Course subject (MBA) International finance.
To be written in Harvard System - 2000 words
Evolution in International Financial Markets
The world of global financial market structure is in an unparalleled state of evolution. Impelled by significant signs of progress in technology and regulatory agendas, market infrastructure through modern economies is becoming progressively integrated, global, competitive and complex. These contemplations and rapidly fluctuating dynamics in financial markets globally are being intensely felt in the Australian marketplace. To bring most effectively for those who are designed to serve, markets require to reliably and effectively deliver the infrastructure for organizations to raise capital and for lenders or investors to invest and allocate risk. By means of the example of recent developments in the over the counter (OTC) derivatives market, this report highlights the opportunities and challenges in ensuring financial markets of Australia to continue to deliver these persistent benefits.
The considerations and variations facing financial markets across the world are also being intensely felt in the marketplace of Australia. Known the ongoing swing in Australia towards better reliance on market based financing, these variations have the potential to overpoweringly shape the future opulence of investors and businesses in this nation. Like in another place, innovation and competition in the Australian marketplace is escalating at every level of their market infrastructure ? from resources raising and ancillary trading through to trade infrastructure post that, and across and between the exchange dealt and over the counter (OTC) markets. There has been massive change across the entire gamut and there is more change on the perspective. (Thakor, 2015)
It is also essential to recognise, however, that while evolution traditionally delivers profits, there might be some risk attached to it. The commercial actualities of evolution mean that it is stereotypically driven by a subcategory of market providers and users, who stand to obtain a direct financial benefit from that initiative or change, whereas the externalities of that change are of a smaller degree of interest to the protagonist.
Frequently, the interests of those recommending the changes and the interests of the broader market are tightly associated. That means that evolution benefits all the users of market.
However, history is also noticeable by changes, the ones that have not delivered this broader benefit and where, they all have in fact had a detrimental impact on the broader market by hampering raising of capital or otherwise trembling the confidence of money lenders, investors and their willingness to invest.
Market Infrastructure – current and future
With a view to compete with ASX directly, new listing companies have been floated. They also target to challenge with developing niche markets among small and medium enterprises and issuers of pan-Asian. Other quotation and listing markets are likely to be developed and other forms of raising capital such as funding of crowd are gaining grip overseas. Although, ASX is even now evidently dominant to Australia’s listings market, the transactions of those ASX-listed securities takes place now on agrowing range of platforms, including ASX’s own dark pool which is also known as Centre point.
The infrastructure (domestic) for futures trading is even now predominantly provided by the Australian Stock Exchange, but now a new domestic rival is entering the pleat. At the same time, it’s worth recalling that the largest of world’s futures exchanges such as the Chicago Mercantile Exchange and Eurex’s of Germany which hold licences to operate in Australia and have that sufficient efficiency to give competition effectively to others in any market. Provided the revenues generated by trading in futures for Australia’s Stock exchange is around double the revenue for trading in equity and it is reasonable to predict that competition for this revenue stream will only rise in near future.
Different Financial markets prevailing globally
Majorly, there are two distinct markets, namely, Future and the OTC derivative market i.e. over the counter derivative. The distinction between the two of these markets is starting to blur. The futurization of the OTC market and the viewpoint of standardised OTC contracts are being rapidly traded on liquid ‘non-traditional’ platforms of trading that are unfolding the severe tensions and dynamics. More widely, regulatory decisions and incentives for commercial are progressively drawing the OTC market onto financial market infrastructure historically allied with traditional exchange of equities type activity. For instance, for the purpose of clearing of OTC products, ASX launched its OTC clearing service in the year 2013, where it contests directly with global stones such as LCH and the Chicago Mercantile Exchange more recently. Other competitors globally also continue to eye off a tougher foothold in the region of Asia as they gaze to deploy their international scale so that they can compete in this marketplace. (Batten, Szilagyi, 2011)
OTC derivatives and the GFC
By way of background, markets of OTC derivatives grew substantially in the prime up to the GFC. It was result of various factors which includes substantial growth of global investment banking franchises along with increasing numbers of facilities and infrastructure which is being available to facilitate the trading of OTC derivatives. Whereas market value of OTC derivatives has dropped back from its 2008 crowning, it is still ten times higher than it was 15 years ago.
Australian Financial Market Association (AFMA)
It is a national industry body which represents about 200 organisations which participates in the Australian over the counter (OTC) financial markets in wholesale. Trades include foreign exchange, financial derivatives, interest rate products, repurchase agreements, electricity derivatives and equity commodities.
The beginning of the year 2014 had most financial market participants supposing a renewed upward trend in interest rates globally compelled by a winding back in the United States Federal Reserve’s – Fed. These expectations werequickly disappointed with a continuance of the downward trend in both real and nominal interest rates globally.
The Australian Stock exchange warrant market practiced a year of change in F.Y. 2014. The two long term issuers pull back on their involvement parting only one main issuer of MINI warrants, whereas other issuers’ engrossedmore on traditional products like trading warrants and instalment warrants. There was a sumof 3,564 warrants listed (which were down 17.14%); though, this was predicted as the high level in the earlier year included the issuance of a product suite by awholly and completelynew issuer. The traded value of $3.8 billion was practically unchanged and MINI style warrants persistedto be the most popular type of new emerged product as around $2.6 billion of value was traded. (Australian Financial Market Association, 2014)
Global Financial Crisis
The financial crisis that took place in 2007–08 which is also known as the global financial crisis is considered by many economists to have been the worst crisis in the financial markets since the great depression that came in 1930s.
This crisis threatened the failure of many large financial institutions, which was barred by the bailout of banks by national governments, but the stock markets still dropped across the world. In many of the areas, the market of housing also suffered, resulting in expulsions, foreclosures and elongated unemployment. The crisis resulted into downfall of the some major businesses existed into market, deteriorations in consumer wealth which was estimated in trillions of U.S. dollars and a recession in economic activity leading to the Great Recession and causative to the European sovereign-debt crisis. The initial phase of the crisis, which was displayed as a fund crisis, can be dated from the 9th day of August in the year 2007, that was the time when BNP Paribas concluded withdrawals from three hedge funds citing - a complete evaporation of liquidity. (Leach-Kemon, 2012)
Several observers have suggested that if the crisis of liquidity continues in the markets, an protracted recession or even its worse still yet to come. The on-going development of the crisis has provoked fears of a collapse in global economy, although there are many vigilantly optimistic forecasters now in addition to some protuberant sources who stays negative. The financial crisis is most likely to yield the biggest banking transformation since the savings and loans meltdown. Investment bank stated that it would see a more evident global recession with recovery doubtful for at least two years. Three days later, renowned economists announced that the beginning of the end of the crisis had begun, whereas the world starting to make the necessary actions to fix the crisis: capital injection by the governments of all countries; injection was made systemically and interest rate slashed to help borrowers. (Giddy, (n.d.))
The tremors faced by the international financial market devised in the real sector of these economies, which was obvious by a worldwide recession in 2001 that was led by the United States, with very sluggish recovery in the pace of economic growth predicted for the coming year and next. Corresponding to this, the period was marked by the culmination of the American stock market bubble, in a process that moved out from tele-communications, media and technology companies i.e. TMT to the rest of the market. The damage of financial wealth impacted capitalization of business, indebtedness levels, banking guaranties and consumption trends. Amongst other factors that are negative, reference should be made of accounting frauds shadowed by bankruptcies and debt composition of agreements involving large United States corporations. The statements were made in the context of an already miserable market and triggered highly negative impacts on the confidence offinancers and investor in the corporate information and in regulatory agencies and therefore, on their willingness to invest in the market. Investments were further downcast by a steady stream of statements of profit which is lower than expected levels, pushing United States stock market indices to highest lows. (Campello, Graham, and Harvey, 2010)
Emergence of various financial instruments into Financial Market:
In recent time, Global financial market has seen emergence of various financial instruments. Some of key financial instrument are as follows
? ABF – Asian Bond Fund
ABF is an initiative of the Executive’s meeting of East Asia Pacific- central banks aimed at outspreading regional financial markets. The first stage i.e. ABF1 is a fund to be invested in US dollar sovereign & quasi sovereign bonds issued in eight of the eleven EMEAP economies.
? ABF2 – Asian Bond Fund
It is an initiative of the Executive’s meeting of East Asia Pacific - central banks aimed at excavating regional financial markets like in ABF1. The second stage i.e. ABF2 comprises eight single market funds that are to be invested in domestic currency denominated government and quasi government currency bonds issued in these economies, and also the Pan Asian Bond Index Fund (PAIF).
? AGS - Australian Government Securities
AGS includes all the securities issued by the Australian Government at proposals conducted by the AOFM and by the Reserve Bank of Australia which is acting as agent of the Australian Government. They comprise Treasury notes, Treasury notes; Treasury indexed bonds and previously Treasury adjustable rate bonds. These securities are being issued either by tender/proposal or syndication. (Reserve Bank of Australia, (n.d.))
? ASIC - Australian Securities and Investments Commission
One among the three Australian Government bodies (and the others being the Australian Prudential Regulation Authority &the RBA - Reserve Bank of Australia) that regulates financial services of the place. ASIC is the national regulator of companies incorporated in Australia. ASIC has the primary responsibility for protection of market and consumer’s integrity issues across all over the financial system. (Reserve Bank of Australia, (n.d.))
The Australian Stock exchange (ASX) bond market includes government bonds that are Treasury indexed bonds and Treasury bonds and corporate bonds which are at fixed and floating rate. A sum total of complete 54 bonds are available to retail investors with maturities now ranging out as far as August 2035. (Reserve Bank of Australia, (n.d.))
? ASX - Hybrid Securities Market
The ASX market for hybrid securities includes preference shares, convertible notes and capital notes. The market for hybrid securities sustained to attract issuers and investors with the lump sum value traded throughoutthe year exceeding $5.6 billion and the market capitalisation for the market sector beyond $28.1 billion. (Reserve Bank of Australia, (n.d.))
? ASX 24 Interest Rate Futures Market
ASX 24 interest rate futures capacities were slightly robust throughout the second half of Financial Year 2014 compared to the first half of the same year. Market activity was motivated by a reduction in interest rate volatility in the year 2014 given sightsof an improving global economic environment and deviating monetary policy movements by the topmost global central banks. The Reserve Bank of Australia – RBA indicated that the existing accommodative monetary policy position was appropriate and the sensible course of action was stability in interest rates.
The global financial market is massive and global flows within this market have an enormous effect on the real economies of various countries, that is, on GDP and economic growth & well-being of individuals. It consists of financial institutions-banks and shadow banks as well as financial markets in bonds, stocks commodities and the derivatives.The evolved global financial markets promotes economic development & growth by performing important functions that facilitate the flow of capital to investors and increase the opportunities to businesses.The financial systemglobally is extremely interconnected. Its interconnectedness increases the difficulty of international regulation synchronisation, while at the same time increasing the need. (The World Bank, 2016)
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Reserve Bank of Australia, (n.d.) Glossary, Available at http://www.rba.gov.au/glossary/index.html [Accessed 28th March 2016]
Australian Financial Market Association (2014) 2014 Australian Financial Markets Report [PDF] Available at http://www.afma.com.au/data/afmr/2014%20afmr.pdf [Accessed 28th March 2016]
The World Bank (2016) Long Term Finance [Online] Available at http://www.worldbank.org/en/publication/gfdr/report [Accessed 28th March 2016]
Giddy, I (n.d.) Global Banking & Capital Market Review [Online] Available at http://people.stern.nyu.edu/igiddy/gbcmreview1.pdf [Accessed 28th March 2016]
Campello, M., Graham, J.R. and Harvey, C.R., 2010. The real effects of financial constraints: Evidence from a financial crisis. Journal of Financial Economics, 97(3), pp.470-487.
Batten, JA, Szilagyi, PG (2011) The Impact Of The Global Financial Crisis on Emerging Financial Markets, Bingley, Emerald Group