Environment of Global

Financial System
Unit 1
 Financial system
• The financial system enables lenders and borrowers to exchange
funds.
• India has a financial system that is controlled by independent
regulators in the sectors of insurance, banking, capital markets and
various services sectors.
• It links savers and investors.
• It helps in capital formation, allocation of risk, facilitates expansion of
financial markets.
COMPONENTS/ CONSTITUENTS OF INDIAN
FINANCIAL SYSTEM
• Financial Institutions
• Financial Markets
• Financial Instruments/ Assets/ Securities
• Financial Services.
 Financial services sector
• The investment chain - through the investment chain, savers and
borrowers are brought together. Savers provide financing to
businesses, and businesses that wish to grow offer opportunities for
savers to take part in the growth and resulting potential returns.
• Risk – use of insurance. the changing value of currencies, the
incidence of major accidents or extreme weather conditions.
• Payment systems - practical mechanisms for money to be managed,
transmitted and received quickly and reliably. Access to payment
systems and banking services is a vital component of financial
inclusion for individuals.
• The financial services sector provides the link between organizations
needing capital and those with capital available for investment.
• The financial services sector that channels the money invested to
those organizations that need it, and provides execution, payment,
advisory and management services.
 Global Financial system
• The global financial system is the worldwide framework of legal agreements,
institutions, and both formal and informal economic action that together
facilitate international flows of financial capital for purposes
of investment and trade financing.
• The world economy became increasingly financially integrated in the 1980s and
1990s due to capital account liberalization and financial deregulation.
• The global financial crisis, which originated in the United States in 2007, quickly
propagated among other nations and is recognized as the catalyst for the
worldwide Great Recession.
• A country's decision to operate an open economy and globalize its financial
capital carries monetary implications captured by the balance of payments.
• It also renders exposure to risks in international finance, such as
political deterioration, regulatory changes, foreign exchange controls,
and legal uncertainties for property rights and investments.
• Regulatory bodies establish financial regulations and legal
procedures, while independent bodies facilitate industry supervision.
Research institutes and other associations analyze data, publish
reports and policy briefs, and host public discourse on global financial
affairs.
• While the global financial system is edging toward greater stability,
governments must deal with differing regional or national needs.
• Emerging market policymakers face a challenge of precision as they
must carefully institute sustainable macroeconomic policies during
extraordinary market sensitivity without provoking investors to
retreat their capital to stronger markets.
 Stages of IB
• Domestic company
• International company
• Multinational company
• Global company
• Transnational company
 Domestic Company
• Limits its operations, mission and vision to the national political
boundaries.
• Analyse the national environment of the country, formulate the
strategies to exploit the opportunities offered
• Motto “if it is not happening in the home country, it is not happening”
• Beyond its present capacity, the company selects the diversification
strategy of entering into new domestic markets, new products,
technology etc.
• Does not want to enter into the international markets.
 International company
• Domestic companies who decide to exploit the opportunities outside
the domestic company.
• Focus is domestic but extends its wings to the foreign companies.
• Locating a branch in the foreign market.
• Extends domestic country marketing mix and business model and
practices to foreign countries.
 Multinational company
• International companies learn that the extension strategy (extending
the domestic product, price and promotion to foreign markets) will
not work
• Toyota exported Toyopet cars made in Japan to USA in 1957. It was
not successful because it was built like tanks and shipped back to
Japan.
• Toyota then started manufacturing cars suitable for US market.
• International companies turn into multinational companies when
they start responding to the specific needs of the different country
markets regarding product, price and promotion.
• Also referred as multidomestic company – operate with distinct
policies and strategies suitable to the country concerned.
• Philips lost its market share – increse in cost of pdn, price
• Later Philips developed a global strategy for producing, marketing and
R&D
 Global company
• Either produces in the home country or in a single country and
focuses on marketing these products globally, or produces the
products globally and focus on marketing these products
domestically.
• Harley produces super heavy weight motorcycles in the US and
markets in the global market.
• Co procuring the products from global countries and markets the
products through its retail organisation in the USA.
 Transnational company
• It produces, markets, invests and operates across the world.
• An integrated global enterprise that links global resources with global
markets at profit.
• Most of the transnational companies satisfy many of the
characteristics of a global corporation.
Characteristics
• Geocentric orientation – thinks globally acts locally. Adopts global
strategy but allows value addition to the customer of a domestic
country.
• Production facilities are spread but specialised and integrated.
• In case of caterpillar, manufacturing and assembly facilities are
located in many countries. Components are shipped for assembly and
the assembled product is shipped to the place of the customer.
• Operating style – key operations are nationalised. R & D activity of
proctor & Gamble and key HR activity of colgate are the joint and
shared activity of the units of these companies in various countries.
• Adaptation – Mercedes Benz is a super luxury car in north America,
luxury automobile in Germany , standard taxi in Europe.
• HRM policy – selects the best HR and develops them regardless of
nationality, ethnic group etc. but the international company reserves
the top and key positions for nationals.
• Purchasing – procures world-class material from the best source across
the globe.
 Participants
• Investment Banks: It provides advice and arrange finance for
companies that want to float on the stock market, raise additional
finance by issuing further shares or bonds, or carry out mergers and
acquisitions.
• Finance-raising and advisory work, both for governments and for
companies.
• Custodian Banks: Custodians are banks that specialize in safe custody
services, looking after portfolios of shares and bonds on behalf of
others, such as fund managers, pension funds and insurance
companies.
• Holding assets in safekeeping, such as equities and bonds
• Arranging settlement of any purchases and sales of securities.
• Providing information on the underlying companies and their annual
general meetings (AGMs).
• Providing regular reporting on all activities undertaken that affect the
holdings in a portfolio, including all trades, corporate actions and
other transactions.
• The custody business is now dominated by a small number of global
custodians who are often divisions of major banks.
• Among the biggest global custodians are the Bank of New York
Mellon and State Street.
• Other services to their clients, such as stock lending, measuring the
performance of the portfolios of which they have custody and
maximizing the return on any surplus cash.
 Retail/Commercial Banks
• Taking deposits from, and lending funds to, retail customers, as well
as providing payment and money transmission services.
• They operate through telephone and internet-based services.
• Banks that offer multiple services such as this are known as ‘financial
conglomerates’
• “any group of companies under common control whose exclusive or
predominant activities consist of providing significant services in at
least two different financial sectors (banking, securities, insurance)”
 Peer-to-Peer (P2P) and Crowdfunding
• Crowdfunding is the practice of funding a project or venture by raising
small amounts of money from a large number of people.
• Using the internet to access many potential funders.
• Crowdfunding can take the following forms:
A donation – people simply believe in the cause.
Debt crowdfunding – investors essentially lend then receive their
money back with interest.
Equity crowdfunding – people invest in exchange for equity or shares
in the venture.
 Insurance Companies
• Protection planning is a key area of financial advice, and the
insurance industry provides a variety of products to meet many
potential scenarios.
• Insurance companies collect premiums in exchange for the coverage
provided.
• This premium income is invested in equities and bonds and, as a
result, the insurance industry is a major investor in both equity and
bond markets.
 Retirement Schemes
• when both the firm and the employee contribute to an investment
pot.
• At retirement, the accumulated fund is used to provide a pension.
 Fund Managers
• Fund managers, also known as investment managers, portfolio
managers or asset managers, run portfolios of investments for others.
• They invest money held by institutions, such as pension funds and
insurance companies, as well as wealthier individuals.
• The global asset management industry has more than doubled in size
since 2000, with the Organization for Economic Co-operation and
Development (OECD) and the International Monetary Fund (IMF)
estimating that there are over US$90 trillion of funds under
management.
• Fund managers charge their clients for managing their money.
• Their charges are often based on a small percentage of the value of
the fund being managed and may also have charges linked to the
performance achieved.
 Stockbrokers and Wealth Managers
Stockbrokers arrange stock market trades on behalf of their clients,
who are investment institutions, fund managers or private investors.
• Execution-only stockbrokers: No advice is offered and commission is
charged per trade. They are aimed at day traders and investors who
are confident in making their own investment decisions and, typically,
investors with small portfolios.
• Robo-advisers: a recent innovation, a robo-adviser is an online wealth
management service that provides automated, algorithm-based
portfolio management advice.
• Advisory and discretionary wealth managers
• Institutional brokers: these are stockbrokers who arrange trades on
behalf of large institutions.
• Their skill lies in their ability to execute what are typically large trades
in the market, without having a significant adverse effect on the share
price.
 Platforms
• Platforms are online services used by intermediaries, such as
independent financial advisers (IFAs), to view and administer their
clients’ investment portfolios.
• Platform providers also make their services available directly to
investors, and platforms earn their income by charging for their
services.
 Private Banks
• Private banks provide a wide range of services for their clients,
including wealth management, estate planning, tax planning,
insurance, lending and lines of credit.
• The distinction between private and retail banks is gradually
diminishing as private banks reduce their investment thresholds in
order to compete for this market.
• Meanwhile, many high street banks are also expanding their services
to attract the ‘mass affluent’ and HNWIs.
 Sovereign Wealth Funds (SWFs)
• A sovereign wealth fund (SWF) is a state-owned investment fund that
holds financial assets such as equities, bonds, real estate, or other
financial instruments.
• Examples of SWFs include the Norway Government Pension Fund,
Abu Dhabi Investment Authority, SAMA Foreign Holdings of Saudi
Arabia and China Investment Corporation.
• SWFs are defined as special purpose investment funds or
arrangements owned by a government. Their key characteristics are
as follows:
• SWFs hold, manage, or administer assets to achieve financial
objectives.
• They employ a set of investment strategies which include investing in
foreign financial assets.
• The assets of an SWF are commonly established out of balance of
payments surpluses, official foreign currency operations, the
proceeds of privatizations and receipts resulting from commodity
exports.
• Their size and global diversification allows them to participate in the
best opportunities, spread their risks and, by diverting their funds
overseas, prevent the overheating of their local economies.
• They may also use part of their wealth as reserve capital for when
their countries’ natural resources are depleted.
• SWFs are becoming increasingly important in the international
monetary and financial system and attracting growing attention.
The limitations are:
• Official and private commentators have expressed concerns about the
transparency of SWFs, including their size and their investment
strategies, and that SWF investments may be affected by political
objectives.
• International Forum of Sovereign Wealth Funds has been formed and
has published a set of 24 voluntary principles, the Generally Accepted
Principles and Practices for Sovereign Wealth Funds, known as the
Santiago Principles.
• leading to increasing transparency, with a number of countries now
publishing annual reports and disclosing their assets under
management.
 Trade and Professional Bodies
• The views of various industry sections are represented, especially to
governments and regulators, and that cross-firm developments can
take place to create an efficient market in which those firms can
operate.
• International Capital Market Association (ICMA), which concentrates
on international bond dealing.
• International Swaps and Derivatives Association (ISDA), which
produces standards that firms that operate in OTC derivatives follow
when dealing with each other.
 Third-Party Administrators (TPAs)
• Third-party administrators (TPAs) undertake investment
administration on behalf of other firms, and specialize in this area of
the investment industry.
• The rationale behind outsourcing has been that it enables a firm to
focus on the core areas (investment management and stock selection,
financial planning) of its business.
• Leave another firm to carry on the administrative functions which it
can process more efficiently.
 Technological Advances
• Technology and the demand for greener solutions are changing the
way that the financial services sector operates.
• Advances in technology have radically altered how we use the
internet and communicate which, in turn, are disrupting traditional
industries.
• Financial technology, known as FinTech, is impacting on the
traditional banking and wealth management industry and therefore
requires the development of new digital services and platforms.
• China’s fund management industry has gone from fledgling asset
management to global pioneer in a short number of years in terms of
how fund purchases take place.
• In 2012, only a handful of investors made fund purchases online but,
according to a survey by the Asset Management Association of China,
more than two-thirds of investors now subscribe to funds via mobile
phone apps.
Environmental, Social and Governance (ESG) Investment

• reflect their personal values in the investments they make whether

that is avoiding the likes of tobacco and oil shares, supporting
environmentally conscious companies.
• Using their funds for impact investing that generates a social and
environmental impact alongside a financial return.
• In the investment industry, the expressions ‘ethical investment’,
‘environmental investment’, ‘green investment’, ‘responsible
investment’ and ‘socially responsible investment’ are often used
interchangeably
• ESG includes a range of approaches that includes various issues; it
may also be referred to as ‘responsible investing’.
• A key trend in recent years has been the increasing debate on
environmental and social issues and the scale of concern about
environmental change is being reflected in the asset management
industry.
• Climate finance is an emerging form of green finance available for
projects in developing countries which helps reduce emissions or
adapt to climate change.
• Research suggests that, by 2025, 50% of investment funds will have
an investment mandate requiring them to invest in accordance with
ESG principles.