An Introduction to Global Financial Markets

by Stephen Valdez & Philip Molyneux

About this book

Originally, the idea of a book on global financial markets came to Stephen Valdez when he hit the problem of recommended reading for candidates coming from Continental Europe to one of the courses run by his former company, Valdez Financial Training. Because the courses in question were about the markets in general, books called How the City of London Works (or similar titles) did not exactly answer the problem. This was particularly true when they found themselves facing audiences from the former Russian republics and Eastern Europe.

It seemed to Stephen that there was a need for a more general book about global markets as a whole, as opposed to one about markets in one particular country such as the US or the UK. In any case, the financial world is becoming more integrated and global in its operations. A parochial knowledge of just one country is proving less and less satisfactory. This book seeks to answer this need. Having said that, the book does not attempt a systematic coverage of the markets in all countries. Such a book would be far bulkier than this one and probably unreadable.

This book should prove useful for those preparing for a variety of examinations (MBA, banking, finance, economics and business studies), those working in banking and financial institutions in a support role (computer staff, accountants, personnel, public relations, back office and settlement) and, finally, staff in the many suppliers of information and computer services to the financial markets (computer manufacturers and soft ware houses, Thomson Reuters and so on).

The first edition came out in 1993, and although each subsequent edition has been brought up to date, it has sometimes seemed appropriate to add completely new chapters. Thus, the third edition added a chapter on European Economic and Monetary Union and the fifth edition a chapter on China and India. In view of their growing influence, a chapter on hedge funds and private equity was also included. Apart from these new chapters, the fifth edition had new or expanded sections on credit derivatives, Islamic banking, the Sarbanes-Oxley legislation and hybrid bonds. The situation in the European Union (EU) following the rejection of the constitution was discussed, as well as recent directives such as the Markets in Financial Instruments Directive (MiFID). The last chapter reviewed current trends. Finally, for that edition, this companion website was introduced.

It was a great pleasure to be asked to collaborate with Stephen Valdez on the sixth, seventh and eighth editions of his text. Global financial markets have been in turmoil since the onset of the mid-2007 credit crisis. Liquidity in interbank and other markets has dried up, and a collapse in global bank lending has resulted in a global economic downturn. Over the past decade or so, banks’ involvement in markets has increased dramatically, partially as a reflection of the trend towards universal banking and also because technological advances have made it easier to price and trade an increasingly broad array of complex financial products. Banks have experienced an increasing dependence on financial markets not only as a funding source but also for risk management (hedging) purposes. What has emerged is a complex web of interdependence between banks and markets for their wellbeing.

Banks rely on the interbank markets for funding (to supplement traditional retail and corporate deposits) and have also increasingly used securitization techniques, not only to move credit off their balance sheets but also to fund a lending explosion, particularly in mortgage markets. As we have seen since the start of the credit crunch, when interbank and securitized markets collapse, failure in banks and other financial institutions soon follows. In light of these momentous events, it was a challenge to revise the sixth edition, which attempted to capture many of trends relating to the global financial crisis of 2008. Major changes were made throughout the text, reflecting rapid developments in markets as well as the crisis. Chapter 5 on investment banking was substantially revised in light of the failure of Bear Stearns and Lehman Brothers and the problems faced by Merrill Lynch and other bulge bracket firms. Chapters 6–8 (on hedge funds and private equity) were significantly altered. There was a new Chapter 9 on the crisis and its consequences.

Chapter 11 had emphasized the historical features of the European Union, whereas in the sixth edition various contemporary issues associated with Europe and the single currency were emphasized. Chapters 12–14 were updated to highlight recent trends in derivatives markets. The booming Chinese and Indian economies were again highlighted in Chapter 15, and the book ended by looking at key trends in Chapter 16. Here, the focus was on lessons learned from the credit crisis, deleverage, regulation of OTC derivative markets, precious metals, hedge fund prospects and various ‘new’ economic paradigms. The credit crisis dramatically changed the financial and economic landscape and the regulatory framework under which financial firms and markets operate. All tables and figures were updated to cover the crisis period.

The modest update we planned for the eighth edition turned into a major revision. The main changes related to updates on non-traditional monetary policy (quantitative easing), planned regulatory reform covering the 2010 US Dodd-Frank Act, the Final Report of the UK Vickers Commission, and EU initiatives as well as Basel III. (Special thanks to John Thornton for valuable analysis and information on these issues.) We also introduced a new section covering the efficient market hypothesis and its limitations, with discussion of behavioural finance issues. We also provided more detail on the eurozone sovereign debt crisis and the performance of emerging and growth-leading economies (EAGLEs), as well as China and India.

A big thanks to Dr Jo Wells for checking through our discussion of derivatives products in the seventh edition and for the excellent insights provided. The previous edition also included revision questions at the end of each chapter and also offered a brief summary of the content of the references and the suggested readings. This aimed at providing students with a good guide to the readings provided.

This eighth edition provides another substantial update and major re-design compared to previous editions. We have done our best to make all the information provided as contemporary as possible. A major innovation has been to try to make the book less ‘text dense’ and more user-friendly with a substantial number of illustrative Boxes that highlight key concepts as well as topical developments. In terms of content, the main differences are that substantial attention has been paid to the many regulatory developments that were only new proposals when we were writing the seventh edition; now that they have become reality, these are documented throughout the text. These cover issues like the impact and implementation of the US Dodd-Frank legislation, the EU’s Capital Requirements Directive IV (that incorporates Basel III into EU law) as well as the European Market Infrastructure Regulation (EMIR) that plans to move much OTC derivatives business back onto exchanges. We cover the regulatory trend for banks to hold more capital and liquidity, the tougher requirements placed on systemically important banks (and other financial institutions) and the regulation of credit rating agencies (CRAs). Chapter 8, in particular, has updates on the major regulatory reforms that have taken place in European securities markets. Chapter 12 covers the new European Banking Union. Chapter 16 highlights the (short-term at least) reversal in fortune of some of the emerging economies that were booming a couple of years. We also note the downturn of global commodities markets.

We very much hope you enjoy the new substantially revised and re-designed text and hope it helps you obtain a contemporary insight into the key features of the trends and developments in global financial markets.

Stephen Valdez
Philip Molyneux