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Risk Management Lessons from the Global Financial Crisis for Derivative Exchanges

Jayanth R. Varma

Developing Private Finance Initiatives (PFI)/Public-Private Partnerships (PPP) for Urban Environmental Infrastructure in Asia Private Finance to Private Entrepreneurship

Miao CHANG and Hidefumi IMURA

Susan Thomas

3 Development Financial Institutions and the Development of Financial Markets S. Morris 4

Finance Teaching and Research after the Global Financial Crisis

Jayanth R.Varma

Comparison of Indian Accounting Standards with International Practices

V. Raghunathan


The Financial Crisis Financial Literacy Among Retail Investors in U.S

Corporate Finance Risk: An Empirical study

Michael Goldberg
Seth L. Elan

8 9

Natalia Outecheva


SEBIs Regulation on Indian markets

G. Rabinath


1 ARTICLE 1 Risk Management Lessons from the Global Financial Crisis for Derivative Exchanges BY:-Jayanth R. Varma

During the global financial turmoil of 2007 and 2008, no major derivative clearing house in the world encountered distress while many banks were pushed to the brink and beyond. An important reason for this is that derivative exchanges have avoided using value at risk, normal distributions and linear correlations. This is an important lesson. The global financial crisis has also taught us that in risk management, robustness is more important than sophistication and that it is dangerous to use models that are over calibrated to short time series of market prices. The paper applies these lessons to the important exchange traded derivatives in India and recommends major changes to the current margining systems to improve their robustness. It also discusses directions in which global best practices in exchange risk management could be improved to take advantage of recent advances in computing power and finance theory.

A) Derivative exchanges have fared much better banks during the global financial crisis as their models were more robust even if they appeared crude in comparison to the internal models of the large banks. This is an important lesson and risk managers must continue to emphasize robustness in their models. B) Sophistication and market calibration should never be pursued at the cost of robustness. C) It would be a mistake for exchanges to become complacent about their margining systems. D) Derivative exchanges in India need to look carefully at their margining methodology and eliminate certain elements that could contribute to the fragility of the risk management system.

GAPS a) Author did not mention the impacts of global risk management crisis on most effected countries other than India and reasons for the same. b) He did not suggest the change in policies needed to avoid risk management crisis and the collaboration needed by the countries to recover from such crisis effectively.

2 ARTICLE 2 Developing Private Finance Initiatives (PFI)/Public-Private Partnerships (PPP) for Urban Environmental Infrastructure in Asia Miao CHANG* and Hidefumi IMURA ABSTRACT Conventionally urban environmental infrastructure (UEI) has been considered to be publicly provided property in many countries. Since the 1990s, however, some developed countries have promoted infrastructure development by PPP/PFI as an innovative and flexible option for reconstruction of the national economy, increase in efficiency of the public sector, and quality improvement of public services. Meanwhile, in developing countries, expectations of private-sector funds have grown because of insufficiency of public funds for construction of UEI, requiring rapid development. This urged many countries to adopt an environmental policy based on the polluterpays principle and establish surcharge and user charge systems, allowing participation of the private sector. Additionally, technical innovation in UEI and efforts toward a resource recycling society made such activities as waste-to-energy, use of recycled water, and waste recycling business fields profitable, and this stimulated the private sector to enter into this area. ISSUES COVERED This paper first clarifies efforts toward development of UEI in Asian countries and causal relationship between PFI for UEI development and sustainable growth, and proposes PFI which is necessary for UEI development. Then it presents current status of PFI for UEI development in Asian countries and its available options, points out that appropriate role sharing between the government and the private sector depends on realization of optimum risk sharing and profit sharing, and discusses potential risks and problems. Finally the authors design a framework for promoting PFI in Asian countries, propose establishment of special organizations for promoting application of PFI, appropriate measures for the private sector to avoid risks, and development of policies to support participation of the private sector. In short, this paper presents an effective prescription of funding to many Asian countries that are rapidly developing UEI, and urges them to establish an optimum regime for UEI development. GAPS The author did not mentioned the major private players in the Asian countries who are focusing towards UEI and PFI (private finance initiatives).He did not mentioned about the steps taken by the government to attract private companies towards UEI and the approach government of Asian countries should adopt about sustaining PPP(public private parternership).


Private Finance to Private Entrepreneurship S. MORRIS ABSTRACT For the last few years, there has been much discussion and agonising about how to attract private finance to infrastructure. This paper argues that we have so far tried to attract private finance without welcoming private entrepreneurship. The government while attempting to withdraw from the financing of infrastructure has sought to retain its decision-making role in the selection, design and operation of infrastructure projects. This means that even today capital markets have not been assigned much of a role in allocating capital in the infrastructure sector. There has not been much room for entrepreneurs willing to take large risks in anticipation of large rewards. The net effect is that while there have been sporadic successes in attracting private finance to infrastructure projects, there has been little success in transferring the risks of these projects to the private sector. FINDINGS To achieve this result, the government needs to:

give the private sector substantial freedom (subject only to very broad guidelines) to identify and design profitable infrastructure projects adopt broad-brush non-distorting incentives; and desist from premature and excessively rigid sectoral regulation

There would remain a class of infrastructure projects that the government may consider of strategic importance but which entrepreneurs do not find profitable to implement. These would require direct government support in the form of an outright subsidy (a negative licence fee established through competitive auction) or some form of credit enhancement. But these should be the exception rather than the rule. GAPS a)The author did not talk about the current policies of the government and its approach towards welcoming private entrepreneurship. b) The author did not mentioned about the present sectors(except infrastructure projects) in which government has been unresponsive towards welcoming private entrepreneurship and the reasons due to which government is not doing so.

4 ARTICLE 4 Development Financial Institutions and the Development of Financial Markets Susan Thomas

ABSTRACT In India, financial markets were liberalized from the mid 1980s onward. Financial liberalization means a redefinition of the DFIs mission and nature of operations. During the era of financial repression, the developmental role of these institutions consisted in mobilizing large amounts of capital and deploying them in direct funding of industrial enterprises. In an era of financial deregulation, the developmental role is very different development of markets and market institutions, innovation of new products and securities and using relatively small amounts of capital to intermediate and support much larger capital flows through the markets. Thus there is a role for a DFI in an era of financial deregulation, but it is a very different role from its past role. Not all DFIs would cope with these traumatic changes in mission and emerge as free market DFIs.

FINDINGS The free market DFIs whether newly created or created by the transformation of older DFIs must confront a number of difficult questions about management and governance .Old performance measures like loan disbursements, profits and contribution to priority sectors are meaningless and irrelevant. New measures are needed that measure the developmental role that they have played.

GAPS a)The author did not mentioned the current initiatives taken by government towards encouraging development of financial institutions and the reforms needed towards development of financial institutions. b)The author did not mentioned what strategic measures need to be taken in above case. c)The author failed to mention the scope of DFIs in the market.

5 ARTICLE 5 Finance Teaching and Research after the Global Financial Crisis Jayanth Varma

ABSTRACT Finance has come in for a great deal of criticism after the global financial crisis of 2007 and 2008. Clearly there were serious problems with finance as it was practiced in the years before the crisis. To the extent that this was only a gap between theory and practice, there is a need for finance practice to go back to its theoretical roots. But there is a need to re-examine finance theory itself.

FINDINGS The paper begins with an analysis of what the crisis taught us about preferences, probabilities and prices, and then goes on to discuss the implications for the models that are used in modern finance. The paper concludes that the finance curriculum in a typical MBA programme has not kept pace with the developments in finance theories in the last decade or more. While a lot needs to change in finance teaching, finance theory also needs to change though to a lesser extent. Many ideas that are well understood within certain subfields in finance need to be better assimilated into mainstream models. For example, many concepts in market microstructure must become part of the core toolkit of finance. The paper also argues that finance theory needs to integrate insights from sociology, evolutionary biology, neurosciences, financial history and the multidisciplinary field of network theory. Above all, finance needs more sophisticated mathematical models and statistical tools.

GAPS a)The author did not talk about the areas in which finance was most effected during crisis and to what extent practical approach should be used. b) The author did not mentioned about what changes it will bring to the current teaching style of finance and the benefits to do so. c) The author did not mentioned about the areas in which integration is needed and what benefits it would fetch towards dealing with crisis.

6 ARTICLE 6 Comparison of Indian Accounting Standards with International Practices V. Raghunathan ABSTRACT Today, the Indian investor has seen the difference between Indian accounting standards and international standards. We therefore find a palpable sense of dissatisfaction with Indian accounting standards among Indian retail and institutional investors. It then becomes the regulators task to take a hard look at Indian accounting standards and attempt to bring them on par with global best practices. In this paper, focus is on key changes that must be made in our standards to reduce the gap with global best practices.

FINDINGS Urgent issues which need immediate action, preferably by outright adoption of the relevant international standard.

Consolidation of Accounts: Segment Reporting Deferred Tax Accounting International Transactions Combinations, Joint Ventures and Related Party Transactions

Other important issues where we must move quickly towards the international standard:

Derivatives Accounting Lease Accounting Interest Capitalisation and Accounting Extraordinary and Non Operating Income and Expenses Results from Discontinued Operations Formatting and Presentation of Accounts

GAPS a)The author did not mentioned about the sectors which are most needy towards adoption of new accounting standards. b) He also did not mention about what are the flaws in the Indian accounting system as compared to foreign accounting system. c) He failed to discuss the impacts of adopting the foreign accounting system and what scope it will bring for the existing large scale industries as well as its scope for small scale industries.


The Financial Crisis M. Goldberg


The global financial crisis has revealed the need to rethink fundamentally how financial systems are regulated. It has also made clear a systemic failure of the economics and financial profession. There has also been little exploration of early indicators of system crisis and potential ways to prevent this malady from developing. In fact, if one browses through the academic macroeconomics and finance literature, systemic crisis appears like an otherworldly event that is absent from economic models.


There are, some aspects that make this crisis different from its predecessors. They are:A) The preceding boom had its origin at least to a large part in the development of new financial products that opened up new investment possibilities (while most previous crises were the consequence of overinvestment in new physical investment possibilities). B) The global dimension of the current crisis is due to the increased connectivity of our already highly interconnected financial system. Both aspects have been largely ignored by academic financial economists.

GAPS a)The author did not mentioned about the pattern in which the preceding crisis affected the global economy but he discussed in detail about the previous crisis patterns. b) He also lacked in giving clarification about how to avoid such crisis in future. With the change in global scenario, the author did not mentioned how such crisis will affect major emerging economies, the sectors that might need a global reform and the collaboration needed by the economies to avoid significant damages in such sectors.


Financial Literacy Among Retail Investors in U.S Seth L.Elan ABSTRACT

This report assesses the financial literacy of retail investors in the United States. Economists have developed various definitions of financial literacy. Financial knowledge denotes a stock of knowledge acquired through education and/or experience specifically related to essential personal finance concepts and products.Literacy involves the ability and confidence to effectively apply or use knowledge related to personal finance concepts and products. The crux of the matter is that a lack of financial literacy can have a very harmful effect on financial well-being.

A) If employees do not have the requisite knowledge, they will not be prepared to make informed decisions regarding the management of their financial affairs, including investing for a secure retirement. B) Surveys also demonstrate that investors lack essential knowledge about investment fraud and the importance of investment costs and expenses. C) Studies have consistently found that American investors do not understand the most basic financial concepts, such as the time value of money, compound interest, and inflation.

RESERCH GAPS a) According to the author, women tend to be more risk-averse investors than men, who often suffer from overconfidence. However, only some of the survey questions point to a behaviour-based explanation, indicating that researchers need to explore other possible causes for this finding. b) The study needs additional research to find an explanation for the differences in how men and women become financially literate.

9 ARTICLE 9 Corporate Finance Risk: An Empirical study Natalia Outecheva ABSTRACT This paper analyzes the behaviour of distress risk, its attributes, and pricing in equity returns. Large failures and corporate scandals in recent years have pointed to the need for extended and deepened research on financial distress, especially on the accelerated impairment of value in the last stages prior to default, when distress risk achieves its highest level.

FINDINGS A comprehensive analysis of the companys exposure to distress risk and an investigation of risk behaviour in financial distress are significant for three reasons: Changes in the corporate cost of capital, which is an increasing function of the risk of a company, are important for investors when deciding whether to invest in comparable securities. Knowledge of risk and differentiation between systematic and unsystematic sources of financial distress are relevant for the choice of active and passive investment strategies in the securities of distressed companies. The behaviour of distress risk is useful for understanding the adverse processes in a distressed company prior to default, which can be used to improve crisis management.

RESEARCH GAPS 1) The author did not mention the time parameter which is needed for proper risk analysis. 2) The author did not provide detailed analysis of such problems and the methods to analyze distress risk.


ARTICLE 10 SEBIs Regulation of the Indian Securities Market: A Critical Review of the Major Developments G Sabarinathan ABSTRACT Since the empowerment of the Securities and Exchange Board of India (SEBI) through an Act of Parliament in 1992, SEBI has come up with a number of initiatives aimed at regulating and developing the Indian securities market and improving its safety and efficiency. These initiatives have made an impact on nearly every aspect of the market. Some of those initiatives have transformed the market fundamentally. Particularly noteworthy is the growth in the following: Market capitalization Number of listed firms Trading volumes and turnover both in the spot and futures markets. FINDINGS Major developments in the field of regulation by SEBI are:a) In terms of enforcement, the data suggest that SEBI has achieved considerable progress in terms of detecting and disposing of instances of non-compliance or infractions. b) There have also been concerns that SEBI awards penalties too late and too little in comparison to the financial scale of the infraction. c) SEBI is also said to have had a poor record in carrying its award through the appellate and the judicial systems. RESEARCH GAPS a) Without a more careful analysis, it is hard to say whether that is the result of poor legal preparation on the part of SEBI or the leniency of the appellate systems towards the trade. b) while the data provide a quantitative measure of the work accomplished by SEBI, they do not measure its impact on the efficiency of the market.