Financial Markets

1
Financial Markets
2
Overview of Financial Markets

• 1. The Structure that Funds Flow
• 2. Facilitate for Financial Instruments
• 3. Decision Making Process
• 4. Operations and Structure for Domestic and
  International Financial Markets

3
Compositions of Financial Markets

• 1. Participants
• 2. Funds Flow
• 3. Financial Instruments
• 4. Trading Transaction
• at Organized Exchange Center
• by Private Placement

4
Functions of Financial Markets

• 1. Assembling of Funds
• 2. Allocation of Funds
• 3. Regulating and Adjusting of Funds
• 4. Providing Information

5
Conditions of Financial Markets

• 1. Dynamic Financial Activities
• 2. Developed Financial System
• 3. Established Legal System
• 4. Sufficient Available Funds

6
Classification of Financial Markets

• 1. By Maturity of Funds (Instruments)
• Money Markets
• Capital (Security) Markets
• Bond Markets
• Stock Markets

7

• 2. By Transaction Objects
• Cash Market
• Foreign Exchange Markets
• Spot Foreign Exchange Markets
• Forward Foreign Exchange Markets
• Gold Market
• Commodity Market

8

• 3. By Transaction Nature
• Primary Market - IPO
• Secondary Market - Circulation Market
• 4. By Structure
• Organized (Formal) Market
• Informal Market

9

• 5. By Transaction Timing
• Spot Markets
• Future Markets
• 6. By Transaction Places
• Exchange
• Over-the-Counter

10

• 7. By Geographical Area
• Domestic Markets
• International Markets
• Euro-Markets
• Asian-Markets

11
Money Markets
12
Attributes of Money Markets

• 1. Trading Short-term Financial Securities
• 2. Low Risk
• 3. High Liquidity

13
Compositions of Money Markets

• 1. Inter-bank Markets
• 2. Short-term Security Markets
• 3. Discount (Re-Discount) Market

14
Money Market Instruments

• 1. Government
• Treasury Bills (USA)
• Foreign Exchange Bills (HK)
• 2. Corporate
• Commercial Paper
• Negotiable Certification of Deposits (NCDs)
• Bankers Acceptances
• Repurchase Agreements

15
Money Market Participants

• 1. Commercial Banks
• 2. Other Financial Institutions
• 3. Brokers and Dealers
• 4. Corporations

16
Hong Kong Money Markets

• Started in late 1960. Used mainly by local banks
• in 1970, Large foreign banks enter the market
• Two Sectors
• Inter-bank Markets
• NCD and CP Markets
• Major Lenders - Notes Issuing Banks and Local
  Registered Banks
• Major Borrowers - Foreign Banks, RLB DTC
• Few Corporations and Individual used this Market

17
Hong Kong Inter-bank Market

• To facilitate the liquidity needs for banking
  institutes to fulfill regulation requirements
• Mainly financial activities were short-term,
  later developed into longer-term for lending
• To acquire profit making process for excess funds
• HIBOR is the rate charged, determined by lending
  banks and influenced by HKMA

18
Inter-Bank Market (Contd)

• at the same time banks can have both Inter-Bank
  Assets and Inter-Bank Liabilities in Hong Kong
  but also outside of Hong Kong
• Inter-bank funds can either be in HKD and USD
• This Market offers low counter-party
• Funds are channeled not only to banks risks and
  administrative overheads

19
Hong Kong NCD Market

• CDs (similar to Time Deposits) have build-in
  Liquidity
• First introduced by a merchant bank Slater Walker
  Hutchinson in 1973
• Chase Manhattan Bank once was the Leading Issuer,
  now HSBC
• There are Floating Rate NCD and Fixed Rate NCD.
  Fixed Rate NCD are more popular

20
NCD Markets (Contd)

• NCD are priced above HIBOR
• Issuing NCD needs legal documentation and time
  consuming, so more expensive
• Major participants are banks, other financial
  institutions, and Corporations

21
Hong Kong Exchange Funds

• Set up in 1935 that
• it shall be used for the purpose of regulating
  the exchange value of the currency of Hong Kong
• the Financial Secretary is authorized to issue to
  any note-issuing bank certificates of
  indebtedness and to require such a bank to pay
  to him for the account of the account of Fund the
  face value for ...

22

• HKMA is the delegated authority as Controller of
  the Funds
• Funds are maintained mainly in USD
• The Funds perform some central banking functions
• as custodian of FX reserves
• as the lender of the last resort
• as supplier of notes and coins

23

• The key objectives are
• to maintain maximum liquidity to defend the HKD
  exchange rate
• to preserve capital
• to generate additional returns
• The Funds have substantial interest-bearing
  liabilities in FX bills and notes
• 1990 launched Exchange Fund Bills
• 1993 launched Exchange Fund Notes

24
Discount Window

• First introduced in June 1992, using the term as
  Liquidity Adjustment Facility (LAF) for the
  supply of cash to the banking system
• major purpose is to strengthen monetary
  management of Hong Kong
• HKMA is the authorized party
• Licensed banks can borrowed through the sale and
  repurchase of eligible securities at the offer
  rate

25

• Banks can place surplus funds with HKMA overnight
  on a clean basis at the bid rate
• Functions
• to Supply additional liquidity to and absorb
  excess liquidity from the banking system
• to monitor the amount of liquidity in the system

26
Capital Markets
27
Attributes of Capital Markets

• 1. Involving Long-term Securities
• 2. Higher Risk
• 3. Diversity on Return, Liquidity and Risk for
  Varies Instruments

28
Composition of Capital Markets

• 1. By Transaction Nature
• Primary Markets
• Secondary Markets
• 2. By Nature of Security
• Stock Market
• Bond Market
• Foreign Exchange Market

29
Bond Markets

• 1. Security Bond
• Issued by Corporations or Government
• Corporate Bonds
• Government Bills and Notes (Bonds)
• Proceeds are used for long-term operations
• 2. Market Issue and Trade Bonds
• 3. Participants Basically Financial Institutio
  ns

30
Stock Markets

• 1. Security Corporate Stocks and Options
• 2. Market Closely watched and reported of
  all financial securities
• 3. Participants Corporations, Individuals,
  and Financial Institutions
• 4. Daily Trading are predictors of economic
  activity and performance of the business
• 5. Investors wealth fluctuates with the
  Market

31
Primary Markets

• Nature the place for corporations to
  raise funds through new issues of securities.
• Methods 1. Commitment Underwriting 2. Best
  Efforts
• Participants 1. Corporations (Issuers) 2.
  Investment Bank (Syndicates) 3. Investors

32
Primary Markets

• Issuing 1. Public Offering Offer for
  Subscription Offer for Sale 2. Private
  Placement
• Securities 1. Government Bonds 2.
  Corporate Securities Bonds Stocks

33
Secondary Markets

• Nature The place for Securities, once issued,
  are traded - rebought and resold.
• Functions 1. Provides information 2. Low
  transaction cost 3. Safety investments
  4. Market efficiency
• Offer Liquidity

34
Secondary Markets

• Participants
• 1. Investors (Buyers/Sellers)
• 2. Security Brokers
• 3. Floor Traders

35
Future Markets

• Nature 1. The Market in which Contracts
  are Written for Buy and Sale in the Future
• 2. Operate that delivery seldom
  takes place.
• 3. Future contracts are traded in
  margin

36
Future Markets

• Future Contract An agreement between buyer and
  seller at time 0 to exchange a standardized,
  pre-specified asset for cash at later time
• Target Investors
• 1. Who want information about future
  prices of products
• 2. Who want to speculate
• 3. Who want to transfer risk by hedging

37
Future Markets

• Products 1. Foreign Currency
• 2. Stock Index
• 3. Interest Rates
• 4. Commodities ie Gold
• 5. Options and Warrants

38
Future Markets

• Future Contracts are trade on an Organized
  Exchange in which is the Clearinghouse of the
  Contracts
• Future Contracts differs from Forward Contracts

39
Exchange Markets

• Nature Market in which cash flows from the
  sale of products or assets in term of foreign
  currency
• Purposes 1. Due to international trade and
  investments resulting the need of
  exchange currencies.
• 2. Due to the exchange rate
  risk among two currencies

40
Foreign Exchange Markets

• Broad Defined Market Involving the banks and
  the customers
• Narrow Defined Market Involving the foreign
  exchange transactions between the two banks

41

• Participants
• 1. Designed Banks
• 2. Foreign Exchange Broker
• 3. Importers and Exporters
• 4. Foreign Exchange Speculators
• 5. Other Foreign Exchange Suppliers

42
Foreign Exchange Markets

• Major Businesses
• 1. Spot Exchange Transactions
• 2. Forward Exchange Transactions
• 3. Swap Exchange Transactions
• 4. Future Exchange Transactions
• 5. Arbitrage

43
Hong Kong Bond (Debt) Markets

• Before 1984, No Bond Markets in HK
• Trading Securities Issued in HK
• in HK Dollars
• in Foreign Currency
• Development is dominated by issues from the
  Government and Financial Institutions
• Bonds of Global Issued are Traded in HK Stock
  Exchange, not in the Bond Markets.

44
HKDM - Contend

• Since 1990, HK Government has launched Exchange
  Fund Bills and Notes to assist the market in
  setting up the benchmark yield.
• The Central Moneymarkets Unit of HKMA is served
  as custodian and clearing agent for all debt
  instruments.
• In 1993, HKDM has developed into an international
  debt market

45
Hong Kong Stock Exchange

• History
• He's security industry started in 1866 when
  equities were traded and formalized in 1891.
• 1914 formally named Hong Kong Stock Exchange
  (HKSE).
• Late 1960 Stock Markets developed into a much
  efficient and major facility for financing.
• In Early 1970, there were Four Exchanges.

46

• 1973, the four exchanges standardized their
  trading sessions that lead to the unified
  securities market.
• 1986, Stock Exchange of Hong Kong was
  incorporated by merging the four exchanges
• in Sept.1986 HKSE became a full number of the
  International Federation of Stock Exchanges.

47

• In Mid1992,Central Clearing System was introduced
  
• In 1993, the state-owned enterprises of China
  began to be listed in HKSE--H shares
• Companies with substantial Chinese capital were
  reclassified as Red-Chip Stocks.
• Index Options were launched in 1993 and regulated
  short-selling was introduced.

48

• In 2000, HISE was the 10th largest in the world
  according to the capitalization, and the 2nd
  largest in Asia.
• HKSE and HKSFE together with HK Securities
  Clearing Company and merged as Hong Kong Exchange
  (HKEx) and listed its stocks in HKSE in June 2000
  
• Basically, HKSE is a Secondary Market

49
Hong Kong Future Markets

• 1977 HK Commodities Guarantee Corp Ltd was
  authorized to trade future contracts
• 1986 Hang Seng Index Futures Contracts began
  trading on HK Future Exchange
• 1992HK Futures Exchange operates through HK
  Securities Clearing Corp (HKSCC) to promote
  performance to all participants

50

• There are 4 classes of membership
• Floor Traders for own accounts
• Traders for all members accounts
• Traders for non-members accounts
• Merchant Traders for underwriting rights

51
Hong Kong Foreign Exchange Markets

• HKFXM was developed right after the abolition of
  all foreign exchange control in 1973 when HKD was
  unpegged from Pound Sterling
• Market grew rapidly due to the increase of
  foreign banks and DTCs during 1975-1978
• Besides, the underdevelopment of money market
  lead to the rely on oversea sources of funds by
  the banks and DTCs

52

• Major participants
• 1. Commercial Banks
• 2. DTCs
• 3. Foreign Exchange Brokers
• 4. Importers and Exporters

53

• Transactions
• 1. Spot Transactions
• 2. Swap Transactions
• 3. Forward Transactions
• 4. Rolling Forex

54

• Actively Traded Currencies
• USD
• Deutschemark
• Yen
• Swiss Franc
• Renminbi
• Australian Dollar
• Canadian Dollar