Beyond the Limits in American and Romanian Financial Markets
| Author | Serghei Mărgulescu; Elena Mărgulescu |
| Pages | 338-345 |
Serghei Mărgulescu. Professor, Ph.D., Faculty of Economic Sciences, “Nicolae Titulescu” University, Bucharest (margulescu@univnt.ro).
Elena Mărgulescu. Lecturer, Ph.D. candidate, Faculty of Economic Sciences, “Nicolae Titulescu” University, Bucharest.
Page 338
Capital markets soared since 1980s. A crucial part in the spectacular growth of the financial markets was played by the investment banks and the exchange markets, while the last six years accelerated even more dramatic this evolution.
The stock of shares and public and private debt held in America grew from 2.4 times GDP in 1995 to 3.3 times in 2004 [1], while in Europe the increase was even more dramatic, albeit from a lower base.
Derivatives markets posted also impressive growth. If we look at the exchange-traded derivatives, we will see that the global futures and options trading grew by 30% in 2003, by 9% in 2004, by 12% in 2005, by 19% in 2006 and by 28% in 2007. During that last year a number of 15 billion contracts were traded on 54 major worldwide exchanges, compared to the 6.2 billion contracts traded in 2002.
This explosive growth in 2007 was triggered by a sharp increase in the volatility of the stock markets and by the massive shift to commodity related derivatives.
Due to the fact that stock-related derivatives, including both index and single-stock futures and options, accounted in 2007 for 64% of the market, the American subprime credit crises substantially raised the volatility of quotations and triggered the boom of hedging transactions, in parallel with volatility speculation.
Commodity derivatives were booming in 2007 due to some factors like the widespread use of electronic transaction systems, the growth in precious metals and bio-energy transactions, the increased interest of institutional investors in this market and the steady development of commodity derivatives markets in some countries like China, which has become a giant worldwide player in metals and agricultural futures transactions, India and Hong-Kong where the volume of derivatives transactions doubled during the last year.
Page 339
An exchange submarket that exploded few years ago is that of the investment vehicles known as ETFs – Exchange-traded Funds. These instruments are quoted on the stock market and are structured on baskets of shares designated to track certain benchmarks offered by a wide range of assets and characteristics of these assets (oil, gold, Asian property, combinations of corporate financial data regarding sales, profits, dividends and book value which are meant to replace the traditional benchmark offered by the market value, and so on).
The first instrument of that kind was launched in 1993 and by 2000 ETFs had just $ 74 billion in assets. The real boom was recorded in the last five years so that by June 2007 there were more than 1,000 products with just over $ 700 billion in assets.
The success of this market, especially in the USA, is due to the fact that unlike index transactions, ETFs give investors flexibility in choosing exposure. This flexibility is offered by the investment funds as well, but not at that low cost that stock exchanges are able to provide due to standardization, volume of trade and non-invoicing the alpha (as a measure of a fund-manager skill).
If we look at the over-the-counter derivatives, we will see that their notional value has reached $ 370 trillion, based on International Settlement Bank data, showing a spectacular growth from the $ 258 trillion two years earlier. On the top of this wave are the earnings from capital market transactions of the first 10 investment banks which soared from $ 55 billion in 2004, to $ 90 billion in 2006.
It is important to notice that, in the last few years, the investment banks business registered a significant shift from corporate stocks to “the mysterious world of debt” which in many investment banks’ trading accounts is known as FICC (fixed income, currencies and commodities).
So for the five big Wall Street firms (Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers, Bear Stearns) taken together, revenues from share-trading were in 2000 twice as much as those from fixed-income transactions, while in 2006 figures reverted due to the boom in fixed-income securities transactions revenues, up to $ 44 billion, and to a slow growth of share-trading, to just $ 27 billion.
The variety of assets that can be seen in the FICC accounts today is vary large indeed: from American subprime mortgages to futures on copper, gold and Japanese yen, from corporate bonds to natural catastrophe insurance, foreign debt instruments of some African states, and so on. However, beyond this diversity, the structural dynamics of the recent years show a stagnation of the corporate bond issuance (the „direct debt” chapter) and a rapid increase of securities issuance backed by other assets, as for example by commercial or residential mortgages (the „collateralized debt” chapter).
The most profitable area has been the growth of derivatives and structured credit products, such as CDSs (credit-default swaps) and CDOs (collateralized-debt obligations).
These instruments have enabled banks to separate the credit risk of the underlying bonds from the movement of the interest rates and to create a secondary market activity.
By 2006 the volume of American outstanding securitized (restructured, bundled up) loans had reached $ 28 trillion, and by 2007 almost 60% of the American mortgages and 25% of the consumer debt were bundled up and sold on.
The cornerstone of the new market are the CDSs (credit-default...
To continue reading
Request your trial