Trade Securities Outside Of The Formal Exchange Systems

Maintaining the stability of the financial system and containing systemic risk that may arise in financial markets.

One of the most important things to our economy is the stock exchange. Investors spend billions of dollars on the stock trade. Thousands of the world's largest companies on the world's many stock exchanges. Numerous times throughout the history of stock exchanges a market crash, which can sometimes only last a few days, can ruin the whole economy for long periods of time. Without stock exchanges in the world, many big companies may not be as advanced as they are today.

With more people investing in the stock market, more buying stocks “on margin” took place, which meant more money was lent out. Many businesses and banks decided to invest in the stock market also, but the problem was that banks were using their customer’s money, without the customers being aware of this, to invest in the stock market.

Derivative contracts were either negotiated with specific counterparties (over-the-counter) or were standardized contracts executed and traded on an exchange. Negotiated over-the-counter derivatives were comprised of forwards, swaps, and specialized options contracts. Over the counter derivatives can be tailored to meet the customers’ needs with respect to time and quantity and they are not traded in an organized exchange. On the other hand, standardized exchange-traded derivatives consisted of futures and options contracts. Even though over-the-counter derivatives were usually not traded like securities in an exchange, they might be terminated or assigned to an alternative counterparty. Standardized derivatives trade on an exchange and have time and quantity that are fixed.

To maintain stability of the financial system and contain universal threats of the financial markets

“Over-the-counter derivatives will be required to be traded on regulated exchanges, and the trades will have to be submitted to regulated clearinghouses” (First Data Corporation, 2010). The clearinghouses must also submit proposals to the regulators before accepting swaps for clearing. Regulators will have the authority to impose capital, margin, reporting, record-keeping and code of conduct requirements on swap dealers and participants to ensure there are adequate financial resources to meet their responsibilities (First Data Corporation, 2010).

Financial markets are crucial to promoting greater economic efficiency by channeling funds from people who do not have a productive use for them to those who do. Well functioning financial markets are a key factor in producing high economic growth, and poorly performing financial markets, vice versa. Financial markets and intermediaries have the basic function of getting people together by moving funds from those who have a surplus of funds to those who have a shortage of funds.

This document is authorized for use only by Yen Ting Chen in FInancial Markets and Institutions taught by Nawal Ahmed Boston University from September 2014 to December 2014.

Recent market developments have highlighted the 'Flight for Security ' of market participants by means of financial collateral. While cash represents the preferred source of collateral in 82% of all OTC derivatives transactions, it needs to be returned with interest to the collateral giver. At the same time this creates a re-investment risk for the collateral receiver. When accepting MMFs as collateral, collateral receivers are not exposed to any reinvestment risk because the fund offers competitive rates of returns. Compared to their

When the financial crisis during 2008 hit the economy, people panicked. In an attempt to stabilize the market, the government took action. The various actions taken in 2008 by the Department of the Treasury and the Federal Reserve Bank, as well as the new regulations proposed and implemented by the Securities and Exchange Commission, were generated to reduce and mitigate the systemic risk created by the Money Market Mutual Funds. These actions and regulations, as well as the systemic risk created, will be addressed during the upcoming paragraphs.

A: Most investments in the economy would fail to take place if there were no financial institutions because many independent investors do not like to take large amounts of risk. By utilizing financial intermediaries, which are “organizations that receive funds from savers and channel them to investors,” people are given peace of mind in knowing that their source of money/investing is more stable and accounted for. Those who apply this principle also value the liquidity, or convertibility, that financial institutions provide in the case of emergency or cold feet.

As contemporary literature has shown, since the 1980s the world has experienced a strong wave of financial integration, which – through capital-market liberalization – seems to have played a vital role in facilitating economic growth, in opening up national capital accounts and in boosting the cross-border movements of goods, services, technology, labour and capital (Elson, 2011; Caprio et al., 2012).

Among the most fundamental risks, associated with exchange-traded derivatives, is variable degree of risk. According to Ernst, Koziol, & Schweizer (2011), the transactions in

A financial intermediary, by definition, is responsible for the process of transferring money from economic agents with a surplus of funds to economic agents with a deficit of funds, and is known as financial intermediation. This is achieved by means of a financial security, such as stocks and bonds. The mechanism that allows the trade of such financial securities is known as a financial market. Financial markets aim to facilitate the raising of capital, as well as the transfer of risk between economic agents and also international trade. Typically, the borrower will issue a receipt, or financial security, to the lender that promises to pay back the capital gained. Securities such as these can be freely bought or sold within financial

The call money market crosses international lines, with funding opportunities located in a number of countries around the world. Because of the inclusion of international banking institutions, the role of the brokerage firm becomes vital to the individual investor. Brokers will be aware of applicable banking laws, and how those laws could impact the transaction. This knowledge regarding participants in the call money market allows the firm to pick and choose among possible avenues for funding with a level of efficiency that would be difficult for the individual.