ray-capital market met

8/8/2019 Ray-Capital Market MET

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Capital Market


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Indian Securities Market

State of art technology

Emergence of CCP

Shorter settlement cycle T+2 Dematerialisation

Advanced Risk management practice

Capital adequacy for members Capital cushion if TLA used >90%for 7 days

Margins

Settlemen

t Guaran

tee Fund


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T + 2 Settlement Process

NSE and BSE provide the Trading Platform

Members report all locked-in Trades

Exchanges forward the details to Clg. Corpns CCs determine net settlement obligations for

both funds and securities

They interpose as a CCP to all trades CCs download obligations to CMs


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T+1

CMs confirm Trades by 1.00 PM

The CCs download settlement reports by 2.30 PM

CCs send instructions to banks/depositories to debit

members account

CMs are required to fund their accounts with

settlement banks by 10.30 AM on T+2 day

CMs are required to ensure availability of stocks intheir pool accounts with NSDL/CSDL by 10.30 AM on

T+2 day


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T+2

Clearing Banks/Depositories confirm funds/

stocks settlement by 11.00 AM

After matching funds and securities CCsinstruct pay outs by 1.30 PM

Settlement is complete on release of pay outs

If fu

nds shortage securities payout withhel

d

If stocks shortage it is allocated and

defaulting clearing members a/c debited


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Risk associated with Settlement

Principal

risk

Replacement

Risk

Liquidity Risk


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Risk Mitigation measures

Monitor net-worth

Monitorexposure

Monitormargins


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SGF

The Exchange guarantees all bonafide trades

Separate SGF for cash segment

Corpus of SGF Core Corpus Contributed by Exchange

Members initial contributions

Con

tin

uous con

tribution

s to the fund


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Corporate Bonds - Characteristics

Independent Rating Agencies rate bonds

Financial Standing of the company matters

Investme

nt Gra

de Bo

nds

Corporate is financially stable

Possibility ofdefault is less

Coupon is less

Sub Investment Grade Bonds

High Risk and high yielding


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Corporate Bonds Why Invest

Investors diversify their assets

Market size is big and it is liquid

When Govt. gilt yields are declining it is allthe more necessary


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Corporate Bonds - Characteristics

When banks reduce their exposures

corporate issue IOU

Low cost fin

an

ce to corporate No need to dilute equity


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Corporate Bonds - Trading

Participants

Scheduled Commercial Banks

Primary Dealers FIs NABARD, EXIM Bank, SIDBI, NHB

PFs

Insurance companies

Mutual Funds


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Corporate Bonds - settlement

Mostly bilateral

Participants Report transactions to exchange

Participan

t to participan

t settlemen

t DVP 1 settlement trade for trade

Same day, T+1 day, T+2 day

Demat settlement - NSDL

Funds settlement at RBI through RTGS

No margins/settlement guarantee


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Repo in Corporate Bonds

Draft Guidelines

Market Repo- once the outright market stabilizes

Only listed securities with AA rating

CDs, CPs and NCDs less than 1 yr maturity excluded

Tenor of Repo 1 day to 1 year Trading OTC

Settlement T+1 or T+2, DVP I, Non Guaranteed

Reversal of Repo Clearing Houses to compute

obligations and settlement on DVP basis

No selling of Repo securities during Repo period

Margin - 25% haircut on market value


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Government Securities Market


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Gsec Market - Characteristics

Govt. raise resources for Public Exp

Either through taxes or public debt

The debt obligation is ack. by issuance of a security

that is tradable

RBI is the Debt Manager for GOI

Same service for State Govt. debts

A calendar is prepared for primary issuance in

consultation with Govt.


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Gsec Market - Characteristics

Participants Banks, Insurance co., PF funds,Large Investors (FIIs)

BR Act 25% ofdemand and time liability in the

form of cash, gold or Gsec. Investment is risk free and assured

Held indemat no reconciliation issues

Wid

e option

s 91d

ays to 30 years Vibrant secondary market enough liquidity

Settlement in DVP safe and efficient


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Instruments short term

Loans are raised through Treasury Bills or dated securities

Treasury bills -

-- T Bills are discounted instruments zero coupon

-- Short term (maturity period < 1 year)-- 91 Days, 182 Days and 364 Days

--Don't carry interest; have discounts

--Available thru 'Auction' or 'On tap'

--Can be held as SGL account or as GPNs


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Instruments long term

Dated Securities -

- Long term (maturity period 1-30 year)

- Carry interest every half year

- Could be fixed or floating coupon

- Can be held as SC(Stock Certificates), SGL (Subsidiary

General Ledger) or GPN (Govt.. Promissory Note)

- State Development Loans


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Types of Dated Securities

Fixed rate bonds

Floating Rate Bonds

Capital Indexed Bonds Zero Coupon Bonds

Special Securities - Oil Bonds

STRIPS- separate trading of registered interest and principal securities Each cash flow is converted to a tradable security

Coupon STRIP Principal STRIP


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Secondary Market

Role of Primary Dealers

Strengthen institutional infra structure

Underwriting and market making

Price discovery in the secondary market

Enlarge investors base

Enhance liquidity and turnover of Gsec


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Secondary Market Trading

OTC trades contact over telephone

Either directly or through brokers

Trades are reported to NDS


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Negotiated Dealing System (NDS)Features

NDS is a screen based electronic dealing and reporting platform It provides integrated electronic platform to the members to:

o bid/subscribe for new government loans in primary market

issue quotes, negotiate deals, strike trades and get the tradessettled in secondary market.

Executes negotiated deals in government securities and moneymarket instruments.

Interfaces with CCIL for trade guarantee - novation (CCP)

Connectivity to Settlement Module for trade settlement

On-line information dissemination to Members

Status intimation to Members as and when events take place


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NDS Order Matching

An anonymous screen based OM module

Place an order or accept without knowing the

coun

ter party Outright OTC trades and NDS OM trades are

reported to CCIL.

CCI

L works out participan

t wisen

et position

for both funds and securities.


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Settlement Mechanism

Delivery versus Payment

Primary market for security auction T+1

for T bills T+2

Funds debited from C/A, SGL credited Secondary Market CCIL as CCP

All trades are reported to CCIL NDS

It finds out participant wise net obligations

For both funds and securities

Settlement takes place in RBI on DVP III basis

CCIL guarantees settlement


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Risk Management

Liquidity Risk LOC and SLOC

Principal Risk In DVP pay out is blocked

Replacement cost risk and Market Risk

Collects margins and operates Settlement guarantee fund Margin in the form of cash and securities

Computed on margin factors for each security

On the basis ofnet exposure twice a day

Default Allocation - For both Funds and Securities


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Foreign Exchange

Market


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TYPES OF TRANSACTIONS

FOREX is bought and sold like any other commodity

INR USD and Cross Currency transactions

Value dates

1) Cash or ready

2) Tom

3) Spot

4) Forward


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CHARACTERISTICS OF FOREX MARKET

Most Active Financial Market

Deep, Liquid, Efficient and Transparent

Its a 24 hour marketMostly OTC Market

US Dollar most traded currency being80-85% one side.


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PARTICIPANTS

(1) Authorized Dealers - Banks: Foreign Banks- Nationalized Banks- Private Banks,

Cooperative

- Institutions SIDBI,EXIM,

(2) PSU IOC, ONGC etc(3) Corporate RIL, Tata, L & T, etc.

(i) Exporters (ii)I

mporters(4) FII(5) Others Travelers, Study, Subscription etc.(6) GOI Defence & Debt Servicing.


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CCP

A B

Buy USD Sell USD

Sell INR Buy INR

CCPA B

Buy USD

Sell INR Buy INR

Sell USD Buy USD

Sell INR

Sell USD

Buy INR


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Multilateral Netting & Novation

ABN AMRO BANKABN AMRO BANK DEUTSCHE BANKDEUTSCHE BANK CITIBANKCITIBANK CANARA BANK CANARA BANK

TRADE1TRADE1 110.00110.00 (110.00)(110.00)

TRADE2TRADE2 (150.00)(150.00) 150.00150.00

TRADE3TRADE3 (265.00)(265.00) 265.00265.00

TRADE4TRADE4 (450.00)(450.00) 450.00450.00

TRADE5TRADE5 900.00900.00 (900.00)(900.00)

TRADE6TRADE6 (750.00)(750.00) 750.00750.00

TRADE7TRADE7 (400.00)(400.00) 400.00400.00

TRADE8TRADE8 (325.00)(325.00) 325.00325.00

Gross PositionGross Position 2025.002025.00 2015.002015.00 885.00885.00 1775.001775.00

Net PositionNet Position --5.005.00 15.0015.00 15.0015.00 --25.0025.00

Netting Factor (%)Netting Factor (%) 99.7599.75 99.2699.26 98.3198.31 98.5998.59


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Forex Settlement and CCP

Rupee Leg settled thru RTGS

USD leg thru ABNAmro, New York

Reduction of credit risk Reduction of settlement risk

Reduction of liquidity risk

Reduction of systemic risk Reduction in Operational Risk


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Liquidity Risk

Adelay, failure, or reversal of settlement

Would cause a significant change in amountsto be paid or received by participants on the

settlement dateExternal Liquidity Resources - Committed

and collateralised Lines ofCredit backedup by clean lines, reduce the probability and

effect of disruptionRupee Lines of Credit with major IndianBanks.


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Settlement Guarantee Fund

Contribution in Cash (USD)

CCIL invests in eligible securities

Yield passed on to members Exposure Limit fixed based on SGF

value


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Default Handling

INR Shortage: Withhold Dollars in theevent of a Rupee Default

USD Shortage: Debit Rupee A/c in the event

of a Dollar Default

Loss Allocation: as a back up for total failure.No Loss allocation invoked till date

since all the defaulting members havereplenished the default amount on thenext business day.


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Continuous Linked Settlement (CLS)


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CLS

CLS was conceived after the publication of theAllsopp report on Foreign Exchange Risk, whichwas in turn prompted by a number of incidentsover the years of defaulting banks causingmajor upsets in the FOREX market.

In the present FOREX market, settlementrequires the payment of one currency to receiveanother. Due to the lack of rapid finality in the

present set up, there is a risk that one side ofthe trade may pay out the currency it owes,without receiving the currency it is owed.


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CLS

CLS Bank was created to address concernsabout large and long term settlement riskswithin foreign exchange markets. It uses apayment versus payment settlementmethod to eliminate these risks.

CLS uses a netting system that reducesthe number of correspondent payments on

the FIN network, using a strict dailypayment schedule for the limited numberof fund transfers in the system.


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CLS

CLS is a Private Sector initiative, owned andfunded by a co-operative of banks which allowsfor multi-currency PvP trades within a limitedand specific daily timeframe.

It essentially eliminates the Herstatt Risk,although does introduce some systemic risk dueto the linkage of currencies. Each Settlement

Member Bank will hold a multi-currencyaccount within CLS Bank, and payments are tobe made daily on a netted basis.


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Logical Day in CLS

Trades Submission by MemberBanks- Eachcounterparty report

Trades to undergo exposure check

Matchingat CLS Bankandheld until the settlement

Cut offTime and Reports

5.30p.m. S 1 Day: Interim Net Position Report I - positions as

perall matched trades forS Day

7.45p.m. S 1 Day: Interim Net Position Report II positionsasperall trades forS Day (Matchedas wellas Unmatched)


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Logical Day in CLS

Once the position is worked out the memberwill be

Longin some currencies (netreceiver)

Short in some currencies ( netpayer)

Forshortcurrencies, settlement banks pay in by agiven

time

Afterpay in is over, CLSreleases the pay outs forlong

currencies through out the day Computation of limit to make early payouts in Asia

Pacific Currencies viz. JPY, AUD and SGD


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Risk Control Measures

Clearingmembers overall balance across all

currencies mustalways bepositive

Negative position ofa memberin agivencurrency must not exceed shortposition limit

Sum pf members negative position must not

exceedaggregate shortposition limit


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Default Handling

Defaultarises when the memberdoes notpay in his

obligations towards CCIL before the closure of RTGS

timingforthatparticularCurrency

Limits blockedare notreleased to the extent of default or

CounterValue Funds are withheld

On replenishment of the funds, the collateralgets released

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