International Capital Markets 2k456y

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1) What are Capital Markets? Capital markets are markets where people, companies, and governments with more funds than they need transfer those funds to people, companies, or governments who have a shortage of funds. Stock and bond markets are two major capital markets. Capital markets promote economic efficiency by channeling money from those who do not have an immediate productive use for it to those who do [1]. Modern capital markets are almost invariably hosted on computer-based electronic trading systems; most can be accessed only by entities within the financial sector or the treasury departments of governments and corporations, but some can be accessed directly by the public. There are many thousands of such systems, most serving only small parts of the overall capital markets. Entities hosting the systems include stock exchanges, investment banks, and government departments. Physically the systems are hosted all over the world, though they tend to be concentrated in financial centers like London, New York, and Hong Kong. Capital markets are defined as markets in which money is provided for periods longer than a year. A key division within the capital markets is between the primary markets and secondary markets. In primary markets, new stock or bond issues are sold to investors, often via a mechanism known as underwriting. The main entities seeking to raise long-term funds on the primary capital markets are governments and business enterprises. Governments tend to issue only bonds, whereas companies often issue either equity or bonds. The main entities purchasing the bonds or stock include pension funds, hedge funds, sovereign wealth funds, and less commonly wealthy individuals and investment banks trading on their own behalf. In the secondary markets, existing securities are sold and bought among investors or traders, usually on an exchange, over-thecounter, or elsewhere. The existence of secondary markets increases the willingness of investors in primary markets, as they know they are likely to be able to swiftly cash out their investments if the need arises [2].

2) International Capital Markets International capital market is that financial market or world financial center where shares, bonds, debentures, currencies, hedge funds, mutual funds and other long term securities are purchased and sold. International capital market is the group of different country's capital market. They associate with each other with Internet. They provide the place to international companies and investors to deal in shares and bonds of different countries.

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James Woepking – International Capital Market Wikipedia – Capital Market

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After invention of computer and Internet and revolution of financial market in 2010, almost all financial markets are converted in international capital markets. We can give the example of Hong Kong, Singapore and Wall Street. International capital market was started with dealing of foreign exchange. After globalization of financial sector, companies have to take certificate for dealing in international market. Suppose, Indian company wants to sell shares in , for this, Indian company should take certificate named global depository receipt (GDR). International capital market's daily turnover has crossed $ 5 trillion. International capital market is very helpful for reducing the risk of small company because in international market, you can buy different countries companies’ shares, debentures and mutual funds. Different countries have different business environment, so if any country is facing loss and due to financial crisis, your investment in that country may suffer losses but you can fulfill this loss from other country's investment. So, overall risk will be reduced by this technique [3].

3) Importance of Capital Markets in International Business In international business financing is a crucial factor. Many international banks play a critical role in financing the operations of international businesses. A company wants to operate internationally needs a lot of funds. These funds can be raised up by issuing securities to investors in the capital markets. Capital markets also allow someone to borrow money from some financial intermediaries. Financial intermediaries receive money from a saver and lend the money to many people or company, and in so doing create economies of scale. Capital markets also efficiently direct capital to productive uses. The savers invest their money in capital markets like stocks and bonds. The borrowers borrow the savers' investments that have been entrusted to the capital markets. It also promotes economic efficiency. Any number of companies might have great business ideas but no funds to carry them out. By shifting the funds to the companies through the capital markets, the funds are employed to their maximum extent. If there were no capital markets, savers' might have kept the fund in cash or in a low-yielding savings . The companies might have put off or canceled their business plans.

4) Forms of International Capital Markets International capital market is not a compact unit, but a highly decentralized system made up of five major parts: 1. Major International Banks 3

www.svtuition.org – International Capital Market

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2. 3. 4. 5.

Major foreign currencies International bond market Global equity market Off-shore financial centers agencies

a) Major International Banks The international banking system depends on large money market across the world, headquartered in the world’s financial centers such as Japan, China, IK, , USA, UK and . Generally international banking has many forms; A correspondent relationship is an agent connection whereby one bank performs as a communicator, or agent for another bank in the first bank’s home country, and vice versa. Subsidiary bank is a foreign bank which is distinctly incorporated from the parent bank. Branch bank is not distinctly incorporated from the parent bank. d bank is a foreign operation in which it takes part ownership in combining with a local or foreign partner. The list of the world’s top 20 banks is given below. These bank rankings are compiled from balance sheet information included on Bankersalmanac.com available on 22nd May 2013.

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Source: Bankers Accuity web site; http://www.bankersaccuity.co m/resources/bank-rankings/#.Uef0JtKl54M; visited at July 18, 2013

1. An Overview of Deutsche Bank AG, Deutsche Bank AG is a German global banking and financial services company with its headquarters in the Deutsche Bank Twin Towers in Frankfurt, . It employs more than 100,000 people in over 70 countries, and has a large presence in Europe, the Americas, AsiaPacific and the emerging markets. In 2009, Deutsche Bank was the largest foreign exchange dealer in the world with a market share of 21 percent. The bank offers financial products and services for corporate and institutional clients along with private and business clients. Services include sales, trading, research and origination of debt and equity; mergers and acquisitions (M&A); risk management products, such as derivatives, corporate finance, wealth management, retail banking, fund management, and transaction banking [4].

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Wikipedia – Deutsche Bank AG

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Private and Business Clients (PBC) provides a broad range of banking services to private individuals, self-employed clients as well as small and medium-sized businesses. These services include current s, deposits, loans, investment management and pension products. Outside of , PBC has longstanding operations in Italy, Spain, Belgium and Portugal and has also been active in Poland and India for several years. PBC’s product range includes payment and current services, investment management and retirement planning, securities as well as loans to private clients and businesses. As the leading retail bank in home market, they provide services to approximately 24 million clients in and another five million abroad. PBC has around 2,800 branches in Belgium, , India, Italy, Poland, Portugal and Spain [5].

2. An Overview of BNP Paribas SA, BNP Paribas is one of the world's largest global banking groups, headquartered in Paris, with its second global headquarters in London. It was formed through the merger of Banque Nationale de Paris (BNP) and Paribas in 2000. In 2012, BNP Paribas was ranked by Bloomberg and Forbes as the fourth largest bank in the world, as measured by total assets. BNP Paribas's four domestic markets are , Italy, Belgium, and Luxembourg. It also has significant retail operations in the United States, Poland, Turkey, Ukraine, and North Africa, as well as large-scale investment banking operations in New York, London, Hong Kong, and Singapore. In 2013 BNP Paribas was awarded the Bank of the Year award by The International Financing Review ("IFR"), Thomson Reuters' leading financial industry publication. The IFR awards are a key industry benchmark and Bank of the Year is the top honor awarded [6]. A pioneer in this area since 2008, BNP Paribas Wealth Management offers solutions tailored to clients wishing to engage in individual philanthropy, through a team of specialists. The strapline “One Bank for Corporates in Europe and beyond” reflects BNP Paribas’ desire and capacity to companies and their subsidiaries, wherever they may be in the world, in their efforts to develop their businesses in the European market and worldwide. TEB won an award for its Open Innovation competition, aimed at gathering creative ideas from Turkish customers, students and young graduates in order to develop the bank’s innovative projects. BNP Paribas has three central business lines;

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www.db.com – Product and Services Wikipedia - BNP Paribas SA

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Retail Banking - BNP Paribas Retail activities comprises a set of Domestic Markets, International Retail Banking and BNP Paribas Personal Finance. Investment Solutions - Investment Solutions offers a broad range of high value-added products and services around the world, designed to meet all the requirements of individual, corporate and institutional investors. Corporate & Investment Banking - BNP Paribas CIB provides its clients with corporate banking, advisory and capital markets services [7]

b) Major International Currencies Currency Market is a generally accepted form of money, including coins and paper notes, which is issued by a government and circulated within an economy. Used as a medium of exchange for goods and services, currency is the basis for trade. The currency market or foreign exchange market is a global decentralized market for the trading of currencies. The main participants in this market are the larger international banks. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends. Electronic Broking Services (EBS) and Reuters' dealing 3000 are two main interbank FX trading platforms. The foreign exchange market determines the relative values of different currencies. The foreign exchange market assists international trade and investment by enabling currency conversion. For example, it permits a business in the United States to import goods from the European Union member states, especially Eurozone , and pay Euros, even though its income is in United States dollars. It also s direct speculation in the value of currencies, and the carry trade, speculation based on the interest rate differential between two currencies[8]. Every time someone travel overseas and exchange their money into a foreign currency, they are participating in the foreign exchange (forex) market. In fact, the forex market is the quiet giant of finance, dwarfing all other capital markets in its world. Unlike the stock market where investors have thousands of stocks to choose from, in the currency market, you only need to follow eight major economies and then determine which will provide the best undervalued or overvalued opportunities. These following eight countries make up the majority of trade in the currency market: 7 8

www.bnpparibas.com – Wikipedia – Foreign Exchange Market

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United States – US Dollar ($) Eurozone (Primarily , , Italy and Spain) – Euro (€) Japan – Japanese Yen (¥) United Kingdom – Pound (£) Switzerland – Swiss Franc (Fr) Canada – Canadian Dollar ($) Australia – Australian Dollar ($) New Zealand – New Zealand Dollar ($) These economies have the largest and most sophisticated financial markets in the world. By strictly focusing on these eight countries, we can take advantage of earning interest income on the most credit-worthy and liquid instruments in the financial markets. Economic data is released from these countries on an almost daily basis, allowing investors to stay on top of the game when it comes to assessing the health of each country and its economy [9] .

c) The International Bond Market The bond market is a financial market where participants can issue new debt, known as the primary market, or buy and sell debt securities, known as the Secondary market, usually in the form of bonds. The primary goal of the bond market is to provide a mechanism for long term funding of public and private expenditures. Traditionally, the bond market was largely dominated by the United States, but today the US is about 44% of the market. As of 2009, the size of the worldwide bond market (total debt outstanding) is an estimated $82.2 trillion, of which the size of the outstanding U.S. bond market debt was $31.2 trillion according to Bank for International Settlements (BIS), or alternatively $35.2 trillion as of Q2 2011 according to Securities Industry and Financial Markets Association (SIFMA) [10]. The international bond market represents a major source of debt financing for the world’s governments, international organizations, and larger firms. This market has traditionally consisted of two types of bonds: Foreign Bonds – are bonds issued by a resident of a country, but sold to residents of another country and denominated in the currency of that country. Euro Bonds – is a bond issued in the currency of a country but sold to residents of other countries.

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www.investopedia.com – Foreign Exchange Markets Wikipedia – International Bond Market

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As the global capital market has evolved, the international bond market has grown increasingly sophisticated. Syndicates of investment banks, securities firms, and commercial banks put together complex packages of international bonds to serve the borrowing needs of large, creditworthy borrowers, such as Major MNCs. National governments and international organizations. The global bond is one such innovative financial instrument. It is large, liquid financial asset that can be traded anywhere at any time. World Bank was the pioneer of using global bonds. Attracted by the World Bank’s success, many other large organizations, such as, Matsushita Electric, the Province of Ontario, Citicorp, and Household Finance have also issued global bonds [11].

d) Global Equity Markets Global equity market is the market in which shares are issued and traded, either through exchanges or over-the-counter markets. Also known as the stock market, it is one of the most vital areas of a market economy because it gives companies access to capital and investors a slice of ownership in a company with the potential to realize gains based on its future performance. Major global equity indices are listed below:

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International Business by Griffin and Pustay – Chapter 8; The International Bond Market

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Source: Baby Pips web site; http://www.babypips.com/school/forex-global-equity-markets-andyou.html#ixzz2ZQf38NYw; visited at July 18, 2013

e) Offshore Financial Centers Offshore financial centers focus on offering banking and other financial services to non-resident clients. Many of these centers are located on island states, such as The Bahamas, Bahrain, the Cayman Island, Bermuda, the Netherlands Antilles, and Singapore. Luxembourg and Switzerland, although not island, are also important offshore financial centers. Offshore centers act as conduits for global trade and ease international capital flows. International t ventures are often structured as companies in an offshore jurisdiction when neither party in the venture party wishes to form the company in the other party's home jurisdiction for fear of unwanted tax consequences. Although most offshore financial centers still charge little or no tax, the increasing sophistication of onshore tax codes has meant that there is often little tax benefit relative to the cost of moving a transaction structure offshore.

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Recently, several studies have examined the impact of offshore financial centers on the world economy more broadly, finding the high degree of competition between banks in such jurisdictions to increase liquidity in nearby onshore markets. Proximity to small offshore centers has been found to reduce credit spreads and interest rates, while a paper by James Hines concluded, "By every measure credit is more freely available in countries which have close relationships with offshore centers." Low-tax financial centers are becoming increasingly important as conduits for investment into emerging markets. For instance, 44% of foreign direct investment (FDI) into India came through Mauritius last year, while over two thirds of FDI into Brazil came through offshore centers. Blanco & Rogers find a positive correlation between proximity to an offshore center and investment for least developed countries (LDCs); a $1 increase in FDI to an offshore center translates to an average increase of $0.07 in FDI for nearby developing countries.[12]

5) Conclusion The international capital market is growing in sophistication as a result of technological advances in telecommunications and computer. Major international banks still utilize their traditional correspondent relationships with other banks but are also increasingly engaged in overseas banks of any country to conduct lending operations in whatever currencies their clients require. MNCs now commonly raise capital, both debt and equity, on a global basis, wherever its cost is lowest.

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Wikipedia – Offshore Financial Centers

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