Financial Market Intermediaries

Prepared by Vini JacobMACFAST

Financial Market Intermediaries

Financial intermediation consists of “channelling funds between surplus and deficit agents”. A financial intermediary is a financial institution that connects surplus and deficit agents. The classic example of a financial intermediary is a bank that consolidates bank deposits and uses the funds to transform them into bank loans.

Types of Financial Market Intermediaries

Financial intermediaries include :

1. Stock Exchange : NSE, BSE

2. OTCEI

3. SEBI

4. Derivatives

5. Money Market Mutual Fund

Stock Exchange

A stock exchange is a form of exchange which provides services for stock brokers and traders to trade stocks, bonds, and other securities. Stock exchanges also provide facilities for issue and redemption of securities and other financial instruments, and capital events including the payment of income and dividends. Securities traded on a stock exchange include shares issued by companies, unit trusts, derivatives, pooled investment products and bonds. E.g.- NSE, BSE

OTC Exchange Of India (OTCEI)

OTC Exchange Of India (OTCEI) also known as Over-the-Counter Exchange of India based in Mumbai. It is the first exchange for small companies. It is the first screen based nationwide stock exchange in India. It was set up to access high-technology enterprising promoters in raising finance for new product development in a cost effective manner and to provide transparent and efficient trading system to the investors.

Securities and Exchange Board of India (SEBI) The Securities and Exchange Board of

India (SEBI) is the regulator for the securities market in India. It was established on 12 April 1992 through the SEBI Act, 1992.

SEBI has to be responsive to the needs of three groups, which constitute the market:

1. the issuers of securities

2. the investors

3. the market intermediaries

Powers of SEBI For the discharge of its functions efficiently, SEBI has been invested

with the necessary powers which are: to approve by−laws of stock exchanges. to require the stock exchange to amend their by−laws. inspect the books of accounts and call for periodical returns from

recognized stock exchanges. inspect the books of accounts of a financial intermediaries. compel certain companies to list their shares in one or more stock

exchanges. levy fees and other charges on the intermediaries for performing its

functions. grant license to any person for the purpose of dealing in certain areas. delegate powers exercisable by it. prosecute and judge directly the violation of certain provisions of the

companies Act. power to impose monetary penalties.

Derivatives

A derivative is a broad term covering a variety of financial instruments whose values are derived from one or more underlying assets, market securities or indices. In practice, it is a contract between two parties that specifies conditions under which payments are to be made between the parties. The most common underlying assets include: commodities, stocks, bonds, interest rates and currencies.

Usage of Derivatives Derivatives are used by investors for the following: hedge or mitigate risk in the underlying, by entering into a derivative

contract whose value moves in the opposite direction to their underlying position and cancels part or all of it out

create option ability where the value of the derivative is linked to a specific condition or event (e.g. the underlying reaching a specific price level)

obtain exposure to the underlying where it is not possible to trade in the underlying (e.g., weather derivatives)

provide leverage (or gearing), such that a small movement in the underlying value can cause a large difference in the value of the derivative

speculate and make a profit if the value of the underlying asset moves the way they expect (e.g., moves in a given direction, stays in or out of a specified range, reaches a certain level).

Money Market Mutual Funds

Money market mutual funds invest money in specifically, high-quality and very short maturity-based money market instruments. The RBI has approved the establishment of very few such funds in India. In 1997, only one MMMF was in operation, and that too with very small amount of capital. Money market funds are generally the safest and most secure of mutual fund investments. The goal of a money-market fund is to preserve principal while yielding a modest return.