Master in Professional Development

MODULE V UNIT 3

FINANCIAL MARKETS IN SPAIN

 INDEX

General description of financial system

Function of the financial assets
Main trading assets
Financial Markets

Institutional description of financial markets in Spain.

Interbank market
Debt market annotation
Private bond market AIAF
Currency markets
Derivatives markets
p
Supervisoryy bodies
Participants in the financial market

Offering a powerful program combining theoretical and practical

content of the role of financial markets and banking as core elements
of any financial system

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 THE COMPANY AND THE FINANCIAL MARKETS

• non-coincidence of savers and investors,, the

Mission
Mi i fundamental
f d l in
i units that are running deficits are different from
a market economy: those with surplus. the desires of
intermediation. Capture Reasons savers do not generally agree with those of
the excess savings and investors regarding
g g the degree
g of liquidity,
q y,
channel
h l th
them iinto
t public
bli security and return on assets issued by the
and private borrowers
latter.

Tools or Where they negociate

financial Financial system financial activities
activities

MEDIA INSTITUTIONS MARKETS

Monetary and financial authorities that act as middlemen buying and selling assets in the financial
markets. Transform primary financial asset (issued by the inverter units) in indirect financial assets
in accordance with the preferences of savers.

Lenders Borrowers

Surplus spending units Units of deficit spending

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 GENERAL DESCRIPTION OF THE FINANCIAL SYSTEM IN SPAIN

DEPARTMENT OF
ECONOMY AND Ultimately responsible for all aspects of the functioning of
FINANCE financial institutions.
Exercises its functions through five executives:
 General director for trade p
policy
y and foreign
g investments,,
The major powers, for the
 BANK OF SPAIN
magnitude of financial
institutions under its control,  General Director of treasury and financial policy.
for the volume of resources  General Director of insurance
channeled and to be responsible
p  National commission of securities market ((CNMV))
for defining and implementing
monetary policy, with autonomy
from government instructions.
• Official institute of
credit(ICO)
( CO)
capture public funds by form of • Private Banks
Credit entities deposit or similar securities with the • Public bank
obligation of restitution, applying • Savings bank
th
themselflf to
t the
th granting
ti off credit.
dit C dit cooperatives
• Credit ti

Credit financial called Credit Institutions Operating • Entities of finances and

institutions Limited Scope (ECAOL) Factoring
• Corporation of financial
Corporation of mutual guarantee leasing
((MGS),
), System
y of second Aval,, • Corporation of credit
Others mortgage
interbank markets, currency and
government debt recorded (in part)
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FINANCIAL Intangible asset of which value is an entitlement to a future benefit.
ASSETS The contract issuer of future monetary obligations.
Th title-holder
The titl h ld obtains
bt i rights
i ht to
t future
f t cash
h
• depending on the benefits of an economic entity (equity).
• independent of these benefits (fixed).
Su precio procede del descuento de los flujos de caja esperado
Function
( di i t esperados).
(rendimientos d )

• Economic units to balance resources in the present, against the promise of economic units to
generate resources in the future. This will issue securities.
g
• Balancing with the amount they invested in time but with present resource requirements.
These are the trading markets for financial assets.

• Aliquots represent ownership of a Distinguish

between
Ordinary company.
values:
shares • Have political and economic rights
- nominal
(dividends, bonuses, etc.). - the market
EQUITY - accounting

Preffered • Aliquots represent ownership of a company.

• Possess economic rights exclusively on pre-
shares
established dividend.

Distinguish between:
• aliquots representing
-nominal value vs. The market.
indebtedness of an economic unit.
• economic returns are non subject - Easyy interest vs. Fundraising
g discount
BOND - Implicit coupon vs. explicit
profits (coupons, premiums).
- Fixed coupon vs. Variable - Maturity
-Principal vs. subordinates
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 FINANCIAL MARKETS
FINANCIAL
Place or environment were financial assets are traded.
MARKETS
Competition determine the price of supply and demand.
Functions Provide liquidity to financial tools.
Reducingg transaction costs,, research costs and information.
Classification
Life expectancy of assets

PRIMARILY:
PRIMARI Y that
h to which
hi h a company comes to SECONDARILY: By which individuals come to
place on a massive publscic ale and in a short time obtain liquidity through the exchange of
their securities. certificates already issued.
Faster and cheaper placement. Generally Faster, cheaper and focuses on the
investment banks are those: transmission
transmission.
•Advising the issuer about time and price. The market is called a market or stock
•Aquire financial assets issued. exchange. The main features of these markets
•Distribute financial assets. and where the success is dependent on :
The bank chargesg a fee ((the difference between o d g liquidity:
• Providing qu d y thee more
o e eas
easily
y to
o ope
operate
ae
the price paid to the company and the price more business. Allows investors to participate in
received for the sale of shares) the management of enterprises
Generally goes to a syndicate of placement : •They value the financial tools.
•Director of bank.
•Co-directors insurers.
•Co-directors underwriters.

A
According
di tot the
th structure
t t A
According
di tot the
th time
ti off delivery
d li
• The sale.
• extra – stock exchange • By cash
• intermediated • By credit 6
 INSTITUTIONAL DESCRIPTIONS OF FINANCIAL MARKETS IN SPAIN

Main market of "money creation"

It comprises with the Central Bank (main figure) of each
INTERBANK geographical
g g p area banks and credit institutions.
MARKET Central Bank calls regular auctions, which puts money and
subsequent actions necessary to "withdraw or inject" liquidity.
The average rate at which loans are negotiated is called Euribor.

The broadcast system is public and is done once a month: the

participants that attend are debt managers.
The Treasury orders the requests at the price cut that interests
you or that you agree with.
ANNOTATED DEBT The highest price accepted is the marginal price, below which
are all the other requested places.
MARKET Th average price
The i iis the
h arithmetic
ih i mean off the h accepted d
applications.
Its function is to provide liquidity to the Public Debt.
The participating organizations are the creators of the market,
Treasury
T andd Bank
B k off Spain,
S i th they are allll iinterconnected
t t d
electronically, operating through brokers authorized to do so.
The creators of markings are required to perform a number of
operations and provide firm quotes for the references of the
P bli D
Public Debt.
bt

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 Secondary market which trades fixed-income assets.
Designed for:
- fixed income tradingg that was not p
public debt.
INTERBANK - gain cash in fixed income issues
MARKET - to avoid such high costs resulting from operating through the
stock market.
The compensation
p service is based on the book entries.

 Where the change is made from one currency to another.

MARKET OF Major
j currencies are dollar,, euro,, pound,
p , yen
y and y
yuan for
China.
FOREIGN
The price can be: spot or forward.
EXCHANGE Off-exchange market where transactions are conducted by
p
telephone.

No operations or The price of currencies is caused by

free floating
g the strength of demand and supply
supply.
Types
Intervention
•Fixed:
Fixed: the authority fixed the price (e.g China)
Currency box: national currency is replaced by
An authority sets the another of greater importance (e.g. Argentina).
parity
p y system
y Flotation bands: a variable depending
p g on the
segment is fixed (fixed or mobile in time) that
can quote currency (e.g Brazil).
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 MARKETS OF DERIVATIVES
Joint negotiation of the tools in a regulated manner.
G
Guarantees deposits
d i updated
d dd daily,
il bbased
d on the
h evolution
l i off the
h
underlying asset (profit and loss adjustment).
Organisations Compensation center to register transactions; lodging between
the contracting parties between the seller and buyer and the
b
buyer and
d seller.
ll E.g
E MEFF

Private contract between two people committing themselves to

operate on an asset, where the results of the operation depends
on an underlying asset.
Differences can be settled by delivery or by the underlying
asset
asset.
Non- Counterparty risk, but there is margin for profit and loss.
organisations There is no clearing centre to record the transaction.
There is no interposition between the contracting parties to
another entity.
entity
No formal negotiation occurs, then the problem arises:
- transfer to a third party
- valuation price

1973 : first options on equity in the USA

80s: Beginning of a 20 –year period of deregulation, allowing fantastic growth of derivatives
markets.
Early 90s: Big losses because of derivatives for some corporate customers, the overnight
collapse
ll off Barings
B i b k
bank.
Late 90s: early 2000s traders frustation. They leave their banks and create their own hedge
funds.
Crisis since 2007 End of a 25-30-year cycle. World economic crisis. Massive governments and
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central banks intervention.
 MOST COMMON DERIVATIVES, CAPABLE FOR USE
CLOSE
• Underlying interest rate, foreign exchange, stocks, etc..
Futures negotiated in The future is a contractual relationship where someone
organized markets of (buyer) agrees to sell to another (seller) a specific good, in
our case the financial asset
asset.
the underlying
Main feature: they are traded in organized markets and there
finances is a profit and loss settlement.

• Interest rate, foreign exchange, stocks, etc..

A contractual relationship in which one party has the right to
demand the execution of a purchase or sale while another
Options in an has an obligation to respond to the petition.
organized market The buyer limits their loss to pay the premium.
Main feature: they are traded in organized markets and there
is an account of profits or losses for the issuer with limited
counterparty risk.

• The future is a contractual relationship where someone

(buyer) agrees to sell to another (seller) a given asset
Forward (financial assets).
Main feature: not traded in organized markets and there is an
accountt o
accou of p
profits
o ts oor losses.
osses

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 MOST COMMON DERIVATIVES, CAPABLE FOR USE
CLOSE
• Market options about the concepts detailed above.
A contractual relationship in which one party has the right to
demand the execution of a purchase or sale (buyer of the
option)
p ) while another has an obligation
g to respond
p to the
O ti
Options O TC
O.T.C petition.
The buyer limits their loss to pay the premium.
Main feature: not traded in organized markets and there is an
account of pprofits or losses for the issuer without limitation of
counterparty risk.

• Asset that contains within it an asset for cash and one / s

active derivatives.
Structured Valuation: the adding of the
transactions - estimated cash value of the asset
- est
estimated
ated value
a ue oof tthe
e de
derivative
at e
Example: Convertible Bonds.

• Publicly issued asset

Warrants not singular Formal bargaining regime.
Widespread transmission in the market.
Minimum days of trading.
Price Creators

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 SUPERVISOR BODYS

 Organization responsible of the supervision of banks

and credit institutions.
Controls and regulates the products offered, as well as
Bank of Spain
institutions active in the credit market.
Inspects Credit Institutions.
It has a policy and action work in some situations.

NATIONAL  Organization responsible for overseeing financial

COMMISSION ON markets as well as specialized agents involved in them.
SECURITIES Control and regulate the markets and operations.
MARKET(CNMV) It has a policy and intervention work in some situations.
Is competent for Collective Investment Institutions.

•Agency
A overseeing
i iinsurance companies. i
GENERAL Controls and regulates the operation of the insurance and
MANAGEMENT OF investment processes.
INSURANCE You work policy and intervention in certain situations.
It h
has a responsibility
ibilit for
f Social
S i l Security.
S it

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 To PARTICIPANT IN THE FINANACIAL MARKETS
REMEMBER

• Key players in the investment markets.

Role: intermediation of the money assets to raise money by the public
CREDIT (excess resources) and providing (demanding money.)
ENTITIES -creators
t off financial
fi i l assets:
t stocks,
t k bonds
b d and db
bank
kddeposits.
it
- investors: loans, holders of financial assets.
Participate as intermediaries in financial markets

• financial
fi i l iintermediaries
t di i are unable
bl tto raise
i ffundsd
repayable (or on loan or deposit, repurchase or similar.
• special corporations that engage in one or more major
FINANCIAL INSTITUTION
activities established by regulation, credits or loans,
CREDIT provision
i i off guaranteest and
d warranties,
ti lleasing,
i ffactoring
t i
and issuing and managing cards

Financial intermediaries authorized to act on the financial markets.

STOCK Main job:
COMPANIES Operating in primary markets.
AND AGENCYS Operating in secondary markets.
As intermediaries for other units.
As investors themselves.

Principal differences:
Societies can take assets for themselves, while the agencies
can only act on behalf of their clients
.
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Master in Professional Development