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Financial institutions (Government Agencies
Bank of England (Central…
Financial institutions
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DEBT MANAGEMENT OFFICE
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Quantitative easing: changing minimum fractional reserves so as to direct increase money supply
mechanics: ex nihilo -> purchase financial assets from other banks and now banks have more money -> reduce yields and cost and increase in demand for assets
Stock Exchange
Providing a market
- Quote driven competing market maker system via SEAQ( stock Exchange Automated Quotations)
- Order-driven electronic system, called SETS ( Stock Exchange Trading Service)
Role
- Raise new finance
- Provide a secondary market
- Brings together lenders and borrowers
Mainly on long term capital market i.e
Gilts, local authority bonds , bulldogs, Ordinary shares, preference shares , debentures, unsecured loan stocks , euro bonds
Markets:
- Gilt-edged market
- UK fully listed securities
- Alternative investment market (AIM)
- Overseas securities
Regulate Market
-Financial Services and Markets Act 2000
- ensure business takes place orderly and provides protection to investors.
:check:Regulating members of the Stock Exchange
:check:Regulating transactions
:check:Regulating companies
Settlement of trade
Provide investors with information
-Stock Exchange Daily Official List (SEDOL); price and volume of transactions used by HMRC for calculating capital gains.
Derivative exchanges
- draws value from underlying assets
- deal directly through OTC
- Credit risk is a major factor; use central clearing system
INSTITUTIONAL INVESTORS
BUILDING SOCIETIES
ROLES
- Lending for house-purchase mortgages
- Surplus cash is invested in
- Glits
- local Authority Bonds
- Other Banks/ building Societies'
certificates of deposits
In investment markets:
- Little influence on gilts and certificates of deposits
- competes with banks in retail deposit market
Clearing banks
-Obtain bulk of finance from private individuals
- Provide means for customers to transfer money to third parties
- Banks advances loan in terms of years or shorter term ones to maintain adequate liquidity
ROLE
-Money market deposits: dominates money market
-Certificates of Deposit: cash deposits from company
-Eurodeposit markets: currency deposited outside its country of origin
-Bill markets: treasury bills
-Glit Market:
-Other : in house units trust, life assurance, personal pension
Investment banks
- Financial advisers to companies
- Fund management
- Money Market Operations
- Other: short and long term finance to companies
trustees for debenture issues
counterparties/ brokers for OTC derivatives
Investment Trusts
- Company set up to invest money; listed in Stock Exchange ; raise equity and debt capital. Buys a variety of assets
- Investment companies own shares as underlying assets
- PRICING
-NAV but depends on different factors i.e supply demand , marketability & management charge
- SPLIT CAPITAL
- LIMITED LIFE INVESTMENTS TRUSTS
ROLE
- depends on the trust objective, role differs accordingly
UNIT TRUST
- trusts in legal sense
- not quoted by SE
-PRICING : Market value of assets / number of units
-BID-OFFER SPREAD: management charge 6% of the funds invested to cover its expense; done thru bid-offer spread
ROLE
- similar to investment trusts but smaller
OPEN-ended investment companies(OEICs)
- company with both investment and unit trust characteristics
- single share price; new units created when money is invested
INVESTMENT MANAGEMENT COMPANIES
- front and back office functions
ROLE
- buy/sell/ formulate stock selection and assets allocation decisions
- fund managers may become too influential in determining asset allocation and direction of capital i.e
- herd-like behavior
2.excessive focus on short term results
- "churning" of portfolios to generate commissions
- closet "passive" investments
- insufficient allocation of "new" classes
Self Administered Pension Scheme
:star:scheme responsible for own investment strategy
- defined benefits scheme:formula to determine contribution
- defined contribution scheme: set contribution rate for employer and employee
Role in investment markets
- gilts/ equities
- fixed interest market, buy longer dated and medium dated stocks to meet liability to pensions in payments
- high coupons stocks
LIFE INSURANCE COMPANIES
- Sell policies
- pool mortality and investment risks by channeling savings into long term capital markets
ROLE
- mixture of UK equities and fixed interest securities
- overseas securities,properties, index linked bonds and money market investments
- gilts
- need to maintain excess of assets over liabilities by law
- investment linked products
- derivatives - hedging market risks
GENERAL INSURANCE COMPANIES
:star: Write policies to cover
- Motor, marine, aviation
- Building insurance
- Personal accidents
- Liability insurance
ROLE
- money market and short dated fixed investments
- Liabilities are all short term; keep an excess of assets to liability + variability of their claims so little investment risks
- may invest in inflation -linked products to support liabilities
- short dated gilts and medium dated gilts