copyright g. dufey uom & ntu/nbs 1 global financial market dynamics prof. gunter dufey nanyang...
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Copyright G. DUFEY UoM & NTU/NBS 1
GLOBAL FINANCIALMARKET DYNAMICS
Prof. Gunter DUFEY<[email protected]>
Nanyang Business School/ NTU Singapore
& The University of Michigan, Ann Arbor, MI USA at
ISEAS19 January 2005
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The ‘BIG’ Picture:Technological Change esp. in Data Processing & Communication
Globalization/Internationalization
Liberalization/Deregulation
Securitization/Financial Innovation
--Engineering
Disintermediation/Reintermediation
Northwestern Public Service Company
U.S. $10,000,000Term Loan
managed and provided by:
Dresdner Bank Aktiengesellschaft Grand Cayman Branch
Merrill Lynch International Bank Limited
Merrill Lynch International Bank Limitedas agent
Framatome S.A.SFr 35,000,000Term Loan
Arranged by
Manufacturers Hanover LimitedProvided by
Banco Central, S.A. Electro BanqueManufacturers Hanover Trust Company London Branch Via Banque
ASLK-CGER Bank Caixa Geral de Depõsitos Paris Branch
Agent Bank
Manufacturers Hanover Limited
April 1989
The Investment Banking Group
This advertisement appears as a matter of record only
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Market Jurisdiction
Currency Interest Rates
Institutions
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Market Jurisdiction
Currency Interest Rates
Institutions
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Financial Markets Markets for Payments
Demand Deposits/Cash Markets for Credit
CreditChannel
National International
FinancialIntermediaries
SecuritiesMarkets
“Internal” “External”
Markets for Equity
Domestic “Global”
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Conditions for the existence and growth of an external market for intermediated funds
1. Ultimate borrowers and lenders must have freedom to move funds “internationally”.
2. There must be free access to clearing balances (non-resident convertibility).
3. External financial intermediaries (Eurobanks) must have sufficient cost advantages to overcome the risk perceptions of transactors.
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Transformation of Jurisdiction
Cost Control Risks
German Interest Rate
EDM Rate
Transaction Cost
Exchange Expectations
Exchange Risk
E $ RateCost Control RisksU.S. Interest Rate
Tra
nsfo
rmat
ion
of C
urre
ncy
Den
omin
atio
n
Source: Adapted from G. Dufey and I.H. Giddy, „The Linkages that Tie Together International Interest Rates“.
Euromoney Nov. 1978, pp. 122-132.
Eurocurrency Interest Rates and Rates in National Markets
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CAPITAL CORPORATIONU.S. $1,800,000,000
Zero Coupon Notes due November 15, 2004Unconditionally Guaranteed by
CORPORATION
Merrill Lynch Capital Markets
Daiwa Europe Limited Crédit Lyonnais
Dresdner Bank E.F. Hutton & Company (London) Ltd. Aktiengesellschaft
Nomura International Limited Westdeutsche LandesbankGirozentrale
Julius Baer International Limited Banca del Gottardo
Banque Internationale à Luxembourg S.A. DG BANKDeutsche Genossenshaftsbank
Norddeutsche LandesbankGirozentrale
November 1984
NEW ISSUE These notes having been sold, this announcement appears as a matter of record only
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International Credit Markets: A Schematic Presentation
CreditChannel
National International
FinancialIntermediaries
SecuritiesMarkets
“Internal” “External”
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The Eurobond Market(The Market for International Issues)
The fundamental reason for its existence is the basic discrepancy between relatively
(A) Tight controls on securities’ issues by foreign borrowers in national markets
and
(B) Fewer (or unenforceable) restrictions on investors to purchase foreign securities
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Structure of International Bond Markets in the 2000s
A. National Markets
New York (“Yankee”)
Swiss foreign bond market
German market
Japanese foreign bond market (“Samurai”)
U.K. (Bulldog)
B.Eurobond Market
USD, EURO
CAN, SFR
Sterling
Composite Units(SDR, etc.)
Exotics
C. Global Bonds
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The ‘BIG’ Picture:Technological Change esp. in Data Processing & Communication
Globalization/Internationalization
Liberalization/Deregulation
Securitization/Financial Innovation
--Engineering
Disintermediation/Reintermediation
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Financial Market Liberalization:A Miracle!
It is easy to identify the forces that resist liberalization:
The politicians and bureaucracy loose power and influence
Established competitors -- once they have adjusted to the regulatory regime -- find that it provides effective protection against competition from new entrants -- both domestic and foreign
So what changes the balance of power? Domestic ‘players’ change their attitude toward
liberalization when their customers go abroad for fin. services and ‘reciprocity’ starts to kick in
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EMERGING ISSUES IN REGULATION
Privacy and Consumerism “New” issues: Money laundering, drugs and terrorists -- and
what really matters: TAXES Compliance and intl. power-plays “Value adding” vs. “value destroying” regulation
Principles of consumer/investor protection:- Disclosure vs. legal protection?- What are “appropriate” investments?- Who takes the risks of criminal activity?- Ethics?
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The ‘BIG’ Picture:Technological Change esp. in Data Processing & Communication
Globalization/Internationalization
Liberalization/Deregulation
Securitization/Financial Innovation
--Engineering
Disintermediation/Reintermediation
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Financial Innovation IStripping a Term Loan
(Fixed Rate)
What are its elements? Provisions of Cash Availability Guarantee Interest Rate Guarantee Credit Risk Interest Rate Option Options on the Collateral
This announcement appears as a matter of record only. The Notes are not being registered for offer as sales in the United States. Offers and sales of the Notes in the United States or to the United States nationals and residents will not be made as part of the distribution and might constitute a violation of United States Law if made.
Lead ManagersBanca Commerciale Italiana Banca Nazionale del Lavoro
Banco di Roma Banque Nationale de Paris
Banque Paribas Credit Commercial de France
DG BANK Deutsche Genossenschaftsbank Dresdner Bank AG, Chicago Branch
Girozentrale und Bank der österreichischen Westpac Banking Corporation
ManagerBanca Nazionale dell’Agricoltura Banco di Napoli – New York Branch Banco di Sicilia – New York Branch Banque Internationale à Luxembourg
CIC-Union Européenne International et Cie. Kansallis-Osake-Pankki
Co-ManagersBanca Popolare di Milano Banco di Santo Spirito (Luxembourg) Bank of China, New York Branch Bank of New Zealand
Banque Générale du Luxembourg S.A. Berliner Handels- und Frankfurter Bank
Malayan Banking Berhad Monte dei Paschi di Siena
Sears, Roebuck and Co.and
Sears Roebuck Acceptance Corp.
U.S. $5000,000,000
Revolving Underwriting Facilitywith
Continuous Tender Panel
Chicago Branch
Arranger and CTP Manager
Dean Witter Capital Markets-International
May 1985
Sparkassen Aktiengesellschaft
New York Branch
New York Branch
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Financial Innovation II Securitization & Structured Finance
Innovative product trends such as securitization of future export receivables, dollar denominated mortgages, credit card receipts, commodities and similar cash flows from other than emerging markets.
Issuer considerations such as reasons for implementing a securitization program, resources necessary, evaluating risk, servicing options, financial guarantees, credit enhancement, I.e. value creation.
Organizational issues such as choice of a legal structure or where to locate your securitization special purpose vehicle.
Regulatory matters including local legal rules can facilitate or hinder transactions.
Tax and accounting considerations such as sale vs. financial treatment, after tax analysis and valuation, cross-border tax issues
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How Swaps Link the International Capital Markets
Cross-C
urrency
Inte
rest R
ate S
wapCross-Currency
Interest Rate Swap
Interest Rate Sw ap
Fixed RateAsset or Liability
Exam ple: Dollar-Denominated
Eurobond
Exam ple: Eurodollar
FRN
Exam ple:Sam urai Bond
Exam ple:Euroyen
Rate Loan
Floating RateAsset or Liability
Cu
rren
cy X
Cu
rren
cy Y
Interest Rate Base:
CurrencyofDenom ination
Fix
ed
-Fix
ed
Cu
rre
ncy
Sw
ap
Flo
atin
g-F
loa
ting
Cu
rrenc
y S
wa
p
Interest Rate Sw ap
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A swap is a (conditional) exchange of future cash flows between two parties. Cash flows may be based on periodic interest payments (“coupons”), or principal when relevant.
Swaps will differ in terms of reference rates (e.g., LIBOR, treasuries, etc.) and/or currencies.
While the expected value of the cash flows at the initiation of a swap is the same, the actual value of the respective cash flow obligation will change over time. In line with changes in different bases for rates of interest and relative currency values (exchange rates).
Such changes give rise to default risk in a swap transaction. Thus, a swap of whatever nature is simply a technique to change the characteristics of cash flows (outflows on the liability side or inflows on assets).
The technique must be carefully distinguished from the use of swaps, I.e. when is it useful to change the characteristics of cash flows?
Cash flows can be changed not only via a swap but also by the direct method: repay liabilities and borrow one with different cash flow characteristics. Thus: swaps permit the separation of funding (investing) from cash flow characteristics.
Implications: what is good for the investor is not necessarily good for the borrower.
Minimize head-on conflict, e.g. allows for securitization (standardizing liquid claims).
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Ranking of the BBA Credit Derivatives Survey
What are the applications for credit derivatives in global markets in 2005?
Management of credit lines Diversification Management of economic capital Investment Management of regulatory capital Balance sheet optimization Product structuring
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The ‘BIG’ Picture:Technological Change esp. in Data Processing & Communication
Globalization/Internationalization
Liberalization/Deregulation
Securitization/Financial Innovation
--Engineering
Disintermediation/Reintermediation
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Trends in Shaping Financial Intermediaries in Asia
The 97 crisis has been a defining moment for financial institutions in Asia. The reaction comprised the following aspects:
1) More professional management, esp. better risk management 2) Improved supervisory environment (rules and enforcement)3) Some improvement of governance and credit environment, enhanced
ability to collect.4) Foreign ownership and competition improves system - not because of
better technology but because of independence from political pressures. However post-colonial hang-ups and loss of political favors impose limits.
5) First time shift from business and gov. lending to consumer services including private banking -- with some ‘teething’ problems.
6) Push for asset management and other non-credit services including capital market activities.
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Pensions and Financial Market Developments The confluence of a) rapid increase in standards of living
(GDP/capita), b) lower birth rates and c) longer life spans puts strains on pension arrangements in all countries
Europe: relying on PAYG to replace approx. 60-70 of last years’ income. Modest employer pensions and savings. System under extreme stress due to confluence of a) and b).
USA: modest SS system, middle class relies on pension systems, individual savings tax supported ret. savings (IRA’s). Strong trend from defined benefits to defined contribution. Tendency for co’s to default on pension promises and putting burden on PBGC.
Asia: Individual savings and extended family system gives way to employer funded pension arrangements, modest SS systems if any, with beginnings of segregated pension fund arrangements (Singapore, Malaysia, GPF in Thailand)
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Special CG Issues in AsiaIn international comparisons, Asian companies fare worst
Lack of regulatory provision and compliance monitoring
Asian co’s pay a steep price in terms of cost and availability of capital (see McKinsey study). WHY?
Experience of first generation entrepreneurs causes perception of property rights to be precarious: loading up with credit from gov. controlled banks provides insurance against political risk
Disclosure and transparency of information is dangerous.
Disprop. representation of minority groups in business class of most SE Asian countries leads to defensive-aggressive behavior!
Fair business practices -- what is fair price in a small market?
Minority shareholders are viewed as stupid and impudent - give money away and want it back with return!
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The Evolving Financial System
Households
Non-financial Enterprises
Banks(DDs and TDs)
NBFIswith
Equity(Insurance/
Finance Companies)
Modified from Allen, Franklin and Douglas, Gale, Comparative Financial Systems: Competition versus Insurance, Unpublished, 1998, by G. Dufey, UofM BS 2001.
Direct
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The Evolving Financial System
Households
Non-financial Enterprises
Banks(DDs and TDs)
NBFIswith
Equity(Insurance/
Finance Companies)
NBFIswithoutequity
(Mutual Funds/ Investment Co.)
Modified from Allen, Franklin and Douglas, Gale, Comparative Financial Systems: Competition versus Insurance, by G. Dufey, 2001.
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Implications for Singapore
Recognize that competition is not regional but global
Increasing the distance between politics and financial markets
Regulatory environment that balances safety and innovation
Improve corp. gov. framework. Foster an agglomeration of talent --
local and foreign
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Implications for all of us
The financial markets of the future will provide ample opportunities for intelligent, ethical people who have acquired a thorough understanding of the techniques, as well as the dynamics that determine (1) the regulatory environment, (2) the innovative products and (3) the institutions of the future.