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

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 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

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 Generally
Banks
 Use short term funding
called “deposits” to
fund the purchase of
long term assets called
loans
 Deposits are liabilities of
the bank, a promise to
pay (most times on
demand) that are
insured
Securities Firms
 Use short term funding
called “repos” to fund
the purchase of long
term assets called bonds
 “Repos” are
collateralized loans
 The sale of an asset with
the explicit guarantee to
buy it back at a future
date and price
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 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
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 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

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 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

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 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

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 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)

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