International Financial Markets

The International Financial Market is the place where financial wealth is traded between individuals (and between countries). It can be seen as a wide set of rules and institutions where assets are traded between agents in surplus and agents in deficit and where institutions lay down the rules.

In present business scenario, international trade activities have increased at great pace which augmented the importance of global finance market. Global finance market mainly focuses on lending and borrowing in foreign currencies to finance the foreign trade transactions. Global finance market operate outside the domain, directive and legislature framework of a country. The numerous components of global finance market include euro currency market, export credit facility, International bond market, and institutional finance. Global finance market is dominated by issues and investors in bond. The choice of currency has important role in the area of global finance market. The most chosen currencies for global finance market is US dollars, pond, sterling, Japanese yen. The contributors in global finance market are multinationals, corporate enterprises, and government.

Forms of International Financial Markets

1. The Foreign Exchange Market

Foreign exchange market is not necessarily a physical place, but it is established network of buyer and seller through the latest technology like e-wire, internet, in addition to the postal communication system, through which a currency of one country is converted into the currency of another country. The exchanges of currency from one to another happen to satisfy the need of goods, commodities and services, in addition to invest in financial assets.

Such market is also known as Euro Currency Market. The banks who are involved in euro currency market are generally large sized commercial banks, also known as Euro Banks. Euro banks are involved in acceptance and lend the funds in currencies of the country of the globe, based on need of the citizens of the country where they are operating.

2. Euro Loan or Credit Market

The e-wired or physical market place, where the lending of funds in foreign currency is done for the period of one year or more years is known as Euro credit or Euro Loans market. Euro credit market basically supports the need of corporate, government public sectors, and Non-Government Organisations (NGOs) to operate globally, and to provide their goods, commodities, and services overseas.

3. Euro Bond Market

Euro bond market is a market in which bonds are issued in different currencies other than the currency of the home country in which they are issued. Such bonds are supporting tools for the international firms, government bodies and NGOs to raise capital for long term investment. Euro bonds are normally issued in the currency of the; issuer’s home currency in other country’s capital market.

Major Global Finance Markets

1. The US financial market

It is biggest and most versatile financial market around the globe. It offers wide range of funding options and is characterized by some of the sophisticated and innovative financial institutions. The dominant place of the Dollar in the international financial field makes it more significant. The financial system of US finance market include the network of commercial banks, domestic and foreign international banks, non-bank financial institution, insurance companies, pension funds, mutual funds, savings, and loan associations. Three authorities such as comptroller of currency the Federal Reserve board and the federal deposit insurance corporations regulate the commercial banks in the US (Gurusamy, 2009).

2. Euro market is composed of Euro dollar bond, FRNs, NIFs.

Euro dollar bond accounts for large share of euro bond issues. Syndicated euro loans are available which borrows in developing countries for frequent access (Gurusamy, 2009). The main factor that makes the Eurocurrency market so attractive to both depositors and borrowers is its lack of government regulation. This allows banks to offer higher interest rates on Eurocurrency deposits than on deposits made in the home currency, making Eurocurrency deposits attractive to those who have cash to deposit. The lack of regulation also allows banks to charge borrowers a lower interest rate for Eurocurrency borrowings than for borrowings in the home currency, making Eurocurrency loans attractive for those who want to borrow money. In other words, the spread between the Eurocurrency deposit rate and the Eurocurrency lending rate is less than the spread between the domestic deposit and lending rate. The Eurocurrency market has two disadvantages. First, when depositors use a regulated banking system, they know that the probability of a bank failure that would cause them to lose their deposits is very low. Regulation maintains the liquidity of the banking system.

In an unregulated system such as the Eurocurrency market, the probability of a bank failure that would cause depositors to lose their money is greater (although in absolute terms, still low). Thus, the lower interest rate received on home-country deposits reflects the costs of insuring against bank failure. Some depositors are more comfortable with the security of such a system and are willing to pay the price. Second, borrowing funds internationally can expose a company to foreign exchange risk. For example, consider a US company that uses the Eurocurrency market to borrow euro-pounds, perhaps because it can pay a lower interest rate on euro-pound loans than on dollar loans. Imagine, however, that the British pound subsequently appreciates against the dollar. This would increase the dollar cost of repaying the euro-pound loan and thus the company’s cost of capital. This possibility can be insured against by using the forward exchange market but the forward exchange market does not offer perfect insurance. Consequently, many companies borrow funds in their domestic currency to avoid foreign exchange risk, even though the Eurocurrency markets may offer more attractive interest rates.

3. Japanese market

Japanese financial system was integrated with the international market since 1970s. The main components of Japan’s financial system are much the same as those of other major industrialized nations: a commercial banking system, which accepted deposits, extended loans to businesses, and dealt in foreign exchange; specialized government-owned financial institutions, which funded various sectors of the domestic economy; securities companies, which provided brokerage services, underwrote corporate and government securities, and dealt in securities markets; capital markets, which offered the means to finance public and private debt and to sell residual corporate ownership; and money markets, which offered banks a source of liquidity and provided the Bank of Japan with a tool to implement monetary policy. Ministry of finance closely monitors the Japanese financial system.

Japan’s securities markets increased their volume of dealings rapidly during the late 1980s, led by Japan’s rapidly expanding securities firms. There were three categories of securities companies in Japan, the first consisting of the “Big Four” securities houses (among the six largest such firms in the world): Nomura, Daiwa, Nikko, and Yamaichi. The Big Four played a key role in international financial transactions and were members of the New York Stock Exchange. Nomura was the world’s largest single securities firm; its net capital, in excess of US$10 billion in 1986, exceeded that of Merrill Lynch, Salomon Brothers, and Shearson Lehman combined. In 1986, Nomura became the first Japanese member of the London Stock Exchange. Nomura and Daiwa were primary dealers in the United States Treasury bond market. The second tier of securities firms contained ten medium-sized firms. The third tier consisted of all the smaller securities firms registered in Japan. Many of these smaller firms were affiliates of the Big Four, while some were affiliated with banks. In 1986 eighty-three of the smaller firms were members of the Tokyo Securities and Stock Exchange. Japan’s securities firms derived most of their income from brokerage fees, equity and bond trading, underwriting, and dealing. Other services included the administration of trusts. In the late 1980s, a number of foreign securities firms, including Salomon Brothers and Merrill Lynch, became players in Japan’s financial world.

Japanese insurance companies became important frontrunners in international finance in the late 1980s. More than 90% of the population owned life insurance and the amount held per person was at least 50% greater than in the United States. Many Japanese used insurance companies as savings vehicles. Insurance companies’ assets grew at a rate of more than 20% per year in the late 1980s, reaching nearly US$694 billion in 1988. The life insurance companies moved heavily into foreign investments as deregulation allowed them to do so and as their resources increased through the spread of fully funded pension funds. These assets permitted the companies to become major players in international money markets. Nippon Life Insurance Company, the world’s largest insurance firm, was reportedly the biggest single holder of United States Treasury securities in 1989. The Tokyo Securities and Stock Exchange became the largest in the world in 1988, in terms of the combined market value of outstanding shares and capitalization, while the Osaka Stock Exchange ranked third after those of Tokyo and New York. Although there are eight stock exchanges in Japan, the Tokyo Securities and Stock Exchange represented 83% of the nation’s total equity in 1988. Of the 1,848 publicly traded domestic companies in Japan at the end of 1986, about 80% were listed on the Tokyo Securities and Stock Exchange.

4. German market

The Deutshe mark denominated German market. It occupies an important place in the entire gamut of euro market. Since 1985, Germanys’ financial system was attuned to world financial order marked by liberalization and deregulation. Universal banking is popular in Germany.

5. Swiss financial market

It is well developed banking system especially for the foreign investors who made the Swiss market global player in global financial market (Gurusamy, 2009). Presently, an estimated one-third of all worldwide offshore funds (funds held outside their country of origin) are kept in banks within Switzerland. Banking in Switzerland is regulated by the Swiss Financial Market Supervisory Authority (FINMA). FINMA is responsible for supervision of Swiss banks, stock exchanges and insurance companies. FINMA is functionally and institutionally independent from the central federal administration and reports directly to the Swiss parliament.

6. Australian market

Australian dollar became very popular in the offshore market on the issue of bonds. The Australian bonds are popular in American market. Financial markets in Australia expanded very speedily in the 1980s, following deregulation. They have continued to grow in the 1990s, but at a pace more in line with world financial markets. Relative to the size of the economy, Australian financial markets are large by international standards, and well developed. While Australia ranks around fourteenth in the world in terms of GDP, many of its financial markets rank more highly. By turnover, the foreign exchange market. Directed mainly at meeting the needs of the domestic economy, in contrast to markets in London, Singapore and Hong Kong, where most of the trading is international, rather than related to the domestic economy. The dominant participants in Australian markets are banks, especially in foreign exchange and derivatives. As a consequence, supervision of the banking system carries with it the supervision of a large part of the activity in financial markets. The Australian foreign exchange market has grown powerfully since the early 1980s, in terms of trading in both Australian dollars and other currencies. There were two phases of growth. Between 1985 and 1990, the market grew very rapidly, with average daily turnover rising from a little over $A5 billion to $A44 billion, an average annual increase of around 50 per cent. Growth stopped at the start of the 1990s as the financial system experienced a period of consolidation, but turnover picked up at a moderate pace from 1992. By 1995, turnover had reached around $A50 billion per day, an average annual increase of around 3 per cent during the five-year period.

Many factors have contributed to this growth. The deregulation of Australian markets, specifically the floating of the exchange rate and the removal of exchange controls was the major factor in the mid to late 1980s. Following that burst in activity, the expansion of the Australian foreign exchange market has been driven largely by the growth in global foreign exchange trading.

It has been observed that Australia has become progressively integrated into the global foreign exchange market, helping to bridge the time gap between the close of the New York market and the opening of the major Asian markets of Tokyo, Hong Kong and Singapore. In global context, the Australian foreign exchange market accounts for around 2.5 per cent of world turnover, ranking ninth among world trading centres. The UK, US and Japan are the three largest foreign exchange markets; between them they accounted for around 55 per cent of total turnover in April 1995.

7. Indian financial market

Indian financial market is one of the prominent financial markets of the world. It is organized early during the 19th century with the name of SEBI (Security exchange board of India). During the 1960s, there are eight security exchanges in India which has mainly three in Mumbai, Ahmadabad and Kolkata. In spite of these boards there are also boards in other cities also such as Madras, Kanpur, Delhi, Bangalore and Pune. Indian economy had remained steady because of the cost-effective control and after 1991 generally when the liberalization has been started in India which made Indian security market boom and helped Indian economy in its growth. There were also many new companies which revolving around many industries segment which are also helping in flourishing the business. After launching NSE (National stock exchange) and OTCIE (Over the counter exchange of India) especially in the mid-1990s which have also helped in the smooth trading and the transparency from the trading of the securities.

Characteristics of financial market in India

• Foreign investment – Foreign debt database which is being composed by BIS, IMF, OCEO, World Bank and investment internationally.
• Insurance
• Loans
• Mutual funds
• Foreign exchange.
• National and international markets relation
• Financial news markets
• Fixed income in sectors – Corporate Bond Prices, Interest details, Money Market, Public sector debts, External debt services, etc.
• Currency indexes, etc.

8. Sterling market

It has significant place in global financial market.