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?

3

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.

4

• 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.

5

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.

6

• 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