Financial markets in USA - An introduction

1. Seminar presented as part of course work of the
subject Financial Institutions and Services by
Pavan Kumar A Ch 215111012
Pradeep M 215111035
Sathyanarayanan R 215111050
Shaik Mohammad Basheer M 215111080

2.  An
Introduction
 Capital Market
 Debt Market
 Money Market
 Mutual funds Market
 Insurance Market
 Derivatives Market
 Pension funds Market

3. 
Largest and most versatile financial system in the world

Wide range of funding options, sophisticated and
innovative market

Institutions enjoy complete operational freedom in terms
of products and instruments offered and also in terms of
pricing

Some control measures are exercised by Federal and
State authorities for the protection of the depositors and
investors

4. 
Institutions- Network of Commercial banks, domestic and
foreign investment banks, non-bank financial institutions,
insurance companies, pension funds, mutual funds and
savings and loan associations.

Authorities are: Comptroller of currency, the Federal
Reserve Board and the Federal Deposit Insurance
Corporation- regulate the commercial banks in US

Small investors protection- deposit insurance

5. 
The Financial crisis of 2007-08 still has its aftereffects
and the economy is showing signs of recovery

There was a problem of asymmetric information between
investors and borrowers in channeling savings into
investments

Banks raised a large fraction of their funds through
demandable deposits and invest in long term assets

The great reliance on leverage and the proprietary
information that banks possessed on their borrowers
induced them to take excessive risks

The trend has somewhat been reversed and competition
policy has been applied much more effectively in the
financial sector, thanks to some serious rethinking.

6. 
The United States (U.S.) is home to the largest insurance
market in the world.

Over a trillion dollars in premiums written in 2003,
insurance operations from the U.S. generated over 35
percent of the worldwide total

Life: In the US, the tax on interest income on life
insurance policies and annuities is generally deferred.
However, in some cases the benefit derived from tax
deferral may be offset by a low return.

Common forms of investment contract Life Insurance in
the US are whole life, universal life and variable
life policies.

7. 














Allstate
American Family Insurance
American Fidelity Assurance
Amica Mutual Insurance
Aviva
AXA Equitable Life Insurance
Company
Bankers Life and Casualty
Conseco
Farmers Insurance Group
Fidelity
Genworth Financial
ING Group
Jackson National Life
John Hancock Insurance
Lincoln National Corporation















MetLife
Mutual of Omaha
Nationwide Mutual Insurance
Company
Old Mutual
Pacific Life
Protective Life
Prudential Financial
Standard Insurance Company
State Farm Insurance
Thrivent Financial for Lutherans
TIAA-CREF
Transamerica Corporation
UNIFI Companies
United of Omaha
Western & Southern Financial Group

8. 
Health: The United States health care system relies
heavily on private health insurance, which is the primary
source of coverage for most Americans

58% of Americans have private health insurance

There are also public programs such as Medicare and
Medicaid, these contributed 50% of national health
spending during recession

Vehicle Insurance generally in US requires drivers to
carry at least liability insurance coverage to ensure that
their drivers can cover the cost of damage to other
people or property in the event of an accident

9. Health Insurance Players
1.
Roseville Insurance
2.
AARP
3.
Aetna
4.
American Family Insurance
5.
American National Insurance
Company
6.
Amerigroup
7.
Anthem Blue Cross and Blue Shield
8.
Assurant
9.
Blue Cross and Blue Shield
Association
10. Celtic Insurance Company,
subsidiary of Centene Corporation
11. Centene Corporation
12. Cigna
13. Coventry Health Care
14. EmblemHealth
15. Fortis
16. Golden Rule Insurance Company
17. Group Health Cooperative
18. GHI
Health Insurance Players
1. Health Net
2. HealthMarkets
3. Healthplus
4. HealthSpring
5. Highmark
6. Humana
7. Independence Blue Cross
8. Kaiser Permanente
9. LifeWise Health Plan of Oregon
10. Medical Mutual of Ohio
11. Molina Healthcare
12. Premera Blue Cross
13. Principal Financial Group
14. The Regence Group
15. Shelter Insurance
16. Thrivent Financial for Lutherans
17. UnitedHealth Group
18. Unitrin
19. Universal American Corporation
20. WellCare Health Plans
21. WellPoint

10. Medicare








Aetna
American Family
Insurance
Bankers Life and
Casualty
Conseco
Mutual of Omaha
Premera Blue Cross
Thrivent Financial for
Lutherans
Kaiser Permanente
Supplemental







Aflac
Allstate
American Fidelity
Assurance
Colonial Life & Accident
Insurance Company
Conseco
Liberty National Life
Insurance Company
Mutual of Omaha
Supplemental health







mental health insurance
Family Heritage
Aflac
Allstate
MEGA Life and Health
Insurance
State Farm Insurance
AARP
Travel






Allianz, a parent of
Mondial Assistance
Group
Centurion Travel
Assistance
International Medical
Group
Seven Corners
Travel Guard
Usa-Assist Worldwide
Protection

11. 
Home: 83% of homes were covered by owner-occupied
homeowners policies, 13% of home insurance policies
were covered by renter's

2.4% of homes were covered by a dwelling fire policy

For each policy, there are typically 5 classifications of
coverage
• Coverage A – Dwelling,
• Coverage B – Other Structures,
• Coverage C – Personal Property,
• Coverage D – Loss of Use/Additional Living Expenses,
• Additional Coverage and Exclusions

Other insurances like Accident, Casualty, Burial, sickness
and unemployment insurances also prevalent

12. 21st Century Insurance
AccuQuote
Aflac
Alleghany Corporation
Allied Insurance
Allstate
American Automobile Association
American Family Insurance
American Income Life Insurance Company
American International Group (AIG)
American Pet Insurance Company
American National Insurance Company
Americo Financial Life and Annuity Insurance
Company
Ameritas
Amica Mutual Insurance
Aon Corporation
Assurant
Assurity
Auto-Owners Insurance
AXA Equitable Life Insurance Company
Bankers Life and Casualty Company
Berkshire Hathaway
California Casualty
Capital Insurance Group
Cincinnati Insurance Company
CNA Financial
Colonial Life & Accident Insurance Company
Commerce Insurance Group
Conseco
Country Financial
Chartis
Chubb Corp.
Encompass Insurance Company
Erie Insurance Group
Equitable Life & Casualty insurance Company
Esurance
Evergreen USA RRG
Farmers Insurance Group
Federated Mutual Insurance Company
GAINSCO
GEICO
General Re
Genworth Financial
GMAC Insurance
Guardian Life Insurance Company of America
Hanover Insurance
The Hartford
HCC Insurance Holdings
Hereford Insurance Company
Horace Mann Insurance Company
Infinity Property & Casualty Corporation
International Fidelity Insurance Company
Illinois Mutual
Jackson National Life
John Hancock Insurance
Kemper Insurance
K&K Insurance
Knights of Columbus

13. La Playa Insurance
lgap Insurance
Liberty Mutual
Lincoln National Corporation
Markel Corporation
MassMutual Financial Group
Merchants Insurance Group
Mercury Insurance Group
MetLife
Mutual of America
Mutual of Omaha
Nationwide Mutual Insurance Company
New Jersey Manufacturers Insurance
Company
New York Life Insurance Company
Northwestern Mutual
Ohio National
OneBeacon
Oxford Health Plans
Pacific Life
PEMCO
Penn Mutual
Primerica
Principal Financial Group
Progressive
Protective Life
Prudential Financial
The Regence Group
Reliance Insurance Company
Response Insurance
RLI Corp.
Safe Auto Insurance Company
Safeco
Safeway Insurance Group
Sentry Insurance
Selective Insurance
Seven Corners Inc
Shelter Insurance
Southern Aid and Insurance
Company
Standard Insurance Company
State Farm Insurance
Symetra
Tri-State Consumer Insurance
Company
TIAA-CREF
The Travelers Companies
Uniguard - Headquarter in greater
Seattle area
United Auto Insurance Company
Unitrin Direct Auto Insurance
Unum
Vantislife Insurance Company
USAA
Wawanesa Insurance USA (CA and
OR)
West Coast Life
Western Mutual Insurance Group
Western & Southern Financial Group
Westfield Insurance
Western Reserve Life Insurance
Company
White Mountains Insurance Group

14. 




SEC oversees the capital markets in their designated
jurisdictions to ensure that investors are protected
against fraud, among other duties.
Primary Market: investors purchase these securities
directly from issuers such as corporations issuing
shares in an IPO or private placement, or directly from
the federal government in the case of treasuries.
USA: 125 IPO’s in 2011, 154 in 2010 , close to 200
during 2004-2007 and YTD there have been 42 IPOs
priced, a +27.3% change from last year
India: 37 in 2011, 64 in 2010, average 80 in 2004-2007
and 5 in 2012
Primary Markets also consists of Rights Issue and
Preferential Issues

15. 




The U.S. Securities and Exchange Commission (frequently
abbreviated SEC) is a federal agency which holds primary
responsibility for enforcing the federal securities laws and regulating
the securities industry, the nation's stock and options exchanges, and
other electronic securities markets in the United States.
Exchanges such as the New York Stock Exchange, NASDAQ and
the American Stock Exchange provide a centralized, liquid secondary
market for the investors who own stocks that trade on those
exchanges.
Many smaller issues and most debt securities trade in the
decentralized, dealer-based over-the-counter markets.
Many other organisations such as Financial Industry Regulatory
Authority, Securities Investor Protection Corporation, Financial Crimes
Enforcement Network and many other Federal agencies.
The principal trade organization for securities dealers is the Securities
Industry and Financial Markets Association

16. 1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
Arizona Stock Exchange (AZX)
BATS Exchange
Chicago Board Options Exchange (CBOE)
Chicago Board of Trade (CBOT) - Owned and operated by CME Group Inc.
Chicago Mercantile Exchange (CME) - Owned and operated by CME Group Inc.
Chicago Stock Exchange (CHX)
Direct Edge
International Securities Exchange (ISE)
ISE Options Exchange
ISE Stock Exchange
NASDAQ Stock Market, The - Owned and operated by NASDAQ OMX Group, Inc.
(formerly The Nasdaq Stock Market, Inc.)
NASDAQ Market Tiers
NASDAQ Global Select Market
NASDAQ Global Market (formerly NASDAQ National Market)
NASDAQ Capital Market (formerly NASDAQ Small Cap Market)
NASDAQ Subsidiaries
NASDAQ OMX PHLX - Formerly Philadelphia Stock Exchange (PHLX)
NASDAQ OMX BX - Formerly Boston Stock Exchange (BSE)
National Stock Exchange (NSX)
New York Stock Exchange (NYSE) - Owned and operated by NYSE Euronext
NYSE Alternext US - Organized as NYSE Alternext US LLC (formerly American Stock
Exchange (AMEX))
NYSE Arca (formerly Pacific Exchange)

17. 



The New York Stock Exchange, commonly referred to
as NYSE is by far the world's largest stock
exchange by market capitalization of its 2317 listed companies
at US$13.39 trillion as of Dec 2010.Average daily trading value
was approximately US$153 billion in 2008.
The NASDAQ Stock Market (National Association of Securities
Dealers Automated Quotations) is the second-largest stock
exchange by market capitalization in the world with 2,711
listings and total capitalization of over $4.5 trillion
BSE has 5112 listings at US$ 1 trillion, volume US$231 billion
while NSE has 1640 listings at US$ 985 billion, average daily
trading volume US$2 trillion
US Benchmark Indices are Dow Jones Industrial Average
(DOW 30), NASDAQ Composite, the S&P 500 Index, and
the Russell 2000 Index.

18. Volume of Securities Outstanding: U.S. Capital Market
Market Instrument
$ trillion
% of total
1
Corporate Equities
17.2
30.5%
2
Agency Securities
& Mortgages
16.7
29.7%
3
Fund Shares
7.3
12.9%
4
Corporate Bonds
7.2
12.8%
5.7
10.2%
2.0
3.6%
56.3
100.0%
5
6
Treasuries and
Open Market
Municipal
Securities
Total Market
Value of These
Categories

19. Control of Financial Assets: U.S. Capital Market
Player Category
$ trillion
% of total
1
Households
36.7
36.3%
2
Fund Managers
16.1
16.0%
14.8
14.6%
13.1
12.9%
9.2
9.1%
5.5
5.4%
5.3
5.2%
101.1
100.0%
3
4
5
6
7
Bankers and
Brokers
Corporate
Managers
Foreign Investors
Government
Officials
Insurance
Executives
Total Financial
Assets of these
Categories

20. 
Currently Market capitalization to GDP ratio is 98.2 %,
declined from 130% in last decade mid.

India’s ratio is 94% and is increasing according to World
Bank[3]

One-third of the World’s market capitalization is from USA

On an average, 4 corporations of US top World market
capitalization list[1], Currently 6 out of 10 are there (4th quarter)

Highest Market capitalization reached Microsoft Inc. (US):
price $119.94, 5,160,024,593 shares,
market capitalization of $618.9 billion

21. 



US is about 44% of the world market with $31-35 trillion of an
estimated $82.2 trillion and (diff. sources) as of Q2 2011,
$822 billion average daily trading volume in the U.S. bond
market
Indian Debt Market is at $1.3 trillion
Mostly transactions take place between broker-dealers and
large institutions in a decentralized, over-the-counter (OTC)
market. However, a small number of bonds, primarily
corporate, are listed on exchanges.
The Securities Industry and Financial Markets
Association (SIFMA) classifies the broader bond market into
five specific bond markets: Corporate, Government & agency,
Municipal, [Mortgage backed, asset backed, and collateralized
debt obligation] and Funding

22. 

Fluctuating interest rates are part of a country's monetary policy and
bond market volatility is a response to expected monetary policy and
economic changes: USA Prime rate: 3.25% , Indian banks around
10%
U. S. bond market size (in trillions of dollars) Q2 2011:
Category
Government
Municipal
Agency
Corporate
Mortgage related
Asset Backed
Total

Amount
9.2
2.9
2.4
7.7
8.3
1.9
32.3
Percentage
28
9
7
24
26
6
100
Indian Bond Market consists of G-Secs :Centre-64%, State-12.5%,
Public Sector Units bonds, Financial Institutions bonds, Corporate
bonds and debentures--23.5%

23. 




Debt Market usually refers to the government bond market,
because of its size, liquidity, relative lack of credit risk and,
therefore, sensitivity to interest rates.
Because of the specificity of individual bond issues, and the
lack of liquidity in many smaller issues, the majority of
outstanding bonds are held by institutions like pension funds,
banks and mutual funds.
In the United States, approximately 10% of the market is
currently held by private individuals.
The US was the leading centre in terms of value outstanding
with 24% of the total 500bn in 2011 Q1.
The most common American benchmark Bond Indices are
the Barclays Capital Aggregate Bond Index, Citigroup
BIG and Merrill Lynch Domestic Master.

24. 

The yield curve is the measure of "cost of funding“.
The yield of a debt instrument is the overall rate of return available
on the investment.

25. 
The market can be divided into two, that for exchange-traded
derivatives and that for over-the-counter derivatives.

An exchange-traded contract such as a futures contract
in Chicago Mercantile Exchange, trade in standardized
derivative contracts such as options contracts and futures
contracts on a whole range of underlying products.

OTC: These consist of investment banks who have traders
who make markets in these derivatives, and clients such
as hedge funds, commercial banks, government sponsored
enterprises, etc.

Outstanding positions stand for Futures: 81 trillion, OTC: 615
trillion in the world, close to 700 trillion in all; US: 182 trillion

26. CONTRACT TYPES
UNDERLYING
Equity
Interest rate
Credit
Foreign
exchange
Commodity
Exchangetraded futures
Exchangetraded options
OTC swap
OTC forward
DJIA Index
future
Single-stock
future
Option
on DJIA Index
future
Single-share
option
Eurodollar
future
Euribor future
Option on
Eurodollar
future
Option on
Euribor future
Bond future
Option on
Bond future
Currency future
Option on
Currency
Currency swap
currency future
forward
WTI crude oil
futures
Weather
derivatives
OTC option
Back-to-back
Repurchase
agreement
Stock option
Warrant
Turbo warrant
Interest rate
swap
Forward rate
agreement
Interest rate
cap and floor
Swaption
Basis swap
Bond option
Credit default
swap
Total return
swap
Repurchase
agreement
Credit default
option
Equity swap
Commodity
swap
Iron ore
forward
contract
Currency
option
Gold option

27. 


In India, Index futures, Index options, Options and futures on
Individual securities, Interest rate futures, Interest rate swaps,
forward rate agreements, foreign exchange contracts, exchange
traded commodities, currency forwards and swaps are traded
Activity in OTC markets dwarfs that of the entire exchange-traded
markets, with daily value of trading estimated to be Rs. 30 billion in
2004
Foreign exchange derivatives are less active than interest rate
derivatives in India similar to US.
Type of Derivative with commercial
bank
Percentage
Interest rate contracts
145 trillion
Foreign exchange contracts
Others
Total
18 trillion
19 billion
182 trillion

28. 
Commodity Exchanges of USA include:
• Chicago Board of Trade (CBOT)
• Chicago Mercantile Exchange (CME)
• Kansas City Board of Trade (KCBT)
• New York Mercantile Exchange (NYMEX)- COMEX

Commodity Futures Trading Commission, an independent
agency of the United States government regulates the floor of
the market

In India, Total volume of commodity derivatives is still small,
less than half the size of equity derivatives
In 2011, MCX has taken the fifth spot among the global
commodity bourses in terms of the number of futures
contracts traded.
Based on the latest data from Futures Industry Association
(FIA), during the period between January and June this year,
about 127.8 million futures contracts were traded on MCX
It is regulated by the Forward Markets Commission




29. 
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
FUTURES EXCHANGES USA:
CBOE Futures Exchange (CFE) (owned
by Chicago Board Options Exchange)
Chicago Mercantile Exchange (CME)
Chicago Board of Trade (CBOT)
Chicago Climate Exchange (CCE)
ELX Futures (Electronic Liquidity
Exchange)
ICE Futures U.S.
Kansas City Board of Trade (KCBT)
Minneapolis Grain Exchange (MGEX)
Nadex (formerly HedgeStreet)
NASDAQ OMX Futures Exchange (NFX)
New York Mercantile
Exchange (NYMEX) and (COMEX)
NYSE Liffe US
OneChicago, LLC (Single-stock futures
(SSF's) and Futures on ETFs)
FUTURES EXCHANGES INDIA:
1.
National Stock Exchange of India (NSE)
2.
Bombay Stock Exchange (BSE)
3.
Multi Commodity Exchange (MCX)
4.
MCX Stock Exchange (MCX-SX)
5.
Bharat Diamond Bourse
6.
National Commodity and Derivatives
Exchange (NCDEX)
7.
National Multi Commodity Exchange of
India (NMCE)
8.
National Spot Exchange
9.
Ace Derivatives & Commodity
Exchange (ACE)
10. United Stock Exchange (USE)

30. 




The Chicago Board Options Exchange (NASDAQ: CBOE), is the
largest U.S. options exchange with annual trading volume that
hovered around one billion contracts at the end of 2007.
CBOE offers options on over 2,200 companies, 22 stock indices, and
140 exchange-traded funds (ETFs).
Options Clearing Corporation or OCC is the world's largest equity
derivatives clearing organization, providing central counterparty (CCP)
clearing and settlement services to 14 exchanges and platforms for
options, financial and commodity futures, security futures and
securities lending transactions.
By acting as guarantor, OCC ensures that the obligations of the
contracts they clear are fulfilled.
OCC operates under the jurisdiction of both the Securities and
Exchange Commission (SEC) and the Commodity Futures Trading
Commission (CFTC).

31. 
Under US law, derivatives have special legal exemptions that
make them a particularly attractive legal form, through which
to extend credit

However, the strong creditor protections afforded to
derivatives counterparties, in combination with their complexity
and lack of transparency, can cause capital markets to
underprice credit risk.

Derivative markets have been accused of the financial crisis
2007-2010 due to an “irrational appeal” for risk taking, and the
lack of clearing obligations

Financial reforms within the US since the financial crisis have
served only to reinforce special protections for derivatives,
including greater access to government guarantees, while
minimizing disclosure to broader financial markets

32.  Usual
instruments such as Certificate of
Deposits, Commercial Papers, Repurchase
agreements.
 In US some instruments such as Eurodollar
deposits, Federal funds, Federal agency
short term securities, Municipal notes are
available.
 Others: Treasury bills, Money funds, Foreign
exchange swaps, Short-lived mortgageand asset-backed securities

33.  Total
commercial paper outstanding
$1.7807 trillion.
 Asset
backed securities: 2004: USD 857 billion
 High
participation by Government bodies,
Individuals and private institutions
 Very
low Rates
6-month CD:
0.53%
1-year CD:
Federal funds
rate
0.77%
0.10%

34. U.S. Treasury bills
7000.0%
Other Treasury securities
U.S. government agency issues
Repurchase agreements
6000.0%
Certificates of deposit
Eurodollar CDs
Commercial paper
5000.0%
Bank notes1
Corporate notes2
Other assets3
Average maturity Days
4000.0%
3000.0%
2000.0%
1000.0%
0.0%
-1000.0%

36.  There
are 3 types of U.S. mutual funds: openend, unit investment trust and closed-end.
 At the end of 2010, there were 7,581 open-end
mutual funds in the United States with
combined assets of $11.8 trillion
 At the end of 2010:
Type of MF
Open end
Closed end
UIT
ETF
Combined assets (trillion)
11.8
0.241
0.051
0.992

38.  Mutual
funds are classified by their principal
investments. The four largest categories of
funds are money market funds, bond or fixed
income funds, stock or equity funds and
hybrid funds.
 Funds may also be categorized as index or
actively-managed.
 money market funds accounted for 24% of
the assets in all U.S. mutual funds.[
 bond funds accounted for 22% of the assets in
all U.S. mutual funds.

41. GROWTH OF MUTUAL FUNDS IN US
SINCE1984

44.  Pension
assets total 26,496 bn
 US contributes 58%
 Total pension assets 2010( usd billion): 15265
 104% GDP
 Has more than $9.838 trillion in assets as of 3103-10
 The
largest 200 pension funds accounted for
$4.540 trillion as of 30-09-09

45. 








Internal Revenue Service
Labor Department agency
Pension Benefit Guaranty Corporation
Defined benefit
Defined contribution
DB/DC split
60:40
Public/private sector split
79:21

46. 




Equity-55%
Bonds-35%
Cash-3%
Other-7%
Some plans in the US are: Defined contribution plan,
Defined benefit plans, Hybrid and Cash Balance Plans,
Qualified retirement plans and Non-qualified plans

47. 








1.http://en.wikipedia.org/wiki/List_of_corporations_by_ma
rket_capitalization
2.http://www.yieldcurve.com/MktYCplotter.asp
3. http://www.gurufocus.com/stock-market-valuations.php
4.http://www.tradingeconomics.com/india /marketcapitalization-of-listed-companies-percent-of-gdp-wbdata.html
5.http://en.wikipedia.org/wiki/Bond_market
6.http://www.federalreserve.gov/releases/h15/data.htm
7.http://en.wikipedia.org/wiki/Mutual_fund
8.http://en.wikipedia.org/wiki/Money_market
9. http://en.wikipedia.org/wiki/Asset-backed_security

48. 








10.ewp.rpi.edu/hartford/~stoddj/.../MishkinPpt/Mishkin_P
PT_CH09.ppt
11.http://en.wikipedia.org/wiki/Health_insurance#United_
States
12.http://en.wikipedia.org/wiki/Retirement_plans_in_the_
United_States
13.http://en.wikipedia.org/wiki/Derivative_(finance)
14.http://en.wikipedia.org/wiki/Derivatives_market
15.http://en.wikipedia.org/wiki/Home_insurance#In_the_
United_States
16.http://www.rotman.utoronto.ca/icpm/files/The%20Perf
ormance%20of%20US%20Pension%20Funds_New%20I
nsights%20into%20the%20Agency%20Costs%20Debate
.pdf
17.http://en.wikipedia.org/wiki/United_States_auto_insura
nce
18.http://www.mellatinsurance.com/insurancemarket/2.pdf