Brief about financial system of the USA

1. By – Pawan Kumar Kushwaha-6520 Ritik Bhedwal- 6511 Virender

2. FINANCIAL SYSTEM
 A financial system is a set of institutions, such as banks, insurance companies,
and stock exchanges, that permit the exchange of funds. Financial systems
exist on firm, regional, and global levels. Borrowers, lenders, and investors
exchange current funds to finance projects, either for consumption or
productive investments, and to pursue a return on their financial assets. The
financial system also includes sets of rules and practices that borrowers and
lenders use to decide which projects get financed, who finances projects, and
terms of financial deals.

3.  Demand for capital
 Surplus capital
 Bridging the gap between demand and supply
 Financial planning and policy making
 Safety and security

4. Savers (Surplus)
1. House Holds
(More)
2. Business organization
(Less)
3. Governments
(Less)
4. Financial Organization
(More)

5.  Borrowers (Deficit)
 House Holds
(Less)
 Business organization
(More)
 Governments
(More)
 Financial Organization
(More)

6. PARTICIPANTS IN A
FINANCIAL SYSTEM
The net providers (savers) & users (borrowers) of capital
Households: Net savers.
Non-Financial Corporations: Net users (borrowers)
Governments: Net borrowers.
Financial corporations: Slightly net borrowers, but almost
breakeven.

7. Bridge the gap between demand and supply
 Facilitates Savings, Investments and
Borrowings
 Transfer of capital from savers to borrower
 Provide payment and settlement system
Safety and Security
 Regulate market participants.
 Protect the interest of investors and borrowers
 Monitor Corporate performance

8. Provide Transparency
 Disseminate price related information
 Easy access at free of cost
Make financial instruments traded
 Enhance marketability
 Provide liquidity

9. FUNCTIONS
OF FINANCIAL
SYSTEMCapital Transfer in a financial system (from savers to
borrowers)
Direct Transfer
 Example: Corporation issues commercial paper to
insurance company.
Indirect Transfer
 Through an merchant bank/investment banking
house:
Example: IPO, seasoned equity offering, or debt
placement.
 Through a financial intermediary:
Example: Individual deposits money in bank, bank
makes commercial loan to a company.

10. FEATURES OF
A GOOD
FINANCIAL
SYSTEM Strong legal and regulatory
 Active role of central bank
 Effective and productive Public
finances/public debt management
 Stable internal and external value of money
 Information system and transparency
 Efficient markets
 Technology driven

11.  Financial Institutions
 Financial Services
 Financial Instruments
 Financial Intermediaries
 Financial Markets
 Financial Regulators

12. A. Regulator
B. Banks
 Commercial Banks
 Investment Banks
C. Credit Unions
D. Institutional Investors
 Pension funds, endowment funds, insurance companies, commercial banks,
mutual funds and hedge funds
E. Exchanges
 Equity Exchanges
 Debt security exchanges
 Derivatives Exchanges
 Commodity Exchanges
F. Credit rating agencies

13.  The Federal Reserve, commonly referred to as
the Fed, is the central bank of the United
States. The Fed is responsible for regulating
the U.S. monetary system (i.e. how much
money is printed, and how it is distributed),
as well as monitoring the operations of
holding companies, including traditional
banks and banking groups. Broadly speaking,
its mandate is to promote stable prices and
economic growth.

14. The U.S. Department of the Treasury, originally
created specifically to manage government revenues
(whereas the Federal Reserve manages payments), has
evolved to encompass several different duties. It
recommends and influences fiscal policy; regulates U.S.
imports and exports; collects all U.S. revenues,
including taxes; and designs and mints all U.S.
currency.
In terms of financial regulation, the Treasury
Department functions primarily through the operations
of two agencies it oversees, the Office of the
Comptroller of the Currency and the Office of Thrift
Supervision, which regulate banks and savings and
loans:

15.  Office of the Comptroller of the Currency: The Office of the
Comptroller of the Currency, or OCC, is the primary means
through which the Treasury regulates U.S. banks. It is headed by
the comptroller of the currency (currently John Dugan). The OCC
is responsible for chartering all U.S. banks and, more broadly, for
ensuring the stability of the banking system. According to the
OCC’s website, it attempts the latter task by monitoring: "a bank’s
loan and investment portfolios, funds management, capital,
earnings, liquidity, sensitivity to market risk, and compliance with
consumer banking laws." Its responsibilities thus overlap, to a
degree, with those of the Federal Deposit Insurance Corporation
(FDIC), which must also monitor banks’ capital reserves and
sensitivity to risk. If a bank doesn’t comply with OCC standards,
the agency holds the authority to take a variety of actions. It can
force the ouster of senior bank personnel, force the bank to change
certain practices, issue fines or penalties, and ultimately issue
orders for the bank to close its operations.

16.  Office of Thrift Supervision: The Office of Thrift
Supervision (OTS) is tasked with supervising
federally-chartered savings and loan associations,
also known as "thrifts." (Thrifts generally specialize
in managing large savings deposits and issuing
mortgages, and are often mutually held, meaning that
involved borrowers and lenders have the ability to
guide the association’s management and financial
practices.) The OTS regulates the formation and
management of thrifts. It is also responsible for
regulating savings and loan holding companies-firms
that buy up rights to all the loans held by various
thrifts-which gives it purview over several major U.S.
banks and financial firms.

17.  The Securities and Exchange Commission (SEC) is an independent
government agency tasked with overseeing U.S. securities markets,
enforcing securities law, and monitoring exchanges for stocks, options, and
other securities. The commission was created by Congress in 1934 and is also
responsible for overseeing corporate takeovers. One of the primary tasks
assigned to the commission is the promotion of transparency in securities
markets and thus the protection of investors from fraud or corporate
malfeasance, in part through requiring that firms file quarterly and annual
financial reports. The SEC is tasked with providing guidance to corporations
regarding U.S. accounting rules, and Congress authorizes the commission to
bring civil charges against firms thought to have committed fraud or other
accounting wrongdoings.
 The SEC administers the body of financial law established through seven
major acts governing the financial industry, including most recently
the Sarbanes-Oxley Act of 2002 and the Credit Rating Agency Reform Act of
2006 (PDF). As a means of regulating market behavior, the SEC polices and
licenses stock exchanges, and is responsible for regulating credit raatings
agencies, which also have taken criticism during the current crisis. The SEC
has enforcement authority in that it can bring civil charges against
individuals or companies thought to have violated securities law (violations
include trading on insider information, committing accounting fraud,
providing false information to the SEC, etc.).

18.  Created in 1933 following a wave of bank closures, the Federal
Deposit Insurance Corporation, or FDIC, was intended as a
financial backstop to provide the broader U.S. population a
guarantee that individual savings wouldn’t evaporate when a bank
did. The agency insures holdings in checking and savings accounts
at member banks, currently guaranteeing up to $100,000 per
person per bank, and up to $250,000 in retirement accounts.
The FDIC exerts regulatory authority in that, to qualify for FDIC
insurance, member banks must meet certain requirements. Banks
are categorized based on the extent of their reserves and liquidity.
Typically, a U.S. bank holding less than 8 percent of the assets it is
managing in reserves is considered "undercapitalized." A bank
holding less than 6 percent becomes subject to FDIC regulation-the
agency can oust the bank’s management or call for other corrective
measures.

19.  The Commodities Futures Trading Commission, or CFTC, was
founded as an independent agency in 1974 to provide a regulatory
framework for the increasingly complex market in futures
contracts (through which traders agree to buy or sell a good at a
specific time in the future for a specific price). At the time of the
commission’s founding, the vast majority of futures trading
involved commodities in the agricultural sector. Traders now
speculate on the future prices of any number of financial entities-
from currencies, to government securities like Treasury bonds, to
the valuation of different stock indices-and the CFTC has come to
regulate all futures contracts, not just those involving commodities.
Among other oversight roles, the CFTC regulates the derivatives
clearinghouses that bring together buyers and sellers of futures
contracts; approves and regulates the organizations responsible for
actually executing futures trades; and monitors buyers and sellers
in an attempt to ensure against fraud and other violations.

20.  The National Credit Union Administration, or NCUA,
in some ways functions both like the FDIC and the
OCC, though it regulates credit unions rather than
banks (credit unions are nonprofit savings and loan
institutions that pool the money of members in order
to provide credit and banking services to one another,
theoretically at lower rates than for-profit banks). The
NCUA is responsible for chartering and supervising
U.S. credit unions. It also insures savings in all
federal- and most state-chartered unions through a
fund called the National Credit Union Share
Insurance Fund.

21.  Credit unions in the United States serve 100 million members, comprising
43.7% of the economically active population. U.S. credit unions are not-for-
profit, cooperative, tax-exempt organizations. The clients of the credit unions
became partner of the financial institution and their presence focuses in
certain neighborhoods because they center their services in one specific
community. As of March 2016, the largest American credit union was Navy
Federal Credit Union, serving U.S. Department of Defense employees,
contractors, and families of servicepeople, with over $75 billion in assets and
over 6.1 million members. Total credit union assets in the U.S. reached $1
trillion as of March 2012. Approximately 236,000 people were directly
employed by credit unions per data derived from the 2012 NCUA Credit
Union Directory.
 Due to their small size and limited exposure to mortgage securitizations,
credit unions have weathered the financial meltdown of 2008 reasonably
well. However, two of the biggest corporate credit unions in the United States
(U.S. Central Credit Union and WesCorp) with combined assets of more than
$57 billion were taken over by the federal National Credit Union
Administration on March 20, 2009.

22. BANKS
 Savings banks are for-profit businesses. They take deposits of money, which they then
invest. Bank account holders are paid interest out of the profits generated from these
investments.
 Credit unions are non-profit cooperative financial institutions. They are owned and
controlled by their members. All members have something in common, such as living,
working, or worshipping in the same place. Their mission is to be community-oriented and
serve people, not profit. Credit unions offer many of the same financial services a bank
would, although often under different names. The US has 92 million credit union members,
the highest number worldwide.
 Commercial banks A commercial bank is a profit-oriented financial institution that accepts
deposits, makes business and consumer loans, invests in government and corporate
securities, and provides other financial services. Commercial banks vary greatly in size,
from the “money center” banks located in the nation’s financial centers to smaller regional
and local community banks. As a result of consolidations, small banks are decreasing in
number. A large share of the nation’s banking business is now held by a relatively small
number of big banks.
 Investment banks are companies that give investment advice. They buy and sell stocks and
bonds. Depending on the bank, they may not accept deposits or make loans, and not all are
FDIC insured.

23. The three major U.S. financial securities markets/exchanges are:
 New York Stock Exchange (NYSE): The NYSE is a stock
exchange based in New York. In April 2007, the New York
Stock Exchange merged with a European stock exchange
known as Euronext to form what is currently NYSE Euronext.
NYSE Euronext also owns NYSE Arca (formerly the Pacific
Exchange).
 National Association of Securities Dealers Automated
Quotation System (Nasdaq): The Nasdaq is the largest
electronic screen-based market. It currently offers lower listing
fees than NYSE.
 American Stock Exchange (AMEX): Unlike the Nasdaq and
NYSE, AMEX focuses on exchange-traded funds (ETFs).

24. Additional Exchanges in the United States
 Boston Stock Exchange (BSE) - made up of the Boston
Equities Exchange (BEX)and the Boston Options Exchange
(BOX) and was acquired by Nasdaq in 2007
 Chicago Board Options Exchange (CBOE)
 Chicago Board of Trade (CBOT) - owned run by CME Group
Inc.
 Chicago Mercantile Exchange (CME) - owned and
controlled by CME Group Inc.
 Chicago Stock Exchange (CHX)
 International Securities Exchange (ISE) - includes ISE
Options Exchange and the ISE Stock Exchange
 Miami Stock Exchange (MS4X)
 National Stock Exchange (NSX)
 Philadelphia Stock Exchange (PHLX)

25. 1. GOLD: It is better to hold synthetic gold instead of physical gold to
avoid foregoing the lease rate.
2. ELECTRICITY: Company usually sales large number of
electricity unit to finance themselves. It does not involve any
storage cost. Price of electricity is depended on demand and supply
in US. And no arbitrage is possible in electricity.
3. CORN: As corn is demandable in US it has steady demand
throughout the year but it has one time harvest which involves
very high storage cost.
4. OIL
5. OTHERS…..

26.  A rating agency is a company that assesses the financial strength
of companies and government entities, especially their ability to
meet principal and interest payments on their debts. The rating
assigned to a given debt shows an agency’s level of confidence that
the borrower will honor its debt obligations as agreed. Each agency
uses unique letter-based scores to indicate if a debt has a low or
high default risk and the financial stability of its issuer. The debt
issuers may be sovereign nations, local and state governments,
special purpose institutions, companies, or non-profit
organizations.
 The credit rating industry is dominated by three big agencies,
which control 95% of the rating business. The top firms include
Moody’s Investor Services, Standard and Poor’s (S&P), and Fitch
Group. Moody’s and S& P are located in the United States, and
they dominate 80% of the international market. Fitch is located in
the United States and London and controls approximately 15% of
the global market.

27.  FICO SCORE
 NextGen Risk Score
 FICO SBSS
 VantageScore
 CE Score
 Educational credit scores
 Other credit scores

28. FICO score
The FICO score was first introduced in 1989 by FICO, then
called Fair, Isaac, and Company. The FICO model is used by the
vast majority of banks and credit grantors and is based on
consumer credit files of the three national credit
bureaus: Experian, Equifax, and TransUnion. Because a
consumer's credit file may contain different information at each
of the bureaus, FICO scores can vary depending on which bureau
provides the information to FICO to generate the score.
 FICO has disclosed the following components:
35%: payment history
30%: debt burden
15%: length of credit history
10%: types of credit used
10%: recent searches for credit

29. Organized Market and Unorganized market
 Organized Market
Organized market is that part of the financial
markets, which operates under a defined set of rules,
regulations and legal provisions and the statutory
authorities such as the Central Government, the
Central Bank the Exchange Commission (such as
SEBI in India), etc. The organized market may also
be called the official or formal market.
 Unorganized market
Unorganized is that part of the financial markets,
which is not standardized and is outside the preview
of government control. In India, the rural money
lenders and traders form the unorganized market.
The basic feature of unorganized market are high
interest rates, fluctuating and varying interest rates,
absence of precise rules, upfront payment of interest,
unsystematic arrangements etc.

30. Money Market and Capital Market
 Money Market
The Money market refers to the market where borrowers and lenders
exchange short-term funds to solve their liquidity needs. Money market
instruments are generally financial claims that have low default risk,
maturities under one year and high marketability
 Capital Market
The Capital market is a market for financial investments that are direct or
indirect claims to capital. It is wider than the Securities Market and
embraces all forms of lending and borrowing, whether or not evidenced by the
creation of a negotiable financial instrument. The Capital Market comprises
the complex of institutions and mechanisms through which intermediate
term funds and long-term funds are pooled and made available to business,
government and individuals. The Capital Market also encompasses the
process by which securities already outstanding are transferred.

31. Financial Services Fee Based / Advisory Services
 1. Stock broking
 2. Credit rating
 3. Corporate services
 4. Capital Market Services
 5. Portfolio Management Services
 6. Underwriting
 7. Custodial services
 8. Investment Advisory

32. Asset / Fund based Services
 1. Bills Discounting
 2. Consultants
 3. Factoring
 4. Forfeiting
 5. Housing finance
 6. Hire Purchase
 7. Venture capital funding
 8. Insurance
 9. Leasing
 10. Consumer Credit

34. TERM/MARKET DEBT EQUITY DERIVATIVES
SHORT TERM
(MONEY MARKET)
• Treasury Bills
• Certificate of Deposits
• Commercial Papers
• Options
• Futures
• Forward
LONG TERM
(CAPITAL MARKET)
• Government Bonds
• Corporate Bonds
• Debentures
• Convertible Bonds
• Common Stock
• Preferred Stock
• Hybrid
Instruments
• SWAPS

35. SHORT TERM -DEBT
• Treasury Bills: A Treasury Bill (T-Bill) is a short-term debt obligation backed by
the U.S. Treasury Department with a maturity of one year or less. Treasury bills
are usually sold in denominations of $1,000. However, some can reach a
maximum denomination of $5 million on noncompetitive bids.
• Certificate of Deposits: A certificate of deposit is a product offered by banks and
credit unions that offers an interest rate premium in exchange for the customer
agreeing to leave a lump-sum deposit untouched for a predetermined period of
time. Almost all consumer financial institutions offer them, although it’s up to
each bank which CD terms it wants to offer, how much higher the rate will be vs.
the bank’s savings and money market products, and what penalties it applies for
early withdrawal.
• Commercial Papers: Commercial paper is an unsecured, short-term debt
instrument issued by a corporation, typically for the financing of accounts
payable and inventories and meeting short-term liabilities. Maturities on
commercial paper rarely range longer than 270 days. Commercial paper is
usually issued at a discount from face value and reflects prevailing market
interest rates.

36.  Government Securities
 Corporate Securities
 Foreign Bonds : Issued by foreign Govt / High rated
companies
 Yankee Bonds :In US by Non US Entities

37.  Government Bond: A government bond is a debt security issued by
a government to support government spending. Government bonds
can pay periodic interest payments called coupon payments.
Government bonds are considered low-risk investments since the
issuing government backs them.
 Government bonds are issued by governments to raise money to
finance projects or day-to-day operations. The U.S. Treasury
Department sells the issued bonds during auctions throughout the
year. Some Treasury bonds trade in the secondary market.
Individual investors, working with a financial institution or broker,
can buy and sell previously issued bonds through this marketplace.
Treasuries are widely available for purchase through the U.S.
Treasury, brokers as well as exchange-traded funds, which contain
a basket of securities.
 Fixed-rate government bonds can have interest rate risk, which
occurs when interest rates are rising, and investors are holding
lower paying fixed-rate bonds as compared to the market. Also,
only select bonds keep up with inflation, which is a measure of
price increases throughout the economy. If a fixed-rate government
bond pays 2% per year, for example, and prices in the economy rise
by 1.5%, the investor is only earning .5% in real terms.

38. Corporate Bonds: The world is running out of safe, reliable
sources of steady income. One of the best remaining
sources: U.S. corporate bonds.
U.S. corporate bonds represent about 12% of
outstanding investment-grade debt worldwide and account
for nearly 33% of yield income, according to Bank of
America Merrill Lynch, as reported by The Wall Street
Journal.
Corporate bonds are issued by companies, which have great
flexibility in how much debt they can issue. Terms for
corporate bonds can be anywhere from less than 5 years to
more than 12 years. Corporate bonds pay the highest yields
because they offer the most risk.

39. DEBENTURES
A debenture is a type of debt instrument unsecured
by collateral. Since debentures have no collateral backing,
debentures must rely on the creditworthiness and
reputation of the issuer for support. Both corporations and
governments frequently issue debentures to raise capital
or funds

40.  Convertible Bonds
 Convertible Preferential Shares
 Warrants

41. CONVERTIBLE
BONDS
 In finance, a convertible
bond or convertible note or convertible
debt (or a convertible debenture if it has a
maturity of greater than 10 years) is a
type of bondthat the holder can convert
into a specified number of shares
of common stock in the
issuing company or cash of equal value. It
is a hybrid security with debt- and equity-
like features.

42.  Equity
 Common Shares
 Preferential Shares
 Foreign Equity: ADRs
 Euro Equity: GDRs

43. Options: Options are a type of derivative security.
An options is a derivative because its price is intrinsically
linked to the price of something else. If you buy an options
contract, it grants you the right, but not the obligation to
buy or sell an underlying asset at a set price on or before a
certain date.
All optionable stocks and exchange-traded funds (ETFs)
have American-style options while only a few broad-based
indices have American-style options. American index
options cease trading at the close of business on the third
Friday of the expiration month, with a few exceptions. For
example, some options are quarterlies, which trade until
the last trading day of the calendar quarter,
while weeklies cease trading on Wednesday or Friday of
the specified week.

44. Bermuda Options:
Early exercise is
restricted to certain
date. (In starting only)
Lockout Options: Early
exercise is restricted for
only certain part of life.
Forward Start Options:
An options which
becomes active after
some time in future.
Cliquet Options: Series
of options becoming
active one after another
as a package in
sequence.
Compound Options: An
option written on
another option as
underline.
Binary Options: Only 2
outcomes are possible
which are predefined.
Look Back Options:
Payoff basis maximum
and minimum value of
underlying during
option life.
Shout Options: Holder
can shout and block the
payoff during option
life.
Asian options: Payoff
basis average price of
underline during option
tenure.
Rainbow Options:
Option with 2 or more
asset as underline.
Chooser Options:
Holder can choose to
make it call or put
option after a certain
date.
Barrier Options: Payoff
basis underline
reaching a point.
A) Knock-In: Get active
after reaching
predefined point.
B) Knock-Out: Get
inactive after reaching
predefined point.

45. DERIVATIVES- SHORT
TERM
 FUTURES: Futures are derivative financial contracts that obligate
the parties to transact an asset at a predetermined future date and
price. Here, the buyer must purchase or the seller must sell the
underlying asset at the set price, regardless of the current market
price at the expiration date.
 Underlying assets include physical commodities or other financial
instruments. Futures contracts detail the quantity of the underlying
asset and are standardized to facilitate trading on a futures
exchange. Futures can be used for hedging or trade speculation.

46.  Pros
1. Investors can use futures contracts to speculate on the direction
in the price of an underlying asset
2. Companies can hedge the price of their raw materials or
products they sell to protect from adverse price movements
3. Futures contracts may only require a deposit of a fraction of the
contract amount with a broker
 Cons
1. Investors have a risk that they can lose more than the initial
margin amount since futures use leverage
2. Investing in a futures contract might cause a company that
hedged to miss out on favorable price movements
3. Margin can be a double-edged sword meaning gains are
amplified but so too are losses
FUTURE
S

47.  A forward contract is a customized
contract between two parties to buy
or sell an asset at a specified price
on a future date. A forward contract
can be used for hedging or
speculation, although its non-
standardized nature makes it
particularly apt for hedging.

48.  A swap is an agreement between two parties to exchange
sequences of cash flows for a set period of time. Usually, at
the time the contract is initiated, at least one of these series
of cash flows is determined by a random or uncertain
variable, such as an interest rate, foreign exchange rate,
equity price or commodity price.
 Unlike most standardized options and futures contracts,
swaps are not exchange-traded instruments. Instead, swaps
are customized contracts that are traded in the over-the-
counter (OTC) market between private parties. Firms and
financial institutions dominate the swaps market, with few
(if any) individuals ever participating. Because swaps occur
on the OTC market, there is always the risk of
a counterparty defaulting on the swap.

50. By Pawan Kushwaha-6520 Ritik Bhedwal-6511 Virender
Kumar-6522