Jamaica

Financial Services Commission (FSC) Bank of Jamaica (BOJ)

REGULATORY FI AN EXAMPLE

SEBI Securities and Exchange Board of India regulates

Capital Market and Brokers Derived Markets Mutual Funds Venture Capital Funds

RBI Reserve Bank of India regulates

Commercial Banks NBFCs Non Banking Finance Companies Primary Dealers Financial Institutions (LIC, GIC,IDBI, UTI, EXIM Bank)

Link between the two

RBI has a officer on the SEBI Board of Director

INTERMEDIARY FINANCIAL INSTITUTIONS : BANKS

Consumer Banking/ Retail Banking

Domestic and NRI transaction Account

Eg. Current Account, Savings Account, NRE Account Related products and services :ATM, Debit Card, Phone Banking, Internet Banking, Extended Banking, Any branch Banking, Door step Banking, Investment Advisory Services, Priority Banking Credit Card, Housing , Car, Consumer, Personal Loans, Credit Line

Products offered on the Asset Side

Wholesale Banking

Offered to corporate houses/institutions

INTERMEDIARY FINANCIAL INSTITUTIONS : NON BANKING

Mutual Funds

UTI, Morgan Stanley, Alliance, Sun F& C

LIC, GIC, Tata AIG, Aviva (Dabur CGU), Max NewYork Life, GE Capital, Standard Chartered Finance, Karvy Consultants, Om Kotak Mahindra,

Insurance Companies

NBFC

NON INTERMEDIARY FINANCIAL INSTITUTIONS

World Bank
Gives soft loans grants to projects in developing nations.

IFC International Financial Corporation

IFC's source of funds is the total of paid in capital and retained earnings. It can also raise funds in the international capital markets. Lends to Developing Nations.

IMF International Monetary Fund

Member countries contribute money to the Fund which, in turn, lends money to Developing Members who face severe Balance Of Payments problems.

OTHERS

Non Banking Financial Services Providers

Custodial and Depository Services Providers (E.g.. SHCIL Stock Holding Corporation of India Ltd, NSDL, CDSL) Credit Rating Agencies (E.g. Moodys CRISIL, ICRA, CARE) Investment Banks - including Merchant Banks (E.g. Merrill Lynch, Goldman Sacs, UBS Warburg, Karvy Consultants) Leasing and Hire Purchase Companies (E.g.IL &FS, Hertz ,Wheelz)

FINANCIAL ENVIRONMENT : CLASSIFICATION BY FINANCIAL MARKETS

Financial System

Financial Institutions

FInancial Markets

Fianancial Instruments

Financial Services

Primary

Secondary

Unorganized

Organized

Capital Markets

Money Markets

Derived Markets

Systems

Instruments

Trading & Settlement

Price Determination Process

FINANCIAL MARKET SEGMENTATION

A financial market can be defined as a market in which financial assets are created or transferred Primary Market

Financial products are created in this market Existing financial products are traded in this Market

Secondary Market

PRIMARY MARKETS
Primary markets are where Corporations or government entities raise money. It is where investors buy the securities the first time. The buyers are investors, the money they put up goes to the issuer of the security. Initial Public Offerings are made on the primary market. So are secondary offerings and seasoned offerings (additional shares). The unique role of the lead investment banker is to determine the type of security to be offered, organize the offering, and set the offering price.

SECONDARY MARKETS
Once an offering is sold to an investor, the same investor may unload the security (usually stock) on the secondary market. This is where the security trades a second time.(Eg.NYSE, NASDAQ, NSE, BSE) Markets work under the Auction and/or Dealer Environment.
Auction Environment :Buyers and sellers can trade directly with one another - buyer and seller are brought together by a broker/specialist - who receives a commission. Dealer Environment The Market Maker is obliged to provide some form of price continuity for the shares. They gain from the bid-ask spread on each trade.

FINANCIAL MARKET SEGMENTATION

Financial Market can be classified as Organized or Unorganized based on the weather it is regulated or not. Organized Market Regulator sets up norms and controls the Market and Market Player.
Stock Exchange NSE, BSE, NYSE Mutual Funds Venture Funds Banking and NBFCs

Unorganized Market
Pawn Broker Sahukar Money Lender

ORGANIZED FINANCIAL MARKET

The financial market can also be classified based on the term and valuation basis of the financial assets. These are : Money Market (OTC Market)

products dealt are of short-term maturity (less than a year) products dealt are of long-term maturity (> a year)

Capital Market (Shares and Debt Segment)

Derived Market (F& O Segment, OTC Market)

these products dealt derive their value from the Money Market and Capital Market based Financial products

ORGANIZED FINANCIAL MARKET

The non OTC financial markets can also be classified based on the nature of Investment representation from the issuers perspective. These are : Debt Market Segment

where the products dealt represent debt and are generally of short to medium term maturity Where the products dealt represent the owners funds it is always of long-term maturity

Stock/Share Market Segment

Derived Market Futures and Options (F&O) Segment

FINANCIAL ENVIRONMENT : CLASSIFICATION BY FINANCIAL PRODUCTS

Financial System

Financial Institutions

FInancial Markets

Fianancial Instruments

Financial Services

Debt Instruments
Equity Instruments

Hybrid Instruments Derived Instruments

FINANCIAL PRODUCTS

Debt products

Equity products

Shares/ Stocks
Ordinary/ Common Preference Convertible Preference

ADRs/GDRs Convertible Debentures

Hybrid products

Bonds Corp/Govt/ Muncipal Debentures Corporate bonds. Fixed Deposit/Cert of Deposit Commercial Paper CP Treasury Bill T-Bill Govt. Securities G-Sec Repo, Term Repo, Rev Repo FCCBs

DEBT V/S STOCK

Bonds are debt whereas stocks are equity. By purchasing equity (stock) an investor becomes an owner in a corporation.Ownership comes with voting rights and the right to share in any future profits. By purchasing debt (bonds) an investor becomes a creditor to the corporation (or government). The primary advantage of being a creditor is a higher claim on assets than that of shareholders. To sum it up, there is generally less risk in owning bonds compared to owning stocks, but this comes at the cost of a lower return.

FORWARDS, FUTURES, OPTIONS AND SWAPS ARE DERIVATIVES SINCE THEY ARE SETTLED IN THE FUTURE.

Exchange based derivatives

OTC Traded derivatives

Equity based derivatives

Stock Futures and Options Index Futures and Options

Fixed Income Derivatives

Interest Rate Futures Interest Rate Options

Swaps Currency Swap Interest Rate Swaps Credit Default Swaps Swaptions Forward Rate Agreements Exotic options

MUTUAL FUNDS:

Equity focused MF

Debt focused MF

Equity Based Mutual Funds Index Mutual Funds Sectoral Funds

MMMF Liquid fund G Sec Fund Debt Fund

Real Estate funds Gold Fund Art fund Wine fund

Dual segment based MF

MF focused on Physical assets

Balanced Mutual Fund

FINANCIAL ENVIRONMENT : CLASSIFICATION BY FINANCIAL SERVICES

Financial Environment

Financial InstitutionsFInancial Markets Financial Services Fianancial Instruments

Market Supporting Environments Custodial & : DepositoryCredit Rating Trading, Broking, Services Clearing, Settlement Risk Management Wealth ManagementMerchant Banking

Factoring and Forf

Mutual Funds Hedge Funds

Insurance

Consultancy : Investement Banking

Leasing and Hire Purchase

Market Facilitation

MARKET SUPPORTING FINANCIAL SERVICES

Regulatory Environment provided by the market regulator Trading Environment, Price Determination Mechanism provided by the Stock Exchange Clearing and Settlement Environment provided by the Stock Exchange Brokerage Environment (Terminal / Web based) Dealer Environment provided by Dealers Custodial Environment provided by Service providers Depository Environment - provided by the Depository and Depository Participants Stock Lending provided by authorized stock lenders

FINANCIAL SERVICES
Credit Rating Environment Risk Management Wealth Management Mutual Funds and Hedge Funds Factoring and Forfaiting Research and Analysis Departments

FINANCIAL SERVICES CONT..

Merchant Banking (IPO management within Investment Banking)

Lead Management, Underwriting Private Placement Book Building Registry and STA Environment Foreign Currency Issue Management
Foreign Currency Convertible Bonds (FCCBs) Global Depository Receipts (GDRs) American Depository Receipts (ADRs)

FINANCIAL SERVICES CONT

Investment Banking Consultancy

Financing Strategies Corporate Restructuring Venture Capital Merger and Acquisition Management

Loan Syndication Services

The process of involving numerous different lenders in providing various portions of a loan.

Insurance Services (Life, Non Life) Leasing (Operating Lease, Financial Lease) Hire Purchase Venture/Angel Funding and Private Equity Funding

FACILITATORS TO THE USERS OF THE FINANCIAL ENVIRONMENT

Brokers/Dealers to facilitate Stock traders

(Example ICICI direct, Sherkhan.com, Motilal Oswal, Dealers on OTCEI) (Example Om Kotak Mahindra, Kothari Pioneer)

Primary Dealers on behalf of Debt Capital Market traders

Distributors of products of Insurance Cos , Mutual Funds and IPOs

(Example Bajaj Capital, SHCIL, Way2Wealth) (Example Direct Sales Agent for sales of Credit Cards, Home Loans, Bank Accounts) (Example Factoring, Forfeiting)

Franchisee of Financial Services and Products

Agents on behalf of the Principals

A QUICK TEST ON THE FINANCIAL ENVIRONMENT CATEGORIZE AS FI/FM/FP/FS

DLF Shares Goldman Sacs Putnam Investments ABN Amro Bank Credit Rating Mutual Fund Units/shares Aviva Life UTI Unit Trust of India NASDAQ

THANK YOU