Financial Services: Securities Brokerage and Investment Banking

CHAPTER 4
Financial Services: Securities Brokerage and Investment Banking
McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All Rights Reserved.
Overview
 This chapter discusses securities
brokerage firms and investment banks
– Activities of securities firms and investment
banks
– Size, structure, and composition
– Balance sheets and recent trends
– Regulation of securities firms and
investment banks
– Global issues
4-2
Securities Firms & Investment Banks
 Nature of business
– Underwrite securities
– Market making
– Advising (example: M&A, restructurings)
4-3
Key Activities
 Investing
 Investment banking
– Activities related to underwriting and
distributing new (IPOs) and secondary
(seasoned) issues of debt and equity
 Public offerings & private placements
 Market making
– Increasing importance of online trading
 Technology risk
– Decimalization
4-4
Activities (continued)
 Trading
– Position trading, pure arbitrage, risk
arbitrage, program trading
 Cash management
 Assisting with M&A
 Back-office and service
functions
4-5
Balance Sheet
 Key assets:
– Long positions in securities and commodities
– Reverse repurchase agreements
– Implications: Market, interest rate & F/X risks
 Key liabilities:
– Repurchase agreements major source of
funds
– Securities and commodities sold short
– Broker call loans from banks
 Capital levels much lower than in banks 4-6
Regulation
 Primary regulator: FSC
– Stock Exchange
– BOJ
4-7
Global Issues
 Global nature of securities firms
– Competition between US and European
firms
– Foreign investors’ transactions in US
securities and US investors’ transactions in
foreign securities exchanges increased
– Global concern about capital, liquidity
and leverage following the financial crisis
 Implications for global competitiveness
∙ Strategic alliances
∙ Exits from foreign markets
4-8
The Local Industry
 Banks
– 7 Commercial banks
– 2 Merchant Banks
 Near Banks
– 3 Building Societies
 Securities Brokers*
– 39 Securities Company dealers
– 32 active ones
Source: BOJ, FSC Jamaica 4/25/2013

9
services
Banking Non-Bank
 Loans
 Loans
– Margin accounts
– Retail
– Commercial
– Credit Cards  Investments
 Deposits – repos
– Savings – Pool funds
– Demand
 Services
– Fixed
– FX
 Services – Buying and selling of
– FX securities
– Trading Finance – Money Management
10
Generally
Securities Firms
Banks
 Use short term funding
 Use short term funding called “repos” to fund
called “deposits” to the purchase of long
fund the purchase of term assets called bonds
long term assets called
loans
 “Repos” are
collateralized loans
 Deposits are liabilities of  The sale of an asset with
the explicit guarantee to
the bank, a promise to buy it back at a future
pay (most times on date and price
demand) that are
insured 11
Intermediation
Deposits Takes a Spread Loans
Agents with Agents short on

Banks capital
Excess Capital
e.g. Peter to buy house

e.g. You, and Ms. Scott
Takes a spread Issues a security

Invest Funds
Agents with Agents short on
Excess Capital Securities Firms capital
e.g. You, and Ms. Scott e.g. Mainly the

Government of Jamaica to
pay their bills
12
Jamaica is Special
The issuers of securities
The Use of Repos
Rest of the world Rest of the world
Demand for Capital =

Only Accessible to the
companies and
wealthy
Governments
In Jamaica In Jamaica
The wealthy and the Dominated by the

not so wealthy Government
13
Recent Trends
• Regulatory
o Since 2008 and the first round with the IMF, deleveraging is the order of
the day
o Increase capital requirement for bank and non- banks
o Reduction of systemic Risk the new buzz word
• Balance sheet
o Reduction in Balance Sheets
o Reduction in Leverage ( the use of borrowed funds)
o Greater focus on off balance sheet assets ( Mutual Funds, Unit Trust etc)
o Greater Focus on Balance sheet diversification
o Increase capital Ratios
• P&L
o Reduction in ROE
o Greater focus on non-interest income
o Cost containment and Consolidation
14
The Big Picture
• The Financial Crisis of 2008 changed the way
financial institutions make money
• The Jamaican story is no different than the global

one
o New Capital requirement for financial institutions
o Focus on reduced risk on Balance sheets (BASEL, Dodd–Frank Wall Street
Reform and Consumer Protection Act , Volcker Rule )
o IMF bail support now very popular
• Interest Rates are at al time lows globally
• The Global economy remains weak despite bits of

bright spots
15
Take Away
• Local financial institutions ( banks and securities brokers)
are more alike than different
• New regulatory changes along with state of the

economy and government finances will ensure increase
creativity and competitions
• The pricing of risk now critical
• Non-Interest Income Growth will be the new focus
• The global financial industry facing common treats ( as

financial professional you can’t run from it)
16

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CHAPTER 4

Financial Services: Securities Brokerage and Investment Banking

Source: BOJ, FSC Jamaica 4/25/2013

Agents with Agents short on

e.g. Peter to buy house

Takes a spread Issues a security

e.g. You, and Ms. Scott e.g. Mainly the

Rest of the world Rest of the world

Demand for Capital =

The wealthy and the Dominated by the

• The Jamaican story is no different than the global

• Interest Rates are at al time lows globally

• The Global economy remains weak despite bits of

• New regulatory changes along with state of the

• The pricing of risk now critical

• Non-Interest Income Growth will be the new focus

• The global financial industry facing common treats ( as

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