An investment bank is a financial
Content
Asad Mazhar
Investment banks
An investment bank is a financial institution that assists corporations and governments in raising capital by underwriting and acting as the agent in the issuance of securities. An investment bank also assists companies involved in mergers and acquisitions, divestitures, etc. Further it provides ancillary services such as market making and the trading of derivatives, fixed income instruments, foreign exchange, commodity, and equity securities. Unlike commercial banks and retail banks, investment banks do not take deposits. To provide investment banking services in the United States an advisor must be a licensed broker-dealer. The advisor is subject to Securities & Exchange Commission (SEC) (FINRA) regulation[1]. Until 1999, the United States maintained a separation between investment banking and commercial banks. Other industrialized countries, including G7 countries, have not maintained this separation historically. Trading securities for cash or securities (i.e., facilitating transactions, market-making), or the promotion of securities (i.e., underwriting, research, etc.) was referred to as the "sell side". Dealing with the pension funds, mutual funds, hedge funds, and the investing public who consumed the products and services of the sell-side in order to maximize their return on investment constitutes the "buy side". Many firms have buy and sell side components.
Organizational structure of an investment bank
Main activities and units
An investment bank is split into the so-called front office, middle office, and back office. While large full-service investment banks offer all of the lines of businesses, both sell side and buy side, smaller sell side investment firms such as boutique investment banks and small broker-dealers will focus on investment banking and sales/trading/research, respectively. Investment banks offer services to both corporations issuing securities and investors buying securities. For corporations investment bankers offer information on when and how to place their securities in the market. The corporations do not have to spend on resources with which it is not equipped. To the investor, the responsible investment banker offers protection against unsafe securities. The offering of a few bad issues can cause serious loss to its reputation, and hence loss of business. Therefore, investment bankers play a very important role in issuing new security offerings.
Asad Mazhar
Core investment banking activities
Front office
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Investment banking is the traditional aspect of the investment banks which also involves helping customers raise funds in the capital markets and giving advice on mergers and acquisitions. Investment banking may involve subscribing investors to a security issuance, coordinating with bidders, or negotiating with a merger target. Another term for the investment banking division is corporate finance, and its advisory group is often termed mergers and acquisitions (M&A). A pitch book of financial information is generated to market the bank to a potential M&A client; if the pitch is successful, the bank arranges the deal for the client. The investment banking division (IBD) is generally divided into industry coverage and product coverage groups. Industry coverage groups focus on a specific industry such as healthcare, industrials, or technology, and maintain relationships with corporations within the industry to bring in business for a bank. Product coverage groups focus on financial products, such as mergers and acquisitions, leveraged finance, project finance, asset finance and leasing, structured finance, restructuring, equity, and high-grade debt and generally work and collaborate with industry groups in the more intricate and specialized needs of a client. Sales and trading: On behalf of the bank and its clients, the primary function of a large investment bank is buying and selling products. In market making, traders will buy and sell financial products with the goal of making an incremental amount of money on each trade. Sales is the term for the investment banks sales force, whose primary job is to call on institutional and high-net-worth investors to suggest trading ideas (on caveat emptor basis) and take orders. Sales desks then communicate their clients' orders to the appropriate trading desks, who can price and execute trades, or structure new products that fit a specific need. Structuring has been a relatively recent activity as derivatives have come into play, with highly technical and numerate employees working on creating complex structured products which typically offer much greater margins and returns than underlying cash securities. Strategists advise external as well as internal clients on the strategies that can be adopted in various markets. Ranging from derivatives to specific industries, strategists place companies and industries in a quantitative framework with full consideration of the macroeconomic scene. This strategy often affects the way the firm will operate in the market, the direction it would like to take in terms of its proprietary and flow positions, the suggestions salespersons give to clients, as well as the way structurers create new products. Banks also undertake risk through proprietary trading, done by a special set of traders who do not interface with clients and through "principal risk", risk undertaken by a trader after he buys or sells a product to a client and does not hedge his total exposure. Banks seek to maximize profitability for a given amount of risk on their balance sheet. The necessity for numerical ability in sales and trading has created jobs for physics, math and engineering Ph.D.s who act as quantitative analysts.
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Asad Mazhar
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Research is the division which reviews companies and writes reports about their prospects, often with "buy" or "sell" ratings. While the research division may or may not generate revenue (based on policies at different banks), its resources are used to assist traders in trading, the sales force in suggesting ideas to customers, and investment bankers by covering their clients. Research also serves outside clients with investment advice (such as institutional investors and high net worth individuals) in the hopes that these clients will execute suggested trade ideas through the Sales & Trading division of the bank, thereby bringing in revenue for the firm. There is a potential conflict of interest between the investment bank and its analysis in that published analysis can affect the profits of the bank. Therefore in recent years the relationship between investment banking and research has become highly regulated requiring a Chinese wall between public and private functions.
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Global transaction banking is the division which provide cash management, custody services, lending, and securities brokerage services to institutions. Prime brokerage with hedge funds has been an especially profitable business, as well as risky, as seen in the "run on the bank" with Bear Stearns in 2008. Investment management is the professional management of various securities (shares, bonds, etc.) and other assets (e.g. real estate), to meet specified investment goals for the benefit of the investors. Investors may be institutions (insurance companies, pension funds, corporations etc.) or private investors (both directly via investment contracts and more commonly via collective investment schemes e.g. mutual funds). The investment management division of an investment bank is generally divided into separate groups, often known as Private Wealth Management and Private Client Services. Merchant banking is a private equity activity of investment banks.[2] Current examples include Goldman Sachs Capital Partners and JPMorgan's One Equity Partners. (Originally, "merchant bank" was the British English term for an investment bank.) Commercial banking
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Middle office
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Risk management involves analyzing the market and credit risk that traders are taking onto the balance sheet in conducting their daily trades, and setting limits on the amount of capital that they are able to trade in order to prevent 'bad' trades having a detrimental effect to a desk overall. Another key Middle Office role is to ensure that the above mentioned economic risks are captured accurately (as per agreement of commercial terms with the counterparty), correctly (as per
Asad Mazhar standardized booking models in the most appropriate systems) and on time (typically within 30 minutes of trade execution). In recent years the risk of errors has become known as "operational risk" and the assurance Middle Offices provide now includes measures to address this risk. When this assurance is not in place, market and credit risk analysis can be unreliable and open to deliberate manipulation.
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Corporate treasury is responsible for an investment bank's funding, capital structure management, and liquidity risk monitoring. Financial control tracks and analyzes the capital flows of the firm, the Finance division is the principal adviser to senior management on essential areas such as controlling the firm's global risk exposure and the profitability and structure of the firm's various businesses. In the United States and United Kingdom, a Financial Controller is a senior position, often reporting to the Chief Financial Officer. Corporate strategy, along with risk, treasury, and controllers, often falls under the finance division as well. Compliance areas are responsible for an investment bank's daily operations' compliance with government regulations and internal regulations. Often also considered a back-office division.
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Back office
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Operations involves data-checking trades that have been conducted, ensuring that they are not erroneous, and transacting the required transfers. While some believe that operations provides the greatest job security and the bleakest career prospects of any division within an investment bank,[3] many banks have outsourced operations. It is, however, a critical part of the bank. Due to increased competition in finance related careers, college degrees are now mandatory at most Tier 1 investment banks.[citation needed] A finance degree has proved significant in understanding the depth of the deals and transactions that occur across all the divisions of the bank. Technology refers to the information technology department. Every major investment bank has considerable amounts of in-house software, created by the technology team, who are also responsible for technical support. Technology has changed considerably in the last few years as more sales and trading desks are using electronic trading. Some trades are initiated by complex algorithms for hedging purposes.
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Asad Mazhar
Investment Banking in Pakistan
Investment banking is an important pillar of the financial sector and particularly the NBFC regime in Pakistan. It took its roots in 1987, however, its still at a nascent stage. Today, investment banks in Pakistan are providing a full array of capital market products and advisory services to their clients. The industry is comprised of a variety of companies which are actively and efficiently serving institutional, corporate, government as well as individual clients.
• • • • • • • • • • • • • •
Al-Towfeek Investment Bank Limited Invest Capital Investment Bank Limited Atlas Investment Bank Limited Crescent Investment Bank Limited Escorts Investment Bank Limited First Credit and Investment Bank Limited[1] IGI Investment Bank Limited Fidelity Investment Bank Limited Islamic Investment Bank Limited AMZ Securities Orix Investment Bank (Pakistan) Limited Prudential Investment Bank Limited Trust Investment Bank Limited Arif Habib Investment and Mutual funds Co.
Investment + Commercial Banks
In order to further strengthen the sector, particularly in the face of this competition, the SECP would like to move towards integration through instituting a Universal Nonbanking regime. This will include a universal license, under which the NBFCs can undertake all the activities allowed to them simultaneously without the need for applying for separate licences. In case if one activity is being concentrated, the NBFC will have the choice to decide for obtaining one single-activity based licence. Capital requirements for such a universal non-banking licence are currently being worked out.
Examples of Investment+Commercial Banks
• • • • • citibank investment banking Atlas Investment Bank Limited dawood investment bank meezan investment bank standard chartered investment banking
Asad Mazhar
Who provide regulations to investment banks?
Subsequent to the transfer of regulatory authority over investment banks from SBP to SECPin December 2002, and promulgation of the NBFC Rules, the SECP has undertaken a two pronged approach. One is to liquidate the investment banks which were in financial trouble and the other is to develop and strengthen the existing ones into healthy NBFCs. Currently there are 13 investment banks among which only 9 are licensed; the remaining are in liquidation proceedings. Within the NBFC sector, investment banking is at the higher end in terms of the specialized services they provide, particularly the capital market product and advisory services. The Securities and Exchange Commission of Pakistan (SECP), in exercise of powers conferred under section 282 D of the Companies Ordinance, 1984 (the “Ordinance”) hereby directs all Non-Banking Finance Companies licensed to undertake the business of Investment Finance Services, Leasing, Housing Finance Services, So state bank of Pakistan provide the regulations to the investment banks working in Pakistan whether there are working individually or the commercial banks that are doing investment activities.
Asad Mazhar
http://en.wikipedia.org/wiki/Investment_banking http://www.accountancy.com.pk/newsgen.asp?newsid=789 www.sbp.org
Investment banks
An investment bank is a financial institution that assists corporations and governments in raising capital by underwriting and acting as the agent in the issuance of securities. An investment bank also assists companies involved in mergers and acquisitions, divestitures, etc. Further it provides ancillary services such as market making and the trading of derivatives, fixed income instruments, foreign exchange, commodity, and equity securities. Unlike commercial banks and retail banks, investment banks do not take deposits. To provide investment banking services in the United States an advisor must be a licensed broker-dealer. The advisor is subject to Securities & Exchange Commission (SEC) (FINRA) regulation[1]. Until 1999, the United States maintained a separation between investment banking and commercial banks. Other industrialized countries, including G7 countries, have not maintained this separation historically. Trading securities for cash or securities (i.e., facilitating transactions, market-making), or the promotion of securities (i.e., underwriting, research, etc.) was referred to as the "sell side". Dealing with the pension funds, mutual funds, hedge funds, and the investing public who consumed the products and services of the sell-side in order to maximize their return on investment constitutes the "buy side". Many firms have buy and sell side components.
Organizational structure of an investment bank
Main activities and units
An investment bank is split into the so-called front office, middle office, and back office. While large full-service investment banks offer all of the lines of businesses, both sell side and buy side, smaller sell side investment firms such as boutique investment banks and small broker-dealers will focus on investment banking and sales/trading/research, respectively. Investment banks offer services to both corporations issuing securities and investors buying securities. For corporations investment bankers offer information on when and how to place their securities in the market. The corporations do not have to spend on resources with which it is not equipped. To the investor, the responsible investment banker offers protection against unsafe securities. The offering of a few bad issues can cause serious loss to its reputation, and hence loss of business. Therefore, investment bankers play a very important role in issuing new security offerings.
Asad Mazhar
Core investment banking activities
Front office
•
Investment banking is the traditional aspect of the investment banks which also involves helping customers raise funds in the capital markets and giving advice on mergers and acquisitions. Investment banking may involve subscribing investors to a security issuance, coordinating with bidders, or negotiating with a merger target. Another term for the investment banking division is corporate finance, and its advisory group is often termed mergers and acquisitions (M&A). A pitch book of financial information is generated to market the bank to a potential M&A client; if the pitch is successful, the bank arranges the deal for the client. The investment banking division (IBD) is generally divided into industry coverage and product coverage groups. Industry coverage groups focus on a specific industry such as healthcare, industrials, or technology, and maintain relationships with corporations within the industry to bring in business for a bank. Product coverage groups focus on financial products, such as mergers and acquisitions, leveraged finance, project finance, asset finance and leasing, structured finance, restructuring, equity, and high-grade debt and generally work and collaborate with industry groups in the more intricate and specialized needs of a client. Sales and trading: On behalf of the bank and its clients, the primary function of a large investment bank is buying and selling products. In market making, traders will buy and sell financial products with the goal of making an incremental amount of money on each trade. Sales is the term for the investment banks sales force, whose primary job is to call on institutional and high-net-worth investors to suggest trading ideas (on caveat emptor basis) and take orders. Sales desks then communicate their clients' orders to the appropriate trading desks, who can price and execute trades, or structure new products that fit a specific need. Structuring has been a relatively recent activity as derivatives have come into play, with highly technical and numerate employees working on creating complex structured products which typically offer much greater margins and returns than underlying cash securities. Strategists advise external as well as internal clients on the strategies that can be adopted in various markets. Ranging from derivatives to specific industries, strategists place companies and industries in a quantitative framework with full consideration of the macroeconomic scene. This strategy often affects the way the firm will operate in the market, the direction it would like to take in terms of its proprietary and flow positions, the suggestions salespersons give to clients, as well as the way structurers create new products. Banks also undertake risk through proprietary trading, done by a special set of traders who do not interface with clients and through "principal risk", risk undertaken by a trader after he buys or sells a product to a client and does not hedge his total exposure. Banks seek to maximize profitability for a given amount of risk on their balance sheet. The necessity for numerical ability in sales and trading has created jobs for physics, math and engineering Ph.D.s who act as quantitative analysts.
•
Asad Mazhar
•
Research is the division which reviews companies and writes reports about their prospects, often with "buy" or "sell" ratings. While the research division may or may not generate revenue (based on policies at different banks), its resources are used to assist traders in trading, the sales force in suggesting ideas to customers, and investment bankers by covering their clients. Research also serves outside clients with investment advice (such as institutional investors and high net worth individuals) in the hopes that these clients will execute suggested trade ideas through the Sales & Trading division of the bank, thereby bringing in revenue for the firm. There is a potential conflict of interest between the investment bank and its analysis in that published analysis can affect the profits of the bank. Therefore in recent years the relationship between investment banking and research has become highly regulated requiring a Chinese wall between public and private functions.
•
Global transaction banking is the division which provide cash management, custody services, lending, and securities brokerage services to institutions. Prime brokerage with hedge funds has been an especially profitable business, as well as risky, as seen in the "run on the bank" with Bear Stearns in 2008. Investment management is the professional management of various securities (shares, bonds, etc.) and other assets (e.g. real estate), to meet specified investment goals for the benefit of the investors. Investors may be institutions (insurance companies, pension funds, corporations etc.) or private investors (both directly via investment contracts and more commonly via collective investment schemes e.g. mutual funds). The investment management division of an investment bank is generally divided into separate groups, often known as Private Wealth Management and Private Client Services. Merchant banking is a private equity activity of investment banks.[2] Current examples include Goldman Sachs Capital Partners and JPMorgan's One Equity Partners. (Originally, "merchant bank" was the British English term for an investment bank.) Commercial banking
•
•
•
Middle office
•
Risk management involves analyzing the market and credit risk that traders are taking onto the balance sheet in conducting their daily trades, and setting limits on the amount of capital that they are able to trade in order to prevent 'bad' trades having a detrimental effect to a desk overall. Another key Middle Office role is to ensure that the above mentioned economic risks are captured accurately (as per agreement of commercial terms with the counterparty), correctly (as per
Asad Mazhar standardized booking models in the most appropriate systems) and on time (typically within 30 minutes of trade execution). In recent years the risk of errors has become known as "operational risk" and the assurance Middle Offices provide now includes measures to address this risk. When this assurance is not in place, market and credit risk analysis can be unreliable and open to deliberate manipulation.
•
Corporate treasury is responsible for an investment bank's funding, capital structure management, and liquidity risk monitoring. Financial control tracks and analyzes the capital flows of the firm, the Finance division is the principal adviser to senior management on essential areas such as controlling the firm's global risk exposure and the profitability and structure of the firm's various businesses. In the United States and United Kingdom, a Financial Controller is a senior position, often reporting to the Chief Financial Officer. Corporate strategy, along with risk, treasury, and controllers, often falls under the finance division as well. Compliance areas are responsible for an investment bank's daily operations' compliance with government regulations and internal regulations. Often also considered a back-office division.
•
•
•
Back office
•
Operations involves data-checking trades that have been conducted, ensuring that they are not erroneous, and transacting the required transfers. While some believe that operations provides the greatest job security and the bleakest career prospects of any division within an investment bank,[3] many banks have outsourced operations. It is, however, a critical part of the bank. Due to increased competition in finance related careers, college degrees are now mandatory at most Tier 1 investment banks.[citation needed] A finance degree has proved significant in understanding the depth of the deals and transactions that occur across all the divisions of the bank. Technology refers to the information technology department. Every major investment bank has considerable amounts of in-house software, created by the technology team, who are also responsible for technical support. Technology has changed considerably in the last few years as more sales and trading desks are using electronic trading. Some trades are initiated by complex algorithms for hedging purposes.
•
Asad Mazhar
Investment Banking in Pakistan
Investment banking is an important pillar of the financial sector and particularly the NBFC regime in Pakistan. It took its roots in 1987, however, its still at a nascent stage. Today, investment banks in Pakistan are providing a full array of capital market products and advisory services to their clients. The industry is comprised of a variety of companies which are actively and efficiently serving institutional, corporate, government as well as individual clients.
• • • • • • • • • • • • • •
Al-Towfeek Investment Bank Limited Invest Capital Investment Bank Limited Atlas Investment Bank Limited Crescent Investment Bank Limited Escorts Investment Bank Limited First Credit and Investment Bank Limited[1] IGI Investment Bank Limited Fidelity Investment Bank Limited Islamic Investment Bank Limited AMZ Securities Orix Investment Bank (Pakistan) Limited Prudential Investment Bank Limited Trust Investment Bank Limited Arif Habib Investment and Mutual funds Co.
Investment + Commercial Banks
In order to further strengthen the sector, particularly in the face of this competition, the SECP would like to move towards integration through instituting a Universal Nonbanking regime. This will include a universal license, under which the NBFCs can undertake all the activities allowed to them simultaneously without the need for applying for separate licences. In case if one activity is being concentrated, the NBFC will have the choice to decide for obtaining one single-activity based licence. Capital requirements for such a universal non-banking licence are currently being worked out.
Examples of Investment+Commercial Banks
• • • • • citibank investment banking Atlas Investment Bank Limited dawood investment bank meezan investment bank standard chartered investment banking
Asad Mazhar
Who provide regulations to investment banks?
Subsequent to the transfer of regulatory authority over investment banks from SBP to SECPin December 2002, and promulgation of the NBFC Rules, the SECP has undertaken a two pronged approach. One is to liquidate the investment banks which were in financial trouble and the other is to develop and strengthen the existing ones into healthy NBFCs. Currently there are 13 investment banks among which only 9 are licensed; the remaining are in liquidation proceedings. Within the NBFC sector, investment banking is at the higher end in terms of the specialized services they provide, particularly the capital market product and advisory services. The Securities and Exchange Commission of Pakistan (SECP), in exercise of powers conferred under section 282 D of the Companies Ordinance, 1984 (the “Ordinance”) hereby directs all Non-Banking Finance Companies licensed to undertake the business of Investment Finance Services, Leasing, Housing Finance Services, So state bank of Pakistan provide the regulations to the investment banks working in Pakistan whether there are working individually or the commercial banks that are doing investment activities.
Asad Mazhar
http://en.wikipedia.org/wiki/Investment_banking http://www.accountancy.com.pk/newsgen.asp?newsid=789 www.sbp.org
