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?

Derivatives Signup and view all the answers

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

Safekeeping of assets Signup and view all the answers

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

Equity crowdfunding Signup and view all the answers

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

Custody for clients' assets Signup and view all the answers

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

Wrap accounts Signup and view all the answers

How do platform providers earn their income?

By charging for their services Signup and view all the answers

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

Facilitating distribution of their products to financial advisers Signup and view all the answers

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

'Wraps' such as pension plans and insurance bonds Signup and view all the answers

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

32% Signup and view all the answers

Which region predominantly undertakes trading in international bonds?

Europe Signup and view all the answers

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

Supply and demand Signup and view all the answers

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

$7.5 trillion Signup and view all the answers

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

Cryptocurrency transactions 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?

United Kingdom Signup and view all the answers

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

US Dollar Signup and view all the answers

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

16% Signup and view all the answers

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

OTC Market Signup and view all the answers

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

Chicago Mercantile Exchange (CME) Signup and view all the answers

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

To hedge against interest rate risk Signup and view all the answers

Which two currencies dominate the interest rate derivatives market?

Euro and US Dollar Signup and view all the answers

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

FX derivatives Signup and view all the answers

What is Lloyd's of London known for?

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

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

'Names' who are individual members Signup and view all the answers

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

Specialist and complex risks in aviation and property Signup and view all the answers

Why do insurers use reinsurance companies?

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

What kind of risks can a reinsurance contract cover?

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

Which of the following is true about reinsurers?

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

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

Offering personal financial services to customers Signup and view all the answers

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

Secondary trading of debt securities Signup and view all the answers

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

Equity markets Signup and view all the answers

What does the term 'equity markets' refer to?

Trading platforms for company shares Signup and view all the answers

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

Nasdaq Signup and view all the answers

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

Systems for buying and selling financial instruments Signup and view all the answers

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

Shenzhen Stock Exchange (SZSE) Signup and view all the answers

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

Saudi Arabia Signup and view all the answers

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

Raise loans or debt finance from investors Signup and view all the answers

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

$100 trillion Signup and view all the answers

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

It helps diffuse pressure from large investors Signup and view all the answers

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

Payment protection policies Signup and view all the answers

What do retirement schemes aim to provide for individuals?

Provision for retirement needs Signup and view all the answers

What type of investment do retirement schemes typically engage in?

Shares, bonds, and cash Signup and view all the answers

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

Insurance companies Signup and view all the answers

What is another term used to refer to fund managers?

Asset managers Signup and view all the answers

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

Shares, bonds, and other assets Signup and view all the answers

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

Insurance companies Signup and view all the answers

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

Inability to repay loans and mortgages Signup and view all the answers

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

Physical assets like property Signup and view all the answers

What is a robo-adviser?

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

How do fund managers usually charge their clients?

Percentage of the value of the fund being managed Signup and view all the answers

What distinguishes execution-only stockbrokers?

Provide no advice and charge per trade Signup and view all the answers

How do institutional brokers charge for arranging trades?

Basis point fees per trade Signup and view all the answers

What type of investors are robo-advisers aimed at?

Retail clients confident in making their own investment decisions Signup and view all the answers

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

Offer either advice only or a fully managed service Signup and view all the answers

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

Execution-only stockbrokers Signup and view all the answers

What type of clients do institutional brokers typically serve?

Large institutions Signup and view all the answers

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

Charging fees for advice and commissions on transactions Signup and view all the answers

What is the role of platforms in the financial industry?

Enabling intermediaries like IFAs to view and administer client portfolios Signup and view all the answers

What is the primary function of retail/commercial banks?

Providing services such as taking deposits and lending funds Signup and view all the answers

What distinguishes challenger banks from traditional retail banks?

Deploying modern financial technology with no community branches Signup and view all the answers

What is a common characteristic of savings institutions?

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

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

P2P firms profit via interest paid by borrowers Signup and view all the answers

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

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

What is the essence of crowdfunding?

Accessing many potential funders via the internet Signup and view all the answers

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

Retail/commercial banks Signup and view all the answers

How do challenger banks differentiate themselves from traditional banks?

By deploying modern financial technology with community branches Signup and view all the answers

What distinguishes savings institutions from retail banks?

Mutual ownership by depositors and borrowers Signup and view all the answers

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

Savers accept greater risk in P2P lending Signup and view all the answers

What is a primary function of investment banks?

Raising finance for companies Signup and view all the answers

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

Holding assets in safekeeping Signup and view all the answers

What distinguishes custodians from investment banks?

Holding assets in safekeeping Signup and view all the answers

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

Cost pressures Signup and view all the answers

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

Collecting income from assets Signup and view all the answers

In what activities do custodians NOT typically engage?

'Financial engineering' services 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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Description

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.