Day 3B.pdf

Capital Markets Primer – Day 3 Intermediaries ❑ Brokers Citi PMO Group ❑ Market Utilities ❑ Citigroup Payments Revature Markets in Action – ❑ Presented by Bob Gasser of Revature Intermediaries (cont’d)...

Capital Markets Primer – Day 3 Intermediaries ❑ Brokers Citi PMO Group ❑ Market Utilities ❑ Citigroup Payments Revature Markets in Action – ❑ Presented by Bob Gasser of Revature Intermediaries (cont’d) Presented by: ❑ Rating Agencies James C. Allen, CFA Issuers Principal, Delahaye Advisers LLC ❑ Private Issuers ❑ Government Issuers Scottsville, VA ❑ Collective Fund issuers DELAHAYE ADVISERS LLC 1  Intermediaries – Securities Brokers Securities Brokers Purpose Act as agent connecting investors and exchanges Deliver investors’ buy/sell orders to exchanges Generates fees from acting as intermediary Features of brokers Can be individuals or firms Registered with FINRA – SRO for brokers DELAHAYE ADVISERS LLC 2  Common Market Intermediaries Broker-dealers Members of regulated Exchanges Operate their own internalized trading platforms Brokers act as agents – only invest client money Dealers act as principals – invest their own money Investment advisers Credit Rating Agencies DELAHAYE ADVISERS LLC 3  Intermediaries – Securities Brokers Securities Brokerage Services Possible services to clients Execute investors buy/sell orders Create investment products for sale to clients Selling investment products of other firms to clients Recommend investment plans for clients Creating/providing investment research Providing market intelligence to clients DELAHAYE ADVISERS LLC 4  Intermediaries – Securities Brokers Securities Brokers Traditional Business Model Revenue sources under traditional Business Model Trading commissions Asset management and administration fees for proprietary and third-party investment funds Net interest on security loans Trading Revenue In 2019, industry moved en masse away from commission revenue DELAHAYE ADVISERS LLC 5  Discount Brokers Discounting Commissions to Zero Offer low-cost execution of buy/sell orders on behalf of clients Don’t offer full portfolio of brokerage services Relying increasingly on the sale of clients order flow to large internalizers This has potential conflicts of interest Brokers may direct clients orders to internalizers that pay the most But whose execution is not the best possible outcome for clients Robinhood: Taking from the Which? Racking up the Score? DELAHAYE ADVISERS LLC 6  Intermediaries – Securities Brokers Changing Industry Business Models DELAHAYE ADVISERS LLC 7  Types of Brokers Dealers Brokers often act as dealers Dealers are regulated by SEC Dealers buy/sell securities for their own accounts Using their own capital Make markets in certain securities Provide quotes for securities Dealers are not traders (tho they may employ traders) Trader buys/sells for internal profit Does not make markets or fills client orders DELAHAYE ADVISERS LLC 8  Securities Dealers Most Active Markets Securities Underwriting Buys from issuer/sells to syndicate members Sells at prices higher than charged by issuer Bond market Given limited trading, dealers give quotes to clients Will sell out of inventory if owned Will buy at bid price if don’t own; sell to client at ask Internalized trading execution Buys and aggregates brokerages’ clients’ order flows Executes orders against each other Often buying at bid and selling at midpoint Buying at midpoint and selling at ask Pockets half of spread and sees market trends for trading direction DELAHAYE ADVISERS LLC 9  Prime Brokers Special Service Brokers Specialized service to high-volume clients like hedge funds Provide investment vehicles to generate interest on cash Broker loans from banks to help clients execute trades, i.e. short trades Find shares for clients to borrow to make short sales Provide research / market intelligence (from internalization activities?) Assist clients such as hedge funds find new investors DELAHAYE ADVISERS LLC 10  Financial Market Utilities Life-Cycle of Securities Trades Source: Securities Clearing, Settlement, and Custody: Financial Market Infrastructures and Payment Services, National Bank of Belgium DELAHAYE ADVISERS LLC 11 Citigroup – Increased Focus on Payments Product Suite Domestic Payments & Payment Acceptance for loan payment and collections, payroll, supplier, tax and gig economy payments Clearing for financial institutions Commercial Cards to manage travel expenses and procurement Cross-border, cross-currency for multiple payment options DELAHAYE ADVISERS LLC 12  Citigroup – Increased Focus on Payments Payments Value Support digitalization of institutional clients and other segments ‘21-’23 ◦ Cross-border transaction value - 13 % CAGR ◦ US$ clearing volume – 4% CAGR same period ◦ Commercial cards spending volume – 32% CAGR ◦ Avg. daily instant payment transactions – 120% CAGR High-Growth Segments ◦ Commercial bank clients (25% commercial wallet CAGR ‘21-’23) ◦ eCommerce marketplaces and platforms (12%-15% CAGR ‘20-’25) ◦ FinTecgh and PIs – B2B, B2C, C2B (15% CAGR ’22-’28) DELAHAYE ADVISERS LLC 13 Citigroup – Payments Focus Enable Corporate Cash Management Broad Receivables Acceptance ◦ Cards, instant deposits and payments ◦ Multiple payment methods and cross-currency Optimizing Liquidity ◦ Mobilizing cash to right place, time, and currency ◦ Real-time funding for digital commerce accelerated cash cycles Global Payout Capability ◦ Pay-out to automated clearinghouses, instant payments, wallets, cards ◦ FX – Global payments with embedded FX DELAHAYE ADVISERS LLC 14 Citigroup – Payments Focus Enable Corporate Cash Management Currently enables multi-domestic and cross-border ◦ 290+ connections to clearing ◦ 65+ instant payments countries ◦ 55+ countries with local card issuance ◦ 135+ cross-currency payment network “Enhancing digitally for tomorrow” ◦ Payment ubiquity - links to multiple account management systems ◦ Virtual cards in 50+ countries ◦ Virtual account in 19 countries ◦ Data services with global consistency ◦ Real-time liquidity and payments 24/7 ◦ Citi Token Services showing leadership in tokenization DELAHAYE ADVISERS LLC 15 Citigroup – Payments Focus Enable Financial Institutions Speed ◦ 24/7 US$ clearing with 130+ clients already using ◦ Cross-border payments into 50 countries in 23 currencies ◦ Application interfaces enabling real-time experiences Cost Efficiency ◦ Payments into wallets and cards ◦ Largest Swift Go intermediary bank ◦ Liquidity optimization across 90 countries Transparency ◦ Integrated and transparent FX to pay in more than 135 currencies ◦ Global beneficiary services payment tracking ◦ Enhanced view of transaction lifecycle with Citi Payments Insights and application interfaces ◦ Confirmed value transfer solution DELAHAYE ADVISERS LLC 16 Citigroup – Payments Focus Enable Financial Institutions (cont’d) Reach ◦ Serving bank clients in 149 countries ◦ Serving more than 90% of top 100 banks Innovation ◦ 10% of Citigroup’s external US$ clearing clients are enabled for 24/7 service DELAHAYE ADVISERS LLC 17 Citigroup – Payments Focus Enabling Digital Commerce Seamless client experience ◦ Working with single payments provider ◦ Across digital commerce lifecycle ◦ Consistent client experience Target Client Segments ◦ Corporates Going Digital – in 50+ top eCommerce countries ◦ eCommerce – 3,100 clients, including top eCommerce banks ◦ FinTechs – 330 clients, including 75% of top 20 fintechs DELAHAYE ADVISERS LLC 18 Citigroup – Payments Focus End-to-End Digital Commerce Journey at Scale Accept ◦ D2C, online pay-ins, and check-out Hold ◦ Real-time liquidity, segregate funds, report, and reconcile Pay ◦ Global pay-outs enabling delivery of online services Finance ◦ Financing suppliers, sellers, and buy-now-pay-later (BNPL) DELAHAYE ADVISERS LLC 19 Citigroup – Payments Focus Citi Payments Express Validation Services Scalable volume to 5,000+ transactions/second and 100x volumes Low latency processing with 99.99% availability Accept, Hold, and Payout at Scale Integrated and global real-time liquidity Simplified cloud based structure reduces total “cost of ownership” by 49% Risk Management Redesigned risk management through automated controls Post-Transaction Services Consistent application interfaces and superior information flow DELAHAYE ADVISERS LLC 20  Payments Business Results Citi as an Example A DELAHAYE ADVISERS LLC 21  Payments Business Results Citi as an Example DELAHAYE ADVISERS LLC 22  Payments Business Results Citi as an Example DELAHAYE ADVISERS LLC 23  “Blockchain is the tech. Bitcoin is merely the first mainstream manifestation of its potential.” ― Hendrith Smith “The Decentralization of Finance is really good for humanity and it’s ultimately a win for each and every one of us. Because now that we can circumvent banks, exchanges and brokerage companies by using smart contracts on the blockchain… every person, every family, and every business will experience more more liberty, more freedom, more opportunities, more abundance, more power, and more wealth.” ― Hendrith Vanlon Smith Jr - MARC KENIGSBERG DELAHAYE ADVISERS LLC  Disintermediating Systemically Important Financial Institutions – Central Counterparties DELAHAYE ADVISERS LLC 25  Clearing Bitcoin Source: Joshua J. Romero, Brandon Palacio & Karlssonwilker Inc. DELAHAYE ADVISERS LLC 26  Rating Agencies Standardized Analyses and Ratings Credit rating agencies Give investors standard ratings on bonds Ratings assess credit quality of issuer and bond Main bond rating firms Moody’s Investors Service DBRS (Canadian) Standard & Poor’s (S&P) Kroll Bond Rating Agency Fitch Ratings Japan Credit Rating Agency Egan-Jones Ratings HR Ratings de Mexico Other rating services Morningstar – mutual funds A.M. Best Rating Services - insurance and insurers DELAHAYE ADVISERS LLC 27  Comparative Debt Ratings Standard & Poor’s Moody’s Investor Fitch Ratings L-T Ratings S-T Ratings L-T Ratings S-T Ratings L-T Ratings S-T Ratings AAA Aaa AAA AA+ Aa1 AA+ AA A-1+ Aa2 AA F1+ AA- Aa3 P-1 AA- A+ A1 A+ A+ A2 A+ A A-1 A3 A F1 A- A3 A- A- Baa1 P-2 A- BBB+ A-2 Baa2 BBB+ F2 BBB Baa2 BBB P-3 BBB Baa3 BBB- A-3 BBB- Baa3 BBB F3 BB+ Ba1 BBB- Not Prime BB b Ba2 BB+ BB- Ba3 BB B BB- DELAHAYE ADVISERS LLC 28  Derivatives The calculus of financial and commodity derivatives What is a derivative? Says Merriam-Webster Dictionary “…a contract or security that derives its value from that of an underlying asset (such as another security) or from the value of a rate (as of interest or currency exchange) or index of asset value (such as a stock index) DELAHAYE ADVISERS LLC 29  Derivatives The calculus of financial and commodity derivatives Types of Derivatives Commodity Agricultural crops Ores Energy Financial Stocks Interest rates Foreign exchange rates Credit quality DELAHAYE ADVISERS LLC 30  Derivatives The calculus of financial and commodity derivatives Reasons for Using Derivatives Hedge risks outside operation of a business Speculation - betting on a view in the market Market making – Dealers working to keep trading orderly DELAHAYE ADVISERS LLC 31  Derivatives The calculus of commodity derivatives Market Participants Commodity producers Farmers Energy companies Mineral producers Commodity users Transportation firms Farmers Manufacturers Intermediaries Grain elevators Manufacturers Refineries DELAHAYE ADVISERS LLC 32  Derivatives The calculus of financial derivatives Market Participants – often producing and hedging risks Banks Broker/dealers Proprietary traders Hedge funds Exchange-traded funds Insurance companies Nonfinancial borrowers DELAHAYE ADVISERS LLC 33  Derivatives Types of Derivatives: Forwards Purpose: Enables trading parties to lock in a price in advance ▪ Company-to-company (bilateral) agreements to buy/sell in the future Seller delivers goods/services at contract price Buyer pays contract price for the goods/services received ▪ Short-term in duration ▪ Cash flows are exchanged between parties’ banks or directly ▪ Usually used in Commodities International trade DELAHAYE ADVISERS LLC 34  Derivatives Types of Derivatives: Listed Options Features Right, but not an obligation to buy shares at set price in set period Strike price is market price for option Options relate to 100 shares of stock Types of options Call option – Right to buy shares Expects share price rises Put option Right to sell shares Expects share price declines DELAHAYE ADVISERS LLC 35  Derivatives Types of Derivatives: Listed Options Reasons for using options Gives holder a right to buy (call)/sell (put) at known price Option holders can hedge securities investments Allows investors to control 100 shares for small investment Where to buy listed options Exchanges – Chicago Board Options Exchange Contracts of standard size, pricing, and expiration dates Provide central clearing and settlement of trades DELAHAYE ADVISERS LLC 36  Derivatives Listed Options Market Participants Investors Shareowners Speculators Securities issuers Hedge funds Insurance companies Issuers Exchanges Option writers Securities Issuers DELAHAYE ADVISERS LLC 37  Derivatives Types of Derivatives: Futures Purpose: Enables parties to hedge a specific risk or speculate on prices Features: ▪ Multilateral Trading Platforms ▪ Exchange creates, lists, and facilitates trading of standard contracts ▪ Set margin requirements for market participants ▪ Types of futures Commodities Financial Instruments Currencies DELAHAYE ADVISERS LLC 38  Derivatives Types of Derivatives: Futures Purpose: Enables parties to hedge a specific risk or speculate on prices Features: ▪ Exchange creates, lists, and facilitates trading of standard contracts ▪ Set margin requirements for market participants ▪ Contracts require delivery of set quantity of asset at FMV at maturity ▪ Holder may sell contract before maturity and avoid delivery ▪ Types of futures Commodities Financial Instruments Currencies 3 month to multi-year contracts Contract amounts – bushels, barrels, dollars, currencies DELAHAYE ADVISERS LLC 39  Derivatives Types of Derivatives: Futures Types of Market Participants Commodity producers / end users Financial firms – banks, broker/dealers hedging financial risks Proprietary traders/speculators Market makers – dealers Provide market liquidity by buying/selling contracts Promote orderly market for clients / own inventory Act as agent between buyers and sellers Participant Activities Buy contracts – go long, expecting prices to rise Sell contracts – unwind long position or go short, expecting prices to fall Producers/financial firms can deliver on contract terms at maturity DELAHAYE ADVISERS LLC 40  Derivatives Types of Derivatives: Swaps / Over-the-Counter Features Bilateral contracts with financial firm as intermediary Contract obligations set in standardized contracts Contract terms Term established by setting contractual terms Standardized International Swaps and Derivatives Assn. (ISDA) contracts Standard Instruments Interest rates – to manage changes in interest rates Foreign exchange – to manage foreign trade risks/intercompany transactions Equity – to manage risk in equity holdings Credit default – to prepare against risk of credit defaults DELAHAYE ADVISERS LLC 41  Derivatives Types of Derivatives: Swaps / Over-the-Counter Market Participants End users hedging financial risks Financial institutions Nonfinancial enterprises Government agencies State and municipal governments Intermediaries Dealers Central clearing parties DELAHAYE ADVISERS LLC 42  Derivatives Swaps/Over-the-Counter Notional Amounts DELAHAYE ADVISERS LLC 43  Derivatives Swaps/Over-the-Counter Notional Amounts Top 25 Holding Companies in Derivatives December 31,2021 (millions of dollars) Exch. Trd. Exch. Trd. OTC OTC OTC OTC Credit Assets Derivs. Futures Options Forwards Swaps Options Derivatives Spot FX JPMorgan Chase & Co. $3,743,567 $49,225,482 $1,107,737 $1,740,215 $8,907,780 $28,984,092 $7,432,575 $1,063,083 $509,265 Citigroup Inc. 2,291,413 43,376,591 787,209 2,172,413 5,683,602 28,837,088 4,677,798 1,218,481 273,956 Goldman Sachs Group 1,463,990 42,443,322 1,936,678 2,156,405 5,107,212 22,671,262 9,490,987 1,080,778 206,964 Morgan Stanley 1,188,140 32,752,684 862,428 1,469,536 3,475,144 19,623,899 6,632,866 688,781 54,686 Bank of America 3,169,495 32,384,997 790,017 1,251,491 5,545,193 19,980,543 4,070,416 747,337 210,012 Wells Fargo & Co. 1,948,068 9,343,489 464,199 263,014 930,033 5,920,657 1,681,413 84,173 5,837 25 Top Bank Hldg Cos. $18,919,613 $234,124,425 $7,171,680 $12,448,230 $34,122,727 $139,567,009 $35,823,580 $4,991,198 $1,819,804 Source: Consolidated Financial Statements for Bank Holding Companies, FR Y- 9, Schedule HC-L DELAHAYE ADVISERS LLC 44  Derivatives Other Types of Options: Warrants Warrants: Are issued by company whose shares warrants convert into Owner can pay strike price to buy shares – but no obligation Are used regularly by private equity firms Provide issuing companies with way to limit dilution Are detachable and saleable to other investors Bonds conversions: Option to convert bond into set number of shares Company may force conversion Investor can hold to maturity, if not forced to convert DELAHAYE ADVISERS LLC 45  Alternative Investment Instruments Currencies Purpose Hedging of currency risk in international trade Hedging of financial risk for financial institutions Principal risk of ownership of currencies To manage risk for financial obligations to clients Speculation on exchange rates - Soros Deliver investors’ buy/sell orders to exchanges Generates fees from acting as intermediary Types of markets Spot trading – mostly banks Derivatives markets DELAHAYE ADVISERS LLC 46  Alternative Investment Instruments Currencies Market Size Estimated to reach $10.2 trillion by 2026 Market Participants Banks Dealers Nonfinancial end-users DELAHAYE ADVISERS LLC 47  Alternative Investment Instruments Cryptocurrencies Features Electronic currencies Supported by distributed ledger technology (DLT, or Blockchain) Up-to-date ledger Keeps track of transaction activity Provides knowledge of who owns what and how much Security of ledger depends on dispersion of ownership/information of ledger DELAHAYE ADVISERS LLC 48  Alternative Investment Instruments Cryptocurrencies Benefits Certainty of ownership Potential anonymity because of independent blockchain Can use where counterparty is willing to accept crypto Particularly useful where inflation is rampant Risks Powerful interests do not want – banks, in particular Central banks are likely to control market in future Will issue traceable currency Will be able to turn on and off May collect taxes directly Not accepted everywhere Translation costs can be high DELAHAYE ADVISERS LLC 49  Alternative Investment Instruments Stable Coins Process Stable Coin firm gives recipient of funds a bank account in market Recipient gives account number to their paying client Payor deposits cash in bank account Stable coin firm uses cash to buy dollar-based coins credited to recipient Recipient cashes in stable coin via web at partner banks in specific markets Agent in local market delivers funds and receives forex fee Partner bank returns stable coin for cash in payor’s market Business Models Monthly subscription fee Forex spread fee Offshore crypto buying/selling Integrate with business-to-business marketplaces DELAHAYE ADVISERS LLC 50  Alternative Investment Instruments Stable Coins Benefits Permits movement of funds cross border with lower translation fees Increases marketability of goods and services across border Disintermediate Banking system and related fees Nonbank payments services and require balances and fees Risks Acceptance not universal partner banks do not deal with fluctuating prices of some coins DELAHAYE ADVISERS LLC 51  Day 4 Agena Investors Retail Institutional Traders Corps Regulation and Regulators Statutory Regulators Self-Regulators (SROs) Major US Market Regulatio DELAHAYE ADVISERS LLC 52