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The Operation of Global Financial MarketsThe Operation of Global Financial Markets
CAO HonghuiCAO HonghuiSenior Research FellowSenior Research Fellow
IFB,CASSIFB,CASS
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ContentContent
1. What are global financial markets ?
2. How do the global financial markets operate ?
3. How about the current global financial markets ?
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1. What are global financial markets ?
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1.1 How to define global financial markets ?1.1 How to define global financial markets ?
Globally, financial products and financial services take place both in exchange
or over the counter or in the linked computer system. When we mention, it
includes at least the followings:
Financial institutions: investment banks, commercial banks, insurance
companies, various kinds of funds management companies, etc..
Financial products/services: CD, stock, bonds, CMP, future contracts, options,
CDS, etc.
Operating mechanism: differ from each other, more open than ever.
Regulatory system: separate regulations in different economies, Basel I, II.
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1.1 How to define global financial markets ?1.1 How to define global financial markets ?
Structure of the global financial markets
◆ Global monetary markets
Inter bank loan market : large size, low interest, easy process; LI
BOR, SHIBOR
World deposit market : Notice/Call deposit, term deposit, Negoti
able Certificate of Deposit/ Large-denomination/Negotiable Certifi
cates of Time Deposit, CDs, Certificate of deposit, CD.
Global commercial market : European CMP market
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1.1 How to define global financial markets ?1.1 How to define global financial markets ?
◆ Global capital markets:
● Global inter bank loan market: LIBOR + management fee+ comm
ission; longer term; Euro denominated.
◆ Global bond markets:
Foreign bonds : bonds denominated in the local currencies in which t
he bond is issued, like bulldog bond in UK, Yankee bond in US, Samu
rai bond in Japan and Panda bond in China.
European bond : global bonds denominated in the currencies in Euro
pe.
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Global bond markets by the end of 2008Global bond markets by the end of 2008
US UK Germany Holland Spain Cayman Italy France Others
22.2%
14.89.9
%7.5
%5.7%
4.90%
4.4% 6.8%23.6
%
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1.1 How to define global financial markets ?1.1 How to define global financial markets ?
◆ Global stock market
● Stock Exchange markets: NYMEX, LSE, DAX, FWB,TSE, SEX,HKSE,
SHSE, etc..
● Over the counter markets: NASDAQ, etc..
● Primary market/ Secondary market
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1.1 How to define global financial markets ?1.1 How to define global financial markets ?
, 34. 20%其他
伦敦证交所5. 70%
上海证交所4. 40%香港交易所
4. 10%
7. 40%纳斯达克
泛欧交易所6. 50%
东京证交所9. 60%
纽交所集团28. 30%
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1.1 How to define global financial markets ?1.1 How to define global financial markets ?
◆ Global foreign exchange market:
inter bank trading system: spot market, forward market an
d swap market.
Global integrated marketing system 24 hour per day
◆ Global gold markets: futures markets in futures exchange
and spot markets inter bank.
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1.1 How to define global financial markets ?1.1 How to define global financial markets ?
◆Financial derivative markets: most trading in OTC markets
Futures market and option market: commodity markets
Swap market
Forward market
Structural financial products market
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1. 2 Why virtual markets more developed ? 1. 2 Why virtual markets more developed ?
Physical markets : financial institutions like various exchanges
Virtual markets : ( NASDAQ, global foreign exchange market, SWI
FT,CHIPS, etc. )
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1.2 Why virtual markets more developed ?1.2 Why virtual markets more developed ?
● More cross border transaction
● Computer based trading more efficient esp. through the
inter banking system
● Less information disclosure esp. for hedge funds and PE.
funds.
● More liberalization in financial innovation
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1.3 The infrastructure of global financial markets1.3 The infrastructure of global financial markets
CHIPS( Clearing House Inter-bank Payment System): Private owned
settlement system of cross border US dollar, established in 1970.
95% or more settlement of cross border US dollar, 1.4 trillion US$ are
processed per day.
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1.3 The infrastructure of global financial markets1.3 The infrastructure of global financial markets
SWIFT ( Society for Worldwide Interbank Financial Telecom
munication): transaction information exchange system based in
Brussels.
300 millions of transaction per day.
By the end of June 2007 , spreads in 207 economies , 8100
financial institutions as members.
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1.4 Why more off-shore financial business?1.4 Why more off-shore financial business?
◆ On-shore international financial markets in Tokyo, New York Cit
y and Hong Kong.
Transaction between residents and non- residents ; Denominated in local currency in which the transaction occurs ; Regulated by the regulations in which it locates.
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1.4 Why more off- financial business ?1.4 Why more off- financial business ?
Denominated in the currency not in the place in which the transaction
occurs ; Lower cost of operation
Transaction occurs between the non-residents ; Not regulated b the regulations in which the transaction locates;
Information easy to keep prudential;
Liberalized capital account and easy to flow across the world.
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1. 4 Why more off –shore financial business ?1. 4 Why more off –shore financial business ?
Africa Asia Pacific Europe Mid-East Latin America
Seychelles MauritiusLiberia Djibouti
Hong KongMarshall IslandsSingaporeMicronesia
LondonGibraltar The Principality of Liechtenstein
BarronLebanonIsraelKuwait
Cayman IslandBermudaVirgin IslandPanama
London, Hong Kong and New York now are on-shore and off shore financial centers.
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1. 4 Why more off –shore financial business ?1. 4 Why more off –shore financial business ?
Year 200l 2002 2003 2004 2005 2006 . 9
Deposit 2002 2162 2655 3142 3253 3799
Loan 1236 1276 1525 1856 2041 2411
Off-shore Deposit/ Loan in 2001-Sept.2006 Off-shore Deposit/ Loan in 2001-Sept.2006 (US$100 millions(US$100 millions ))
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◆ 350,000 corporations in Virgin Island which is 153
square kilos. and another 2000 corporations are established per month.
◆ More than 10,000 companies are associated with
China, which is the second biggest place China’s FDI come from,
exceeding US and Japan and most of them are for the preferred tax.
1. 4 Why more off –shore financial business ?1. 4 Why more off –shore financial business ?
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2. How do the global financial markets operate ?
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2.1 2.1 Pricing mechanismPricing mechanism
aggregated pricing: price priority, time priority
auction:
bid/ask : inter bank transaction and security
firms
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2.2 Market marker2.2 Market marker
Market maker serves as both the buyer and the seller in the market, and make
s the deal by biding.
Market maker is obliged to make the deal in the price it provides with
Providing with liquidity
Maintain continuousness
Against over speculation
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2.3 Margin Call 2.3 Margin Call
Margin call: the most important institutional arrangement in future
s market
Market–to market: control the risk according to the market value o
f the position
Initial margin: initial requirement to open the account to trade
Maintenance margin: the lowest margin to maintain the position
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2.4 New trends of the global financial markets2.4 New trends of the global financial markets
● More securitization in financing: ABS,MBS, CDO,CLO,CDS,CMBS, etc..
● More liberalization of finance:
Liberalized interest
Liberalization of capital account
Mixed financial management
Opening of the financial markets
● Globalization of the markets
● Accelerated regional integration: Euro Zone, etc..
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3. How about the current global financial markets?
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3.1 Main phenomenon in current global financial markets3.1 Main phenomenon in current global financial markets
Phenomena I: More sovereign debt risks across the global markets:
Dubai crisis, Greece crisis; concerns about the debts in Spain, UK.
Portugal.
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Sovereign Debts Ratio of Some Main EconomiesSovereign Debts Ratio of Some Main Economies
AT : Australia ; BE : Belgium ; DE : Germany ; ES : Spain ; FI : Finland ; FR :France ;GB : UK ; GR : Greece ; IE : Iceland ; IT : Italy ; NL : New Zealand ; PT : Portugal ; US : US
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AT : Australia ; BE : Belgium ; DE : Germany ; ES : Spain ; FI : Finland ; FR : France ; GB : UK ; GR : Greece ; IE : Iceland ; IT : Italy ; NL : New Zealand ; PT : Portugal ; US : US
Sovereign Debts Ratio vs. CDS premiaSovereign Debts Ratio vs. CDS premia
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3.1 Main phenomenon in current global financial markets3.1 Main phenomenon in current global financial markets
Phenomena II: Increasing risks of the commercial banks’ cross bor
der positions in the emerging markets
By the end of 2009, net cross border exposures increase to 12.6 billions
US dollars in emerging market. Financial asset in emerging market incre
ased 7.8 billions US dollar and debt increased 4.8 billions us dollar. Tre
mendous capital flow into the emerging market across the border esp. A
sian Pacific markets, Latin American markets and Caribbean markets, w
hile the capital flight out of European emerging markets.
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3.2 Broad money M2 slowed gradually in EM.3.2 Broad money M2 slowed gradually in EM.
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3.2 Short credit indicators in Asia3.2 Short credit indicators in Asia
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3.2 External and fiscal stresses in East Asia3.2 External and fiscal stresses in East Asia
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3.2 Risk scores in emerging markets3.2 Risk scores in emerging markets
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3.2 Risk scores in emerging markets3.2 Risk scores in emerging markets
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3.2 Risk scores in emerging markets3.2 Risk scores in emerging markets
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3.2.Balance of payments3.2.Balance of payments
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3.2.Balance of payments3.2.Balance of payments
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3.2 Exchange rates in emerging markets3.2 Exchange rates in emerging markets
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3.2 Interest rates in emerging markets3.2 Interest rates in emerging markets
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3.2 Credit growth in emerging markets3.2 Credit growth in emerging markets
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3.2 Stock markets in emerging markets3.2 Stock markets in emerging markets
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3.2 Foreign buying of Asian Equity has tracked Asian growth3.2 Foreign buying of Asian Equity has tracked Asian growth
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3.2 Foreign buying of Asian debts has been growing3.2 Foreign buying of Asian debts has been growing
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3.2 Credit growth in Emerging markets ?3.2 Credit growth in Emerging markets ?
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Affected by Greek debt crisis and large fiscal deficitAffected by Greek debt crisis and large fiscal deficit ,, Euro and UK. PounEuro and UK. Pound slumpd slump ,, US dollar goes upUS dollar goes up ,, from 78 to 87 in early May,2010. from 78 to 87 in early May,2010.
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3.2 Oil price in NYMEX 3.2 Oil price in NYMEX
0102030405060708090
100
2009 11 17年 月 日 2010 1 12年 月 日 2010 3 9年 月 日 2010 5 4年 月 日
Affected by the solid US dollar, tightening housing market in ChAffected by the solid US dollar, tightening housing market in China and Euro debt crisis, crude oil price in NYMEX fluctuated wina and Euro debt crisis, crude oil price in NYMEX fluctuated with the stock indexith the stock index ,, slumped in January and May,2010 and eveslumped in January and May,2010 and even slipped to $ 67.41, which is the lowest.n slipped to $ 67.41, which is the lowest.
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What would the global financial markets go next step?
…...
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Thanks for your attention !
David TSAO
Senior Research Fellow
Director
Financial Markets Division
IFB,CASS