The main domestic markets are the money markets and the banking markets with the main international markets being the Eurodollar markets, the trade finance markets and foreign exchange markets.

 

(1)    MONEY MARKETS

 

The money markets consist of the primary and secondary markets:

 

(i)     PRIMARY MONEY MARKET

 

  The primary money market is the market in which the Bank of England intervenes as central bank to control the volume and cost of liquidity (money or credit) within the financial system. The Bank formerly only dealt with a limited number of the ‘Discount Houses’ (with the market also being referred to as the Discount Market). The range of available counter parties with which the Bank can deal has since been extended and the range of instruments expanded, in particular, to include 'Repos' (sale and repurchase agreements which has the same commercial effects as a secured loan). The Bank generally either buys or sells paper (bills) in the market which will consequently increase or reduce the amount of funds (liquidity) available in the discount market which finds are then either passed on or withdrawn from the rest of the financial system. The cost at which the Bank deals also creates a floor rate (Bank rate) against which other lending costs can then be calculated.

 

(i)     SECONDARY MONEY MARKET

 

  The secondary money markets emerged during the late 1950s and the early 1960s as specialist dealing markets in alternative types of bills or paper. The first market was the 'Local Authority' bill market which arose following the closure of the earlier Public Works accounts which forced local authorities to borrow money directly from the markets for the first time. A market in local authority paper then quickly developed. This was followed by the ‘Sterling Certificate of Deposit’ (tradable receipts for underlying deposits), the general ‘Certificate of Deposit’ as well as the ‘Inter-Company’ and ‘Inter-bank’ Markets. These represent specialist wholesale markets within which financial institutions deal in particular types of debt or paper.

 

(2)    BANKING MARKETS

 

The two main types of traditional bank in the UK have were the commercial banks and the merchant banks. Commercial banks have traditionally only accepted deposits (savings) from the public and advanced loans or credit on the deposit volumes received. With the emergence of the secondary money markets, commercial banks have been able to borrow much larger amounts of funds directly in the wholesale markets, including specifically the inter-bank market, which has allowed them to expand their loans and the asset side of their business. Commercial banking has then generally moved from being traditional ‘deposit (or liability) based’ to ‘asset’ (loans) based and then ‘asset and liability management’ based in which the banks continually monitor their lending commitments on the asset side of their balance sheets and funds available on the liability side. Commercial banks also now provide a range of other financial services for their customers including consumer finance, consumer credit, other payment cards and increasingly on-line internet based financial services.

 

Merchant banks historically arose before commercial banks and generally dealt in trade finance related instruments and provided a range of corporate capital market advice and support services. This is now generally referred to as investment banking which was the term introduced in the US to refer to investment or securities firms that were created following the separation of commercial banking and securities business under the Glass Steagall provisions of the Banking Act 1933 and which was passed after the Stock Market Crash 1929 and ensuing Great Depression. A merchant bank is strictly a hybrid UK institution that can undertake investment business as well as provide deposit account facilities usually for large corporate or government clients. 

 

(3)    EURODOLLAR MARKETS

 

The main international markets are the Euro syndicated loan market and the Eurobond market with n underlying deposit or inter-bank market. The syndicated loan market is an extension of the domestic commercial bank market and is consequently ‘term loan’ based. A number of additional information requirements and controls are nevertheless imposed on borrowers under the term loan agreements used while funds will generally be advanced by a group (syndicate) rather than by a single bank due to the amount and exposure involved. The reference to 'Eurodollar' generally means that the currency in which the funds are advanced (historically US dollars but subsequently Japanese yen, Euros, Swiss francs and other currencies) is separate from the currency of the country in which the debt is issued and traded (generally sterling in London).

 

The Eurobond market is a parallel security based market in which the borrowers (governments or large companies) issue debt instruments (bonds) into the market rather than borrow the money directly from a bank or group (syndicate) of banks. Once issued (in the primary market), the bonds will be traded (in an over-the-counter (OTC) secondary market). Eurobonds were originally issued for similar amounts and terms as syndicated loans although the advantage was that lower costs of funding were available depending upon the credit standing of the borrower. Early bonds also generally used for fixed interest rates. The Eurobond market has then developed a number of alternative floating rate and shorter duration instruments including Medium Term Notes (MTNs), Euronotes and Commercial Paper for periods of less than one year. While there has been a general decline in the syndicated loan as against the Eurobond market, this was compensated for by a corresponding expansion in Eurobond activity and syndicated lending remain a highly useful and flexible credit device especially in more complex financing situations.

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(4)    FOREIGN EXCHANGE

 

One of the other principal international market is the foreign currency market which provides for the purchase and sale of the currencies of different countries either on an immediate (spot) or future (forward) basis. London remains the main centre of the market which is conducted on an over the counter (OTC) basis.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5)    FINANCIAL DERIVATIVES

 

 

The other main types of financial instrument that may be traded are financial derivatives. These generally consist of futures, options and swaps which may either be dealt with on a formal exchange or OTC basis. The domestic derivatives market is based at the London International Financial Futures Exchange (LIFFE and now part of NYSE Euronext) although a number of financial derivatives were also traded through the OM Exchange (now part of the NASDAQ OMX Group) and London Stock Exchange. International derivatives (including derivatives products attached to international syndicated loans or bond issues) are generally dealt with on an inter-bank or OTC basis. The international OTC derivatives market is the largest financial market in the world and is currently valued in excess of between US$601-684 trillion.