Essay About Financial Markets Regulation And Overview Of Financial Markets

Financial Markets Regulation
Financial Markets Regulation
FINANCIAL MARKETS
REGULATION
Lecture 1
What is regulation? Objectives of
financial markets regulation
Master Studies in Finance
Spring 2010
Ewa Kania, Department of Banking 2
Agenda
1. Overview of financial markets, institutions and
instruments
2. What is regulation?
3. Why regulate?
1. Overview of financial markets, institutions
and instruments
A financial system
• channels funds from lenders to borrowers
• creates liquidity and money
• provides a payments mechanism
• provides financial services such as insurance and pensions
• offers portfolio adjustment facilities
In economics a market is an organisational device which brings
together buyers and sellers.
Financial market: An organisational framework within which
financial instruments can be bought and sold.
• A financial system consists of a set of organised
markets and institutions together with regulators of those
markets and institutions. Their main function is to
channel funds between end users of the system: from
lenders (‘surplus units) to borrowers (‘deficit units).
• In addition, a financial system provides payments
facilities, a variety of services such as insurance,
pensions and foreign exchange, together with facilities
which allow people to adjust their existing wealth
portfolios.
• There are many advantages in borrowing and lending via
intermediaries and organised markets, compared with
borrowing and lending directly between end users.
• These include transforming the maturity of short-term
savings into longer-term loans, together with the
reduction of risk and transaction costs.
Financial markets facilitate:
• The raising of capital (in the capital markets);
• The transfer of risk (in the derivatives markets);
• International trade (in the currency markets)
and are used to match those who want capital to those who
have it.
• Typically a borrower issues a receipt to the lender
promising to pay back the capital. These receipts are
securities which may be freely bought or sold.
• In return for lending money to the borrower, the lender
will expect some compensation in the form of interest or
dividends.
• The term “market” is sometimes used for what are more
strictly exchanges, organizations that facilitate the trade in
financial securities, e.g., a stock exchange or commodity
exchange.
• This may be a physical location (like the NYSE) or an
electronic system (like NASDAQ). Much trading of stocks
takes place on an exchange; still, corporate actions
(merger, spin-off) are outside an exchange, while any two
companies