Financial Markets-Regulatory Change and the Implications for Capital Markets - Essay Example

FINANCIAL MARKETS- REGULATORY CHANGE AND THE IMPLICATIONS FOR CAPITAL MARKETS By Name Institution Lecturer Course Date Question 1: crowd funding A financial market refers to a market where people and entities trade financial securities, such as bonds, shares and treasury bills among others. It simply means it is a market where buyers and sellers take part in the trade of financial securities/ assets such as equities, bonds, currencies, and derivatives. For a financial market to operate effectively, there are some key requirements including transparent pricing and trading regulations. On the other hand, a capital market refers to a market for buying and selling equity and debt instruments. Capital markets mostly enhance savings and investment between suppliers of capital, for example, retail investors and institutional investors, and capital users, such businesses, government and individuals. Capital markets are of two types, primary markets (where new stock and bond issue are traded) and secondary markets (where already existing securities are traded). Because of the global financial crisis, there was the launch of a far-reaching policy for the change of financial sectors regulation with quite a number of changes at global, regional and national levels. Given that most of the regulatory policies focus has been on the growing economies, it is, therefore, not clear to list the effects of the changes for emerging markets. It is, however, inevitable that these markets will be affected in one way or another directly through the local development of the international changes, or indirectly as international banks in the developed economies change their business routines in response to the imposed regulatory policies (Lambert, Belleflamme & Schwienbacher 2012). Advanced financial services in the US are looking beyond narrow compliance at how developments will have an impact on the attractiveness and viability of their activities and operating models. Crowd funding refers to the activity whereby money is raised in small amounts from a large number of people with the aim of funding a project or a venture. Till recently, funding a business involves asking a number of people for large sum of money. Crowd funding is putting this notion on its head, through use of the internet to assist entrepreneurs talk to thousands-if not millions-of funders who contribute a small amount each. In funding innovations, the idea is the latest. This means that owners of small businesses being neglected by the high street banks now do have a chance to plead directly to small investors. Equally, it has always been that investing in small businesses is the rich domains, the new concept of crowd funding means that anyone can enjoy the benefits of investing in the start-ups if you want to risk a certain amount of money. Contributions are made through online platforms, which then organise and administer fund raising. Projects range from those assisting to finance community-based projects for no financial return, to complicated portfolio-picking, purely for a gain in monetary terms. It of three different kinds: donations, debt and equity. Debt crowd funding is the situation where by investors receive back their funds with interest. Returns are financial but investors also have the advantage of having contributing to the prevalence of an idea they believe in. Equity crowding refers to where individuals invest in an opportunity in exchange for equity. Money is exchanged for a share in the venture, project or a business. As with the other kinds of shares, the value goes up if it is successful. If not, the values will go down and one could lose his/her money completely (Bradford 2012). There is no doubt crowd funding can get risky. This is because the investors are not sure that they will receive a reward in return. In fact, since most of the businesses or projects fail a potential investor could end up losing lots of money. An investment could be diluted if more shares are issued and dividends could get rare, when an investor receive a share of a business or a project. One must take a long term view to any returns- since it may take a long time to realise the returns; therefore it is wise not to have the idea that one may receive returns instantly. However one of the challenges is that most crowd funds are illiquid this means that it could be difficult, or even impossible, to get back the invested money or to have it converted into cash again- the main issue here is an individual to keep in mind if they are thinking of taking the equity route. There exists no market of selling shares or crowd funding investments. Global markets are not doing well significantly and most of the economists feared the current global recession could become an economic depression. Developing countries have several fundraising plans, each of which has been used at several times. Funds may be domestically raised. One of the strategies government use initially is the issue of medium and long dated securities to the public. Household sector get encouraged to invest in such sectors since the interest income is tax-exempted. As the markets began to go down in fiscal year 2008, private giving went down as well. According to released information by the Forbes magazine, 1.5 billion dollars was raised in 2011 globally through the different forms of crowd funding. The Australian securities and investment commissions do not regulate crowd funding but there is an interest in the area. In Australia, artists, filmmakers, video-game creators and software developers have used crowd funding so often and in return, they offer the donors a less value item. ASIC is not against crowd funding, but as a corporate regulator, they are entitled to making a fair and effective investments market place that encourages confident and customers. Australia is a short on capital and therefore should encourage crowd funding to get early stage keeps ideas going on. ASIC stated that crowd funding is a discrete activity, which is not prohibited in Australia, nor regulated generally (Geilner & Womer 2007). However, recent laws make equity-based crowd funding not legal. For every different financial product, their investors’ protection laws have been implemented. These regulations involve onerous agreement and disclosure necessities that make crowd funding unfeasible. ASIC does not fight crowd funding, and it has done several things. First, they have done monitoring of the sector over the past one year or so. Second, they have written to a number of Australian-based crowd funding websites listing their opinions and making it clear on their legal standards that have to be met. Third, they issued an advisory last year to make things clear concerning the activities that fall under ASIC’s jurisdiction. There have been some movements towards reviewing the way crowd funding is regulated in Australia. Good news is that, on similar day, the government said it was going to look into reviewing the tax laws in relation to workers share option strategies. ESOP is another part of legislation where Australian significantly is behind the competitiveness of the other developed world. Australia government is putting into consideration the idea of liberating equity crowd funding to put it open for retail investors. At this moment, the implementation of crowd funding is boosted by pre- social media legislation. Australia is lagging behind as the US, UK, Canada, Italy, France and New Zealand have already put down their fund raising laws to accept crowd funding to be in practice. Enacting of such legislature in Australia will have certain impacts on the investors since it has the potential to ignite impact investing. Most necessarily, when it comes to the issue of attracting investors, crowd funding enhances founders to bring to bear what is known as social capital. Social capital is simply all the real and potential value kept in the relations of the originators and the company. The actual value of the company and the investments opportunity will represent a different consideration. However, to a certain point it is not worth a thing that is fixed or broken by crowding funding, it simply brings the strategy out into the light and gives more ability transparency, while giving chances to new class of everyday people to take place as investors as well. Enacting the legislations it would make it easier for the investors or people who are interested, since they can step to the crowd funding platform like the founder of the crowd, make an investors profile, and begin vetting and connecting with real companies and also the founders. One can offer support to the companies who share similar values like yours, keep updated with the latest news and progress, and one can keep contact with them and give a helping hand if one have ways to add more value (Gail 2008). Companies wishing to raise capital through crowd funding will have certain challenges in raising the required capital. Recently, proprietary companies are not allowed to raise funds from a large number of investors not unless they will adhere with the small scale personal offers exemption. Accordingly, the disclosure document is not mandatory for an issuer who wishes to make personal offers so long as the offer does not exceed AUD2 million and that it is brought up in any 12 months-time from no more than 20 investors. CAMAC brings up a question whether one possibility for the enactment might raise the number of investors with or with no some form of ceiling on the amount of funds that a single individual could lay down for investments. If permitted in Australia crowd funding would have a much greater impact on the landscape first financing stage initially for companies that had a problem of securing capital traditionally (Hemer 2011). Crowd funding has become a big industry with lots of finances enough to fill up the funding gap faced by many small issuers. This means that it would be made easier for companies to raise capital needed for investment with less hustle. Those who take part in making of the investments should be risk takers this means that there is no guarantee that they will receive returns on the invested capital. On the other hand, one may end up losing quite an amount in case the venture or business does poorly. Companies wishing to raise capital may do so through crowd funding since in raising capital is more effective; unlike in the banks where collateral is a requirement for a potential borrower to receive loans. It does not need collateral at any point, just offering a gift to persuade people to contribute of which the gift offered is of less value. In the case Australia embraces the policy of crowd funding, market controllers will be forced to make a crucial decision on continuing with protecting investors and making capital to flow easily through the online paths. If they do accomplish this Australia will stand a better chance to complete, spark development, and hang onto talents. In theory context, it is effective since it is easy to begin, there are few compliance rules that are needed and it only requires pocket change on the side off the investor. With banks and traditional investors finding their start-up too hard or small, since most of the innovators that use crowd funding would otherwise struggle to raise sufficient capital. Question 2: cryptographic currency Cryptographic currency refers to a digital currency or virtual that uses cryptography for security purposes. A crypto currency has got security features and this makes it hard to counterfeit this currency. It is not issued by any central authority body, and this renders it theoretically immune to the government interference or manipulation because of its defining feature. The anonymous status of this currency transactions make them to be suitable for a host of nefarious activities for example laundering of money and evading the tax baggage. Bit coin was the first cryptographic currency to capture the public imagination, launched in the year 2009. Its introduction attracted competition and what followed was spawning of other competing crypto currencies, for example, Litecoin, Namecoin and PPcoin. This kind of currency makes it easy to transfer funds between two parties in transactions; the transfers are accelerated by the use of public and private keys for security reasons. Minimal fees are applied in the processing transactions, making it easy for the users to avoid the costs charged by almost all banks and financial institutions for transfers. This kind of currency also have got a disadvantage because of their virtual nature and they lack a central repository, a users digital crypto currency balance can be erased by a computer crash if there is no back up copy records. The rate at which a cryptographic currency can be exchanged for another currency can widely fluctuate since the prices are based on the supply and demand. Crypto currency is intangible and is available digitally on the internet. This kind of currency is peer-to-peer network of strong machines linked together over the internet with a certain objective, which is a currency ledger to be maintained by these machines. It records every transaction on this currency ever. Every kind of crypto currency has got its own ledger (Industry report 2009). Conventional money comes with several draw backs or problems. It is a partisan, as we all know money is not a neutral service offered by the government. The private institutions create the money supply on the basis of making profit. This system of money is designed to benefit those who are involved in providing it, not those who use it. Conventional money is kind of currency that is based on debt, since money is made available anytime loans are given by banks. Therefore for each unit made there is one unit of debt made. When it comes to the conventional money, individuals are encouraged to think of it as a thing. Banks encourage people to think of it as a thing so that they can lend it to the people and in the process making profit by charging profit, though money is essentially data and has no physical existence. However, conventional money is permanently unavailable (Michael 2009). The funds to cover up the interest on debt-money are never made. Therefore, there exists a deficit of money to pay back both the principal and the interest at once. Volatility refers to the ability or property of something to change from one form to another. Crypto currencies do not have the volatility trait since they cannot be tangible and on the other hand they are not distributed by any central regulatory body. This means that this kind of currency is independent since no bank system is involved with the distribution or control of the currency. One of the factors I believe could bring volatility of the crypto currencies is the destabilisation of the computer trades. We all know that these currencies are digital and this means that they mostly depend on the computer technology so in case of deactivation means that traders will have to bear the cost. In case of data loss, this means that all the records will be lost and if there was no backup it would be lost completely. They created a market trading sector which is controlled and driven by decisions of short term which means that they will have to make decisions fast so as to capitalise on fast market movements. Moreover, we all know that machines cannot be used to forecast the future. Question 3: Basel III Basel III was brought forward due to the shortcomings of Basel I and Basel II in the year, 2010. It explains the treatment of capital requirements and high capital obligations. Credit risk is the most serious and dangerous of all risks faced by the banking systems. It can be obvious as the potential for loss due to the downfall of a borrower in meeting its contractual requirements to clear a debt in accordance with the established terms in the contract (Mark 2014). There are three major categories of credit risk. Default risk this is a situation whereby the bank declare that the client do not have the ability to pay up debt obligations or the delay is longer than ninety days past on any material credit requirements. This form of risk might have effects on all credit transactions such as loans, derivatives and securities. Sovereign risks- are brought about by a state when it freezes the foreign currency payments or when it is not able to pay obligations at the maturity date. Basel III has provided a framework for harsh and better quality capital, risk coverage, ways of improving on the build-up of capital which can be regarded in times of crisis or boom. It introduces the leverage ratio and puts into consideration the ranking systems. These changes have the objective of increasing banks capability of handling systematic disturbances because of economic crisis. There are two main minimum liquidity requirements: Liquidity coverage ratio this will force banks to meet a standard of high quality assets to withstand a hard task of raising funds set by the supervisors. Net stable funding ratio, is a long term structural ratio implemented to address liquidity problems. It always insures that the complete balance sheet and offers simulation for banks to use facilities of financing that are stable. Credit risk is seen as the most crucial and difficult task to deal with mostly by the bank managers and it receives blame for the most devastating financial crisis of the world (Timo 2014). Basel III has three pillars: standards for minimum capital requirements, supervisory review process and market discipline. The main objective of the first pillar is to improve the structure of capital requirements. Under this doctrine, all commercial giving out money at a certain interest is subject to the same 8% capital requirements no matter the worthiness of the money borrowed by a borrower and the collateral strength of the loan. In this pillar, banks are given a range of methods that they can use to measure risk weighted assets and following capital requirements for taking care of the credit risks. The second pillar is the supervisory review process. Basel III Accord puts some necessary regulations to have control over capital structure which require not only banks but also the supervisors to drop an application and meet the standards in the first pillar. The third pillar of Basel II is market discipline. For the enhancement of transparency of banks to other key players in the market, banks will be required to publish their detailed data on the rates of risk and structure of capital of a company. It raises transparency levels of banking systems and a new image is brought for the clients who are safer, more perspective. Basel III is too hard to follow and it received critics since it was believed to destroy industries, raise the levels of systematic risks and cause limits on availability of credit. It is evident that regulations on financial markets can have several consequences. One of them being increase in the cost of finance- funds constraints available where regimes have been implemented that do not match upcoming market activities. There is reduced availability of credit due to the deleveraging. As banks, they will have a negative effect on upcoming markets since they are involved with assets selling and focusing on their home markets. The largest impact of the Basel III capital needs is more likely to go down on advanced banks of the economy. Since most of the financial markets operate effectively and interventionist macro prudential regulations. Basel III offers a bit of consideration to the advantages that this can bring forth out of a stable financial stability point of view. In addition to the main Basel III protocol, its measures on capital will cause a number of impacts on emerging markets since capital regulation will be involved. Bibliography Belleflamme, P., Lambert, T., and Schwienbacher, A 2012, Crowd funding: Tapping the Right Crowd. [Online] Retrieved from [Accessed May 6, 2014]. Bradford, SC 2012, Crowd funding and the Federal Securities Laws. Columbia Business Law Review, vol. 2001, no 1, pp. 3-148. Backes-Gellner, U. & Werner, A 2007, Entrepreneurial Signaling via Education: A Success Factor in Innovative Start-Ups. Small Business Economics, vol. 29, pp. 173-190. Black, BS. & Gilson, RJ 1998, Venture Capital and the Structure of Capital Markets: Banks versus Stock Markets. Journal of Financial Economics, vol. 47, pp. 243-277. 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