Benigay Maria; Regudo,Djon;Arcillo, Marjory
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Transcript of Benigay Maria; Regudo,Djon;Arcillo, Marjory
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McGraw-Hill /Irwin Copyright 2004 by The McGraw-Hill Companies, Inc. All rights reserved.16-1
Chapter SixteenSecurities Firms and
Investment Banks
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Services Offered by Securities Firms
versus Investment Banks
Investment Banks Service entities who wish to raise funds through sales of debt
and equity securities, including corporations or governments;services include originating, underwriting, and placingsecurities in money and capital markets
Securities Firms services involve assistance in the trading of securities in the
secondary markets (brokerage services or market making)
The largest companies in the industry perform
multiple services (e.g., underwriting and brokerage)and are generally called investment banks
advise corporations on mergers and acquisitions as well asadvising on the restructuring of existing corporations
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Size, Structure, and Composition of the
Industry
Size of the industry is measured by the equity capital ofthe firms in the industry ($144.5 bn. in 2001)
Three major types of firms
national full-line investment banks that service retail and
corporate customers (e.g., Merrill Lynch) national full-line firms that specialize in corporate finance
(e.g., Goldman Sachs)
the remainder of the industry and includes five subclasses specialized investment bank subsidiaries of commercial banks
specialized discount brokers
regional securities firms
specialized electronic trading securities firms
venture capital firms
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Securities Firm and Investment Bank
Activity Areas
Securities firms and investment banks engage in as
many as seven key activity areas
Investing
Investment Banking Market Making
Trading
Cash Management
Mergers and Acquisitions
Other Service Functions
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Investing
Involves managing pools of assets such as
mutual funds
Compete with commercial banks, life insurancecompanies, and pension funds
Manage funds either as agents for other investors
or as principals
Objective is to select asset portfolios to beat
some return-risk performance benchmark such
as the S&P 500
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Investment Banking
Refers to activities related to underwriting and
distributing new issues of debt and equity securities
Industry is dominated by a small number of
underwriting firms Securities underwriting can be undertaken through
either public or private offerings
Private placement - securities issue placed with one of a few
large institutional investors
Public placement - may be underwritten on a best efforts or
firm commitment basis and offered to the public
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Market Making
Involves the creation of a secondary market in an
asset by a securities firm or investment bank
Either agency or principal transactionsAgency transactions - two-way transactions on behalf of
customers
Principal transactions - the market maker seeks to profit on
the price movements of securities and takes long or short
inventory positions for its own account
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Trading
Closely related to market-making activities Six types of trading
Position trading- purchases of large blocks on expectation offavorable price move
Pure Arbitrage - buying an asset in one market and selling itimmediately in another market at a higher price
RiskArbitrage - buying securities in anticipation of someinformation release
Program Trading- simultaneous buying and selling using a
computer program to initiate such trades Stock Brokerage - trading securities on behalf of individuals
Electronic Brokerage - offered by major brokers, directaccess via internet to trading floor
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Cash Management
Securities firms and investment banks offer
bank deposit-like cash management accounts(CMAs) to individual investors
money market mutual fund sold by investment
banks that offer check-writing privileges
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Mergers and Acquisitions
Frequently provide advice on, and assistance
in, mergers and acquisitions
assist in finding merger partners
underwrite any new securities
asses the value of target firms
recommend terms of the merger agreement
assist target firms in preventing a merger
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Other Service Functions
Custody and escrow services
Clearance and settlement services Research and advisory services
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Balance Sheet Assets
Assets
Cash $ 50,982.3 1.51%
Receivable from other broker-dealers 1,204,448.8 35.72Receivable from customers 177,945.9 5.28
Receivables from noncustomers 15,757.7 0.47
Long positions in securities/commodities 838,254.9 24.86
Securities and investments not marketed 10,550.0 0.31
Securities purchased w/resell agreement 856,043.4 25.39
Exchange membership 1,034.2 0.03
Other assets 216,,624.5 6.43
Total assets $3,371,641.7 100.00
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Balance Sheet Liabilities
LiabilitiesBank loans payable $ 76,191.9 2.26%
Payables to other broker-dealers 629,858.6 18.68
Payables to noncustomers 59,910.5 1.78
Payables to customers 391,543.1 11.61
Short positions in securities/commodities 409,342.3 12.14Securities sold w/repurchase agreements 1,282,870.8 38.05
Other nonsubordinated liabilities 302,757.3 9.16
Subordinated liabilities 68,710.4 2.04
Total liabilities $3,227,184.9 95.72
CapitalEquity capital 144,456.7 4.28
Number of firms 7,029
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Regulation
The primary regulator of the securities industry is theSecurities and Exchange Commission (SEC) establishedin 1934
SEC sets rules governing securities firms underwriting
and trading activities Shelf registration allows qualifying firms that plan to
offer multiple issues of stock over two years to submitone registration statement summarizing the firms
financing plans for the period The Securities Investor Protection Corporation (SIPC)
protects investors against losses of up to $500,000 onsecurities firm failures