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The Capital Markets

Book Description

The Capital Markets: evolution of the financial ecosystem is the new standard providing practical text book style coverage of this dynamic market and its products.

Written by the former President of BNY Mellon Capital Markets, LLC for both financial professionals and novices, The Capital Markets provides a comprehensive macro view of the marketplace and how its products operate.  This book is the definitive resource and the companion text to The Capital Markets website.

The subject matter offers an authoritative discussion of the fundamentals of both, the fixed income and equity markets, underwriting, securitizations, derivatives, currency among other products through the lens of leading industry practitioners.   Key Learning Concepts

  • Understand the impact of both global and domestic regulatory changes
  • Learn about the products that holistically make up the capital markets
  • Explore the components of the infrastructure that underpins these markets
  • Examine the tools used for trading and managing risk
  • Review new product innovations

Table of Contents

  1. Cover
  2. Copyright
  3. Dedication
  4. Preface
  5. Acknowledgments
  6. About the Author & Executive Editor
    1. Gary Strumeyer
    2. Sarah Swammy
  7. About the Contributors
  8. Part One: Introduction and Tools
    1. Chapter 1: The Early 21st‐Century Evolution of Global Capital Markets
      1. Introduction
      2. Capital Market Mission and Key Capital Market Questions
      3. Post–Great Recession, Global Capital Markets Chart a More Conservative Course
      4. Accurate Financial Era Definition Helps Chart Business and Portfolio Strategy
      5. The Great Transition Age Unfolds
      6. No Transitions Are Frictionless
      7. The New Conservative Financial Consensus Speeds the Transition to the Next‐Generation Global Financial System
      8. Sturdier Global Financial System Promotes World Economic Growth
    2. Chapter 2: The Role of Global Capital Markets
      1. Introduction
      2. The Basic Products Offered in Capital Markets
      3. Capital Markets as a Substitute for Bank Lending
      4. Key Participants in Capital Markets
      5. Types of Markets
      6. Capital Markets Development
    3. Chapter 3: How the Global Financial Crisis Transformed the Industry
      1. The Situation Prior to the Global Financial Crisis
      2. Overview of Regulation Introduced 2008–2015
      3. Impacts on Business Models
      4. How It Impacts the Functioning of Capital Markets
    4. Chapter 4: Cash Bonds and Futures
      1. Tools of the Trade
      2. Discount Factors
      3. Price‐Yield Formula
      4. U.S. Treasury Debt Obligations
      5. PV01, PVBP
      6. Convexity
      7. Yield Curve
      8. Sample Trades
      9. Forward Prices: Cash and Carry
      10. Forward Rates
      11. Extracting the Discount Factor Curve
      12. Carry, Roll‐Down
      13. U.S. Treasury Futures
    5. Chapter 5: Risk in Capital Markets
      1. Introduction
      2. Overview of Risk Management in Capital Markets
      3. Metrics Used to Measure and Monitor Risk
      4. Brief Overview of Regulatory Landscape
      5. Metrics for Major Risk Types
      6. The Intersection between Risk and Strategy
      7. Future Outlook
    6. Chapter 6: Enablers for Robust Risk Management in Capital Markets
      1. Introduction
      2. Overview of Capital Markets Risk Management Processes
      3. Technology Capabilities and IT Architecture to Support Capital Markets Risk
      4. Data Capabilities to Support Capital Markets Risk
      5. Looking Forward
    7. Chapter 7: Making Markets Work
      1. Introduction
      2. Securities Market Infrastructure
      3. Derivatives Market Infrastructure
      4. Concluding Remarks
  9. Part Two: Capital Markets Products
    1. Chapter 8: Money Markets
      1. Federal Funds Markets
      2. Repurchase Agreements
      3. U.S. Treasury Bills (T‐Bills)
      4. Government‐Sponsored Enterprises/Federal Agency Securities
      5. Commercial Paper
      6. Certificates of Deposit
      7. Eurodollar Deposits
      8. Municipal Notes
      9. Variable Rate Demand Notes
      10. Money Market Funds
      11. How the Financial Crisis of 2007 and 2008 Changed the Money Markets
      12. Conclusion
    2. Chapter 9: Repurchase Agreements
      1. Introduction
      2. Mechanics of a Repo Trade
      3. Margining Trades
      4. Market Participants
      5. Risks Associated with Repo Transactions
      6. Delivery Conventions
      7. General Collateral and Specials
      8. Determinants of Repo Rates
      9. Availability of Collateral
      10. The Federal Reserve and Repo
      11. Repo and Bond Carry
      12. Conclusion
    3. Chapter 10: U.S. Treasury and Government Agency Securities
      1. Features of U.S. Treasury Securities
      2. Types of Treasury Securities
      3. Treasury Auctions
      4. Conclusion
    4. Chapter 11: Government‐Sponsored Enterprises and Federal Agencies
      1. Introduction
      2. Agency Bonds
      3. Overview of Government‐Sponsored Enterprises; Housing GSEs
      4. History of Fannie Mae and Freddie Mac
      5. Federal Home Loan Banks (FHLB)
      6. Overview of Government‐Sponsored Enterprises; Non‐Housing GSEs
      7. Overview of Federal Agencies
      8. Types of Agency Debt
      9. Cost‐Benefit Analysis of Callable Notes
      10. The 2008 Financial Crisis
      11. Conclusion
    5. Chapter 12: Inflation‐Linked Bonds
      1. Indexation
      2. Real Yields and Inflation Breakevens
      3. Seasonality of Consumer Prices
      4. Diversification Properties
      5. Tax Treatment
      6. Risks
      7. Issuance Schedule
      8. I Bonds
      9. Other Countries
      10. Reasons for Issuing Inflation‐Linked Bonds
      11. Bond Mathematics
      12. Summary
    6. Chapter 13: Mortgage‐Backed Securities
      1. Mortgages: The Building Blocks of MBSs
      2. What Are Mortgage‐Backed Securities?
      3. The Issuing Agencies
      4. Why Are MBSs Attractive?
      5. Terminology
      6. Types of Underlying Loans
      7. Agency Pass‐through Trading
      8. Prepayment Risk and Analysis
      9. OAS Analysis and MBS
      10. The Future of Fannie Mae and Freddie Mac Securitization
    7. Chapter 14: Corporate Bonds
      1. What Is a Corporate Bond?
      2. Types of Bond Structures
      3. How Are Corporate Bonds Priced?
      4. Stakeholders in the Corporate Bond Market
      5. Price Transparency
      6. High‐Yield (“Junk”) Bonds
      7. Emerging Bond Markets
      8. What Is an Emerging Market?
    8. Chapter 15: Preferred Stock
      1. Perpetual Preferred Stock
      2. Dividend‐Received Deduction (DRD)
      3. Fixed to Float
      4. Noncumulative Preferred Stock
      5. Cumulative Preferred Stock
      6. Convertible Preferred Stock
      7. Features of Preferred Stock
      8. Anticipating the Risks
      9. Preferred Stock Issuance and Trading
      10. Conclusion
    9. Chapter 16: Distressed Debt Securities
      1. Overview of Distressed Debt Securities
      2. What Constitutes “Distress”
      3. Trading Market for Distressed Debt
      4. Trading Strategy on the Distressed Debt
      5. Puerto Rico: A Distressed Situation
      6. The Sovereign Debt Crisis
      7. Greece
      8. Final Thoughts on Distressed Debt Securities
    10. Chapter 17: Securitization
      1. Securitizations in General
      2. Securitization Basics: Structures, Collateral Types, and Risks
      3. TRACE Reporting
    11. Chapter 18: Asset‐Backed Securities
      1. Automobile Securitization
      2. Credit Card Securitization
    12. Chapter 19: Non‐Agency Residential Mortgage‐Backed Securities (RMBSs)
      1. RMBS Overview
      2. The Creation of RMBSs
      3. Mortgage Quality Types
      4. Participants in the Creation of an RMBS
      5. Credit Ratings
      6. Risk Factors Affecting RMBSs
      7. Operation of the RMBS Market
      8. RMBS Contracts
      9. Representations and Warranties
      10. Opacity and Complexity of Securities
    13. Chapter 20: Commercial Mortgage‐Backed Securities (CMBSs)
      1. Overview of Commercial Mortgage‐Backed Securities
      2. CMBS Market Participants
      3. Underlying Collateral
      4. CMBS 2.0
      5. CMBS Structures
      6. Industry Practices for the Marketing and Sales of CMBSs
    14. Chapter 21: Collateralized Debt Obligations (CDOs)
      1. Introduction to CDOs
      2. Priority of Payments
      3. CDO Market Participants
      4. Collateral Pricing
      5. CDO Trading
      6. Motivation for Issuing CDOs
    15. Chapter 22: Structured Investment Vehicles (SIVs)
      1. Introduction to SIVs
      2. SIV Structure
      3. Structural Protections
    16. Chapter 23: Collateralized Loan Obligations (CLOs)
      1. What Is a Collateralized Loan Obligation (CLO)?
      2. Structures and Strudels: An Introduction to Structured Finance
      3. \textit{Bon Appetit:} Reengineering for Risk Appetite
      4. Chasing Waterfalls
      5. The Capital Structure: The Intersection of Structured and Corporate Finance
      6. Being Friendly: Debt versus Equity
      7. CLO Coverage Tests: Take your PIK
      8. The Life and Times of a CLO
      9. The Loan Market
      10. CLO Report Cards: Performance Metrics
      11. The CLO Manager
      12. Qualitative Analysis of a CLO
      13. Quantitative Analysis of a CLO
      14. A Whole New World: CLOs in the Post‐Crisis Regulatory Environment
      15. Conclusion
    17. Chapter 24: Municipal Bonds
      1. Introduction
      2. Municipal Bond Credit Analysis
      3. The Erosion of the General Obligation Pledge
      4. A Word about Puerto Rico
      5. Types of Municipal Bond Structures
      6. The Primary Market
      7. The Secondary Market
      8. Investing in Municipal Bonds
      9. Municipal Bond Risk Factors
      10. Case Study
    18. Chapter 25: Equities
      1. What Is an Equity?
      2. Types of Equities
      3. Why Do Companies Issue Equities?
      4. Equity Market Participants
      5. Equity Markets
      6. Mechanics of Order‐Driven Markets
      7. History of Equity Trading
      8. Modern Market Structure—Order Types
      9. Modern Market Structure—Complexity
      10. Modern Market Structure—Market Data
      11. High‐Frequency Trading
    19. Chapter 26: Cash Equities in the Secondary Market
      1. Introduction
      2. The Institutional Client
      3. The Portfolio Manager
      4. The Research Analyst
      5. The Buy‐Side Trader
      6. The Broker‐Dealer (Sell‐Side)
      7. Equity Research
      8. The Research Analyst
      9. Research Sales
      10. Execution
      11. Additional Products and Services
      12. Conclusion
    20. Chapter 27: Exchange‐Traded Funds (ETFs)
      1. Constructing an ETF: Market Participants and Their Functions
      2. ETF Regulations
      3. Determining Net Asset Value of ETFs
      4. Portfolio Disclosure
      5. Understanding Different ETF Strategies
      6. Portfolio Construction Methodology
      7. Conclusion
    21. Chapter 28: Equity Capital Markets
      1. Securities Offering Reform of 2005
      2. The Rise of Electronic Trading
      3. The Great Recession
      4. Growth of the ATM Market
      5. ATM Financing versus Follow‐on Offering
      6. Due Diligence Regimen
      7. Transaction Participants and Typical ATM Documentation
      8. The Selling Agent
      9. Corporate Board and Management Oversight
      10. Marketplace Acceptance
      11. Sizing an ATM Program
      12. Regulation M
      13. Procedures and Mechanics of the ATM program
      14. ATM Selling Strategies
      15. Variations of the ATM Model
      16. Summary
    22. Chapter 29: Interest Rate Swaps
      1. Plain‐Vanilla Fixed‐for‐Floating Swaps
      2. Classical Single‐Curve World
      3. The New World: Decoupled Discount and Forward Curves
      4. OIS Market
      5. Libor Market Instruments
      6. Dual Curve Construction
      7. Swap Trading—Rates or Spreads
      8. Swap Spreads
      9. Risk, PV01, Gamma Ladder
      10. Credit Considerations: XVA
    23. Chapter 30: Interest Rate Options
      1. 1‐Step Binomial Model
      2. From 1 Time‐step to 2 to …
      3. Normal Distribution
      4. Modeling Asset Changes
      5. Greeks
      6. Call Is All You Need
      7. Interest Rate Options
      8. Market Players
      9. Caplets/Floorlets: Options on Forward Rates
      10. European‐Style Swaptions
      11. Skews, Smiles
      12. CMS Products
      13. Bond Options
    24. Chapter 31: Commodities
      1. Introduction
      2. Commodity Fundamentals
      3. Types of Commodities
      4. Commodities Exchanges
      5. Commodity Contracts
      6. Key Characteristics
      7. Investment Vehicles
      8. Future Trends
      9. Boom to Bust and Back Again?
      10. New Commodities
    25. Chapter 32: Currency
      1. The Emergence of a Foreign Exchange Market
      2. The Mechanism
      3. Who Uses the Foreign Exchange Market?
      4. What Are the Main Currencies?
      5. Exchange Rate Regimes
      6. The Size of the Foreign Exchange Market
      7. The Future of the Foreign Exchange Market
    26. Chapter 33: Conclusion
      1. Section 1: Safer Banks, but Is the Financial System Safer?
      2. Section 2: Are There Any Unintended Implications of Recent Regulation?
      3. Section 3: A Need for Reinvention
  10. Index
  11. End User License Agreement