What a financial market actually is
For the members of the Financial Market Club, FSJES
A company wants to build a factory and needs money it does not have. A household has savings sitting in an account and no plan for them. The two have never met and have no reason to trust each other. A financial market is the set of arrangements that lets them do business anyway.
The job: moving money to where it can be used#
Savers have surplus funds, and borrowers have productive uses for them. The borrower issues a security, a written claim on its future. A bond promises repayment with interest. A share gives the buyer a slice of ownership. The saver buys the claim, and the borrower gets the money. That exchange is the whole function. Everything else in this article is about making it work reliably.
A market is not a building#
Students often picture a trading floor. The Bourse de Casablanca is an institution, but the market is the arrangement of buyers, sellers, rules and prices around it. Morocco's Treasury auction market has no floor in that sense, yet it is where the state sells its debt, and Al Maliya (June 2016) calls it the Treasury's main source of financing. In the first quarter of 2016, subscriptions there reached nearly 35 billion dirhams. After 11.3 billion of repayments, domestic Treasury debt stood at 494.5 billion dirhams at the end of March.
Two routes for the same money#
Savings can reach borrowers through a bank, which collects deposits and lends them on, or directly through a market. Morocco uses both. At the end of 2015 the country had 19 banks with 6,139 branches, and Al Maliya put the banked share of the population at nearly 68%. The market route sits beside that network. The 2016 reforms the magazine describes aim to widen it, with new instruments for issuers and investors who want an alternative to a bank loan.
New securities and old ones#
When the state sells a new bond at auction, that is the primary market: money moves from investors to the issuer. When an investor later sells that bond to someone else, that is the secondary market, and the issuer receives nothing. It still matters a great deal. People will lend for ten or twenty years only if they can sell the claim before it matures. Liquidity in the secondary market is what makes long lending acceptable. Al Maliya says Morocco's securities lending law (Law 45-12) was written for this reason, since such lending plays an important role in market liquidity.
Prices carry information#
A market produces prices, and in debt markets the price is a rate. At the end of March 2016, Moroccan Treasury rates in the primary market were about 2.6% for two years, 2.8% for five years, 3.6% for fifteen years and 4.2% for twenty years. Longer borrowing costs the state more. Compared with December 2015, the two-year rate had fallen 22 basis points and the five-year rate 30. Anyone who wants to price a loan, judge a company or read the economy starts from numbers like these. The magazine reports the movements but does not explain their causes, so be careful about inventing an explanation for them in class.
Rules decide whether anyone shows up#
Nobody buys a claim from a stranger without some protection. That is why the 2016 reforms put so much weight on supervision. The Autorite Marocaine du Marche des Capitaux (AMMC) replaced the CDVM, with more independence. A new insurance supervisor, the ACAPS, joined Bank Al-Maghrib and the AMMC, so that the whole financial sector answers to independent supervisors. The new public-offering law raised disclosure duties for issuers. Transparency is what lets a stranger's promise be priced.
Even the market has an owner#
The Bourse de Casablanca was owned in equal parts by its brokerage firms. They were therefore both its owners and its clients, which Al Maliya says conflicted with good governance practice. In November 2015 the State, the AMMC and the exchange's shareholders signed an agreement to open the capital. The planned split was banks 39%, the Caisse de Depot et de Gestion 25%, independent brokerage firms 20%, insurers 11% and Casablanca Finance City Authority 5%, with room for a foreign strategic partner. Markets are institutions that people design and redesign, and ownership is one of the design choices.
New instruments follow new needs#
The same reform package added tools with specific jobs:
- A futures market, so that economic agents can protect themselves against price swings.
- OPCI real estate funds, to channel long-term savings into property.
- ETF listings and a dedicated market for SMEs, planned in the stock exchange bill.
- A securitization framework that also allows sukuk to be issued.
Each one answers a problem, and the problem usually comes first.
Questions for the club#
- In the Treasury auction figures above, who are the savers and who is the borrower? What security changes hands?
- Why might a saver accept 3.6% for fifteen years but only 2.6% for two?
- If the Bourse's owners were also its main customers, what kind of decision could go wrong?
For the members of the Financial Market Club, FSJES. Moroccan figures describe 2015 and early 2016, so check current numbers before citing them.
Sources: Al Maliya n°60, June 2016 (Moroccan figures, reforms and the Bourse ownership plan). The general definitions are standard textbook ideas; check them against the financial markets chapter of Mishkin. The Moroccan figures describe 2015 and early 2016, so look for current numbers before citing them in a presentation.