A Financial Market Infrastructure - Case Study Example

International Financial Markets and Multinational Disclosure Introduction International financial market is a universal place where financial products or wealth are traded between countries and individuals. Investors can get a wide place for trading assets and earning profit. There are huge numbers of financial institutions which are involved in this market and operating their business in different financial activities. The different parts of international financial market are bond market, currency market, stock market, commodity market, derivative market and money market. Various institutions such as Central Bank, Borsa Italiana, Ministry of Economy and Finance, CONSOB, Monte Titoli etc are working in this market with different objectives and aim. Wide range of instructions and rules are maintained here and the rules of macroeconomic governance are followed by the each related parties and institutions. This market also engaged to examine the balance of payment system, foreign direct investment, international monetary system, exchange rate etc and obviously the international trade which is related to the above mentioned topic. International risk such as foreign exchange risk, political risk etc are involved in this market and the participants have to face those risks. International finance is maintained after considering some key concepts and those are purchasing power parity, optimum currency area theory, interest rate parity, Mundell–Fleming model, international Fisher effect etc. Again multinational disclosure is provision of information which shows the strategic information such as geographic region of a particular company, company size, related industry, corporate governance structure of that company, trend analysis, relevant business data, information about share holders and management, information about intangible assets, company background, information regarding stock prices etc. Summary of Articles Slow decline of capital inflows in the emerging market and the associate risk factors of in the expansion of Central Bank’s balance sheet In the quarterly review of Bank for International Settlements this can be observed that this bank has focused on the international banking and financial development in the quarterly review article. According to them the growth of financial market is gradually decreasing in many countries in the recent years. For example it can be said that all the economic indicators show that in China growth of financial market has decreased than the prior year and it happened because of the tightening financial policies in the previous year. As a result external demand of the financial products is also decreasing. These slower growths, continuous decline of house prices, lower inflation also help to decrease the amount of reserve or provision in Chinese Central Bank (Avgouleas, 2012). Through easy monetary policy the country can achieve a stable economic growth in future. Economic indicators also indicate the same situation in Latin America and Eastern Europe. Central bank of Brazil cut its policy rate to 9 % due to pressure of slower growth and inflation. Policy rate of this bank reached at the highest level in the year 2011 and now it is 300 basis points lower than that highest level. For this reason currency of Brazil is under the pressure downward movement against the US dollar and the difference between them is significant. Weak capital inflow in the economies of emerging markets is the major reason behind all the above mentioned circumstances. As the capital inflow is decreasing, the amount of returns on market bonds is also sharply decreased. From the 1st graph this can be observed that in the year 2012 capital inflows declined in a significant way. Along with that equity, bond and their moving average also decreased than the previous years. As capital inflow decreased, returns on bond also decreased which can be observed in the 2nd graph. Asia, Latin America and Europe were affected from this cause. As a result, exchange rates of the major big countries in the world increased. These countries are Brazil, India, Russia, Mexico etc. Bank for International Settlements also focused on the risk factors which are associated with the expansion of central bank balance sheet in the emerging financial market in Asia. The size and growth of this mentioned balance sheet is always moving upward since 2001. Now the risks of financial stability, inflation, financial market distortion, exit strategies, the finance, credibility and independence of central bank etc are associated with the expansion activities. The rate of increase in the size of balance sheet affects the monetary liability and as a result the amount of liabilities will get increased. At that point of time to control the increased amount of monetary liability, a pressure will be generated on rate of inflation. Expansion of central bank balance sheet will lead the private sector banks for expanding their amount of credit and this will bring an unstable situation in the economy. Again more than 50 banks in the different countries [Korea, Malaysia, Indonesia, Thailand etc] purchased more sterilization bills of central bank and increased the percentage of hold reserve at the central bank. This activity helped those banks to decline the growth rate of total loan amount which was harmful for their business activities (Bank for International Settlements, 2012). Principles of Financial Market Infrastructure A financial market infrastructure is an important part in the international financial market. It provides facilities of settlement, clearing procedure and recording of other financial transactions and monetary transactions. These recordings will provide a stable place in the market where they are serving their financial services. It also plays a crucial role in case of forecasting the financial market and the stability in future. It highlighted the brisk management procedures and handles the financial crisis situation in an efficient way. According to Bank for International Settlements this can be analyzed that financial market infrastructure (FMI) should have transparent, clear, enforceable and well – founded legal basis for all of its activities and from each material aspects so that relevant jurisdiction can be done in proper way. Financial market infrastructure should have transparent and clear governance arrangement which will promote the efficiency and safety activities of FMI. This will also support to build the stability of the financial system, objectives of stake holders and other relevant interest consideration of public. Financial market infrastructure should effectively manage, monitor and measure all the credit exposures which are arising from the different activities like clearing, settlement and payment procedure. For this reason FMI requires collateral securities to manage all the credit risk exposures. Again it should maintain sufficient financial resources to manage the relevant credit risk factors (Prodhan, 2013). Financial market infrastructure should accept the collateral securities on the basis of credit amount, market rate and liquidity. It also should set the concentration limits and conservative haircuts in this case. Effective margin system should be implemented by FMI which can control the risk based factors and review the chances of risks on regular basis. Financial market infrastructure should manage, monitor and measure the liquidity risks which are associated in the business activities. It should maintain sufficient liquid resources and these liquid resources should be in different currencies. Final settlement should be provided by it in clear and certain format and final settlement should be provided in real time or intraday (Choi, 2007). FMI also should identify the possible internal and external operational risk factors and reduce the effectiveness of the impact of those risk factors by implementing proper procedure, policy, system and control. Operational risks, custody and investment risks, general business risks, credit risk, liquidity risk, legal risk, systematic risk etc are involved in the operation and activities of financial market infrastructures. Central bank, other market regulators and relevant authorities will be responsible for the proper disclosure policies of FMI, proper application of the stated principles on their activities, cooperation with other authorities in international and domestic field. They are working as supervisory and regulatory authority of financial market infrastructures. They have power to obtain and access all the financial information. They are also taking corrective actions as and when necessary for the benefit of international financial market. The authorities control the sufficient resources like monetary fund, experienced personnel. They can conduct ongoing training for better performance in the financial market (Bank for International Settlements, 2012). Financial Disclosure Multinational companies are providing their financial accounting information to the foreign stake holders in a different way. They generally prepare supplementary financial statements by using different accounting principles like International accounting standard, U. S. GAAP etc. Inactive financial market disclosure requirements are very common among different countries. All the financial statements and financial accounts should be translated in a convenient way so that those statements will be understandable to all the foreign investors. The differences which will arise in the international market and relevant corporate control will be disclosed in those disclosures. Disclosure requirements are common in United Kingdom and United States. In the maximum developing countries, majority of funds are raised through banks, government and wealthy investors. For this reason public disclosures of financial statements are required in those countries (Butler, 2012). Accounting standards are playing an important role for preparing the financial disclosure in the different countries. For example Japanese multi - national companies are preparing secondary financial statement according to US GAAP principles and this will impact on their disclosures in the international market. Again Chinese multi – national companies seek capital from the international market by promoting the IAS standard and this guideline is provided by the government of China. In United States, MNCs follow either US standard or IAS standard. If any firm in US follows the IAS standard then it has to provide a reconcile statement where all the IAS accounts will be disclosed with the US standard. Again European Union accepts combination of local standard, IAS and US standard. Now the objective of FMI’s disclosure framework is to improve the governance and overall transparency of financial market instruments. This will highlight the risk management procedure and operational activities of financial market instruments. All the relevant information like prospective and current participants in financial market instruments can be obtained from these disclosures. These will enhance the efficiency and safety in case of payment, settlement, clearing and recording arrangements and hence increase the financial stability in the market. For preparing the template of disclosure FMI should maintain certain format. This format includes an executive summary with all the key points of disclosure, the summary of major changes since the last updated financial disclosure, a description about the functions of FMI. This description includes performance statistics and major data which are related to the operations and services of FMI. This description also includes the system design, regulatory and legal framework, operational strategies etc. Apart from this description another comprehensive disclosure is required which will be narrative in nature. This particular section will provide the sufficient details about the principles and approaches of FMI. Last but not the least a list should be prepared where publicly available resources will be included. The reader will understand the principles of FMI in a better way after observing those references. The authorities should follow a six step procedure for doing the responsibilities of assessment. These are a)determine the appropriate and necessary steps for assessment, b)collection of facts on each and every key considerations, c)develop a brief conclusion, d)proper rating should be assigned on major responsibilities, e)appropriate time frame should be indicated and f)assessment report should be prepared (Bank for International Settlements, 2012). International banking and financial market developments This is observed that small and insignificant differences in rules, regulation and legislation among different banks can change the activities and behavior of banks and its balance sheets in a significant way. Huge and rapid adjustments have to be done for this changing behavior of banks. Emerging market economies is one of the factors for this huge change. When economic and monetary policies of US reduced the flow of money in the economy then it will create a market pressure. Investors will face the unstable situation for further investment in banks or other financial institutions due to the economic weakening condition. This situation was observed in China due to the increasing financial risks. The non banking sectors of this country provided a huge amount of credit facilities to the business entities. The volume of credit was 25 % of the total amount of credit in the country and faced a challenging situation for the worse condition of the emerging market situation. At the end of 2013 average ratio of equity fell in all the major countries and regions. The percentage of capitalization in Asia, Latin America and Europe was reduced drastically. Financial portfolios which include bonds and equity were also decreased. There is a very deep relationship among bank, economic growth and market. Bank and financial market of a country can develop and improve the economic growth and as a result growth of the global economy will be increased. Bank and financial market both are supplying sufficient capital which is required for running the business operations in a country or in the international market. Banks are providing loans whereas financial market is providing capital from the investors. So operation and activities of both the parties are important for a well stabled economy. Central bank also performs an important task in this issue by providing right guidelines. For example Bank of Japan has implemented threshold-based guidelines which are also forward in nature and through these implemented guidelines it can control the rate of inflation within the country (Bank for International Settlements, 2014). Conclusion International financial markets attract investors because it provides favorable economic advantages which the investors can get and benefit for their investment in different foreign markets. Investors expect that foreign currency will be appreciated than their own domestic currencies and they also will get benefits of international diversification. Capital inflows are required in sufficient quantity especially in the emerging markets. Associate risk factors are also a matter of consideration at the time of expansion of central bank’s balance sheet. The investors can get more than one advantages when they will invest in the international financial market. One of those is diversified mutual fund facility which can reduce the possible risk factors. They also can purchase foreign securities directly through the international financial market. For protecting the interest of investors and stake holders multi – national companies should prepare the disclosure of the financial statements in an effective and detailed way so that stake holders can understand the financial situation of the company. Different countries are maintaining this disclosure by using different financial accounting standards like UK GAAP, International accounting standard etc and some countries are maintaining disclosures by using combination of accounting standards [UK GAAP, International accounting standard and local accounting standard of that country]. The functions of international banks are also very important in this case and they will help to improve the international financial market. But activities of these banks are also affected by the reduced rate of growth of the emerging market economies. References Avgouleas, E. (2012). Governance of Global Financial Markets: The Law, the Economics, the Politics. Cambridge: Cambridge University Press. Bank for International Settlements. (2012). International banking and financial market developments. BIS Quarterly Review. Print. Bank for International Settlements. (2012). Principles for financial market infrastructures. Technical Committee of the International Organization of Securities Commissions. Print. Bank for International Settlements. (2012). Principles for financial market infrastructures: Disclosure framework and Assessment methodology. Board of the International Organization of Securities Commissions. Print. Bank for International Settlements. (2014). International banking and financial market developments. BIS Quarterly Review. Print. Butler, K. (2012). Multinational Finance: Evaluating Opportunities, Costs, and Risks of Operations. Beijing: John Wiley & Sons. Choi, F. (2007). International Accounting, 5/E. New Delhi: Pearson Education India. Prodhan, B. (2013). Multinational accounting: segment disclosure and risk: Segment Disclosure and Risk. London: Routledge. Read More