Currency swap: Contract that commits two counterparties to exchange streams of interest payments in different currencies for an agreed period of time and to exchange principal amounts in different currencies at a pre-agreed exchange rate at maturity.
A currency swap has three stages:
An initial exchange of principal: the two counterparties exchange principal amounts at an agreed exchange rate. This can be a notional exchange since its purpose is to establish the principal amounts as a reference point for the calculation of interest payments and the re-exchange of the principal amounts.
Exchange of interest payments on agreed dates based on outstanding principal amounts and agreed fixed interest rates.
- Re-exchange of the principal amounts at a predetermined exchange rate so the parties end up with their original currencies.
- Again this may be done to hedge risk, to speculate on changes in exchange rates, or to attempt to lower the cost of borrowing by borrowing in the currency in which the most favourable interest rates are available and then swapping into the currency that the firm needs to carry out its business. Whether this will be cheaper will depend among other things on the bid—offer spread.
Read the rest of this entry »
A eurobond is a debt security handled internationally by syndicates, groups of bankers and/or brokers who underwrite and distribute new issues of securities or large blocks of outstanding issues. It is typically in bearer (non-registered form) and is issued outside the country of the currency in which it is denominated.
Borrowers and lenders are spread around the world, while the intermediaries are spread across Europe, with the majority of business being done from London. The market was founded in the early 1960s and has provided a competitive source of funding for borrowers who can tap discreet but important sources of finance. Japanese banks, pension funds and insurance companies have become important lenders in recent years and there are still plenty of wealthy individuals who prefer the anonymity offered by bearer securities. The eurobond market is the world’s second largest securities market after the US bond market in terms of trading volume and the third largest after the US and Japanese bond markets in terms of debt outstanding. Read the rest of this entry »
There are two ways that a swap position can be interpreted: (1) as a package of forward/ futures contracts, and (2) as a package of cash flows from buying and selling cash market instruments.
Package of Forward Contracts Consider the hypothetical interest-rate swap described earlier to illustrate a swap. Let’s look at party X’s position. Party X has agreed to pay 10% and receive six-month LIBOR. More specifically, assuming a $50 million notional principal amount, X has agreed to buy a commodity called six-month LIBOR for $2.5 million This is effectively a six-month forward contract in which X agrees to pay $2.5 million in exchange for delivery of six-month LIBOR. If interest rates increase to 11%, the price of that commodity (six-month LIBOR) is higher, resulting in a gain for the fixed-rate payer, who is effectively long a six-month forward contract on six-month LIBOR. The floating-rate payer is effectively short a six- month forward contract on six-month LIBOR. There is therefore an implicit forward contract corresponding to each exchange date. Read the rest of this entry »
Nearly all of the mutual fund families offer multiple funds that are geared toward international investing. The different kinds of funds can be categorized into index funds, international funds, regional funds, country funds, emerging market funds, and global funds. International mutual funds have higher expense ratios than domestic mutual funds to cover higher trading costs and higher management fees. The funds also tend to have redemption fees to control frequent trading. Examples of funds offered by major mutual fund companies are given below.
* Index funds. These include Fidelity Spartan International Index Fund, Vanguard Developed Markets Stock Index, Vanguard Emerging Markets Stock Index, and Price International Equity Index Fund.
* International funds. These funds do not invest in the domestic market. Funds include Fidelity International Growth, T. Rowe Price International, Fidelity Overseas, Vanguard International Growth, Fidelity Diversified International, and so on.
* Global funds. These funds invest in all countries, including the domestic market, and include Templeton World, GT Global Worldwide, Dreyfus Global, Vanguard Global Equity, Price Global Stock, and so on. Read the rest of this entry »
The HHI takes into account the relative size and distribution of the firms in a market and approaches zero when a market consists of a large number of firms of relatively equal size. The HHI increases both as the number of firms in the market decreases and as the disparity in size between those firms increases. Markets in which the HHI is between 1,000 and 1,800 points are considered to be moderately concentrated, and those in which the HHI is in excess of 1,800 points are considered to be concentrated. During the 1990s, the HHI for the U.S. Mutual fund industry saw a minor decrease from 396 to 352 based on assets under management,6 indicating that the industry was, and still is, fairly unconcentrated according to this statistical measure.
Another fairly unconcentrated financial industry—domestic commercial banks (including thrifts)—has an HHI of 338, based on deposits of $3.4 trillion as of December 31, 2000. A subset of that universe—domestic money center banks— is much more concentrated, with an HHI of 1,676, based on deposits of $1.5 trillion. In comparison, the U.S. airline carrier industry has an HHI of 1,330, based on 2000 revenues. Read the rest of this entry »
The Problem
Since the beginning of 1997, the U.S.-sold Japan Fund has experienced substantial cash inflows and outflows from investors, and portfolio manager David Smith has voiced his concern recently about the volatility. He also noted that extremely large shareholder orders seem to coincide more and more with news affecting Japan, and cash flow management is taking up a large percentage of his time that might otherwise be spent selecting securities.
Smith suspects some shareholders are trying to increase their profits by “timing” the market—quickly moving their money from one fund to another within the complex. Furthermore, he speculates that these investors might be attempting to profit from the methodology that the fund complex uses to compute the daily NAV of the fund by trading on stock price information that may become available between the time when the Japanese markets close and the time the fund values its holdings. Read the rest of this entry »
In addition, the composition of equity funds changed during the 1990-2000 period. According to Strategic Insight, broader investment objectives such as growth and growth & income experienced a decrease of 7.7 percentage points in share of equity funds during the decade. The decrease was offset by an increase in more specialized funds, with higher management fees, such as sector funds and international funds. In particular, emerging market and country funds went from a half-percent share of funds 110P available in 1990 to almost 3% in 2000. At the same time, there was a substantial increase in lower management fee products such as index funds, which were almost nonexistent in 1989.
2. Number of funds During the 1990s, fund choices grew alongside assets at a rapid pace as the number of mutual funds increased from around 3,000 to over 8,000.
Implications of this tremendous increase in the number of funds for management fees depend on the resulting trends in average and median fund size, as shown in Table 2 (which defines a fund to include each class of a multi-class fund). Read the rest of this entry »
James M. Clash
A wave of consolidation is washing over the mutual fund business. So far this year funds totaling more than $125 billion in assets have changed hands. To hear the consolidators tell it, mergers are good because they bring fund investors economies of scale and breadth of choice within a fund family. Will these promises be fulfilled? It is instructive to consider some of the bigger recent mergers. The results are not encouraging.
Take the Dreyfus funds, purchased in December 1993 by Pittsburgh’s Mellon Bank. In the three years before the merger, the 12 domestic stock funds at Dreyfus performed, on average, on a par with the S&P 500 index. In the three years since, these funds, on average, have underperformed the index by a stunning seven percentage points a year.
Then there’s the American Capital/Van Kampen merger in August 1994. In the 26 months prior to the marriage, the 11 stock funds here outperformed the S&P 500 index by an average of two points annually. In the 26 months since the merger, the funds have underperformed, Read the rest of this entry »
BACKGROUND AND PURPOSE
The primary purpose of regulations is to protect investors, and the roots of governmental regulation of mutual funds in the longer-established markets are often associated with major scandals and market crashes.
In the USA, the stock market crash of 1929 prompted an extensive investigation by Congress into the securities industry. It revealed that overselling, or ‘ramming’ of shares, particularly radio company shares, had created unrealistic expectations and false, overvalued markets. The investigation resulted finally in the Investment Company Act 1940, which established the Securities and Exchange Commission (SEC) - this Act remains the cornerstone of US mutual fund regulation - and the Investment Advisers Act 1940. Along with two Acts passed into Federal law in the 1930s - the Securities Act 1933 and the Securities Exchange Act 2934 - these four Acts provide the bulk of federal powers over the activities of US investment companies. In fact, the only addition to US legislation affecting all companies since 1940 is the Sarbanes-Oxley Act of 2002 and that has only an indirect bearing on mutual funds themselves, being more concerned with accounting, auditing and disclosure practices of trading companies, following the Enron and Worldcom scandals. Read the rest of this entry »
Italy - primary regulatory responsibility lies with the central bank - Banca d’Italia - under the Banking Law or, more formally, Legislative Decree 385 0f 1 September 1993, and Law 410 of 23 November 2001 in relation to real estate funds. Essentially, the Bank of Italy authorises banks that provide investment services and other companies that engage in collective asset management. Investment firms are authorised by the separate public authority responsible for regulating Italy’s securities markets, CONSOB - Commission Nazionale per la Societa e la Bores. Read the rest of this entry »
India - the mutual fund industry started in India in 1964 with the formation of the Unit Trust of India, registered under a separate Act of Parliament. Other public sector institutions entered the business in 1987 but it was not until 1993 that the first of the private sector participants commenced operations. Regulatory responsibility resides with the Securities and Exchange Board of India (’SEBI’), which published its Mutual Fund Regulations in 1996 and amended them in January 2006 to widen the permitted investment powers to include gold and goldrelated instruments. Read the rest of this entry »
Hong Kong - the Securities and Futures Ordinance enacted in March 2002 and operational from April 2003, combined into a single ordinance all previously existing ordinances for the regulation of the securities and futures markets, principally the 1974 Protection of Investors Ordinance and the Securities Ordinance. Hong Kong also has a series of Codes, the first of which - the Code on Unit Trusts - was enacted in 1978, when the Committee on Unit Trusts was formed to administer the Code. Read the rest of this entry »
France- the most important piece of legislation governing French mutual funds is its Law of 23 December 1988, an Act governing collective investment schemes, actually enacted by decree in September 1989. It replaced two 1979 Acts, which governed SICAV and FCP structures separately, with a single set of regulations, and implemented the 1985 UCITS Directive. Detailed regulations are set out in Application Decrees and Orders dated December 1998 and any points concerning SICAVs not covered in these laws are governed by general legislation, in particular the basic company law dated 24 July 1966. Read the rest of this entry »
Korea- like Japan, Korea in the late 1960s needed to mobilise domestic capital to facilitate long-term, stable financing of large-scale industrial and infrastructure projects. The securities investment industry naturally attracted special attention and the Securities Investment Trust Business Act (SITBA) was passed in 1969, to allow the setting up of contractual-type investment trusts, and the first of these, Korea Investment Corporation, was launched that year. Under SITBA, which was implemented by related Presidential Decrees and Enforcement Ordinances, the Ministry of Finance and Economy had, by 1989, authorised three investment trust companies to undertake operations nationwide and five in provincial areas to distribute investment trusts in Seoul and in their respective specified regional areas. Read the rest of this entry »
South Africa - the Collective Investment Schemes Control Act, which updated and replaced previously existing unit trust legislation, 
was enacted in 2002 and in place at the start of 2003. This Act moved legislation more in line with international best practice and was the subject of negotiation between the trade association and regulatory authorities for some years. The Financial Advisory and Intermediary Services Act (FATS), which became law towards the end of 2002, had as its purpose the regulation of financial planners and advisers, as well as product suppliers, in the giving of advice and the conduct of their business in all areas where other industry legislation did not make specific provision. During its passage as a Bill, it had an impact in terms of how and what advisers were selling, in anticipation of the law. The Financial Intelligence Centre Act, aimed at combating rnoney-laundering activities, brought South Africa into line with international best practice and the subordinate legislation enabling effective practical implementation was in place by year-end 2002. In spite of its name, the Securities Services Act 2004 does not apply to collective investment schemes, nor to activities regulated under FATS, and the Financial Markets Advisory Board, established by the Financial Markets Control Act 1989, continues.
Mutual funds are used by private investors and by institutions for different but overlapping reasons
Private investors use mutual funds to invest money in the hope that it will:
- grow in value, or
- provide income, or
- deliver both, i.e.. capital growth and income either to serve specific financial needs, now or in the future, or simply to enhance their prospect of wealth.
Institutions, particularly life companies and pensions funds, use mutual funds as a convenient way to organise and manage some if not all of their investment portfolios, which will have objectives similar to those of the private investors who are the ultimate beneficiaries. Read the rest of this entry »
In most countries, the regulations stipulate an important safeguard, whereby a fund’s individual holdings are to be registered in the name of an independent custodian or trustee, to ensure that investment in mutual funds is safe, in the sense that the assets cannot be misappropriated by the manager or by the investment adviser. However, this does not prevent fund prices fluctuating, reflecting the value of the underlying investments, and therefore, although ownership is secure, the value of an investment in mutual funds can fall as well as rise.
As with any investment portfolio, a mutual fund can be used for all or any of the following: Read the rest of this entry »
Spain - a new Mutual Fund Law, the ‘CIF Law‘ (35/2003), implemented the expansion of the UNITS Directive and effectively established hedge funds; prior to this, the principal legislation was the Lee de Institutions ones de Inversion Colectiva of 1984 and the Real Decorate de Instituciones de Inversion Collective of 1990, amended in February 2001. Supervisory responsibility is vested in the CNMV - Comision Nacional den Mercado de Valor’s, established by the Securities Market Law which was updated by Law 37/1998. Unusually, there are no institutional funds in Spain but this may change as CNMV’s circular of 3 May 2006 issued rules for hedge funds. Read the rest of this entry »
Canada - laws and regulations are made and enforced by each province and territory, which has its own securities regulator, a government agency usually known as a ‘Securities Commission’. Representatives from each commission serve on an umbrella body, the Canadian Securities Administrators, which occasionally creates national rules. In addition, the Mutual Fund Dealers Association of Canada (MFDA) and the Investment Dealers Association of Canada (IDA) have been formed as Self Regulatory Organisations (SROs) to regulate specific industry groups within certain provinces. SROs are not government agencies but member bodies that operate subject to the oversight of the Securities Commissions.
Germany - a new law, the Financial Markets Promotion Act, which came into force on 1 July 2002, modernised German investment law. Among other things it is now possible to have different share classes for one fund and open-ended real estate funds are allowed to invest worldwide as long as currency risks are limited to 30% of net assets. Also, from 1 May 2002, under amendments to the 1994 Securities Trading Act, the previously separate supervisory offices for banking, insurance and investment were brought together into a new single regulator - Basin - Federal Financial Supervisory Authority, responsible to the Federal Ministry of Finance for all aspects of supervision. Basin has three aims stipulated under the law - investor protection, market transparency and market integrity - and pursues these through the issue of regulations, ordinances and guidelines.
