Role of Financial Role of Financial IntermediariesIntermediaries

G.SELVANESAN MBA

IntroductionThe term financial intermediary may refer to

an institution, firm or individual who performs intermediation between two or more parties in a financial context. Typically the first party is a provider of a product or service and the second party is a consumer or customer.

Financial intermediaries are banking and non-banking institutions which transfer funds from economic agents with surplus funds (surplus units) to economic agents (deficit units) that would like to utilize those funds. FIs are basically two types: Bank Financial Intermediaries, BFIs (Central banks and Commercial banks) and Non-Bank Financial Intermediaries, NBFIs (insurance companies, mutual trust funds, investment companies, pensions funds, discount houses and bureaux de change).

Financial intermediaries can be:

Banks; Building Societies; Credit Unions; Financial adviser or broker; Insurance Companies; Life Insurance Companies; Mutual Funds; or Pension Funds. The borrower who borrows money

from the Financial Intermediaries/Institutions pays higher amount of interest than that received by the actual lender and the difference between the Interest paid and Interest earned is the Financial Intermediaries/Institutions profit.

The role of financial intermediariesThe role of financial intermediaries

While some investors make their own investment decisions and invest directly in CIS units, many others seek financial and investment advice from an investment professional or financial intermediary.

Financial intermediaries may include banks, broker-dealers, investment advisers and financial planners. Because of the important role these parties play in the process of investment decision making by investors (e.g. by recommending CIS investments to investors), regulatory authorities may regulate these financial intermediaries in a number of ways. Regulation may encompass requirements that financial intermediaries meet certain competency standards such as qualification and training criteria.

Alternatively, a regulatory authority may not impose specific qualifications on a class of financial intermediary, but rather may require that the qualifications of the person be disclosed to potential clients.

In addition, regulatory authorities may impose specific standards of conduct requirements on financial intermediaries when providing services to investors. For instance, a requirement that the financial intermediary make a determination that a particular CIS is a "suitable" investment based on the investment objectives and financial circumstances of the investor to whom the recommendation is made.

Hedgers use futures or options markets to reduce or eliminate the risk associated with price of an asset.

Speculators use futures and options contracts to get extra leverage in betting on future movements in the price of an asset. They can increase both the potential gains and potential losses by usage of derivatives in a speculative venture.

Arbitragers are in business to take advantage of a discrepancy between prices in two different markets. If, for example, they see the futures price of an asset getting out of line with the cash price, they will take offsetting positions in the two markets to lock in a profit.