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INVESTMENT BANKING - AN OVERVIEW

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					INVESTMENT BANKING 鈥?AN OVERVIEW 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, derivatives, 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. Until 1999, the United
States maintained a separation between investment banking and commercial banks.
Other industrialized countries, including G8 countries, have not maintained this
separation historically. Trading securities for cash or for other securities (i.e.,
facilitating transactions, market-making), or the promotion of securities (i.e.,
underwriting, research, etc.). What an Investment Bank Sells The sell side of
investment banking involves underwriting and the research of securities, trading
existing securities for cash or trading securities for other securities to maximize profit
for their investors, or buy side. How an Investment Bank Raises Money The buy side
of investment banking is dealing with various funds and other groups that have put
money into the investment bank with the interest of seeing returns from their
investment, such as hedge funds and mutual funds, as well as individuals and other
small investment groups. Dealing with the pension funds, mutual funds, hedge funds,
and the investing public who consume 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 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. 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.
  Activities of investment banking Front office Investment banking (corporate finance)
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). 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 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. 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. 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. Other businesses that an
investment bank may be involved in 鈥?Global transaction banking is the division
which provides 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. 鈥?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).
  鈥?Merchant banking is a private equity activity of investment banks. 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.
  Middle Office 鈥?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. Corporate treasury is
responsible for an investment bank's funding, capital structure management, and
liquidity risk monitoring. 鈥?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. 鈥?Corporate strategy, along with risk,
treasury, and controllers, often falls under the finance division as well.
鈥?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 鈥?Operations involve 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,
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 A finance degree has proved significant in
understanding the depth of the deals and transactions that occur across all the
divisions of the bank. 鈥 ?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. SIGNIFICANCE OF INVESTMENT BANKING
Investment banking is one of the most global industries and is hence continuously
challenged to respond to new developments and innovation in the global financial
markets. New products with higher margins are constantly invented and manufactured
by bankers in hopes of winning over clients and developing trading know-how in new
markets. However, since these can usually not be patented or copyrighted, they are
very often copied quickly by competing banks, pushing down trading margins. In
addition, while many products have been commoditized, an increasing amount of
profit within investment banks has come from proprietary trading, where size creates
a positive network benefit (since the more trades an investment bank does, the more it
knows about the market flow, allowing it to theoretically make better trades and pass
on better guidance to clients). The fastest growing segment of the investment banking
industry are private investments into another development in recent years has been the
vertical integration of debt securitization. Previously, investment banks had assisted
lenders in raising more lending funds and having the ability to offer longer term fixed
interest rates by converting the lenders' outstanding loans into bonds. For example, a
mortgage lender would make a house loan, and then use the investment bank to sell
bonds to fund the debt, the money from the sale of the bonds can be used to make new
loans, while the lender accepts loan payments and passes the payments on to the
bondholders. This process is called securitization. Traditionally, the term Investment
banking or I-banking is used to describe the business of raising capital for companies
and advising them on financing and merger alternatives. In order to raise this cash,
investment banks sell securities of stocks and bonds to investors, which will later be
traded in global financial markets. However, investment banking is not one specific
service or function, but rather encompasses a range of functions. OTHER ROLES
M&A Advisory Investment banks provide advice and assist in mergers and
acquisitions. They can for example, assist in finding merger partners, underwriting
new securities to be issued by the merged firms, assessing the value of target firms,
recommending terms of the merger agreement, and even helping target firms to
prevent a merger. Setting up deals where one company buys another is an important
source of fee income for many investment banks. Sales and trading Instead of creating
a primary market in securities like the capital market divisions, sales and trading
divisions of investment banks create a secondary market for securities. Sales and
trading, which can also be called market making, can involve either agency or
principal transactions. Agency transactions are two-way transactions on behalf of
customers, for example, acting as a stockbroker or dealer for a fee or commission. In
principal transactions, the market maker seeks to profit from price movements of
securities and take either long or short positions for its own account. There are many
types of trading, among which for example position trading, meaning purchasing a
large block of securities on the expectation of a favorable price move. Pure arbitrage
trading entails buying one asset at one price and selling it immediately in another
market at a higher price. Risk arbitrage involves buying blocks of securities in
anticipation of some information release, such as a merger or takeover announcement
or a Federal Reserve interest rate announcement. Asset management Asset
management is the professional management of securities and other assets (real estate,
etc.) on behalf of clients. That may be institutions (insurance companies, pension
funds, corporations, etc.), or private investors (individuals or groups of individuals,
such as mutual funds). The Asset Management division is sometimes called
Investment Management. The provision of 'investment management services' includes
elements of financial analysis, asset selection, stock selection, plan implementation
and ongoing monitoring of investments. Merchant Banking Although not defined in
U.S. federal banking and securities laws, the term merchant banking is generally
understood to mean negotiated private equity investment by financial institutions in
the unregistered securities of either privately or publicly held companies. Both
investment banks and commercial banks engage in merchant banking, and the type of
security in which they most commonly invest is common stock. They also invest in
securities with an equity participation feature; this may be convertible preferred stock
or subordinated debt with conversion privileges or warrants. Other investment bank
services - raising capital from outside sources, advising on mergers and acquisitions,
and providing bridge loans while bond financing is being raised in a leveraged buyout
(LBO) - are also typically offered by financial institutions engaged in merchant
banking. CONCLUSION Since investment banks engage heavily in trading for their
own account, there is always the temptation for them to engage in some form of front
running. investment banks usually provides both advisory and financing banking
services, as well as the sales, market making, and research on a broad array of
financial products including equities, credit, rates, commodities, and their derivatives.
  Sumathi.A, Assistant Professor in Commerce, Rathinam college of Arts and Science.
CBE-21