Introduction: The Financial Services Sector
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Questions and Answers

What are the main activities that take place in the wholesale financial markets according to the text?

  • Trading of stocks, bonds, currencies, and derivatives only
  • Trading of stocks, bonds, currencies, derivatives, and insurance (correct)
  • Trading of currencies and derivatives only
  • Trading of stocks and bonds only

    • Which of the following is NOT an activity that takes place in the wholesale sector as mentioned in the text?

  • Fund management
  • Custodian banking
  • Investment banking
  • Retail banking (correct)

    • What term is sometimes used interchangeably with the wholesale sector in the financial services industry?

  • Professional sector (correct)
  • Bond sector
  • Retail sector
  • Insurance sector

    • In the wholesale financial markets, what type of trading involves options, swaps, futures, and forwards?

    <p>Derivatives</p> Signup and view all the answers

    What is a key service provided by custodian banking in the wholesale financial markets?

    <p>Safekeeping of assets</p> Signup and view all the answers

    Which of the following is NOT a major activity in the wholesale financial markets according to the text?

    <p>Equity crowdfunding</p> Signup and view all the answers

    What do platforms in the financial services sector generally arrange for clients?

    <p>Custody for clients' assets</p> Signup and view all the answers

    What type of accounts enable advisers to have a holistic view of a client's various assets?

    <p>Wrap accounts</p> Signup and view all the answers

    How do platform providers earn their income?

    <p>By charging for their services</p> Signup and view all the answers

    What is a key advantage of platforms for fund management groups?

    <p>Facilitating distribution of their products to financial advisers</p> Signup and view all the answers

    Apart from mutual funds, what other financial products do platforms in the financial services sector typically offer?

    <p>'Wraps' such as pension plans and insurance bonds</p> Signup and view all the answers

    What percentage of the global bond market is made up of corporate bonds?

    <p>32%</p> Signup and view all the answers

    Which region predominantly undertakes trading in international bonds?

    <p>Europe</p> Signup and view all the answers

    In the foreign exchange market, what determines the exchange rates for currencies?

    <p>Supply and demand</p> Signup and view all the answers

    What is the approximate average daily turnover of the foreign exchange markets?

    <p>$7.5 trillion</p> Signup and view all the answers

    Which of the following is NOT a type of FX trading instrument based on the text?

    <p>Cryptocurrency transactions</p> Signup and view all the answers

    Which country is listed as the main centre for FX trading according to the Bank for International Settlements (BIS) survey?

    <p>United Kingdom</p> Signup and view all the answers

    What is the dominant currency that is on one side of 88% of all FX trades?

    <p>US Dollar</p> Signup and view all the answers

    What percentage of FX trading is accounted for by outright forwards according to the BIS survey?

    <p>16%</p> Signup and view all the answers

    In which type of market does trading take place directly between parties rather than on an exchange?

    <p>OTC Market</p> Signup and view all the answers

    Which exchange dominates trading in exchange-traded derivatives markets globally?

    <p>Chicago Mercantile Exchange (CME)</p> Signup and view all the answers

    What is the primary reason for the growth of the interest rate derivatives market since 2001?

    <p>To hedge against interest rate risk</p> Signup and view all the answers

    Which two currencies dominate the interest rate derivatives market?

    <p>Euro and US Dollar</p> Signup and view all the answers

    Which segment of derivatives is primarily used for speculating on currency movements?

    <p>FX derivatives</p> Signup and view all the answers

    What is Lloyd's of London known for?

    <p>Operating as a marketplace for insurers and accepting insurance risks through syndicates</p> Signup and view all the answers

    Which entity is liable to the full extent of their private wealth in Lloyd's of London?

    <p>'Names' who are individual members</p> Signup and view all the answers

    What type of risks does Lloyd's of London specialize in insuring?

    <p>Specialist and complex risks in aviation and property</p> Signup and view all the answers

    Why do insurers use reinsurance companies?

    <p>To hedge some of the risks associated with the policies they have written</p> Signup and view all the answers

    What kind of risks can a reinsurance contract cover?

    <p>'One-off' risks such as major construction or large sporting events</p> Signup and view all the answers

    Which of the following is true about reinsurers?

    <p>'Names' in reinsurers are liable to the full extent of their private wealth.</p> Signup and view all the answers

    What is the primary focus of the retail sector as mentioned in the text?

    <p>Offering personal financial services to customers</p> Signup and view all the answers

    Which of the following is NOT listed as a service provided by the retail sector in the text?

    <p>Secondary trading of debt securities</p> Signup and view all the answers

    What is the name given to stock markets where the ordinary and preferred shares of companies are traded?

    <p>Equity markets</p> Signup and view all the answers

    What does the term 'equity markets' refer to?

    <p>Trading platforms for company shares</p> Signup and view all the answers

    Which exchange was ranked as the second largest in the world as of 2022?

    <p>Nasdaq</p> Signup and view all the answers

    What are multilateral trading facilities (MTFs) as mentioned in the text?

    <p>Systems for buying and selling financial instruments</p> Signup and view all the answers

    Which is NOT a major exchange in Europe as mentioned in the text?

    <p>Shenzhen Stock Exchange (SZSE)</p> Signup and view all the answers

    Where is Tadawul located, the largest exchange in the Middle East according to the text?

    <p>Saudi Arabia</p> Signup and view all the answers

    What do bond markets primarily allow governments and companies to do?

    <p>Raise loans or debt finance from investors</p> Signup and view all the answers

    What was the global market capitalisation at the end of 2022 as per the text?

    <p>$100 trillion</p> Signup and view all the answers

    What is one advantage of having a large number of funders in equity crowdfunding?

    <p>It helps diffuse pressure from large investors</p> Signup and view all the answers

    What is a key area of financial advice that the insurance industry provides products for?

    <p>Payment protection policies</p> Signup and view all the answers

    What do retirement schemes aim to provide for individuals?

    <p>Provision for retirement needs</p> Signup and view all the answers

    What type of investment do retirement schemes typically engage in?

    <p>Shares, bonds, and cash</p> Signup and view all the answers

    Which entity collects premiums in exchange for providing coverage in the insurance industry?

    <p>Insurance companies</p> Signup and view all the answers

    What is another term used to refer to fund managers?

    <p>Asset managers</p> Signup and view all the answers

    Where do fund managers invest money on behalf of institutions and individuals?

    <p>Shares, bonds, and other assets</p> Signup and view all the answers

    What is a major investor in both equity and bond markets?

    <p>Insurance companies</p> Signup and view all the answers

    What scenario do payment protection policies in the insurance industry cover?

    <p>Inability to repay loans and mortgages</p> Signup and view all the answers

    What is a common investment for retirement schemes besides shares and bonds?

    <p>Physical assets like property</p> Signup and view all the answers

    What is a robo-adviser?

    <p>An online service providing automated, algorithm-based portfolio management advice</p> Signup and view all the answers

    How do fund managers usually charge their clients?

    <p>Percentage of the value of the fund being managed</p> Signup and view all the answers

    What distinguishes execution-only stockbrokers?

    <p>Provide no advice and charge per trade</p> Signup and view all the answers

    How do institutional brokers charge for arranging trades?

    <p>Basis point fees per trade</p> Signup and view all the answers

    What type of investors are robo-advisers aimed at?

    <p>Retail clients confident in making their own investment decisions</p> Signup and view all the answers

    What is a key characteristic of advisory and discretionary wealth managers?

    <p>Offer either advice only or a fully managed service</p> Signup and view all the answers

    Which type of stockbroker charges commission per trade and offers no advice?

    <p>Execution-only stockbrokers</p> Signup and view all the answers

    What type of clients do institutional brokers typically serve?

    <p>Large institutions</p> Signup and view all the answers

    What is the main source of revenue for wealth management firms?

    <p>Charging fees for advice and commissions on transactions</p> Signup and view all the answers

    What is the role of platforms in the financial industry?

    <p>Enabling intermediaries like IFAs to view and administer client portfolios</p> Signup and view all the answers

    What is the primary function of retail/commercial banks?

    <p>Providing services such as taking deposits and lending funds</p> Signup and view all the answers

    What distinguishes challenger banks from traditional retail banks?

    <p>Deploying modern financial technology with no community branches</p> Signup and view all the answers

    What is a common characteristic of savings institutions?

    <p>Mutual ownership by individuals who have deposited or borrowed money</p> Signup and view all the answers

    How does peer-to-peer (P2P) lending differ from traditional banking?

    <p>P2P firms profit via interest paid by borrowers</p> Signup and view all the answers

    What happens to savings in P2P lending while waiting to be lent out?

    <p>No interest is paid while waiting to be lent out</p> Signup and view all the answers

    What is the essence of crowdfunding?

    <p>Accessing many potential funders via the internet</p> Signup and view all the answers

    Which type of financial institution has historically operated through branches with physical locations?

    <p>Retail/commercial banks</p> Signup and view all the answers

    How do challenger banks differentiate themselves from traditional banks?

    <p>By deploying modern financial technology with community branches</p> Signup and view all the answers

    What distinguishes savings institutions from retail banks?

    <p>Mutual ownership by depositors and borrowers</p> Signup and view all the answers

    Why do savers earn higher returns in Peer-to-Peer (P2P) lending compared to traditional banking?

    <p>Savers accept greater risk in P2P lending</p> Signup and view all the answers

    What is a primary function of investment banks?

    <p>Raising finance for companies</p> Signup and view all the answers

    Which of the following is NOT a typical service provided by investment banks?

    <p>Holding assets in safekeeping</p> Signup and view all the answers

    What distinguishes custodians from investment banks?

    <p>Holding assets in safekeeping</p> Signup and view all the answers

    What has driven down the charges that custodians can make for their traditional services?

    <p>Cost pressures</p> Signup and view all the answers

    Which of the following is a service typically provided by custodians?

    <p>Collecting income from assets</p> Signup and view all the answers

    In what activities do custodians NOT typically engage?

    <p>'Financial engineering' services</p> Signup and view all the answers

    Study Notes

    Financial Markets

    • The financial services sector has two distinct areas: wholesale and retail sectors.
    • Wholesale sector is also known as the professional or institutional sector.
    • Wholesale financial markets involve:
      • Equity markets (trading of quoted shares)
      • Bond markets (trading of government, supranational, or corporate debt)
      • Foreign exchange (trading of currencies)
      • Derivatives (trading of options, swaps, futures, and forwards)
      • Insurance markets (major corporate insurance, reinsurance, captive insurance, and risk-sharing insurance)

    Wholesale Sector

    • Wholesale sector includes:
      • Fund management (managing investment portfolios of collective investment schemes, pension funds, and insurance funds)
      • Investment banking (banking services tailored to organisations, including mergers and acquisitions, equity trading, fixed-income trading, and private equity)
      • Custodian banking (provision of services to asset managers, including safekeeping of assets, administration of underlying investments, settlement, and corporate actions)

    Bond Markets

    • The global bond market exceeds $128 trillion in value, with sovereign, supranational, and agency debt accounting for 68% and corporate bonds making up 32%.
    • Bonds traded range from domestic bonds to international bonds issued by companies, governments, and supranational agencies.

    Foreign Exchange (FX) Markets

    • FX markets are the largest of all financial markets, with an average daily turnover of $7.5 trillion.
    • The rate at which one currency is exchanged for another is determined by supply and demand.
    • FX markets are provided mostly by major banks, with each providing rates of exchange at which they are willing to buy or sell currencies.
    • FX trading is concentrated in a small number of financial centres, with the UK being the main centre.

    Derivatives Markets

    • Derivatives markets trade complex products based on underlying instruments, including currencies, indices, interest rates, equities, commodities, and credit risk.
    • Derivatives are available on both exchange-traded and over-the-counter (OTC) markets.
    • The largest exchange-traded derivatives market is the Chicago Mercantile Exchange (CME), while Europe dominates trading in OTC derivatives markets.

    Retail Sector

    • Retail sector focuses on services provided to personal customers, including:
      • Retail banking (traditional range of current accounts, deposit accounts, lending, and credit cards)
      • Insurance (provision of life assurance and protection solutions)
      • Pensions (provision of investment accounts designed to capture savings during working life and provide benefits on retirement)
      • Investment services (range of investment products and vehicles, including execution-only stockbroking, wealth management, and private banking)
      • Financial planning and advice (helping individuals understand and plan for their financial future)

    Equity Markets

    • Equity markets are the name given to stock markets where quoted shares of companies are traded.
    • Global market capitalisation was over $100 trillion at the end of 2022.
    • The largest exchange in the world is the New York Stock Exchange (NYSE), with a domestic market capitalisation of over $24 trillion.

    Insurance Markets

    • Insurance markets specialise in the management of personal risk, corporate risk, and protection of life events.
    • The largest insurance markets are the US, China, and Japan.
    • The market is led by a number of major players, including China Life, Allianz, and AXA.

    Other Financial Institutions

    • Retail/commercial banks provide services to retail customers, including deposit-taking, lending, and payment services.

    • Savings institutions, such as credit unions and building societies, offer savings products and other services to retail customers.

    • Peer-to-peer (P2P) lending and crowdfunding are emerging alternatives to traditional banking, allowing individuals to lend and borrow directly.### Debt Crowdfunding

    • Investors lend money and receive it back with interest

    • An alternative to traditional funding methods

    Equity Crowdfunding

    • People invest in exchange for equity or shares in the venture
    • Start-ups seek funding from a large number of people to enhance brand loyalty
    • Advantage of having many funders: diffuses pressure from large investors and turns small investors into brand ambassadors

    Insurance Companies

    • Provide solutions for managing risks
    • Offer a variety of products, including life cover, general insurance cover, and payment protection policies
    • Collect premiums and invest in equities and bonds
    • Hold cash to satisfy claims and liquidate investment holdings if necessary

    Pension Funds

    • A key method for individuals to make provision for their retirement needs
    • Types: company pension schemes, self-directed schemes, and personal retirement schemes
    • Accumulated funds are used to provide a pension at retirement
    • Invest in shares, bonds, and physical assets like property to meet their aim of providing a pension

    Fund Managers

    • Run portfolios of investments for others
    • Invest money held by institutions and individuals
    • Global asset management industry has over $90 trillion of funds under management
    • Buy and sell shares, bonds, and other assets to increase client portfolio value
    • Subdivided into institutional and private client fund managers

    Platforms

    • Provide facilities for investments to be bought and sold
    • Arrange custody for clients' assets
    • Offer wide ranges of mutual funds, pension plans, and insurance bonds
    • Examples: Cofunds and Hargreaves Lansdown
    • Earn income by charging for services

    Private Banks

    • Provide a wide range of services, including investment management, for clients
    • Offer wealth management services, including investment advice and portfolio management
    • Charge for managing clients' money

    Stockbrokers and Wealth Managers

    • Arrange stock market trades on behalf of clients
    • Divide into four main categories:
      • Execution-only stockbrokers: offer telephone or internet-based trade execution and settlement
      • Robo-advisers: provide automated, algorithm-based portfolio management advice
      • Advisory and discretionary wealth managers: offer wealth management services to private investors
      • Institutional brokers: arrange trades on behalf of large institutions

    Platforms

    • Online services used by intermediaries to view and administer clients' investment portfolios
    • Offer tools to analyse client portfolios and choose products
    • Examples: fund supermarkets

    Investment Banks

    • Provide advice and arrange finance for companies wanting to float on the stock market
    • Offer services for institutional firms investing in shares and bonds
    • Typically provide finance-raising and advisory work, securities-trading, and treasury dealing services
    • Investment management for sizeable investors, such as corporate pension funds and wealthy private clients

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    Learn about the differences between retail and professional/commercial sectors in financial markets, including their functions and main customers. Explore the activities that take place in wholesale financial markets within the financial services sector.

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