s3,4.pdf
TRANSCRIPT
Fixed Income Securities
Debt Market : How it works ?
Session -3 & 4
By: Vivek Rajvanshi
Why Debt Market?
Gilts vs Corporate Bonds
2
Features of Debt Securities
• Issuer of Bonds in India:
– Government
– Municipals/State Governments
– Corporations
• Example:
– T-bills, Bonds
3
Indian Debt Market: A Broad Classification
• (1) Call/notice money market
– "Call Money" means deals in overnight funds
– "Notice Money" means deals in funds for 2 - 14 days
– “Term Money” means deals in funds for 15 days-1 year
• Products: T-bills , CDs ,Commercial Paper , CBLOs etc.
• (2) Bond market
4
Indian Debt Market: A Broad Classification..cont’d
• Bond market
1. Government Securities or Gilts
• Issued by the central government to fund their fiscal deficit also called direct dated securities
• Indirect government securities – Issued by central government in lieu of subsidies
» E.g., oil bonds, fertilizer bonds
» Do not qualify for the statutory requirements
2. State development loans (SDL)
• Issued by the state governments
3. Corporate Bonds
• Issued by private and public sector companies
– Examples: Zero coupon/deep discount bonds, fixed interest bonds, floating rate bonds etc.
5
How Government Finance – Fiscal Deficit
• Gross fiscal deficit FY 2014-15 (RE)
– 5,92,000 (3.9 per cent of GDP)
• Financing
– (a)Internal Debt (80%)
– Market Borrowings
• Issuance of Dated Securities
– Repayments
• Net Issuance of T-bills
– (b)External Debt (6%)
• Largely used to finance specific projects, loans from ADB etc.
– (c)Securities against Small Savings (13%)
6 Source: Controller General of Accounts (CGA), www.cga.nic.in
All figures in Rs. ‘crore’
How Government Finance – Fiscal Deficit
7 Source: Controller General of Accounts (CGA), www.cga.nic.in
All figures in Rs. ‘crore’
RBI……………..Objectives
• Minimizing borrowing cost
– The weighted average yield of dated secs was around 8.51
% in 2014-15 as compared to the 8.52% in 2011-12
– However coupon on the outstanding stock of G-dated secs
increased from 7.88% to 8.09%
• Maintaining the maturity profiles
– Maturity < 1 year (short)
– Maturity up to 7 year (Medium)
– Maturity > 7 year (Long)
– Minimize the roll over risk
– 2010-11 , average maturity 11.62 years, 2011-12 12.36 ys
8 Source: Controller General of Accounts (CGA), www.cga.nic.in
All figures in Rs. ‘crore’
How Government finance – Fiscal Deficit
9 Source: Min of Fin, GoI, www.finmin.nic.in
Figures are in ‘crore’
Issuance of Dated Securities (2014-15, RE)
• Gross Amount 592,000
• Repayments 138,795 (23.44%)
• Repurchase/Buy Back 6,282
• Net Issuance 446,921
10 Source: Banerji et al. (2011) New thinking on corporate bond
market in India
Issuance of Treasury Bills
11 Source: Min of Fin, GoI, www.finmin.nic.in
Figures are in ‘crore’
Issuance of Treasury Bills
12 Source: Min of Fin, GoI, www.finmin.nic.in
Figures are in ‘crore’
How Firms Finance Themselves ? (2010-11)
• Internal financing (31%)
– Retained earnings (21%)
– Depreciation (10%)
• External financing (68%)
– Issuing new equity (14%)
– Bank loans (18%)
– Issuing bonds (04%)
– Foreign borrowings (03%)
– Current liabilities (25%)
13 Source: Banerji et al. (2011) New thinking on corporate bond
market in India
How Firms Finance Themselves ?
14 Source: Banerji et al. (2011) New thinking on corporate bond
market in India
How Firms Finance Themselves…cont’d
• Excessive reliance on internal financing
• Large role for banks
• Miniscule and stagnant bond market
• Secured vs Unsecured loans
15
Source of Corporate Finance
16 Source: World Bank , 2005
Outstanding Bonds
17 Source: World Bank, 2005
Share of Corporate Bond in Total Debt
Debt Route a Big Hit
19 Source: RBI Annual Report, 2013-14 & Handbook of Statistics,
SEBI, 2012
• IPO in debt was introduced in 2009
• Provide a better source of funds to corporations, especially when market sentiments are bad in equity market
IPO offering
Equity Debt FY09 2034 1500 FY10 46941 2500 FY11 46182 9431 FY12 23989 35611 FY13 8663 16980 FY14 6528 42383
Why Corporate Bond Market?
• Ensuring Financial System Stability
• Creating new classes of investors
• Reduced currency mismatch
• Deeper and more responsive Term structure
20
Why Corporate Bond Market?
• Meaningful coverage of read needs
21 Source: Corporate bond market in India Issues and challenges, Rajeswari Sengupta
Issues with Corporate Bond Market?
• Mostly issues settles with private placements
– High cost of issuance for public issue
– Public issues need to comply with additional disclosure
requirements and time taking process
– Rating requirements
– Regulatory requirements for pension funds, banks etc.
22
Source: Corporate bond market in India Issues and challenges, Rajeswari Sengupta
Indian Debt Market: How it Works?
23
Indian Debt Market: How it works…
24
Description G-Securities Debt
Market
Corporate Debt Market
Issuer GoI and other Sovereign
bodies
Banks/ Corporate /PSUs
Regulator RBI SEBI
Merchant Banker RBI/PDs Banks/Investment Firms
Clearing and Settlement
House
CCIL NSCCL/ICCL/MCX-SX-
CCL
Depository RBI NSDL/CDSL
Rating Not Required Required
Regulator - RBI
• Regulator for all G-Secs.
• Cannot participate in Auctions
• Issue securities on behalf of GoI (FRBM Act, 2003)
• Regulating money supply
– Through LAF
– Through OMOs
• The Public Debt Office (PDO) of the RBI acts as the
registry and central depository for the G-Secs.
25
Regulator – SEBI & FIMMDA
• SEBI is a regulator for all corporate securities
– Provide direction for the development of both primary and
secondary corporate bond markets
• FIMMDA – act as a self regulator
– Represents Market Players and aids the development of the
bond, money and derivatives markets
– Develop standardized sets of documentation
– Function as an arbitrator for disputes, if any, between
member institutions
26
Participants
• Banks
– SLR Requirements (21.5%)
• Insurance Companies
– Regulatory requirements
• LIC has to allocate 60% if its annual incremental investments in G-
Secs. while GIS and its subsidiaries - 40%
• Provident Funds
– Regulatory requirements
• Percentage of their incremental accretions need to be invested
– 25% in GoI G-Secs., 15%- State Govt. Secs., 40% in PSU bonds and max of
10% in private sector debentures
27
Participants..cont’d
• Primary Dealers (PDs)
– Objectives
• Strengthening institutional infrastructure
• To make G-Secs. market more vibrant, liquid and broad based
• To ensure the development of underwriting and market making capabilities
– Obligations
• Annual bidding commitment- participate in securities auctions
• Underwriting the primary issuance
• Offering quotes (act as a market maker)
• Providing market information to the Central Bank
– Benefits
• Access to call money market as borrower and lender
• Extended liquidity support by RBI
28
Other Participants
• Mutual funds
• Trusts
• Corporate Treasuries
• PSU’s Treasuries
• FIIs
29
Holding Pattern of G-Securities
Holding Pattern of G-Securities
Source: RBI Bulletin, March, 2015
Category Dec-14
Commercial Banks 42.77 Insurance Companies 21.00
RBI 13.23
Mutual Funds 1.68
Provident Funds 7.47
Cooperative Banks 2.57
Corporates 1.12
FIIs 3.62
Non Bank PDs 0.34
Others 6.20
Total 100.00
42.77%
21.00%
13.23%
1.68%
7.47%
2.57% 1.12%
3.62% 0.34% 6.20%
Commercial Banks
Insurance Companies
RBI
Mutual Funds
Provident Funds
Cooperative Banks
Corporates
FIIs
Non Bank PDs
Others
Trading Activity in G-Securities
Source: RBI Bulletin, March, 2015
Trading Platform
• NDS – Negotiated Dealing System
– Introduced in Feb 2002
– Has two modules
• Primary market module
– Used for the auction of dated securities, SDLs and T-bills
• Secondary market module
– Mainly for reporting of OTC trades
– Trades reported, immediately, send to CCIL for clearing and settlement
33
Trading Platform
• NDS – OM (Order Matching Segment)
– RBI Introduced web based NDS OM in June 29, 2012 for gilt account holders (GAH) through primary members but maintained by CCIL
– Screen based, anonymous, order driven trading system
– Members can place their orders (bids and offers) directly
– All bids and offers are matched on price/time priority
– CCIL acts as the central counter party (CCP) for settlement
– Requirements to be a member
• SGL account with the RBI
• Current account with RBI
• INFINET (Indian Financial Network) connectivity
• Membership of CCIL
34
NDS-OM-How a Trade Settled
35 Source: rbi.org.in
1. Participants place orders on NDS-OM
2. NDS-OM matches the orders and
trade is done
3. Flow of trade details to the CCIL
settlement systems
4. CCIL sends the net fund and security
obligations to members
5. CCIL submits net settlement files at
the end of day to RBI
6. Funds and securities settlement
carried out in DvP (Delivery versus
Payment) – both funds and securities
legs are settled on a net basis
Settlement Process
36 *For this purpose, CCIL collects margins from all participants and maintains
‘Settlement Guarantee Fund
CCIL – Works out
party-wise net
obligations
RBI – Settles the trade
through Dvp
CCIL Collects Trade
Information
If any participant fails to provide
funds/ securities, CCIL make the
same available from its own
means*
List of Active Members-NDS (OM)
37 Source: RBI & FIMMDA, 2012
Category of
Participants Nos.
Public Sector Banks 23
Private Sector Banks 16
Foreign Banks 29
Co-operative Banks 41
Bank Cum Primary
Dealers 12
Non-bank Primary
Dealers 8
Financial Institutions 7
Insurance Companies 11
Mutual Funds 29
Other Corporates 2
Provident Funds 4
Total 183
14%
10%
12%
20% 8%
5%
4%
5%
19%
1% 2%
Public Sector Banks
Private Sector Banks
Foreign Banks
Co-operative Banks
Bank Cum PrimaryDealers
Primary Dealers
Financial Institutions
Insurance Companies
Mutual Funds
Other Corporates
Provident Funds
Features of a Developed Bond Market
• Settlement Risk
– The risk that one of counterparty fails to deliver the terms
of a contract at the time of settlement
• Transparency and Efficiency
– Pre-announced auctions plans
– Immediate dissemination of information for all trades
• Liquidity
– Broad Investor Base
– System of primary dealers
38
Clearing and Settlement (1/2)
• CCIL – (The Clearing Corporation of India Ltd.)
– Clearing agency for G-Secs.
– Clear all OTC and NDS-OM trades
• Settlement through netting by novation
• Acts as central counterparty
• Maintains a ‘Settlement Guarantee Fund’
– Advantages
• Reduced counterparty and liquidity risk
• Efficiency in payment system
• Guaranteed settlement and low settlement cost
– Settlement is done by RBI
39
Clearing and Settlement (2/2)
• NSCCL- The National Securities Clearing
Corporation Ltd.
– A wholly owned subsidiary of NSE
– Provides clearing and settlement services for Mutual Fund
Segments and Corporate Debt Segment of NSE
• ICCL- Indian Clearing Corporation Ltd.
– A wholly owned subsidiary of BSE
– Provides clearing and settlement services for Mutual Fund
Segments and Corporate Debt Segment of BSE
• MCX-SX-CCL
40 (Source: nseindia.com)
Monitoring & Control (1/4)
• Corporate bond reporting system
– OTC Trade
• Either the buyer or the seller can report the trade, but the reporting
party has to enter both sides of the deal
• Reporting may be made to either platform provided by BSE/NSE
but not to both for the same transaction
• BSE and NSE ensure that
– The information reported with BSE and NSE is aggregated,
– Checked for redundancy
– and disseminated on their websites in a homogenous manner
– Electronic order book trade
• Settled through the clearing and settlement agency assigned by the
respective exchange
41
Source: Circular - SEBI/CBM/BOND/1/2007/01/03 dated March 01, 2007
Monitoring & Control (2/4)
• Clearing and settlement – All trades in corporate bonds which are reported on - FIMMDA,
NSE-WDM and NSE web site are eligible for settlement through NSCCL
– Both buyers and sellers are required to explicitly express their intention to settle the trades through NSCCL
– On the settlement date, during the pay-in, participants are required to transfer the securities to the Depository account specified by NSCCL
– On successful completion of pay-in of both securities and funds are transferred by NSCCL to the depository / bank account of the counter-party
42 Source: nseindia.com
Monitoring & Control (3/4)
• Settlement schedule
– The settlements of corporate bond trades shall be carried
out between Monday to Friday for three settlement cycles
viz., T+0, T+1 and T+2
• All money market instruments are settled through T+0
• All other G-Secs settled through T+1
43 Source: nseindia.com, accessed on May 1, 2012
Indian Money Market
44
Call/notice Market
• Used to manage liquidity for a very short term
• Call money – overnight, O/N MIBOR
• Notice money market – 2 to 14 days, 3D MIBOR
• Banks and PDs borrow and lend funds to each other on
unsecured basis
– To fill the gaps or temporary mismatches in funds
– To meet the CRR requirements
– Most of the trade done in OTC market but need to report all deals.
• Settlement between participants through the current account
maintained with the RBI
• NDS-Call is the platform for trading (Sept. 2006)
45
Repo
• Repo (Repurchase Agreements)
– Contracts for sale and future repurchase of financial assets
at pre-specified rates and time
– Usually gilts are used as collateral
• Basket vs Specific repo
– No price risk/secured lending
– Done on overnight or term basis
– Security owner retain the rights to receive any cash flows
from the security (e.g., coupon and accrued interest)
– In normal conditions, call rate rule higher than the repo
– CROMS – Trading platform
46
Collateralized Borrowing and Lending Obligation
• CBLO is an instrument issued at a discount
• Can be traded in secondary market
• CCIL provides the trading platform
• If reverse repo rates are higher than CBLO then there may be
arbitrage opportunity
– Borrow @ CBLO and park cash @ reverse repo
• Conducted by CCIL
– Act as counterparty to every CBLO transaction
– Participants have to open Constituent SGL accounts with CCIL
• CCIL fixes the borrowing limit of each participants based on the market value
• CCIL maintains a separate SGL account with RBI and deposit all the collaterals in
that account
47
T-bills
• Promissory notes issued by central government
– Maturity period-91, 182 and 364 days
– Tradable at secondary market
– 14- days T-bills are tradable
– Issued at a discount of the face value
– Primary market – sale by auction
– Day count convention used for computing yield to maturity on T-Bills is Actual/365 whereas for discount yield it is 30/360
– Assumed on 01-May-2011 market price of T-Bill maturing on 15-Jun-2011 is Rs 99.1015
– Calculate the YTM and discount yield
– Ans YTM - 7.1940% and DY- 7.1880 %
48
Data Source for FIMs
• RBI
• CCIL
• FIMMDA
• NSE , BSE & MCX-SX
• BIS
• Bloomberg
• Reuters
• Debt Management Deptt, Ministry of Finance, GoI
49
50
Primary Market: Issuance of a Bond
Primary Market in G-Securities (T-bills)
Source: Public Debt Management Quarterly Report Jan – Mar 2015
Primary Market in G-Securities (T-bills)
– RBI issues the auction calendar for the sale of T-bills (Qtrly)
• Auctions of T-bills with 91 days maturity are held weekly
• Auctions of T-bills with 182 & 364 days maturity are held
fortnightly
• Auctions are held on Wednesday and day of payment is Friday
Source: Public Debt Management Quarterly Report Jan – Mar 2015
Primary Market in G-Securities (Bonds)
– RBI Issues the auction calendar for the sale of bonds twice
in the fiscal year
• Provide information about date of issue, amount and tenor which
can be modified if required
• RBI consider market conditions and government requirements
while deciding about the features of the bond to be issued (when
issued market)
• Auction may be yield based or price based
• Two type of bonds are issued
– Issue of new security – only the amount of the issue and maturity of bond is
known – participants bid on the basis of the required yield, also called the
yield based auction
– Reissue of old security – already existing securities are issued – in addition to
the amount of the issue and maturity, coupon also known at the time of the
auction – participants quote prices for bidding, also called price based auction
53
Allotment of New Securities (1/2)
• Variable/Multiple-price method
– Also called “French Auction”
– Bids are accepted at different prices/yield
– The bidder at the cut-off price/yield gets the best price
• Uniform/Single-price method
– Also called “Dutch Auction”
– All bids are accepted at the same price
– Cut-off price is the highest price at which the issuer can get
the entire issue subscribed
• Both variable and uniform price based auctions are conducted by RBI for
the re-issue of the existing securities
54
Variable/Multiple-price method
Source: RBI, * September 6 and 7 being holidays, settlement is done on September 8, 2008 under T+1 cycle.
Price based auction of an existing security 8.24% GS 2018
Maturity Date: April 22, 2018 Coupon: 8.24%
Auction date: September 5, 2008 Auction settlement date: September 8, 2008*
Notified Amount: Rs.1000 crore
Details of bids received in the decreasing order of bid price
Bid no. Price of bid Amount of bid
(Rs. Cr)
Implicit
yield
Cumulative
amount
1 100.31 300 8.1912% 300
2 100.26 200 8.1987% 500
3 100.25 250 8.2002% 750
4 100.21 150 8.2062% 900
5 100.20 100 8.2077% 1000
6 100.20 100 8.2077% 1100
7 100.16 150 8.2136% 1250
8 100.15 100 8.2151% 1350
The issuer would get the notified amount by accepting bids up to 5. Since the bid number 6 also
is at the same price, bid numbers 5 and 6 would get allotment in proportion so that the notified
amount is not exceeded. In the above case each bidder would get Rs. 50 crore. Bid numbers 7
and 8 are rejected as the price quoted is less than the cut-off price.
Allotment of G-Secs: Price Based Auction
• Consider a price based auction (reissue of an existing
security)
– Issue amount – Rs. 2000 crore
56
Bidder
Amount of Bid
(Rs Crore) Price per 100
B1 100 103.25
B2 200 103.15
B3 500 103.05
B4, B5 1100 103
B6, B7 1200 102.95
B8 200 102.9
• Using both uniform and variable price auctions:
• Find the cut-off price
• Who will get the full allotment and at what price?
• Who will get the partial allotment and at what price?
• Who will not get any allotment?
• What will be the price for the Non-competitive bidders
Allotment of G-Secs: Price Based Auction..Cont’d
• Using both uniform and variable price auctions: – The issuer would get the notified amount (2000 crore) by accepting
bids up to bidder B5,B6. Therefore the cutoff price would be 102.95
(note: the corresponding amount corresponding to bidder B5 and B6
are not given)
• Who will get the full allotment and at what price? – Under the uniform price auction bidder B1, B2, B3, B4, B5 will get the
full allotment at price 102.95
– Under the variable price auction bidder B1, B2, B3, B4, B5 will get the
full allotment at prices 103.25, 103.15, 103.05, 103 and 102.95
respectively
57
Allotment of G-Secs: Price Based Auction..Cont’d
• Who will get the partial allotment and at what price?
– Under the uniform price auction bidder B6 and B7 will get the partial allotment
at price 102.95
– Under the variable price auction bidder B6 and B7 will get the partial allotment
at prices 102.95
• Who will not get any allotment?
– Bidder B8 will not get any allotment under both auction methods
• What will be the price for the Non-competitive bidders
– Under the uniform price auction Non-competitive bidders will get the allotment
at price 102.95
– Under the variable price auction Non-competitive bidders will get the full
allotment at prices 103.07
=(100*103.25+200*103.15+500*103.05+1100*103+100*102.95)/2000
58
Allotment of G-Secs: Yield Based Auction …(1/2)
• Yield Based Auction: A yield based auction is
generally conducted when a new Government
security is issued.
– Investors bid in yield terms up to two decimal places (for
example, 8.19 per cent, 8.20 per cent, etc.).
– Bids are arranged in ascending order and the cut-off yield is
arrived at the yield corresponding to the notified amount of
the auction.
– The cut-off yield is taken as the coupon rate for the
security. Successful bidders are those who have bid at or
below the cut-off yield.
– Bids which are higher than the cut-off yield are rejected.
Allotment of G-Secs: Yield Based Auction…(2/2)
• An illustrative example of the yield based auction:
– Maturity Date: September 8, 2018
– Coupon: To be determined in the auction (8.22% as shown
in the illustration below)
– Auction date: September 5, 2008
– Auction settlement date: September 8, 2008*
– Notified Amount: Rs.1000 crore
– * September 6 and 7 being holidays, settlement is done on
September 8, 2008 under T+1 cycle.
Allotment of G-Secs: Yield Based Auction…Cont’d
• The issuer would get the notified amount by accepting bids up to 5. Since
the bid number 6 also is at the same yield, bid numbers 5 and 6 would get
allotment pro-rata so that the notified amount is not exceeded. In the above
case each would get Rs. 50 crore. Bid numbers 7 and 8 are rejected as the
yields are higher than the cut-off yield.
Details of bids received in the increasing order of bid yields
Bid No. Bid Yield Amount of bid
(Rs. crore)
Cummulative
amount (Rs.Cr)
Price* with coupon
as 8.22%
1 8.19% 300 300 100.19
2 8.20% 200 500 100.14
3 8.20% 250 750 100.13
4 8.21% 150 900 100.09
5 8.22% 100 1000 100
6 8.22% 100 1100 100
7 8.23% 150 1250 99.93
8 8.24% 100 1350 99.87
61 Source: RBI, *Once the coupon is decided, Price corresponding to the yield can be determined
When Issued Market
– When Issued Market (when, as and if issued)
• WI transactions would commence on the notification date and it
would cease on the working day immediately preceding the date of
issue.
• All WI transactions for all trade dates will be contracted for
settlement on the date of issue.
• Any WI trade must have a Primary Dealer (PD) as a counterparty
(both counterparties can be PDs). In other words, non-PDs cannot
be both buyer and seller in a WI transaction.
• Open Positions in the WI market are subjected to the following
limits: i. Non-PD entities – Long Position, not exceeding 5 per cent
of the notified amount. ii. PDs – Long or Short Position, not
exceeding 10 per cent of the notified amount.
• Primary Dealers will report on a daily basis all ‘When Issued’
transactions, undertaken by them in the prescribed format
62
When Issued Market
– ‘When Issued’ market has two basic advantages: -
– (i) It facilitates the distribution process for Government
securities by stretching the actual distribution period for
each issue and allowing the market more time to absorb
large issues without disruption.
– (ii) ‘When Issued’ market also facilitates price discovery
process by reducing uncertainties surrounding auctions.
63
Underwriting in Auctions
• Role of PDs
– One day prior to the auction, bids are received from the
Primary Dealers (PD) indicating the amount they are
willing to underwrite and the fee expected
– Auction committee of RBI, on the basis of the market
condition finalize the amount to be underwritten
• In case the auction is fully subscribed, the PDs need not subscribe
to the issue unless they have bid for it
64
Private Placement of Securities
• A private placement is a direct offering of securities, usually, to a small number (max 50) of chosen private investors
– Public and private offerings of securities have different
regulatory requirements • All securities issued to the general public must be registered but not
in case of private placements – Results in low cost of issuance to the issuer
– Disclosure and other information important to the investors must be provided in a private placement memorandum
65
Bought Deal
• Bought deals work as follows:
– The underwriters offer a potential issuer of debt securities a firm bid to purchase a specified amount of securities with a certain coupon rate and maturity
– The issuer is given a day to accept or reject the bid
• If accepted, the underwriters have ‘bought the deal’ and can sell the securities to other investment firms or/and institutional investors
66
Data Source for FIMs
• http://www.smartmoney.com/bonds/ This site contains a good source for current rates, the current and past yield curves, and explanations of how the shape of the yield curve can affect economic performance. It also has a summary of current economic factors that are influencing rates.
• http://www.bondresources.com/ The site listed above has price and yield curve information and the ability to chart Treasury securities over time.
• http://www.bloomberg.com/markets The site listed above has price and yield curve information and the ability to chart Treasury securities over time.
• http://www.investinginbonds.com The site listed above has price and yield curve information and the ability to chart Treasury securities over time.
• http://www.stls.frb.org/ Historical information on interest rates and other economic factors are available in the Federal Reserve Economic Data Base (FRED) at the address shown above. Data in FRED can be downloaded in a spreadsheet format.
67
Thank You!
68