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Debt securities are often called fixed income securities, wherein borrowings being made in return for a predetermined stream of cash flows, paid on a fixed schedule. Fixed income securities broadly are classified under the general definition of debt securities or interest rate sensitive securities The concept of fixed income is often nebulous when instruments such as floating rate instruments or other instruments that have future cash flows uncertainties
Defining Features
The defining feature is that there are well-defined rules governing when there will be a payout to the holder of the security Holders of debt securities are creditors, and the issuer is the borrower (Government, or corporate) Cash flows promised to the holders of securities represent contractual obligations of the respective issuers
Benchmarks
Government Securities issued keeping in view the yield curve development, liquidity positions, minimizing roll over risk, benchmark & YC implications i li ti Benchmarks is a product of market as well as RBI operations
Market Participants
Treasury Bills
Instruments of short-term borrowings of Govt. Maturity 91, 182 and 364 days Issued at a discount through auction by RBI and redeemed at par Serves as a bench mark for short-term securities All issuance of T-Bills (including under MSS & LAF) run online on PDO-NDS system Multiple Price based Auction Demand for T-Bills inversely related to call rates Repo transactions permitted in all T-Bills
Municipal bonds(ULBs)
Trends towards decentralization and urbanization have necessitated borrowings by municipal corporations Municipal bonds have a number of interesting features. features There are two basic types: General Obligation Bonds: The governments taxation authority backs the bond. Revenue bonds revenue from a specific project is used to pay the bonds down Tax-free bonds
Municipal Bonds
Municipal issues are in the nature of revenue bonds, with fixed interest rate, with government guarantee, maturity 7-15 years, are in the form of Structured Obligations(SO)
M unic i pa l C o r po ra t io ns (A mo u nt i n C ro re s o f R upe e s )
M u n ic ip al C o rp o ratio n B an g alo re A h me d abad N as h ik L u d hain a N ag pu r M ad u rai I n d o re H yde rab ad Is s ue D ate 1 997 1 998 1 999 1 999 2 001 2 001 2 001 2 002 M atu rity (Y e ars ) 7 7 7 10 7 15 7 8 .5 C o upo n (% ) 13 14 1 4.75 1 3.5 -14 1 3.43 1 2.25 1 1.50 7 R atin g A -(S O ) A A -(S O ) A A -(S O ) L A A (SO ) L A A -(SO ) L A + (SO ) A A +(S O ) A ge nc y C R ISIL C R ISIL C R ISIL IC R A IC R A IC R A C R ISIL A m o unt 1 00 1 00 1 00 10 50 30 10 8 2.5 G u ar an te e Yes No No No No No Ye s No
AMC
Guarantee by DFIs/MDBs
Bonds Principal + Interest ULBs Loan/Bonds Project Cash Flows Escrow Debt Reserve Fund
Corporate Securities
Commercial papers, Bonds/NCDs/ABS Secured or unsecured debt Embedded Options: calls, puts Spread as per ratings Ratings and rating migration Securities other than AAA are classified as non-SLR securities Corporate trustee represents bondholders May have guarantees(third partys guarantees) May have debt service reserve fund/Sinking Fund Can be asset backed, structured securities
Trading Size
Major Players
Issuers (typically Governments, Corporations, Municipalities, Banks and FIs) Investors or the buy side institutions (banks, financial institutions, Pension Funds, Mutual Funds, Debt Funds, Reserve Bank of India, Insurance Companies, etc. etc ) Foreign Institutional Investors Primary Dealers Inter-dealer Brokers Rating Agencies Reserve Bank of India
G Sec Operations
G-SECs issued by the Order of the President of India thro the Ministry of Finance(Department of Economic Affairs: Budget Division) RBI manages the entire government debt operations at its IDM Both the initial sale of securities and subsequent transfers are handled by the RBI Settlement thro a computerized book-entry system called the SGL and constituents SGL Accounts Settlement System is Delivery versus payment (DvP)/RTGS with T+0, T+1 as the conditions of deals
Institutional Arrangements
Regulator Government of India (through the Public Debt Act of 1944, replaced with GS Act, 2006) empowers RBI to regulate primary issuance of debt securities, issuance and redemption; Lien/Pledge /Hypothecation, STRIPS SEBI regulates primary issuance of debt securities other than government securities Trading Direct, Broker driven (OTC markets generally predominate) Anonymous Order Driven
Platforms NDS-OM/NDS-Call/CBLO/CROMS NDS-OTC
Organization
Negotiated Dealing System (NDS) NDS of RBI provides an electronic platform for negotiating trades in government securities. NDS Order Matching (NDS-OM) NDS-OM is an electronic, screen based, anonymous, order driven trading system, introduced by RBI as part of the existing NDS system to system facilitate electronic dealing in government securities WDM Segment of NSE Trading System
BSE and NSE to have in place for bond trading
NSEs Wholesale Debt Market (WDM) segment offers a fully automated screen based trading platform through the NEAT (National Exchange for Automated Trading) system
Trading
Trade
Post-Trade
Clearing
Clearing
Pre-Settlement
Settlement
Settlement
Post-Settlement
RBI operates both as the monetary authority and the debt manager to the GOI
Debt manager (debt management functions are undertaken at the IDM cell of the RBI) Issuer & custodian of government bills and securities Manages servicing and redemptions Raises funds on behalf of the state governments Monetary Authority (monetary policies for price stability and liquidity management) Open-market operations (OMO) Bank rate policy Repo/Liquidity Adjustment facility (LAF) Market Stabilization Schemes (MSS de-sequestering recently)
www.fimmda.org
Self regulatory organization Market follows FIMMDA practices Valuation methods prescribed for the markets FIMMDA/PDA/Bloomberg yield curve used by markets FIMMDA-CRISIL Spread matrix for corporate bond pricing FIMMDA corporate bond valuer
Primary Dealers
Primary Dealers are those banks & securities firms that are approved to transact directly with the Reserve Bank in auctions. Advantage of primary dealer system is that the Reserve Bank will be in a position to conduct its auctions efficiently with a small number of well capitalized institutions. Primary dealers are expected to Participate in auctions Underwrite Auction Act as "Market Makers RBI provides liquidity support (LAF) PDs have access to the RBIs open market operations PDs are permitted to borrow and lend in the money market
Primary Dealers
A Bank PDs 1 Citibank N.A., 2 Standard Chartered Bank 3 Bank of America N.A. 4 J P Morgan Chase Bank, N.A. 5 HSBC Bank 6 Bank of Baroda 7 Canara Bank 8 Kotak Mahindra Bank Ltd. 9 Corporation Bank 10 HDFC Bank B Stand alone PDs 1 IDBI Gilts 2 ICICI Sec P D Ltd. 3 PNB Gilts Ltd. 4 SBI DFHI Ltd 5 STCI PD Ltd 6 ABN AMRO Securities (India) Pvt 7 Deutsche Securities (India) Pvt Ltd 8 DSP Merrill Lynch Securities Trading Ltd 9 Lehman Brothers Securities Pvt.Ltd.
Adequate availability of benchmark securities Benchmark issuance focus more on supply of bonds across maturities Re-issuance/re-opening be tailored to market liquidity Lengthening of the maturity helps develop the secondary debt securities market
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Secondary Markets
Banks typically hold a substantial portion for bonds, effectively to maturity, to a smaller extent for short term trading purpose Large portion of HTM portfolio as against the trading portfolio Contractual saving institutions mainly focus on long term bonds, buy-hold investors in general Captive nature of holdings create market distortions in yield and illiquidity (Pension funds, mutual funds, insurance companies) Price discovery processes must be as efficient as possible such that true market prices that accurately reflect conditions in the economy
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Reference Rates
FIMMDA/NSE MIBOR/MIBID Call/Repo/CBLO MIFOR/OIS/IRS NSE/CCIL ZCYC NSE/CCIL Bond Index FIMMDA/CRISIL Spread Matrix NSE Var
Market Benchmarks
FIMMDA, PDAI & Bloomberg Prices of GOI Securities FIMMDA Corporate Bond Spread Matrix FIMMDA Corporate Bond Traded Data & Spreads FIMMDA Moneyline Telerate India Commercial Paper FIMMDA y p Moneyline Telerate India Treasury Bill FIMMDA State Loan Calculator FIMMDA NSE MIBID/MIBOR FIMMDA Reuters MIFOR, MIOCS, MIOIS and MITOR
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Yield Curve
NSE ZCYC based on NS CCIL ZCYV based on NSS FIMMDA/Bloomberg Bootstrapping g pp g
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Dollar Index: EUR 57.6%, JPY 13.6%, GBP 11.9%, CAD 9.1%, SEK 4.2%, CHF 3.6%
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Reforms
Repos, CLBO, Short sales permitted When Issued introduced STRIPs introduced IRF i introduced d d FRAs, Swaps, OIS exist
Let us see how much you learn by y y reading Indian debt markets
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