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Asad Mazhar

Investment banks

An investment bank is a financial institution that assists corporations and governments in


raising capital by underwriting and acting as the agent in the issuance of securities. An
investment bank also assists companies involved in mergers and acquisitions,
divestitures, etc. Further it provides ancillary services such as market making and the
trading of derivatives, fixed income instruments, foreign exchange, commodity, and
equity securities.

Unlike commercial banks and retail banks, investment banks do not take deposits.

To provide investment banking services in the United States an advisor must be a


licensed broker-dealer. The advisor is subject to Securities & Exchange Commission
(SEC) (FINRA) regulation[1]. Until 1999, the United States maintained a separation
between investment banking and commercial banks. Other industrialized countries,
including G7 countries, have not maintained this separation historically. Trading
securities for cash or securities (i.e., facilitating transactions, market-making), or the
promotion of securities (i.e., underwriting, research, etc.) was referred to as the "sell
side".

Dealing with the pension funds, mutual funds, hedge funds, and the investing public who
consumed the products and services of the sell-side in order to maximize their return on
investment constitutes the "buy side". Many firms have buy and sell side components.

Organizational structure of an investment bank


Main activities and units

An investment bank is split into the so-called front office, middle office, and back
office. While large full-service investment banks offer all of the lines of businesses, both
sell side and buy side, smaller sell side investment firms such as boutique investment
banks and small broker-dealers will focus on investment banking and
sales/trading/research, respectively.

Investment banks offer services to both corporations issuing securities and investors
buying securities. For corporations investment bankers offer information on when and
how to place their securities in the market. The corporations do not have to spend on
resources with which it is not equipped. To the investor, the responsible investment
banker offers protection against unsafe securities. The offering of a few bad issues can
cause serious loss to its reputation, and hence loss of business. Therefore, investment
bankers play a very important role in issuing new security offerings.
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Core investment banking activities


Front office
• Investment banking is the traditional aspect of the investment banks which also
involves helping customers raise funds in the capital markets and giving advice on
mergers and acquisitions. Investment banking may involve subscribing investors
to a security issuance, coordinating with bidders, or negotiating with a merger
target. Another term for the investment banking division is corporate finance, and
its advisory group is often termed mergers and acquisitions (M&A). A pitch book
of financial information is generated to market the bank to a potential M&A
client; if the pitch is successful, the bank arranges the deal for the client. The
investment banking division (IBD) is generally divided into industry coverage and
product coverage groups. Industry coverage groups focus on a specific industry
such as healthcare, industrials, or technology, and maintain relationships with
corporations within the industry to bring in business for a bank. Product coverage
groups focus on financial products, such as mergers and acquisitions, leveraged
finance, project finance, asset finance and leasing, structured finance,
restructuring, equity, and high-grade debt and generally work and collaborate with
industry groups in the more intricate and specialized needs of a client.

• Sales and trading: On behalf of the bank and its clients, the primary function of a
large investment bank is buying and selling products. In market making, traders
will buy and sell financial products with the goal of making an incremental
amount of money on each trade. Sales is the term for the investment banks sales
force, whose primary job is to call on institutional and high-net-worth investors to
suggest trading ideas (on caveat emptor basis) and take orders. Sales desks then
communicate their clients' orders to the appropriate trading desks, who can price
and execute trades, or structure new products that fit a specific need. Structuring
has been a relatively recent activity as derivatives have come into play, with
highly technical and numerate employees working on creating complex structured
products which typically offer much greater margins and returns than underlying
cash securities. Strategists advise external as well as internal clients on the
strategies that can be adopted in various markets. Ranging from derivatives to
specific industries, strategists place companies and industries in a quantitative
framework with full consideration of the macroeconomic scene. This strategy
often affects the way the firm will operate in the market, the direction it would
like to take in terms of its proprietary and flow positions, the suggestions
salespersons give to clients, as well as the way structurers create new products.
Banks also undertake risk through proprietary trading, done by a special set of
traders who do not interface with clients and through "principal risk", risk
undertaken by a trader after he buys or sells a product to a client and does not
hedge his total exposure. Banks seek to maximize profitability for a given amount
of risk on their balance sheet. The necessity for numerical ability in sales and
trading has created jobs for physics, math and engineering Ph.D.s who act as
quantitative analysts.
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• Research is the division which reviews companies and writes reports about their
prospects, often with "buy" or "sell" ratings. While the research division may or
may not generate revenue (based on policies at different banks), its resources are
used to assist traders in trading, the sales force in suggesting ideas to customers,
and investment bankers by covering their clients. Research also serves outside
clients with investment advice (such as institutional investors and high net worth
individuals) in the hopes that these clients will execute suggested trade ideas
through the Sales & Trading division of the bank, thereby bringing in revenue for
the firm. There is a potential conflict of interest between the investment bank and
its analysis in that published analysis can affect the profits of the bank. Therefore
in recent years the relationship between investment banking and research has
become highly regulated requiring a Chinese wall between public and private
functions.

• Global transaction banking is the division which provide cash management,


custody services, lending, and securities brokerage services to institutions. Prime
brokerage with hedge funds has been an especially profitable business, as well as
risky, as seen in the "run on the bank" with Bear Stearns in 2008.

• Investment management is the professional management of various securities


(shares, bonds, etc.) and other assets (e.g. real estate), to meet specified
investment goals for the benefit of the investors. Investors may be institutions
(insurance companies, pension funds, corporations etc.) or private investors (both
directly via investment contracts and more commonly via collective investment
schemes e.g. mutual funds). The investment management division of an
investment bank is generally divided into separate groups, often known as Private
Wealth Management and Private Client Services.

• Merchant banking is a private equity activity of investment banks.[2] Current


examples include Goldman Sachs Capital Partners and JPMorgan's One Equity
Partners. (Originally, "merchant bank" was the British English term for an
investment bank.)

• Commercial banking

Middle office

• Risk management involves analyzing the market and credit risk that traders are
taking onto the balance sheet in conducting their daily trades, and setting limits on
the amount of capital that they are able to trade in order to prevent 'bad' trades
having a detrimental effect to a desk overall. Another key Middle Office role is to
ensure that the above mentioned economic risks are captured accurately (as per
agreement of commercial terms with the counterparty), correctly (as per
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standardized booking models in the most appropriate systems) and on time


(typically within 30 minutes of trade execution). In recent years the risk of errors
has become known as "operational risk" and the assurance Middle Offices
provide now includes measures to address this risk. When this assurance is not in
place, market and credit risk analysis can be unreliable and open to deliberate
manipulation.

• Corporate treasury is responsible for an investment bank's funding, capital


structure management, and liquidity risk monitoring.

• Financial control tracks and analyzes the capital flows of the firm, the Finance
division is the principal adviser to senior management on essential areas such as
controlling the firm's global risk exposure and the profitability and structure of the
firm's various businesses. In the United States and United Kingdom, a Financial
Controller is a senior position, often reporting to the Chief Financial Officer.

• Corporate strategy, along with risk, treasury, and controllers, often falls under
the finance division as well.

• Compliance areas are responsible for an investment bank's daily operations'


compliance with government regulations and internal regulations. Often also
considered a back-office division.

Back office
• Operations involves data-checking trades that have been conducted, ensuring that
they are not erroneous, and transacting the required transfers. While some believe
that operations provides the greatest job security and the bleakest career prospects
of any division within an investment bank,[3] many banks have outsourced
operations. It is, however, a critical part of the bank. Due to increased competition
in finance related careers, college degrees are now mandatory at most Tier 1
investment banks.[citation needed] A finance degree has proved significant in
understanding the depth of the deals and transactions that occur across all the
divisions of the bank.

• Technology refers to the information technology department. Every major


investment bank has considerable amounts of in-house software, created by the
technology team, who are also responsible for technical support. Technology has
changed considerably in the last few years as more sales and trading desks are
using electronic trading. Some trades are initiated by complex algorithms for
hedging purposes.
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Investment Banking in Pakistan


Investment banking is an important pillar of the financial sector and particularly the
NBFC regime in Pakistan. It took its roots in 1987, however, its still at a nascent stage.
Today, investment banks in Pakistan are providing a full array of capital market products
and advisory services to their clients. The industry is comprised of a variety of companies
which are actively and efficiently serving institutional, corporate, government as well as
individual clients.

• Al-Towfeek Investment Bank Limited


• Invest Capital Investment Bank Limited
• Atlas Investment Bank Limited
• Crescent Investment Bank Limited
• Escorts Investment Bank Limited
• First Credit and Investment Bank Limited[1]
• IGI Investment Bank Limited
• Fidelity Investment Bank Limited
• Islamic Investment Bank Limited
• AMZ Securities
• Orix Investment Bank (Pakistan) Limited
• Prudential Investment Bank Limited
• Trust Investment Bank Limited
• Arif Habib Investment and Mutual funds Co.

Investment + Commercial Banks


In order to further strengthen the sector, particularly in the face of this competition, the
SECP would like to move towards integration through instituting a Universal Non-
banking regime. This will include a universal license, under which the NBFCs can
undertake all the activities allowed to them simultaneously without the need for applying
for separate licences. In case if one activity is being concentrated, the NBFC will have
the choice to decide for obtaining one single-activity based licence. Capital requirements
for such a universal non-banking licence are currently being worked out.

Examples of Investment+Commercial Banks


• citibank investment banking
• Atlas Investment Bank Limited
• dawood investment bank
• meezan investment bank
• standard chartered investment banking
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Who provide regulations to investment banks?

Subsequent to the transfer of regulatory authority over investment banks from SBP to
SECPin December 2002, and promulgation of the NBFC Rules, the SECP has undertaken
a two pronged approach. One is to liquidate the investment banks which were in
financial trouble and the other is to develop and strengthen the existing ones into healthy
NBFCs. Currently there are 13 investment banks among which only 9 are licensed; the
remaining are in liquidation proceedings. Within the NBFC sector, investment banking is
at the higher end in terms of the specialized services they provide, particularly the capital
market product and advisory services.

The Securities and Exchange Commission of Pakistan (SECP), in exercise of powers


conferred under section 282 D of the Companies Ordinance, 1984 (the “Ordinance”)
hereby directs all Non-Banking Finance Companies licensed to undertake the business of
Investment Finance Services, Leasing, Housing Finance Services,
So state bank of Pakistan provide the regulations to the investment banks working in
Pakistan whether there are working individually or the commercial banks that are doing
investment activities.
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http://en.wikipedia.org/wiki/Investment_banking

http://www.accountancy.com.pk/newsgen.asp?newsid=789

www.sbp.org