What is a Capital Markets Subsidiary?
A capital markets subsidiary is a company owned by an insurer, reinsurer, or commercial bank. This company handles complex deals related to raising money in capital markets. Capital markets are places where companies and governments raise money by selling stocks, bonds and other investments.
The capital markets subsidiary specializes in the kinds of deals normally done by investment banks and securities firms. But it is owned by a different kind of financial company – an insurer, reinsurer or bank. This is different from independent investment banks.
What Do Capital Markets Subsidiaries Do?
Capital markets subsidiaries do many different things to raise money for their parent companies and clients:
They help companies issue new shares of stock to raise money from investors. This is called an initial public offering or IPO. The subsidiary handles all the legal and regulatory work. It also markets the new shares to potential investors.
They help companies issue corporate bonds. Corporate bonds are a way for companies to borrow money from many investors at once. The capital markets subsidiary handles creating and selling the bonds.
They help structure and trade derivatives. Derivatives are complex financial products whose value is based on other assets. Companies use them to manage financial risks or bet on price changes. Common derivatives include options, futures, and swaps.
They provide advice on mergers and acquisitions. This is when companies buy or merge with other companies. The capital markets subsidiary gives advice and handles the complex financial details.
They engage in trading of stocks, bonds, currencies and commodities to make profits. This trading also provides important benefits to the markets. It makes it easier and quicker for investors to buy and sell investments.
Why Do Insurers, Reinsurers and Banks Own Capital Markets Subsidiaries?
There are a few key reasons:
It allows them to offer a wider range of financial services to clients. For example, a commercial bank with a capital markets arm can help its corporate clients issue stocks and bonds. An insurer can help its big clients manage complex risks using custom derivatives.
It provides an additional way to make money. The parent company earns fees and trading profits generated by the subsidiary. This diversifies its revenue and profits.
It allows them to do complex financial deals to support their own business. For example, an insurer might use derivatives traded by its subsidiary to manage the risks on its insurance policies. A bank might have the subsidiary issue bonds to help finance its loans.
Owning a capital markets subsidiary lets the parent company do these things directly. They don’t have to hire an outside investment bank. That gives them more control and typically saves money.
Regulation of Capital Markets Subsidiaries
Capital markets subsidiaries are highly regulated because their activities are complex and risky. They are typically regulated by the same agencies that oversee investment banks and securities firms.
In the United States, key regulators include:
- The Securities and Exchange Commission (SEC) oversees the issuance and trading of securities like stocks and bonds
- The Commodity Futures Trading Commission (CFTC) regulates most derivatives trading
- The Financial Industry Regulatory Authority (FINRA) oversees licensing of subsidiary employees and trading practices
There are similar regulatory bodies in other countries where the subsidiaries operate. For example, the Financial Conduct Authority (FCA) is the main regulator in the United Kingdom.
These regulators require the subsidiaries to follow strict rules about:
- Properly handling client money and assets
- Managing risks and maintaining financial reserves
- Preventing fraud and manipulation of markets
- Ensuring employees are properly trained and licensed
- Detailed record-keeping and reporting to the regulators
The parent insurer, reinsurer or bank is also regulated. But it is usually overseen by different regulators responsible for those industries. For example, in the U.S., insurers are regulated by state insurance departments. Banks are regulated by the Federal Reserve, Office of the Comptroller of the Currency and Federal Deposit Insurance Corporation.
This means capital markets subsidiaries often have to answer to multiple regulators. The regulators work together to supervise these complex companies.
Importance of Capital Markets Subsidiaries
Capital markets subsidiaries play an important role in the financial system. They help their parent companies and clients raise the money needed to grow. Their trading activities help keep markets running smoothly.
At the same time, their complexity means their activities can pose risks to the financial system if not managed properly. That’s why strong regulation is important.
The capital markets subsidiaries of insurers and reinsurers are especially important. They help these companies manage the complex financial risks involved in insurance. This ultimately helps ensure insurers can pay claims to policyholders.
The subsidiaries of banks are key players in investment banking. They help companies access the funding they need by issuing securities. They also help investors buy and sell these securities.
