Financial Institutions and Financial Markets Forex Banking

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 financial institutions. In India, Financial Institutions are institutions specified in the Companies Act.

Public Financial Institutions – SECTION 4A (1) Each of the financial institutions specified in this sub-section shall be regarded, for the purposes of this Act, as a public financial institution, namely :- (i) The Industrial Credit and Investment Corporation of India Limited, a company formed and registered under the Indian Companies Act, 1913 (7 of 1913); (ii) The Industrial Finance Corporation of India, established under section 3 of the Industrial Finance Corporation Act, 1948 (15 of 1948); (iii) The Industrial Development Bank of India, established under section 3 of the Industrial Development Bank of India Act, 1964 (18 of 1964); (iv) The Life Insurance Corporation of India, 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 – Companies Act still not updated) Source: http://www.mca.gov.in/Ministry/actsbills/pdf/Companies_Act_1956_Part_1.pdf

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 share capital of such institution is held or controlled by the Central Government.

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 Central Government 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

Financial Institutions in a Developed Country (USA Example) Transforming financial assets acquired through 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.

Financial Institutions in a Developed Country (USA Example) Assisting in the creation of financial assets for their customers, and then selling those financial assets to other market participants. Providing investment advice to other market participants. Managing the portfolios of other market participants. LIST – Depository Institutions (commercial banks, savings and loan associations, savings banks, and credit unions), insurance companies, pension funds; and finance companies.

Borrowers (issuers of securities) Lenders (buyers of securities), and Financial Markets A mechanism for the exchange/trading of financial products under a policy framework. Participants: Borrowers (issuers of securities) Lenders (buyers of securities), and Financial intermediaries. Lenders and borrowers differ in regard to terms of risk, return, and term of maturity.

Economic Function of Financial Markets Creation of a financial asset Exchange of a Financial Asset Price Discovery Liquidity Reduction in the cost of transaction (search costs and information costs)

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

Global Financial Markets: Classification Internal Market (also called national market) External Market (also called International market, offshore market, and Euromarket) Domestic Market Foreign Market

Global Financial Markets: Classification From the perspective of a given country, financial markets can be either internal (also called 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 those securities are subsequently traded. The foreign market – Where the securities of issuers not domiciled in the country are sold and traded. (regulatory authorities impose norms)

Global Financial Markets: Classification 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

Global Financial Markets: Classification The External Market (also called the International Market, or Offshore Market and popularly Euromarket) Allows trading of securities with two distinguishing features: At issuance securities are offered simultaneously to investors in a number of countries, and They are issued outside the jurisdiction of any single country.

Global Financial Markets: Classification 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, the European Investment Bank, and the Asian Development Bank)

Globalization of Financial Markets: Contributory Factors Deregulation or liberalization of markets and the activities of market participants in key financial centers of the world Technological advances for monitoring world markets, executing orders, and analyzing financial opportunities; and Increased Institutionalization of financial markets.