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Finance: The big picture

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jacques-yves merelle

on 1 January 2015

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Transcript of Finance: The big picture

Public exchanges
Tax haven & offshore financial centers
Brokerage firms

Banks - Asset Management divisions
Hedge Funds
Pension Funds
Insurance & Retirement Institutions
Rating agencies
Audit & Advisory
Index providers
NGOs & Associations
Cayman Islands
Central Banks
Asset Managers - non banks
Financial News & data providers
Corporate and Investment Banking (CIB)
Private bank
Commercial bank
Clearing House
Other players
Financial Advisors for institutions
Missions (depending on their mandate)
-control inflation (ECB)
-intervene on exchange rates (Bank of Japan, Bank of India)
-make sure that sound banks can operate even during crises (all)
-try to boost growth (Fed)
-manage foreign reserve assets
-oversee financial institutions to ensure their soundness
-give or not authorization to institutions to operate

Dark pools
Operational Finance
Raise funds with:
-Bank loans
-Bonds, commercial papers

Cost control
Tax payments
Offshore activities
Tax advisors
Shell Corporations
Trading and Risk Management software developers
Investor relations
Maintain good relationships with investors
Protect the company against changes in:
-cost of materials
-exchange rates
Retail clients

Bank branches
Support or legislate against tax havens
Overview market players to ensure they comply with the government rules
Go to their bank to:
-deposit money
-get a loan
-invest in financial products
Trust their bank to protect and grow wealth
rate the Governments' solvency
rate the companies that pay for being rated
alert the Governments to bad practices
Influences the Central Bank when possible
Private unregistred investment pools that can use a variety of techniques: short-selling, leveraging, use of derivatives. Often, a high amount of money is required to invest in hedge funds.

Among the strategies:
-mortgage-backed arbitrage
-pair trading
-managed futures

Have enough money to invest in hedge funds
High Net Worth Individuals
Ultra High Net Worth Individuals
track hidden money
Open branches in offshore financial centers to reduce taxes
Help their clients to set up shell corporations
A fund ran by two Nobel prize winners that collapsed hard: c.f. When genius failed
Investment fund of Henry Kravis, c.f. the movie Barbarians at the gate
Warren Buffet's investment fund
The Netherlands
United States
United Kingdom
Stock exchanges
-soft commodities

Institutional brokers
Can invest directly in financial products
Bank branche
Online banks
Financing Solutions and Advisory
Flow Traders
Candesic analysis
Active Asset Allocation
Vault Guides
Zhu (2009)
Ekkehart Boehmer
Vania Schleef
Chatham Financial
AXA Careers
Investment News
Robert Shiller, Yale University
Stéphane Hoblaingre
Jacques-Yves Merelle
EDHEC 2012, Active Asset Allocation
Hedging Solutions
Asset & Liability Management (ALM)
Credit Research
Equity Research
-buy and sell on behalf of the bank they work for
-implement different strategies: arbitrages on indexes, mergers, volatility..., fundamental analysis, algorithmic trading, High Frequency Trading...
-execute either with electronic brokerage platforms or through their broker
-activity increasingly regulated or forbidden for banks
-specialized by asset types:
Synthetic financing
Securities lending
Prime brokerage
Clearing solutions
Interest rate
structural currency risk management
Mission: ensure that the bank has sufficient liquidity to honor its commitments to clients and counterparts,
Help companies to raise equity-linked capital. Advise in particular on:
-Initial Public Offering (IPO = when private companies become public by being listed on an exchange)
-share placement
-capital increases
-convertible bond issues
-assist client coverage to write the pitches
Macroeconomic Research
Corporate Finance
Client coverage
-Serve as relationship managers with Corporates, Financial institutions, Governments...
-identify opportunities
-write the pitches

Structured Finance
Transactions and
Work closely with lending and capital markets.
Design financing solutions through origination, structuring and execution of structured debt, syndication

Day-to-day banking services for Corporates and the bank subsidiaries

-Make sure the IT systems work (banking operations, trading floor, high frequency terminals)
-Code modeling strategies
-Set up risk-management tools
-design processes and systems to complete banking transactions
-help divisions to integrate new tools
Compliance & Control
-internal controls
-make sure the bank complies with ethics and regulation frameworks
-prevention of fraud
-monitor Market, Credit, Liquidity, Portfolio and Operational Risks by ensuring implementation of Investment and Operational Risk Framework, Controls, Processes and Procedures
-design and validate risk models
-Follow a sector
-write research for IPOs
-meet with debt/equity issuers
-give opinion to Buy / Sell / Keep
-assess debt issuers' solvency
-use ratings from rating agencies
-assess listed companies' business plans

-buy and sell financial assets on behalf of clients (execution)
-market making
-stabilize stock prices if needed
-keep active secondary market
-price financial products
-execute either with electronic brokerage platforms or through their broker
-specialized by asset types:
-analyze and give opinions on main market trends and parameters (central banks rates, yields, growth, inflation, unemployment rates, etc.)
Finance: the Big Picture
-shows the different functions in Finance
-shows where they stand and how they interact
-give example of companies in the business
-it is useful to prepare finance job fairs to understand who you are talking to
-easier with a mouse : scroll to zoom in / zoom out infinitely
-organization is different for each company, this only gives an idea of departments' interactions
-some company examples are given, obviously there are plenty of other examples
--> this document is not finished yet, sorry
--> any sugggestion is welcome
Consumer credit
Real estate credit
-Online brokerage
-Personal account management
-accounts management
-local companies servicing
-advice to individuals
-real estate credit
Complex orders execution?
Relationship Managers
-know their clients, meet with them regularly
-propose financial products
-make sure services are properly delivered
-identify opportunities for new products
-Credit / Equity / Commodities...
-Follow a sector
-write research papers on companies or special issues
-give opinion to Buy / Sell / Keep

-Specialists of segments (Fixed Income, Equity, Funds, Commodities...)
-Assist Relationship Managers to formulate advices on specific segments
-help to build portfolios for each asset class
-Source information from Research
Patrimonial & tax advice
-help to pass down legacy
-succession planning
-propose financial arrangements to lower taxes payable
Clients are segmented, for instance:
HNWI > private banking
UHNWI > wealth management

Clients can choose between:
Alternative investments
-Real Estate
DPM - Discretionary Portfolio Management

(they trust the bank to handle their wealth)

Advised Management
(they take decisions and ask for advice)
propose to clients
Structured Products
Direct investment portfolios
Middle Office
Back Office
Family office services

Family office services include:
-help in managing assets
-introduce experts that the FO needs
-coordinates experts
-advise on succession planning
Family offices are a private entity belonging to a family and controlled by its members. It managed for instance the family properties, wealth, participation in companies or plans successions.
-thematic funds: Bonds, World Equities, Commodities...
-Hedge Funds
-Private Equity
Flow traders
-Buy and sell financial asset son behalf of clients
Voice broking
Electronic broking
Post-trade risk mitigation
Broking is about communicating prices between buyers and sellers. Brokers maintain regular contact with clients via the telephone, place orders, assess market liquidity and execute trades.
Brokers take commissions on the transactions they help executing.
Some brokers provide research papers. They recommend clients to buy and sell assets, which creates trading opportunities = revenues for the broker
The broker matches buyers and sellers by phone
-More in markets where there is few liquidity, or where transaction are complex ex: interest rate swaps
-Desks are specialized by products
-Directly in contact with traders
-Identify clients who potentially need to execute trades
Electronic broking gathers buyers and seller on an automated trading platform
-More in markets which are liquid and standardized ex: equities
-Easier and faster to execute 'normal' trades such as Forex or government bonds
-Different broking platforms, specialized by products

Brokers need to differentiate themselves from their competitors, and therefore offer more than trade services. For instance post-trades services that help clients monitor, manage and reduce the risks associated with what happens after the contracts are made.
-compute the portfolio's risk
-propose to reduce interest-rate, inflation or Forex risks
-help pricing illiquid assets
-portfolio reconciliation and compression
-netting and aggregation services
High Frequency Servers
Crossing networks
Matches buy and sell orders electronically for execution without first routing the order to an exchange or other displayed market, such as an electronic communication network (ECN), which displays a public quote
All trades take place at a price discovered elsewhere.
Who owns prices discovered in primary markets?
Discover how much buy and sell volume there is at the crossing price.
ITG’s POSIT, Instinet’s Global Instinet Crossing, Golman Sachs Sigma X, Pipeline, liquidnet, ETF One

and the NYSE’s After-hours Trading Session I.
A certain number of crosses per day
Crossing networks almost invariably have excess demand or supply.

Crossing networks tend to be used for highly liquid stocks and offer money managers the advantages of very low commissions (e.g., 1 to 2 cents per share or lower), anonymity for the buying or selling account, and avoidance of market impact

Electronic Trading platforms
Centralized order-driven market with automated order routing.

Electronic Communications Network (ECN)
It has no trading floor. All orders are sent electronically. The quotes are displayed publicly.

'Lit' venues are trading systems/places that publicly display bid price and ask price and executes all submitted orders at the bid or the ask.
'Lit' venues
'Dark' venues
Retail trading platforms that enable individuals to place Buy/Sell orders electronically. Orders from individuals are entered on the online broker platforms and then routed to ECNs for execution (cf. ECN).
'Dark' venues are trading systems that do not publicly display orders.
Operated by exchanges, Investment banks or agency brokers (broker-dealers that act on behalf of a client, no proprietary orders)
Accessed through crossing networks or directly between participants. Dark pools are equity trading systems that do not publicly display orders.
Unlike the exchange, the dark pool has no market makers through which to absorb excess order flow and thus cannot guarantee that an order will be executed.
It is used by institutions who wish to trade large blocks of shares without revealing their intentions to the broad market, in order to avoid being front-run and move the market while buying/selling.
Dark pools can be run by exchanges, broker-dealers or independent firms:
Dealers trade for their own accounts.
-Day Traders
Brokers trade for other people’s accounts.
-Retail and institutional
-Full-service and discount
Broker-dealers do both.
-Wire houses

Investor Services
Trading venues provide systems that help traders execute their trades. Exchanges and brokers often compete with each other.
Trade facilitators
Corporate and government bonds trade OTC in wire houses.
Inter-dealer brokers often organize markets.
E.g., Cantor Fitzgerald (eSpeed)
OTC Dealers (e.g., Knight/Trimark)

Pacific Exchange / Archipelago
Chicago (formerly Midwestern) Stock Exchange
Boston Stock Exchange
Philadelphia Stock Exchange
National (formerly Cincinnati) Stock Exchange
US regional exchanges
Specially alert to:
-tax avoidance / tax havens
-High Frequency Trading
-speculation on commodities
-insider trading & conflicts of interest
Offshore Leaks
Stock exchanges that operates outside of the country's main financial center in New York City. A regional stock exchange operates in the trading of listed and over-the-counter (OTC) equities
An ECN connects buyers and sellers over a network that eliminates the need for an intermediary such as a broker or investment bank. Tend to handle over the counter (OTC) (small volume) securities
A shell corporation (or 'mailbox' company) is a company which serves as a vehicle for business transactions without itself having any significant operations. it is used for:
-tax evasion purposes
-dissociating an operation from its mother company
-transferring costs
-protecting against litigation
-Set up accounts in countries with low tax rates
-Protect clients by bank secrecy, accounts are easier to conceal to onshore authorities
-Provide banking services to offshore companies
-Can be used as financial hubs for money laundering

Funds domiciliation
Company branches
AM divisions
cf. Institutional Investors
Securities Services?
Some companies have their own trading divisions
For instance :
Shareholding, M&A
Hold shares of other companies
Merge with or buy other companies
Treasury Management
Make sure to have enough money to face financial obligations
Tax haven activities
Offshore financial centers activities
Who's where?
Member of the clearing house
Some exchanges act as their own clearing house. Others contract out the clearing and settlement functions to dedicated organizations.
Clearing Services
An investor (the end-user) wishing to clear derivatives trades can do it through a clearing house directly by joining as a member of the clearing house. However, this require substantial paperwork and to comply with strict requirements.

Instead, the end-user can do its clearing operations through a firm which is already registered as a member of the clearing house. It is therefore said to enter into a "clearing agreement" with the clearing member.
Is able to operate clearing operations in the clearing house
In derivatives transactions, clearing is a post-execution process in which an independent third party, known as the "clearing house" steps in between the original parties of the transaction and guarantees that none of them default before the derivatives agreement matures. For that, it requires that both parties deposit collateral, that may be used to pay a party if its counterpart defaults on payment.

Certain types of derivatives transactions must be "cleared" because it is required by the law, and other transactions can be cleared if required by the parties.
The Clearing House:
-receives the terms of the contract as agreed by both parties
-validates the contract for clearing
-ask both parties to deposit a collateral (cash or financial assets), which is called "posting an initial margin". Parties do not post margin directly to the Clearing House but to the Member they contracted, who in turn posts to the Clearing House.
-holds the deposits until the derivative contract matures
-daily, as the derivatives price moves, recomputes the margin that needs to be posted. If margin is insufficient, it transfers a "margin call" to the Member, who will ask its contractor to post more collateral
Depending on the type of transactions, some derivative exchanges require investors to clear their trades to operate on the market
a firm (generally banks) that holds securtities on behalf of trading firms
CSD are institutions (nearly utilities) that hold securities' certificates (materially or electronically) on behalf of financial companies. This allows these latter to hold their securities at one location where they can be available for clearing and settlement. It is easier to transfer securities when they are stored at the same place.
Each depository is a custodian, but custodian is not a depository. Depository can legally have ownership, which a Custodian cannot.
The representative of the customer in the depository system. Deals directly with the customer.
Depository Participant
Securities Identification
The ISIN Organization gives identification numbers to tradable securities. Securities for which ISINs are issued include bonds, equities, funds, commercial paper and warrants. The ISIN code is a 12-character alpha-numerical code.
Private associations of brokers
-list or de-list securities
-make sure that market operators comply with regulation
-disseminate market prices
-suspend trades for securities which price varies over a given level

Local CSD
International CSD
CSDs can be national or international
Services include:
-Securities safekeeping
-management of dividend payments, stock splits, activation of call/put options
-Securities lending
-Repo Settlement
-Application for ISIN code
Many countries have one domestic CSD that was traditionally associated with the national stock exchange.
CSD that settles trades in international securities such as eurobonds although many also settle trades in various domestic securities, usually through direct or indirect links to local CSDs.
The Netherlands...
Central Securities Depository
Specialist Advisors
Professional Services
Debt Management Agencies
Raise debt to finance Infrastructures, social security, retirement, public services...
-Follow daily the Government cash position
-Issue Government debt (Fixed rate, inflation linked notes)
-Manage the government debt under the most secure conditions in the interest of the taxpayer
Audit is conducted by auditors. It is an independent examination of data, statements, records, operations and performances of a company. It can be conducted by an internal service of the company or a third-party auditor.
Advisory is conducted by consultants. Consultant are called by companies who need expertise on a subject for which they don't have specialists internally.
Insurance companies
Institutions for retirement provision
Mutual Insurance company
Highly impacted during subprimes crisis
Institutions for occupational retirement provision: an institution, irrespective of its legal form, operating on a funded basis and established separately from any sponsoring undertaking or trade for the purpose of providing retirement benefits in the context of an occupational activity on the basis of an agreement or contract agreed individually or collectively between the employer(s) and employee(s) or their respective representatives, or with self-employed persons, in compliance with the legislation of the home and host Member States, and which carried out activities directly arising from that purpose.
Bank offering insurance services
Life & Savings
Property & Casualty Insurance
Asset Management
Savings & Retirement
Personal protection products
Insurance for
-physical damages
-personal property (car, homes...)
-personal or professional liability
-Corporate Services
-Special Industry segments : trains, aerospace, Marine...
Pension schemes
Several Insurance companies have developped retail banking activities to respond to the diversification of banks' activities in insurance
Coverage of
-health insurance
-serious illness
-retirement products
-life insurance products
Independant broker-dealers
Client pay a premium to the insurer to ensure coverage in the event of a loss (fire, accident, theft, etc.). All of the premiums collected by the insurer are used to settle the claims filed by its policyholders. By pooling risks, the insurance company protects them at a reasonable cost
Help clients to set aside capital to finance the future, a special project or retirement. It collects money of policyholders and propose to grow it according to their objectives: investment timeframe, performance expectations, level of risk tolerated, etc. The money is then managed by the Asset Management teams. The insurer pays itself by charging management fees or from the difference between the return it earns on its investments and the rates credited to policyholders
Covers risks related to an individual's physical integrity, health or life.
It functions in a similar way to property insurance lines. The insurer assesses the risk and determines the appropriate premium to charge the policyholder. This kind of coverage can be taken out by individuals for themselves or by companies for their employees.
The asset management business involves investing and managing assets for the Group's insurance companies and their clients, as well as for third parties, both retail and institutional clients. The objective is to obtain the best possible return on invested assets, based on the risk profile and investment timeframe chosen.

Earns commissions or fees that are calculated on the basis of assets under management, investment style and often the quality of the performance actually delivered
Credit Insurance
Business information
Receivables Management
Trade Credit Insurance
Protect accounts receivable from bad debt loss
Debt collection
-Business information on Corporates
-Corporates Financial Analysis
-Credit risk assessment
Retail Banking
Political Risk Mitigation
Identify and try to reduce political risks for international companies, such as expropriation, nationalization, kidnap...
Reinsurance is an insurance for insurance companies. It help them to reduce their risks and smooth their revenues.
An example of contract: if an insurance sells insurance policies, it can reduce its risk exposure by sharing the claims with the Re Insurer. It also shares the premiums to remunerate the Re Insurer.
The Custodian shall also ensure that: a) the sale, issues, repurchase, conversion and cancellation of Shares, performed by or on behalf of the Company are carried out in accordance with the law and the Company's articles of incorporation; b) in transactions involving the assets of the Company, the consideration is remitted to it within the usual time limits; c) the income of the Company is allocated in accordance with the Company's articles of incorporation.
Activist Investment Funds
Trading venues
Securities Services
Paying Agent
Securities Lending
Issuer Services
Clearing Fund
Clearing Houses maintain an "insurance fund" to protect market participants in the event of a Clearing Member default
Universities & Business schools
Endowments & Foundations
Fiduciary managers

Private banking
Credit Rating agencies
Fund Rating
Other Ratings
Rating agencies are companies specialized in assigning rates
Sovereign Wealth Funds
All the services needed to exchange and hold financial instruments (or "securities": equities, bonds, derivatives...)
Brokers (exactly like real estate brokers) help trades to happen by matching buyers and sellers, without holding securities. They act on behalf of others as their Agent, for which they earn a commission. They also cover other services
Market data
Brokers can provide real-time market prices for complex trades. For instance on OTC or commodities markets. Indeed, knowing the market price of equities is straightforward but it is harder to find at what price a specific swap on oil has been recently executed. Brokers can provide information as they help these trades to be executed.
Broker-Dealers internalized
set up their own dark pools, where they can better match customer orders internally and therefore save trading fees that would otherwise be paid
to exchanges and other trading centers.
BATS, direct edge
Broker-dealers are brokers and dealer. Dealers (exactly like antique dealers) buy securities and sell them at a higher price ("markup"). They act for themselves as Principals.
Independent Dark Pools
Broker-dealer-owned dark pools
Exchange-owned dark pools
Asset Management
Front Office
Investment Banking
Investment banking is where the bank helps clients raise money in capital markets and also where the bank advises companies on mergers & acquisitions.
Research is where banks review companies and write reports about future earnings prospects. Other financial professionals buy these reports from these banks and use the reports for their own investment analysis.
Other potential front office divisions that an investment bank may have include: commercial banking, merchant banking, investment management, and global transaction banking.
The goal of the middle office is to ensure that the investment bank doesn’t engage in certain activities that could be detrimental to the bank’s overall health as a firm
The back office provides the support so that the front office can do the jobs needed to make money for the investment bank
Raising Capital and Security underwriting
Investment banks help their clients (companies) to raise capital on financial markets. It is a mix of corporate finance and financial markets.
-Help companies to issue bonds (syndication, roadshows, underwriting...)

-Help Investment Banking teams to sell bonds or shares of companies that need to raise capital
-attend road shows and investor meetings to generate investor demand
-write pitches to sell financial products
-work closely with traders to specify clients' needs, and price financial products
-specialized or cross-assets
-KYC process (client 'on-boarding')
M&A advisory and other corporate reorganizations
Advise buyers and sellers on business valuation, negotiation, pricing and structuring of transactions, as well as procedure and implementation
When an investment bank advises a potential seller (target), this is called a sell-side engagement
When an investment bank advises a potential buyer (acquirer), this is called a buy-side assignment
Other services include advisory on:
-joint ventures
-buyouts (the purchase of a company's shares in which the acquiring party gains control of the targeted firm)
-hostile takeovers
-takeover defense
Perform due diligence = analysis and investigation of the company that the client would like to acquire (gather and analyze financial information, historical and projected financial results, evaluate potential synergies and identify opportunities and areas of concern)

Discuss the potential transaction with partners

Negociate Merger agreements

Process the paperwork
Equity Capital Markets (ECM)
Debt Capital Markets (DCM)
Private placements
Determines the price range at which securities can be issued
In charge of placing the issued securities on the market, they keep everyone in the loop: work closely with traders to get 'market color', talk with sales people who pitch equity offerings, update the investors to tell them about the deal.
Proprietary Traders
Train! Find in what industry / department work the following people:
Jérôme Kerviel
Société Générale

Jordan Belfort
Stratton Oakmont
"The wolf of Wall Street"

Warren Buffet
Berkshire Hathaway

Henry Kravis
in "Barbarians at the Gate"

Nick Leeson
in "Rogue Trader"

"Margin Call"
Kenneth Lay
in "The smartest
guys in the room"

Middle Office
Back Office
Risk Management
Financial Control
Corporate treasury
Corporate strategy
-Combine financial instruments to build pre-packaged investment strategies known as "structured products" for clients
-Work close to traders and sales to design their investment strategies
Fixed income
Foreign exchange
Quantitative Research
Search models to:
-simulate asset classes
-price complex derivatives
-design investment strategies
-develop pricing models
Technical analysts
Identify market patterns that allow traders to enter/exit their positions optimally
Algorithmic trading
Development of automated trading strategies including:
-High Frequency Trading
-Ultra-Low latency strategies
-Optimization of trades execution
-Market making programs
-quote both buy and sell in a financial instrument held in inventory, on a regular and continuous basis at a publicly quoted price > provide liquidity = allow investor to enter/exit strategies at any time
-make profit on the bid-ask spread
Bernard Madoff
Madoff Investment Securities
Ran the largest Ponzi scheme until he was arrested in 2008

-Pure equities ("vanilla")
-Derivatives (futures, options...)
-Delta 1 (ETF, basket trading)
Financial Planners for individuals
-Wide range of products and services, often
heavy on proprietary products
-Large offices, usually located in major cities
-Wide range of products and services, seldom proprietary
-Focus on unbiased financial advice
-Independently owned and operated local businesses

-help retain investors to trade public stocks or other securities
-serve as distributors mutual fund shares, insurance products
-provide investment advisory services
-financial planning
Private Equity
Alternative Investment Managers
Private Equity firm, hedge fund or wealthy individual that buys enough shares of a company in order to gain sufficient control over it to effect major changes. The goal being to sell the company at a higher price.
Specialized alternative investment firms
Funds that directly invest into private companies or that de-list publicly listed companies. The capital is raised from retail and institutional investors, and can be used to fund new technologies, expand working capital within an owned company, make acquisitions, or to strengthen a balance sheet.

The majority of private equity consists of institutional investors who can commit large sums of money for long periods of time. Indeed such investments demand long holding periods to allow for a turnaround of a distressed company or a liquidity event such as an IPO or sale to a public company.
High Frequency Trading
Commodities trading
Market makers
Distressed securities funds
Hedge fund or private equity fund that invests in extremely weak debt or in imminent default ("distressed assets"). The fund buys the debt at a discounted price on a secondary market and then tries to force the debtor (companies, countries or individuals) to repay his debt.
State-owned investment fund investing globally in real and financial assets such as stocks, bonds, real estate, precious metals, or in alternative investments such as private equity fund or hedge funds
Asset managers, also known as "investment managers", are hired by clients (individuals, corporates, institutions...) to invest assets on their behalf. The investment results, whether positive or negative, belong to the client. Asset managers are generally paid on a set schedule based on the amount of assets under their management.
Alpha strategies
Beta strategies
Alternative investment solutions
Multi-assets strategies
Liability driven Investing (LDI)
Defined contributions
Trading & Liquidity
Smart Betas
Active Fixed Income funds
Active Equity funds
Cash management
Securities lending
Hedge funds
Private Equity
Real Estate
Infrastructures & other "real assets"
Target Date funds
Balanced portfolios
-economic P&L calculation
Management of the liquidity risk of the bank

Provide the funding to meet cash requirements and placing cash surpluses
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