After Effects of Global Financial Crisis on Indian Derivatives Market

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The contents of this primer are for general information and guidance purpose only. Readers are advised to refer to the specific circulars issued by Reserve Bank of India from time to time.

While every effort has been made to ensure that the information set out in this document is accurate, the Reserve Bank of India does not accept any liability for any action taken, or reliance placed on, any part, or all, of the information in this document or for any error in or omission from, this document. The G-Secs market has witnessed significant changes during the past decade. Introduction of an electronic screen based trading system, dematerialized holding, straight through processing, establishment of the Clearing Corporation of India Ltd.

CCIL as the Central Counter Party CCP for guaranteed settlement, new instruments, and changes in the legal environment are some of the major aspects that have contributed to the rapid development of the G-Sec market.

Major participants in the G-Secs market historically trading mechanism in indian stock market pdf been large institutional investors.

With the various measures for development, the market has also witnessed the entry of smaller entities such as co-operative banks, small pension, provident and other funds etc. These entities are mandated to invest in G-Secs through respective regulations. However, some of these new entrants have often found it difficult to understand and appreciate various aspects of the G-Secs market. The Reserve Bank of India has, therefore, taken several initiatives to bring awareness about the G-Secs market among small investors.

This primer is yet another initiative of the Reserve Bank to disseminate information relating to the G-Secs market to the smaller institutional players as well as the public. An effort has been made in this primer to present a comprehensive account of the market and the various processes and operational aspects related to investing in G-Secs in an easy-to-understand, question-answer format.

The primer also has, as annexes, a list of primary dealers PDsuseful excel trading mechanism in indian stock market pdf and glossary of important market terminology.

I hope the investors, particularly the smaller institutional investors will find the primer useful in taking decisions on investment in G-Secs. Reserve Bank of India would welcome suggestions in making this primer more user-friendly.

Bonds are used by companies, municipalities, states and sovereign governments to raise money to finance a variety of projects and activities. Owners of bonds are debt holders, or creditors, of the issuer.

Such securities are short term usually called treasury bills, with original maturities of less than one year or long term usually trading mechanism in indian stock market pdf Government bonds or dated securities with original maturity of one year or more. In India, the Central Government issues both, treasury bills and bonds or dated securities while the State Governments issue only bonds or dated securities, which are called the State Development Loans SDLs. G-Secs carry practically no risk of default and, hence, are called risk-free gilt-edged instruments.

Treasury bills are zero coupon securities and pay no interest. They are issued at a discount and redeemed at the face value at maturity. The CMBs have the generic character of T-bills but are issued for maturities less than 91 days. Generally, the tenor of dated securities ranges from 5 years to 40 years. The nomenclature of a typical dated fixed coupon G-Sec contains the following features - coupon, name of the issuer, maturity year.

In case, there are two securities with the same coupon and are maturing in the same year, then one of the securities will have the month attached as suffix in the nomenclature. Trading mechanism in indian stock market pdf this case, there is another paper viz. Each security is assigned a unique number called ISIN International Security Identification Number at the time of issuance itself to avoid any misunderstanding among the traders.

If the coupon payment date falls on a Sunday or any other holiday, the coupon payment is made on the next working day. However, if the maturity date falls on a Sunday or a holiday, the redemption proceeds are paid on the previous working day. Fixed Rate Bonds — These are bonds on which the coupon rate is fixed for the entire life i.

Most Government bonds in India are issued as fixed rate bonds. For example — 8. Coupon on this security will be paid half-yearly at 4. The coupon is re-set at pre-announced intervals say, every six months or one year by adding a spread over trading mechanism in indian stock market pdf base rate. FRBs were first issued in September in India. For example, a FRB was issued on December 21, for a tenor of 11 years, thus maturing onDecember 21, The base rate on the bond for the coupon payments was fixed at 3.

In the bond auction coupon for the first six months was fixed at 4. Zero Coupon Bonds — Zero coupon bonds are bonds with no coupon payments. However, like T- Bills, they are issued at a discount and redeemed at face value. The Government of India had issued such securities in the nineties, It has not issued zero coupon bonds after that. Capital Indexed Bonds — These are bonds, the principal of which is linked to an accepted index of inflation with a view to protecting the Principal amount of the investors from inflation.

A 5 year capital indexed bond, was first issued in December which matured in Since then, they were issued on monthly basis on last Tuesday of each month till December It may be noted that such bond may have put only or call only or both options.

The first G-Sec with both call and put option viz. The optionality on the bond could be exercised after completion of five years tenure from the date of issuance on any coupon date falling thereafter. The Government has the right to buy-back the bond call option at par value equal to the face value while the investor has the right to sell the bond put option to the Government at par value on any of the half-yearly trading mechanism in indian stock market pdf dates starting from July 18, Special Securities - Under the market borrowing programme, the Government trading mechanism in indian stock market pdf India also issues, from time to time, special securities to entities like Oil Marketing Companies, Fertilizer Companies, the Food Corporation of India, etc.

These securities are usually long dated securities and carry marginally higher coupon spread of about bps over the yield of the dated securities of comparable maturity. These securities are, however, not eligible SLR securities but are eligible as collateral for market repo transactions.

However, they are created out of existing securities only and unlike other securities, are not issued through auctions. Securities represent future cash flows periodic interest and principal repayment of an underlying coupon bearing bond. These cash flows are traded separately as independent securities in the secondary market. E-Kuber through any of the Primary Dealer at the option of the holder at any time from the date of issuance of a G-Sec till its maturity.

SGBs are unique instruments, prices of which are linked to commodity price viz Gold. SGBs are denominated in multiples of gram s of gold with a basic unit of 1 gram. The tenor of the SGB is for a period of 8 years with exit option from 5th year trading mechanism in indian stock market pdf be exercised on the interest payment dates.

The investors are compensated at a fixed rate annum payable semi-annually on the initial value of investment. SDLs are dated securities issued through normal auction similar to the auctions conducted for dated securities issued by the Central Government please see question 3.

Interest is serviced at half-yearly intervals and the principal is repaid on the maturity date. They are also eligible as collaterals for borrowing through market repo as well as borrowing by eligible entities from the RBI under the Liquidity Adjustment Facility LAF. Investment in gold has attendant problems in regard to appraising its purity, valuation, safe custody, etc. Investing in G-Secs has the following advantages:.

They can be held in book entry, i. G-Secs are available in a wide range of maturities from 91 days to as long as 40 years to suit the duration of varied liability structure of various institutions.

The settlement system for trading in G-Secs, which is based on Delivery versus Payment DvPis a very simple, safe and efficient system of settlement. The DvP mechanism ensures transfer of securities by the seller of securities simultaneously with transfer of funds from the buyer of the securities, thereby mitigating the settlement risk.

G-Sec prices are readily trading mechanism in indian stock market pdf due to a liquid and active secondary market and a transparent price dissemination mechanism. Besides banks, insurance companies and other large investors, smaller investors like Co-operative banks, Regional Rural Banks, Provident Funds are also required to hold Trading mechanism in indian stock market pdf as indicated below:.

Such liquid assets shall be in the form of cash, gold or unencumbered investment in approved securities. The exposure of a trust to any individual gilt fund, however, should not exceed five per cent of trading mechanism in indian stock market pdf total portfolio at any point of time. Commercial banks, scheduled UCBs, Primary Dealers a list of Primary Dealers with their contact details is given in Annex 2insurance companies and provident funds, who maintain funds account current account and securities accounts Subsidiary General Ledger SGL account with RBI, are members of this electronic platform.

All members of E-Kuber can place their bids in the auction through this electronic platform. A Gilt Account is a dematerialized account maintained with a scheduled commercial bank or PD. A Notification and a Press Communique giving exact particulars of the securities, viz. RBI places the notification and a Press Release on its website www.

Information about auctions is also available with select branches of public and private sector banks and the PDs. The investors are thus given adequate time to plan for the purchase of G-Secs through such auctions.

A specimen of a dated security in physical form is given at Annex 1. The details of all the dated securities issued by the Government of India are available on the RBI website at http: A sample of the auction calendar and the auction notification are given in Annex 3 and 4 respectively.

The 91 day T-bills are auctioned on every Wednesday. The Treasury bills of days and days tenure are auctioned on alternate Wednesdays. T-bills of days tenure are auctioned on the Wednesday preceding the reporting Friday while T-bills are auctioned on the Wednesday prior to a non-reporting Friday.

The Reserve Bank releases a quarterly calendar of T-bill issuances for the upcoming quarter in the last week of the preceding quarter. The Reserve Bank of India announces the issue details of T-bills through a press release on its website every week. The tenor, notified amount and date trading mechanism in indian stock market pdf issue of the CMBs depend upon the temporary cash requirement of the Government.

The tenors of CMBs is generally less than 91 days. The announcement of their auction is made by Reserve Bank of India through a Press Release on its website. The non-competitive bidding scheme referred to in paragraph number 4. However, these instruments are tradable and qualify for ready forward facility. First set of CMBs were issued on May 12, In terms of Sec.

Under Article 3 of the Constitution of India Under section 48A of Union territories Act, in case of Union Territorya State Government has to obtain the trading mechanism in indian stock market pdf of the Central Government for any borrowing as long as there is any outstanding loan that the State Government may have from the Centre.

Market borrowings are raised by the RBI on trading mechanism in indian stock market pdf of the State Governments to the extent of the allocations under the Market Borrowing Programme as approved by the Ministry of Finance in consultation with the Planning Commission. RBI, in consultation with State Governments announces, the indicative trading mechanism in indian stock market pdf of borrowing on a quarterly basis.

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If you are familiar with pivot points in forex, then you should be able to trade this type.