Study Unit 1

The Financial System

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INTRODUCTION

At the end of this lesson presentation, you will be

able to:
Analyse the components of a financial system
Distinguish between primary and secondary
market
Contrast money market and capital market
Analyse the functions served by financial
markets

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FINANCIAL SYSTEM

Purpose
Ensure orderly flow of funds from those with excess to those who
require it
Availability of excess funds
Short or long periods
Funding requirements
To make investments (real or financial) and expenses
Regulation
To protect both parties who transact

2013 SIM University. All rights reserved.

PARTIES IN THE FINANCIAL SYSTEM

Businesses may
require funds for making an investment in real assets
have excess funds prior to declaring dividends
Individuals may
require funds for investments or expenses
have savings
Governments may
need to issue debt securities to fund government spending
need to invest reserves
Financial institutions
act as intermediaries to bring parties together

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MAJOR FINANCIAL INSTITUTIONS

Banks
deposits, loans, trade finance
Investment banks
fund raising via securities issuance
Insurance companies
offer protection for premiums
Pension funds
collect periodic payments from individuals during their
employment to provide benefits during retirement periods.
Mutual funds and hedge funds
Invest in securities
Exchanges
provide for orderly securities transactions.

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FINANCIAL MARKETS

Financial markets are where the actual financial transactions take

place.
Based on type of transaction, can be classified as either:
Primary market
new security created and issued
auction, private placement, IPO or seasoned offering
Secondary market
trading of securities already in issue
traded via exchange
transparent, regulated, liquid
or traded over-the-counter
self regulated eg ISDA, less liquid and transparent
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FINANCIAL MARKETS

Based on the characteristics of the securities, can be classified as

either:
Money Market
trading of debt securities with maturity of one year or less
eg. T-bills, repurchase agreements, commercial papers,
negotiable certificates of deposits and bankers acceptances.
Capital Market
trading of equity, debt or hybrid securities with maturity of more
than 1 year
eg. common shares, preference shares, bonds
Foreign Exchange Market
trading of spot and forward foreign currencies
Derivative Securities Market
trading of forwards, futures, options, swaps
eg. commodity derivatives, financial derivatives, credit
derivatives
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INTERNATIONALIZATION OF FINANCIAL MARKETS

The relative decline of U.S. Capital Markets is due to:

Better investment prospects in other countries

Growing pools of savings in developing countries
Deregulation around the world
New technology in foreign exchanges
9-11 made U.S. regulations tighter
Greater risk of lawsuit in the U.S.
Sarbanes-Oxley has increased the cost of being a U.S.-listed public
company

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THE FINANCIAL SECTOR IN SINGAPORE

Highlights
deep and liquid capital markets
SGX is listing location of close to 800 companies
largest Real Estate Investment Trust (REITs) market in Asia exJapan
4th most active foreign exchange trading centres in the world
2nd largest over-the-counter derivatives trading centre in Asia
total assets under management of S$ 1.2 trillion
most business-friendly regulation in the world (World Bank report).
efficient legal and judicial framework
competitive tax rate
well-regulated financial sector
only Asian country with an "AAA" rating

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SUMMARY

An efficient financial system is important to ensure

an orderly flow of funds from those with excess
funds to those who require it
To attract issuers, investors and financial
intermediaries to participate in a financial market,
regulators have to balance commercial needs and
regulatory needs

2013 SIM University. All rights reserved.

REFLECTION QUESTION

Although Singapore is touted as a key financial

center, it still lags behind the markets in New York &
London and competes directly with Hong Kong in
Asia.
What else can our regulators do to promote
Singapore as THE key financial center in Asia?

2013 SIM University. All rights reserved.