Modern trends in the development of the global financial market

The growth of various financial instruments of the global financial market, which led to the emergence of internal independent sources of financial market development, as well as the stable progressive dynamics of developed market economies (the US federal budget surplus exceeds $ 110 billion), have found expression in recent decades in the rapid growth of assets of the global financial system. For example, mutual funds in the U.S. alone control more than $4 trillion. Dollars, which is about half the amount owned by such institutions throughout the world economy, in which about 2,000 such funds operate. At the same time, capitalization2 of most developed countries is growing rapidly. Between 1980 and 1999, the capitalization of world equity markets increased 13 times (see Table 11.2.), while total GDP increased by 2.5 times. As a result, the ratio of capitalization to GDP in the world as a whole increased from 23 to 118%.

Table 11.2.

Capitalization of world stock markets, at the end of the year, (million dollars).

Especially rapid growth of the global stock market occurred in the second half of the 90s and is associated, first of all, with information technology companies, primarily the United States. The U.S. share of global capitalization increased from 30% in the late 80s to almost 50% in the late 90s. At the same time, Japan’s share, which reached 38% in 1989, fell to 9-12% by the end of the last decade. The consequences of the crisis of 1990-1991 in the stock market of this country continued to be felt throughout the decade. Europe’s share has increased slightly, from a quarter to a third of the world’s.

The growth of capitalization was mainly due to an increase in the price of shares, since the number of joint-stock companies that have an official quotation on stock exchanges (and capitalization is calculated only for these companies) has changed insignificantly in developed countries. The number of issuers for a decade and a half of the past century  increased here from 18 to 21 thousand.

The growth of debt markets also outpaced the growth of  the real economy. The volume of debt on securities in relation to GDP increased from 80% in 1990 to 120% in 1999 At the same time, if in the 80s, in the first half of the 90s. growth was mainly due to government borrowing, then since the late 90s, due to the tendency to reduce budget deficits and the relative size of the public debt of most developed countries (with the exception of Japan), this indicator began to decline, but at the same time, the activity of private issuers has increased markedly. Over the same period, the ratio of debt on securities of private issuers to GDP increased from 34 to 50-55%.

Approximately half of all securities debt falls on the United States, and on developed countries as a whole – 94%, i.e. here industrialized countries dominate even more than in stock markets (Table 11.3).

Volume of global debt securities markets (total year-end debt, billions of dollars)

Table 11.3.

1 Domestic debt securities2. The Bank for International Settlements’s Russian data3, excluding redesigned debts from the London Club4 including securities of international organizations ($328 billion at the end of 2000), are presented here. Calculated by the BISS Quarterly Review over a number of years.

Emerging markets rely more on bank credit than on securities markets to finance their economies. In addition, in a number of Muslim countries (and this is about 700 million people of the world’s population), where there are stock markets, bond  markets are absent or are in a depressed state due to the fact that the Koran prohibits interest payments.

In the past two decades, the term “securitization” has often been used to characterize financial markets. It is used in several meanings, but the most common is the reorientation of enterprises from a bank loan to the issue of securities. Securitization as a process is to varying degrees common to all developed countries. The issue of securities is of the greatest importance in countries with an Anglo-American system of law, noticeably less – in European continental countries. This is evidenced by such indicators as the ratio of capitalization to GDP, the ratio of debt on bonds of non-financial corporations to GDP, the share of capital investments financed by the issue of shares.

In developing countries and countries with economies in transition, the level of securitization is generally much lower than in developed countries. The main role in the external financing of enterprises, as noted, in these countries is played by bank credit. This is clearly demonstrated by the example of Russia and Belarus. Almost all the issues carried out here in the 90s were associated either with the privatization of state-owned enterprises, or with the revaluation of fixed assets, or with any corporate actions related to the restructuring of property relations. Issues, the result of which would be the attraction of new capital, are rare, and the most significant ones are implemented in foreign markets. Any significant issues of corporate bonds began to be carried out only since 1999, but they are still limited. An obstacle to expanding securities financing in Russia and Belarus, as in most other emerging markets, is the weak protection of shareholders and creditors, shortcomings in bankruptcy legislation, the tax system, and the lack of effective measures to monitor compliance with the law.

Securitization as a process is very noticeable in international capital markets. Since the 80s, the issue of securities has become the main way to attract external financial resources. In the 90s, it accounted for from 50 to 80% of external borrowings. We are talking about the primary markets of international securities, i.e. instruments specially placed on foreign markets.

Over the past three decades, many new financial instruments have emerged in the financial markets, called derivatives or financial derivatives. This is the most dynamic segment of the financial market.

When evaluating these markets, several indicators are used, the main of which is the so-called nominal value of the underlying assets. In addition to it, an indicator of the number of derivative contracts and turnover indicators (again by nominal value and number of contracts) are also published. According to the statistics of the Bank for International Settlements, in 1998-2000 the nominal value of the underlying assets of exchange derivatives amounted to 13-14 trillion. Usd., which is  19 times more than in 1987 The nominal value of the underlying assets of over-the-counter contracts for the same period was 80 – 90 trillion. Usd. – about 60 to 70 times higher than in 1987 (Table 11.4).

Table 11.4.

Major derivatives markets (nominal value of year-end contracts, billions of dollars)

Sources: International Capital Markets: Developments, Prospects and Key Policy Issues // IMF. – Wash. September. 1998. P. 99; Bank for International Settlements-69th // Annual Report. – Basle. 1999. P. 133; BIS Quarterly Review.

In the 70s, the growth of the nominal value of derivatives was mainly due to the stock market, and until 1978 only in the United States. In the 80s and, especially, in the 90s, the largest increase in the nominal value of derivatives accounted for the over-the-counter market.

The turnover of trading in futures and options on exchanges  (excluding futures and options on commodities and shares) in the early 90s amounted to 100 – 200 trillion. Usd. (see Table 11.5), by the end of the decade had grown to 350 – 390 trillion. USD, which is several times higher than the turnover of trading in underlying assets.

Table 11.5.

Turnover of trade in exchange derivatives, trillion. Usd.

Sources: Bank for International Settlements // Annual Report. – Basle, (for a number of years); BIS Quarterly Review, Feb. 2001. P.86

By the mid-90s, the derivatives exchange market had reached such proportions that further growth at the same high rate is no longer possible. In 1995, 1996 and 1999, there was even a decline in turnover. In terms of value on derivative exchanges, interest rate-based instruments are in the first place. Approximately a third of the total exchange and OTC derivatives market falls on swap-type contracts, of which interest rate swaps are more than 90%. Thanks to swaps, the boundaries between national capital markets are further blurred, since any issuer or investor has the opportunity to replace the flows of payments in national currency for bonds issued by him or purchased with payment flows in another currency at the expense of issuers or investors in other countries. To do this, you need to buy a swap contract from a bank that acts as an intermediary between two counterparties in different countries.

For the bank, these operations are off-balance sheet. They were practically not regulated in any way. The Asian crisis of 1997-1998, the Russian default of August 1998 showed that over-the-counter derivatives can destabilize the global financial system. That is why, in recent years, regulators have increased their attention to over-the-counter derivatives markets and are developing measures to tighten their control.

More than half of the turnover and nominal value of the underlying assets of exchange derivatives in the late 90s accounted for the United States, which roughly corresponded to the country’s share in the stock and bond market. In the 90s, non-US markets grew at a faster pace compared to the United States, which is simply due to their later opening, but now they have already reached a fairly high level of development and, obviously, the proportions of the late 90s in the coming years will remain.

At the same time, if we use another indicator – the number of exchange derivative contracts, then since the end of the 90s, American exchanges have lost their status as the largest in the world. The German exchange EUREX came forward. At the end of 1998, it ranked first in Europe in terms of the number of contracts sold, and in 1999 it came out on top in the world.

In 2000, the turnover of trade on EUREX increased by 20%, reaching 445 million contracts. Trading turnover on the Chicago Board Options Exchange increased by 28% (to 326 million contracts). According to this indicator, it came in second place in the world. The third was taken by the Paris Exchange, which, as a result of reorganization, united the cash and derivatives markets into a single whole (the Paris Exchange proper, as well as the MATIF futures exchange and the MONEP option exchange). In 2000, the turnover here increased by 26%, reaching 236 million contracts. The third place in the world table of ranks went to the Chicago Mercantile Exchange (CME) – 231 million contracts.

If we use the turnover of nominal values of underlying assets as a criterion, the situation changes markedly. The first and second places fall on the CME and the English LIFFE, the third and fourth – on EUREX and SWOT.

In recent years, new risk management tools have been born. Thus, in 1995, futures contracts based on insured events indices appeared, allowing insurance companies to redistribute risks in property and life insurance between different regions. The Chicago Chamber of Commerce and the Chicago Mercantile Exchange plan to start trading futures contracts on mortgage-based securities (bonds of quasi-state mortgage agencies) in the near future. Futures contracts are developed, the underlying asset of which should be macroeconomic indicators, for example, GDP or inflation.

Among the new instruments designed to split risks, credit derivatives are developing most rapidly. The global volume of their market was estimated at 150 – 200 billion dollars. at the beginning of 1998 and about $500 billion. in 2000.