Banking Foundation Course

Foundation Course in Banking

Version : 2.1
Date : 04-August-2005
Cognizant Technology Solutions
500 Glenpointe Centre West
Teaneck, NJ 0!!!
"h# $0%&'0%&0$((
)))*cognizant*co+

Business & ,T -odel . Cards /%*00% "age $ o1 $00
TABLE OF COTET!
1 1.BFS CONCEPTS.................................................................................................................................4
2 1.1. THE CONCEPT OF MONEY.......................................................................................................5
3 1.2.FINANCIAL INSTRUMENTS.....................................................................................................13
4 1.3.FINANCIAL MARKETS..............................................................................................................24
5 2.BANKING..........................................................................................................................................33
6 2.1.INTRODUCTION TO BANKING...............................................................................................34
7 2.2.RETAIL BANKING......................................................................................................................42
8 2.3.CONSUMER LENDING...............................................................................................................56
9 2.4.COMMERCIAL AND HOLESALE BANKING....................................................................7!
Functions of the Treasury Manager......................................................................................................79
Bifurcation of All major markets (Equities, Bon, F!, "eri#ati#es$....................................................%&
Treasury a''lications segments ( #enors..........................................................................................%)
*ome of the offerings in +ash Management *er#ices are , .................................................................%7
-ayment . "is/ursement 0fferings........................................................................................................%7
+ollections *er#ices...............................................................................................................................%7
1! 2.5.CARDS AND PAYMENTS.........................................................................................................1!5
11 2.6.IN"ESTMENT MANAGEMENT .............................................................................................117
12 2.7.IN"ESTMENT BANKING AND BROKERAGE....................................................................138
13 2.8.RISK MANAGEMENT...............................................................................................................154
14 2.9.CUSTODY AND CLEARING....................................................................................................162
1.1.1Market +onstituents.....................................................................................................................12&
1.1.3*ecurities Market.........................................................................................................................122
1.1.4Trae 5nitiation............................................................................................................................127
1.1.&0rer Management.....................................................................................................................127
1.1.)Trae E6ecution...........................................................................................................................129
1.1.2Trae Enrichment........................................................................................................................177
1.1.7Trae 8aliation..........................................................................................................................177
1.1.%Trae +learing............................................................................................................................177
1.1.9Trae Affirmation.+onfirmation.................................................................................................173
1.1.17Trae *ettlement Failure...........................................................................................................173
1.1.11Trae *ettlement........................................................................................................................174
1.1.13Trae Accounting ( 9econciliation..........................................................................................17&
Trae accounting an 9econciliation is the internal control 'rocess use /y custoians to manage
trae transactions. 5n this 'rocess, the custoian etermines that the customer:s account has the
necessary securities on han to eli#er for sales, that the customer:s account has aequate cash or
forecaste cash for 'urchases. 5t maintains the recors of traes internally an tries to match it ;ith
outsie ;orl. 5t tries to match the 'ositions /y com'aring 'ositions of traes (0'en an settle
/oth$.....................................................................................................................................................17&
1.1.149isks associate ;ith Traing ( *ettlement.............................................................................17&
1.1.1&<ork Flo;s 0f Traing an *ettlement....................................................................................17&

Business & ,T -odel . Cards /%*00% "age ( o1 $00
1.1.1)+or'orate Actions.....................................................................................................................17%
1.1.125ncome -rocessing ....................................................................................................................17%
1.1.17-ro6y 8oting..............................................................................................................................179
1.1.1%Ta6 -rocessing..........................................................................................................................1%7
15 2.1!.CORPORATE SER"ICES.......................................................................................................182
16 3.RECENT DE"ELOPMENTS.......................................................................................................188
17 4.GLOSSARY.....................................................................................................................................2!!
18 5.REFERENCES................................................................................................................................2!8

Business & ,T -odel . Cards /%*00% "age 2 o1 $00
1.BF! COCE"T!

1.1. T#E COCE"T OF $OE%

Business & ,T -odel . Cards /%*00% "age ! o1 $00
T#E COCE"T OF $OE%
DEF&&' $OE%
3-oney is a standardized unit o1 e4change5* The practical 1or+ o1 +oney is currency* ,t /aries
across countries )hereas +oney re+ains the sa+e* For e4a+ple, in ,ndia, the currency is the
,ndian 6upee 7,N68 and in the 9S, it is the 9S :ollar 79S:8*
:ue to /arious econo+ic 1actors, the /alue o1 each country;s currency is not e<ual* For e4a+ple,
i1 the e4change rate =et)een 9S :ollars 79S:8 and ,ndian 6upees 7,N68 is 9S: % > ,N6 2!*0,
it i+plies that one 9*S dollar is e<ui/alent to 2!*0 ,ndian 6upees* The 9S: is nor+ally taken as
a =ench+ark against )hich to co+pare the /alue o1 each currency*
T#E COCE"T OF &TE(E!T: !&$"LE &TE(E!T AD CO$"O)D &TE(E!T
,nterest is the a+ount earned on +oney? there is such an earning =ecause present consu+ption
o1 the lender is =eing sacri1iced 1or the 1uture? you are letting so+e=ody else use the +oney 1or
present consu+ption* 9sing an analogy, interest is the @rent; charged 1or delaying present
consu+ption o1 +oney* ,nterest rates are not constant and )ill /ary depending on di11erent
econo+ic 1actors
!i*+,e interest
Si+ple interest is calculated only on the =eginning principal* Si+ple ,nterest > "-r-t.100 )here# "
is the "rincipal or the initial a+ount you are initially =orro)ing or depositing, to earn or charge
interest on, r is the interest rate and t is the ti+e period*
E/a*+,e
,1 so+eone )ere to recei/e 5A interest on a =eginning /alue o1 B%00, the 1irst year they )ould
get#
0*05CB%00 > B5
,1 they continued to recei/e 5A interest on the original B%00 a+ount, o/er 1i/e years the gro)th in
their in/est+ent )ould look like this#
Dear %# 75A o1 B%00 > B58 E B%00 > B%05
Dear $# 75A o1 B%00 > B58 E B%05 > B%%0
Dear (# 75A o1 B%00 > B58 E B%%0 > B%%5
Dear 2# 75A o1 B%00 > B58 E B%%5 > B%$0
Dear 5# 75A o1 B%00 > B58 E B%$0 > B%$5
Co*+ound interest

Business & ,T -odel . Cards /%*00% "age o1 $00
With co+pound interest, interest is calculated not only on the =eginning interest, =ut on any
interest accu+ulated )ith the initial principal in the +eanti+e* Co+pound interest >
0"-112r.10034t 5 "67 )here# " is the "rincipal or the initial a+ount you are initially =orro)ing or
depositing, to earn or charge interest on, r is the interest rate and t is the ti+e period*
E/a*+,e
,1 so+eone )ere to recei/e 5A co+pound interest on a =eginning /alue o1 B%00, the 1irst year
they )ould get the sa+e thing as i1 they )ere recei/ing si+ple interest on the B%00, or B5* The
second year, though, their interest )ould =e calculated on the =eginning a+ount in year $, )hich
)ould =e B%05* So their interest )ould =e#
*05 4 B%05 > B5*$5

,1 this )ere to continue 1or 5 years, the gro)th in the in/est+ent )ould look like this#
Dear %# 75A o1 B%00*00 > B5*008 E B%00*00 > B%05*00
Dear $# 75A o1 B%05*00 > B5*$58 E B%05*00 > B%%0*$5
Dear (# 75A o1 B%%0*$5 > B5*5%8 E B%%0*$5 > B%%5*!
Dear 2# 75A o1 B%%5*! > B5*08 E B%%5*! > B%$%*55
Dear 5# 75A o1 B%$%*55 > B!*0'8 E B%$%*55 > B%$*!(
Note that in co+paring gro)th graphs o1 si+ple and co+pound interest, in/est+ents )ith si+ple
interest gro) in a linear 1ashion and co+pound interest results in geo+etric gro)th* So )ith
co+pound interest, the 1urther in ti+e and in/est+ent is held the +ore dra+atic the gro)th
=eco+es*
&FLAT&O
,n1lation captures the rise in the cost o1 goods and ser/ices o/er a period o1 ti+e* For e4a+ple, i1
6s*%00 today can =uy 5 kg o1 groceries, the sa+e a+ount o1 +oney can only =uy 5F7%E,8 kgs* G1
groceries ne4t year, )here , re1ers to the rate o1 in1lation =eyond today*
Thus, i1 the in1lation rate is 5A, then e/erything else =eing e<ual 7that is, sa+e de+and H supply
and other +arket conditions hold8, ne4t year, you can only =uy 5F7%*058 )orth o1 groceries*
I <uantitati/e esti+ate o1 in1lation in a particular econo+y can =e calculated =y +easuring the
ratio o1 Consu+er "rice ,ndices or C", o1 t)o consecuti/e years* That;s right, the C", that you
hear o1, is the )eighted a/erage price, o1 a prede1ined =asket o1 =asic goods* The A increase o1
the C", this year /s* the C", o1 last year, gi/es the in1lation, or rise in price o1 consu+er goods,
o/er last year*

Business & ,T -odel . Cards /%*00% "age ' o1 $00
,n1lation results in a decrease in the /alue o1 +oney o/er ti+e* The link =et)een the interest
rates, no+inal and real, and in1lation ena=les you to identi1y this i+pact*
o*ina, &nterest
No+inal rate o1 interest 7N8 re1ers to the stated interest rate in the econo+y* For e4a+ple, i1
counter&party de+ands %%0 rupees a1ter a year in return 1or %00 rupees lent today, the no+inal
rate o1 interest is %0A* This, as you see, includes the in1lation rate*
E/a*+,e
Dou;/e lent out %00 rupees, at %0A, 1or one year* Gn +aturity, you get a pro1it, so you think, o1 %0
rupees* But this su+ o1 %%0 rupees =uys less than %%0 rupees did a year ago, due to in1lationJ
Thus, the /alue o1 %%0 rupees today is actually, or really, less than the /alue o1 %%0 rupees a year
ago, and it is less =y the in1lation rate* Thus the real interest you earned is less than %0A*
(ea, rate o8 &nterest
6eal rate o1 interest 768 re1ers to the in1lation&adKusted rate o1 interest* ,t is less than the no+inal
rate o1 interest 1or econo+ies ha/ing positi/e rate o1 in1lation*
The relationship =et)een the 6 7real rate o1 interest8, N 7no+inal rate o1 interest8 and , 7rate o1
in1lation8 is as#
6> N&,
7This is a )idely used appro4i+ation? the e4act 1or+ula takes into account ti+e /alue o1 in1lation
etc*8
Why is it i+portant to kno) the real rate o1 returnL Take an e4a+ple )here a =usiness is earning
a net pro1it o1 A per annu+* But, in1lation is also standing at A* So, real pro1it is actually at
zero*
E/a*+,e
No+inal rate 7N8 > %0A, ,n1lation 7,8 > 5A
There1ore, real interest is#
6 > N . , > 5A
There1ore, the real rate o1 return is not %0A =ut 5A*
T&$E VAL)E COCE"T OF $OE%
Ti+e /alue o1 +oney, )hich ser/es as the 1oundation 1or +any concepts in 1inance, arises 1ro+
the concept o1 interest* Because o1 interest, +oney on hand no) is )orth +ore than the sa+e
+oney a/aila=le at a later point o1 ti+e* To understand ti+e /alue o1 +oney and related concepts

like "resent /alue and 1uture /alue, )e need to understand the =asic concepts o1 si+ple and
co+pound interest descri=ed a=o/e*
Future Va,ue
Future Malue is the /alue that a su+ o1 +oney in/ested at co+pound interest )ill ha/e a1ter a
speci1ied period*
The 1or+ula 1or Future Malue is#
FV 9 "V-11 2 i3
n
Where#
FM # Future Malue at the end o1 n ti+e periods
"M # Beginning /alue G6 "resent Malue
i # ,nterest rate per unit ti+e period
n # Nu+=er o1 ti+e periods
E/a*+,e
,1 one )ere to recei/e 5A per annu+ co+pounded interest on B%00 1or 1i/e years,
FM > B%00C7%*058
5
> B%$*!(
&ntra-:ear ;o*+ounding
,1 a cash 1lo) is co+pounded +ore 1re<uently than annually, then intra&year co+pounding is
=eing used* To adKust 1or intra&year co+pounding, an interest rate per co+pounding period +ust
=e 1ound as )ell as the total nu+=er o1 co+pounding periods*
The interest rate per co+pounding period is 1ound =y taking the annual rate and di/iding it =y the
nu+=er o1 ti+es per year the cash 1lo)s are co+pounded* The total nu+=er o1 co+pounding
periods is 1ound =y +ultiplying the nu+=er o1 years =y the nu+=er o1 ti+es per year cash 1lo)s
are co+pounded*

Business & ,T -odel . Cards /%*00% "age %0 o1 $00
E/a*+,e
Suppose so+eone )ere to in/est B%0,000 at 'A interest, co+pounded se+iannually, and hold it
1or 1i/e years*,
,nterest rate 1or co+pounding period > 'AF$ > 2A
Nu+=er o1 co+pounding periods > 5C$ > %0
Thus, the 1uture /alue FM > %0,000C7%E0*028N
%0
> B%2,'0$*22
"resent <a,ue
"resent Malue is the current /alue o1 a 1uture cash 1lo) or o1 a series o1 1uture cash 1lo)s* ,t is
co+puted =y the process o1 discounting the 1uture cash 1lo)s at a predeter+ined rate o1 interest*
,1 B%0,000 )ere to =e recei/ed in a year, the present /alue o1 the a+ount )ould not =e B%0,000
=ecause )e do not ha/e it in our hand no), in the present* To 1ind the present /alue o1 the 1uture
B%0,000, )e need to 1ind out ho) +uch )e )ould ha/e to in/est today in order to recei/e that
B%0,000 in the 1uture* To calculate present /alue, or the a+ount that )e )ould ha/e to in/est
today, )e +ust su=tract the 7hypothetical8 accu+ulated interest 1ro+ the B%0,000* To achie/e
this, )e can discount the 1uture a+ount 7B%0,0008 =y the interest rate 1or the period* The 1uture
/alue e<uation gi/en a=o/e can =e rearranged to gi/e the "resent Malue e<uation#
"V 9 FV . 112&34
n
,n the a=o/e e4a+ple, i1 interest rate is 5A, the present /alue o1 the B%0,000 )hich )e )ill
recei/e a1ter one year, )ould =e#
"M > %0,000F7%E0*058 > B 0,5$(*'%
et "resent Va,ue 1"V3
Net "resent Malue 7N"M8 is a concept o1ten used to e/aluate proKectsFin/est+ents using the
:iscounted Cash Flo) 7:CF8 +ethod* The :CF +ethod si+ply uses the ti+e /alue concept and
discounts 1uture cash 1lo)s =y the applica=le interest rate 1actor to arri/e at the present /alue o1
the cash 1lo)s* N"M 1or a proKect is calculated =y esti+ating net 1uture cash 1lo)s 1ro+ the
proKect, discounting these cash 1lo)s at an appropriate discount rate to arri/e at the present /alue
o1 1uture cash 1lo)s, and then su=tracting the initial outlay on the proKect*
N"M o1 a proKectFin/est+ent > :iscounted /alue o1 net cash in1lo)s . ,nitial costFin/est+ent* The
proKectFin/est+ent is /ia=le i1 N"M is positi/e )hile it is not /ia=le i1 N"M is negati/e*

Business & ,T -odel . Cards /%*00% "age %% o1 $00
E/a*+,e
In in/estor has an opportunity to purchase a piece o1 property 1or B50,000 at the =eginning o1 the
year* The a1ter&ta4 net cash 1lo)s at the end o1 each year are 1orecast as 1ollo)s#
Dear Cash Flo)
% B0,000
$ ',500
( ',000
2 ',000
5 ',000
! ',000
',000
' ,000
0 2,500
%0 5%,000 7property sold at the end o1 the %0th year8
Issu+e that the re<uired rate o1 return 1or si+ilar in/est+ents is %5*00A*
N"M > & 50000 E 0000F7%E0*%58N
%
E '500F7%E0*%58N
$
E O** E5%000F7%E0*%58N
%0
> B!%$*0!
Po)e/er, i1 )e assu+e that the re<uired rate o1 return is %!*00A,
N"M > & 50000 E 0000F7%E0*%!8N
%
E '500F7%E0*%!8N
$
E O** E5%000F7%E0*%!8N
%0
> 7B%(!0*8
Thus, it can =e seen that the N"M is highly sensiti/e to re<uired rate o1 return* N"M o1 a proKect#
,ncreases )ith increase in 1uture cash in1lo)s 1or a gi/en initial outlay
:ecreases )ith increase in initial outlay 1or a gi/en set o1 1uture cash
in1lo)s
:ecreases )ith increase in re<uired rate o1 return

&nterna, (ate o8 (eturn 1&((3
&nterna, (ate o8 (eturn 1&((37 also re1erred to as @Dield; is o1ten used in capital =udgeting* ,t is
the i+plied interest rate that +akes net present /alue o1 all cash 1lo)s e<ual zero*

Business & ,T -odel . Cards /%*00% "age %$ o1 $00
,n the pre/ious e4a+ple, the ,66 is that /alue o1 re<uired rate o1 return that +akes the N"M
e<uals zero*
,66 > r, )here
N"M > & 50000 E 0000F7%Er8N
%
E '500F7%Er8N
$
E O** E5%000F7%Er8N
%0
> B0*00
,66 can =e calculated using trial and error +ethods =y using /arious /alues 1or r or using the ,66
1or+ula directly in -S Q4cel* Pere, ,66 > %5*(0A* ,n other ter+s, ,66 is the rate o1 return at
)hich the proKectFin/est+ent =eco+es /ia=le*

Business & ,T -odel . Cards /%*00% "age %( o1 $00
1.2. F&AC&AL &!T()$ET!

F&AC&AL &!T()$ET!
(A&!&' CA"&TAL
Corporations need capital to 1inance =usiness operations* They raise +oney =y issuing Securities
in the 1or+ o1 Equity and Debt* Q<uity represents o)nership o1 the co+pany and takes the 1or+ o1
stock* :e=t is 1unded =y issuing Bonds, Debentures and /arious certi1icates* The use o1 de=t is
also re1erred to as Leverage Financing. The ratio o1 de=tFe<uity sho)s a potential in/estor the
e4tent o1 a co+pany;s le/erage*
,n/estors choose =et)een de=t and e<uity securities =ased on their in/est+ent o=Kecti/es*
,nco+e is the +ain o=Kecti/e 1or a de=t in/estor* This inco+e is paid in the 1or+ o1 Interest,
usually as se+i&annual pay+ents* Capital Appreciation 7the increase in the /alue o1 a security
o/er ti+e8 is only a secondary consideration 1or de=t in/estors* Con/ersely, e<uity in/estors are
pri+arily seeking Growt, or capital appreciation* ,nco+e is usually o1 lesser i+portance, and is
recei/ed in the 1or+ o1 Dividends*
:e=t is considered senior to e<uity 7i*e*8 the interest on de=t is paid =e1ore di/idends on stock* ,t
also +eans that i1 the co+pany ceases to do =usiness and li<uidate its assets, that the de=t
holders ha/e a senior clai+ to those assets*
!EC)(&T%
Security is a 1inancial instru+ent that signi1ies o)nership in a co+pany 7a stock8, a creditor
relationship )ith a corporation or go/ern+ent agency 7a =ond8, or rights to o)nership 7an option3.
Financial instru+ents can =e classi1ied into#
:e=t
Q<uity
Py=rids
:eri/ati/es
DEBT
:e=t is +oney o)ed =y one person or 1ir+ to another* Bonds, loans, and co++ercial paper are
all e4a+ples o1 de=t*
Bond
In in/estor loans +oney to an entity 7co+pany or go/ern+ent8 that needs 1unds 1or a speci1ied
period o1 ti+e at a speci1ied interest rate* ,n e4change 1or the +oney, the entity )ill issue a
certi1icate, or =ond, that states the interest rate 7coupon rate8 to =e paid and repay+ent date
7+aturity date8* ,nterest on =onds is usually paid e/ery si4 +onths 7se+iannually8*
Bonds are issued in three =asic physical 1or+s# Bearer Bonds, 6egistered Is to "rincipal Gnly
and Fully 6egistered Bonds*
Bearer =onds are like cash since the =earer o1 the =ond is presu+ed to =e the o)ner* These
=onds are !nregistered =ecause the o)ner;s na+e does not appear on the =ond, and there is no
record o1 )ho is entitled to recei/e the interest pay+ents* Ittached to the =ond are Coupons* The
=earer clips the coupons e/ery si4 +onths and presents these coupons to the paying agent to
recei/e their interest* Then, at the =ond;s "aturity, the =earer presents the =ond )ith the last
coupon attached to the paying agent, and recei/es their principal and last interest pay+ent*
Bonds that are registered as to principal only ha/e the o)ner;s na+e on the =ond certi1icate, =ut
since the interest is not registered these =onds still ha/e coupons attached*

Bonds that are issued today are +ost likely to =e issued 1ully registered as to =oth interest and
principal* The trans1er agent no) sends interest pay+ents to o)ners o1 record on the interest
#ayable Date* Boo$ Entry =onds are still 1ully registered, =ut there is no physical certi1icate and
the trans1er agent keeps track o1 o)nership* 9*S* Go/ern+ent %egotiable securities 7i*e*,
&reasury Bills, %otes and Bonds8 are issued =ook entry, )ith no certi1icate* The custo+er;s
Con'ir(ation ser/es as proo1 o1 o)nership*
"rin;i+a, and &nterest
Bondholders are pri+arily seeking inco+e in the 1or+ o1 a se+i&annual coupon pay+ent* The
annual rate o1 return 7also called Coupon, Fi)ed, *tated or %o(inal +ield8 is noted on the =ond
certi1icate and is 1i4ed* The 1actors that in1luence the =ondRs initial coupon rate are pre/ailing
econo+ic conditions 7e*g*, +arket interest rates8 and the issuerRs credit rating 7the higher the
credit rating, the lo)er the coupon8* Bonds that are In De'ault are not paying interest*
The principal or par or Face a+ount o1 the =ond is )hat the in/estor has loaned to the issuer* The
relati/e Ssa1etyS o1 the principal depends on the issuer;s credit rating and the type o1 =ond that
)as issued*
Cor+orate =ond
I =ond issued =y a corporation* Corporations generally issue three types o1 =onds# *ecured
Bonds, !nsecured Bonds 7:e=entures8, and *ubordinated Debentures.
Ill corporate =onds are =acked =y the 1ull 1aith and credit o1 the issuer, =ut a secured =ond is
1urther =acked =y speci1ic assets that act as collateral 1or the =ond*
,n contrast, unsecured =onds are =acked =y the general assets o1 the corporation only* There are
three =asic types o1 Secured Bonds#
"ortgage Bonds are secured =y real estate o)ned =y the issuer
Equip(ent &rust Certi'icates are secured =y e<uip+ent o)ned and used in the issuers =usiness
Collateral &rust Bonds are secured =y a port1olio o1 non&issuer securities* 7usually 9*S* Go/ern+ent
securities8
Secured Bonds are considered to =e Senior :e=t Securities, and ha/e a senior creditor status? they
are the 1irst to =e paid principal or interest and are thus the sa1est o1 an issuer;s securities*
9nsecured Bonds include de=entures and su=ordinated de=entures* :e=entures ha/e a general
creditor status and )ill =e paid only a1ter all secured creditors ha/e =een satis1ied* Su=ordinated
de=entures ha/e a su=ordinate creditor status and )ill =e paid a1ter all senior and general
creditors ha/e 1irst =een satis1ied*
E/a*+,e
,B- can issue %0 year =onds )ith a coupon o1 5*5A*
"riceline can issue si+ilar %0 year =onds at 'A
The di11erence in coupon is due to their credit ratingJ

Business & ,T -odel . Cards /%*00% "age %! o1 $00
$uni;i+a, =ond 1$unis3
I =ond issued =y a +unicipality* These are generally ta4 1ree, =ut the interest rate is usually
lo)er than a ta4a=le =ond*
Treasur: !e;urities
Treasury =ills, notes, and =onds are +arketa=le securities the 9*S* go/ern+ent sells in order to
pay o11 +aturing de=t and raise the cash needed to run the 1ederal go/ern+ent* When an in/estor
=uys one o1 these securities, heFshe is lending +oney to the 9*S* go/ern+ent*
Treasur: =i,,s are short&ter+ o=ligations issued 1or one year or less* They are sold at a discount
1ro+ 1ace /alue and donRt pay interest =e1ore +aturity* The interest is the di11erence =et)een the
purchase price o1 the =ill and the a+ount that is paid to the in/estor at *aturit: 18a;e <a,ue8 or at
the ti+e o1 sale prior to +aturity*
Treasur: notes and =onds =ear a stated interest rate, and the o)ner recei/es se+i&annual
interest pay+ents* Treasur: notes ha/e a ter+ o1 +ore than one year, =ut not +ore than %0
years*
Treasur: =onds are issued =y the 9*S* Go/ern+ent* These are considered sa1e in/est+ents
=ecause they are =acked =y the ta4ing authority o1 the 9*S* go/ern+ent, and the interest on
Treasury =onds is not su=Kect to state inco+e ta4* T&=onds ha/e +aturities greater than ten
years, )hile notes and =ills ha/e lo)er +aturities* ,ndi/idually, they so+eti+es are called ST&
=ills,S ST&notes,S and ST&=onds*S They can =e =ought and sold in the secondary +arket at
pre/ailing +arket prices*
!a<ings Bonds are =onds issued =y the :epart+ent o1 the Treasury, =ut they arenRt are not
+arketa=le and the o)ner o1 a Sa/ings Bond cannot trans1er his security to so+eone else*
>ero ;ou+on =onds - interest rate at *aturit:
Teros generate no periodic interest pay+ents =ut they are issued at a discount 1ro+ 1ace /alue*
The return is realized at +aturity* Teros sell at deep discounts 1ro+ 1ace /alue* The di11erence
=et)een the purchase price o1 the zero and its 1ace /alue )hen redee+ed is the in/estorRs return*
Teros can =e purchased 1ro+ pri/ate =rokers and dealers, =ut not 1ro+ the Federal 6eser/e or
any go/ern+ent agency*
The higher rate o1 return the =ond o11ers, the +ore risky the in/est+ent* There ha/e =een
instances o1 co+panies 1ailing to pay =ack the =ond 7de1ault8, so, to entice in/estors, +ost
Case !tud:
Qnron set up po)er plant at :a=hol, ,ndia
The cost o1 the proKect 7"hase %8 )as 9S: 0$0 -illion
Funding
o Q<uity 9S: $'5 +io
o Bank o1 I+ericaFIBN I+ro 9S: %50 +io
o ,:B, H ,ndian Banks 9S: 05 +io
o 9S Go/t . G",C 9S: %00 +io
o 9S Q4i+ Bank 9S: $00 +io
Qnron 9S declared =ankruptcy in $00$
Qnron ,ndia;s assets are +ortgaged to /arious =anks as a=o/e*
:ue to interest pay+ents and depreciation, assets are )orth considera=ly less than
9S: 0$0 +io*
Who )ill get their +oney =ackL Ind ho) +uchL

Business & ,T -odel . Cards /%*00% "age % o1 $00
corporate =onds )ill o11er a higher return than a go/ern+ent =ond* ,t is i+portant 1or in/estors to
research a =ond Kust as they )ould a stock or +utual 1und* The =ond rating )ill help in
deciphering the de1ault risk*
Co**er;ia, +a+er
In unsecured, short&ter+ loan issued =y a corporation, typically 1or 1inancing accounts recei/a=le
and in/entories* ,t is usually issued at a discount to 1ace /alue, re1lecting pre/ailing +arket
interest rates* ,t is issued in the 1or+ o1 pro+issory notes, and sold =y 1inancial organizations as
an alternati/e to =orro)ing 1ro+ =anks or other institutions* The paper is usually sold to other
co+panies )hich in/est in short&ter+ +oney +arket instru+ents*
Since co++ercial paper +aturities donRt e4ceed nine +onths and proceeds typically are used
only 1or current transactions, the notes are e4e+pt 1ro+ registration as securities )ith the 9nited
States Securities and Q4change Co++ission* Financial co+panies account 1or nearly 5 percent
o1 the co++ercial paper outstanding in the +arket*
There are t)o +ethods o1 +arketing co++ercial paper* The issuer can sell the paper directly to
the =uyer or sell the paper to a dealer 1ir+, )hich re&sells the paper in the +arket* The dealer
+arket 1or co++ercial paper in/ol/es large securities 1ir+s and su=sidiaries o1 =ank holding
co+panies* :irect issuers o1 co++ercial paper usually are 1inancial co+panies )hich ha/e
1re<uent and siza=le =orro)ing needs, and 1ind it +ore econo+ical to place paper )ithout the use
o1 an inter+ediary* Gn a/erage, direct issuers sa/e a dealer 1ee o1 %F' o1 a percentage point* This
sa/ings co+pensates 1or the cost o1 +aintaining a per+anent sales sta11 to +arket the paper*
,nterest rates on co++ercial paper o1ten are lo)er than =ank lending rates, and the di11erential,
)hen large enough, pro/ides an ad/antage )hich +akes issuing co++ercial paper an attracti/e
alternati/e to =ank credit*
Co++ercial paper +aturities range 1ro+ % day to $0 days, =ut +ost co++only is issued 1or less
than (0 days* "aper usually is issued in deno+inations o1 B%00,000 or +ore, although so+e
co+panies issue s+aller deno+inations* Credit rating agencies like Standard H "oor rate the
C"s* 6atings are re/ie)ed 1re<uently and are deter+ined =y the issuerRs 1inancial condition, =ank
lines o1 credit and ti+eliness o1 repay+ent* 9nrated or lo)er rated paper also is sold in the
+arket*
,n/estors in the co++ercial paper +arket include pri/ate pension 1unds, +oney +arket +utual
1unds, go/ern+ental units, =ank trust depart+ents, 1oreign =anks and in/est+ent co+panies*
There is li+ited secondary +arket acti/ity in co++ercial paper, since issuers can closely +atch
the +aturity o1 the paper to the in/estorsR needs* ,1 the in/estor needs ready cash, the dealer or
issuer usually )ill =uy =ack the paper prior to +aturity*
E?)&T%
Q<uity 7Stock8 is a security, representing an o)nership interest* Q<uity re1ers to the /alue o1 the
1unds contri=uted =y the o)ners 7the stockholders8 plus the retained earnings 7or losses8*

Business & ,T -odel . Cards /%*00% "age %' o1 $00
Co**on sto;k
Co++on stock represents an o)nership interest in a co+pany* G)ners o1 stock also ha/e
Li(ited Liability 7i*e*8 the +a4i+u+ a shareholder can lose is their original in/est+ent* -ost o1 the
stock traded in the +arkets today is co++on* In indi/idual )ith a +aKority shareholding or
controlling interest controls a co+panyRs decisions and can appoint anyone heFshe )ishes to the
=oard o1 directors or to the +anage+ent tea+*
Corporations seeking capital sell it to in/estors through a #ri(ary ,''ering or an Initial #ublic
,''ering -I#,.. Be1ore shares can =e o11ered, or sold to the general pu=lic, they +ust 1irst =e
registered )ith the *ecurities and E)cange Co((ission -*EC.* Gnce the shares ha/e =een
sold to in/estors, the shareholders are usually 1ree to sell or trade their stock shares in the
Secondary Markets 1su;@ as t@e eA %ork !to;k E/;@ange 5 NYSE3. Fro+ ti+e to ti+e, the
,ssuer +ay choose to repurchase the stock they pre/iously issued* Such repurchased stock
shares are re1erred to as &reasury *toc$, and the shares that re+ain trading in the secondary
+arket are re1erred to as *ares ,utstanding* Treasury Stock does not ha/e /oting rights and is
not entitled to any declared di/idends* Corporations +ay use Treasury Stock to pay a stock
di/idend, to o11er to e+ployees*

!to;k Ter*ino,og:
#ublic ,''ering #rice 7#,#8 . The price at )hich shares are o11ered to the pu=lic in a #ri(ary
,''ering* This price is 1i4ed and +ust =e +aintained )hen !nderwriters sell to custo+ers*
Current "ar$et #rice . The price deter+ined =y Supply and :e+and in the Secondary -arkets*
Boo$ /alue 0 The theoretical li<uidation /alue o1 a stock =ased on the co+panyRs Balance *eet.
#ar /alue . In ar=itrary price used to account 1or the shares in the 1ir+;s =alance sheet* This
/alue is +eaningless 1or co++on shareholders, =ut is i+portant to o)ners o1 #re'erred *toc$*
"re8erred !to;k
"re1erence shares carry a stated di/idend and they do not usually ha/e /oting rights* "re1erred
shareholders ha/e priority o/er co++on stockholders on earnings and assets in the e/ent o1
li<uidation. "re1erred stock is issued )ith a 1i4ed rate o1 return that is either a percent o1 par
7al)ays assu+ed to =e B%008 or a dollar a+ount*
Ilthough pre1erred stock is e<uity and represents o)nership, pre1erred stock in/estors are
pri+arily seeking inco+e* The +arket price o1 inco+e seeking securities 7such as pre1erred stock
and de=t securities8 1luctuates as +arket interest rates change* "rice and yield are in/ersely
related*
There are se/eral di11erent types o1 pre1erred stock including *traigt, Cu(ulative, Convertible,
Callable, #articipating and /ariable* With straight pre1erred, the pre1erence is 1or the current
year;s di/idend only* Cu+ulati/e pre1erred is senior to straight pre1erred and has a 1irst
pre1erence 1or any di/idends +issed in pre/ious periods*
Con<erti=,e +re8erred sto;k can =e con/erted into shares o1 co++on stock either at a 1i4ed
price or a 1i4ed nu+=er o1 shares* ,t is essentially a +i4 o1 de=t and e<uity, and +ost o1ten used
as a +eans 1or a risky co+pany to o=tain capital )hen neither de=t nor e<uity )orks* ,t o11ers
considera=le opportunity 1or capital appreciation*
on-;on<erti=,e +re8erred sto;k re+ains outstanding in perpetuity and trades like stocks*
9tilities represent the =est e4a+ple o1 noncon/erti=le pre1erred stock issuers*
E/a*+,e
When Cognizant Technology Solutions ca+e out )ith its ,nitial "u=lic G11ering on NIS:IU in
June %00', the "u=lic G11ering "rice 7"G"8 )as set at B%0 per share* The stock )as split
t)ice, $&1or&% in -arch&$000 and (&1or&% again in Ipril $00(* Is o1 :ec !, $00(, the Current
-arket "rice stood at B2!*$!* Po)e/er, i1 the stock&splits are taken into consideration the
actual +arket price )ould stand at ! ti+es the Current -arket "rice at )hopping B$5(*5!JJ

Business & ,T -odel . Cards /%*00% "age $0 o1 $00
A*eri;an De+ositor: (e;ei+ts 1AD(3
The purpose o1 an I:6 is to 1acilitate the do+estic trading o1 a 1oreign stock* In I:6 is a receipt
1or a speci1ied nu+=er o1 1oreign shares o)ned =y an I+erican =ank* I:6s trade like shares,
either on a 9*S* Q4change or G/er the Counter* The o)ner o1 an I:6 has /oting rights and also
has the right to recei/e any declared di/idends* In e4a+ple )ould =e ,n1osys I:6s that are
traded in NIS:IU*
#%B(&D!
Py=rids are securities, )hich co+=ine the characteristics o1 e<uity and de=t*
Con<erti=,e =onds
Con/erti=le Bonds are instru+ents that can =e con/erted into a speci1ied nu+=er o1 shares o1
stock a1ter a speci1ied nu+=er o1 days* Po)e/er, till the ti+e o1 con/ersion the =onds continue to
pay coupons*
Barrants
Warrants are call options . /ariants o1 e<uity* They are usually o11ered as =onus or s)eetener,
attached to another security and sold as a !nit* For e4a+ple, a co+pany is planning to issue
=onds, =ut the +arket dictates a 0A interest pay+ent* The issuer does not )ant to pay 0A, so
they 3s)eeten5 the =onds =y adding )arrants that gi/e the holder the right to =uy the issuers
stock at a gi/en price o/er a gi/en period o1 ti+e* Warrants can =e traded, e4ercised, or e4pire
)orthless*
DE(&VAT&VE!
I deri/ati/e is a product )hose /alue is deri/ed 1ro+ the /alue o1 an underlying asset, inde4 or
re1erence rate* The underlying asset can =e e<uity, 1oreign e4change, co++odity or any other
ite+* For e4a+ple, i1 the settle+ent price o1 a deri/ati/e is =ased on the stock price, )hich
changes on a daily =asis, then the deri/ati/e risks are also changing on a daily =asis* Pence
deri/ati/e risks and positions +ust =e +onitored constantly*
ForAard ;ontra;t
Case !tud:
Tata -otors Vtd* 7pre/iously kno) as TQVCG8 recently issued con/erti=le =ond aggregating to
B%00 +illion in the Vu4e+=urg Stock Q4change* The e11ecti/e interest rate paid on the issue
)as Kust 2A )hich )as +uch lo)er than )hat it )ould ha/e to pay i1 it raised the +oney in
,ndia, )here it is =ased out o1* The co+pany )ould use this +oney to pay&=ack e4isting loans
=orro)ed at +uch higher interest rates*
Why doesn;t e/ery co+pany raise +oney a=road i1 it has to pay lo)er interest ratesL Will
there is
Will there =e any e11ect on e4isting Tata -otors share&holders due to the con/erti=le
issueL ,1 @Des;, )hen )ill this =eL

Business & ,T -odel . Cards /%*00% "age $% o1 $00
I 1or)ard contract is an agree+ent to =uy or sell an asset 7o1 a speci1ied <uantity8 at a certain
1uture ti+e 1or a certain price* No cash is e4changed )hen the contract is entered into*
Futures ;ontra;t
I 1utures contract is an agree+ent =et)een t)o parties to =uy or sell an asset at a certain ti+e in
the 1uture at a certain price* ,nde4 1utures are all 1utures contracts )here the underlying is the
stock inde4 and helps a trader to take a /ie) on the +arket as a )hole*
#edging in/ol/es protecting an e4isting asset position 1ro+ 1uture ad/erse price +o/e+ents* ,n
order to hedge a position, a +arket player needs to take an e<ual and opposite position in the
1utures +arket to the one held in the cash +arket*
Ar=itrage# In ar=itrageur is =asically risk a/erse* Pe enters into those contracts )ere he can
earn risk less pro1its* When +arkets are i+per1ect, =uying in one +arket and si+ultaneously
selling in other +arket gi/es risk less pro1it* Ir=itrageurs are al)ays in the look out 1or such
i+per1ections*
O+tions
In option is a contract, )hich gi/es the =uyer the right, =ut not the o=ligation to =uy or sell shares
o1 the underlying security at a speci1ic price on or =e1ore a speci1ic date* There are t)o kinds o1
options# Call Gptions and "ut Gptions*
Ca,, O+tions are options to =uy a stock at a speci1ic price on or =e1ore a certain date* Call
options usually increase in /alue as the /alue o1 the underlying instru+ent rises* The price paid,
called the option pre+iu+, secures the in/estor the right to =uy that certain stock at a speci1ied
price* 7Strike price8 ,1 heFshe decides not to use the option to =uy the stock, the only cost is the
option pre+iu+* For call options, the option is said to =e in&the&+oney i1 the share price is a=o/e
the strike price*
"ut O+tions are options to sell a stock at a speci1ic price on or =e1ore a certain date* With a "ut
Gption, the in/estor can SinsureS a stock =y 1i4ing a selling price* ,1 stock prices 1all, the in/estor
can e4ercise the option and sell it at its SinsuredS price le/el* ,1 stock prices go up, there is no
need to use the insurance, and the only cost is the pre+iu+* I put option is in&the&+oney )hen
the share price is =elo) the strike price* The a+ount =y )hich an option is in&the&+oney is
re1erred to as intrinsic /alue*
The pri+ary 1unction o1 listed options is to allo) in/estors )ays to +anage risk* Their price is
deter+ined =y 1actors like the underlying stock price, strike price, ti+e re+aining until e4piration
7ti+e /alue8, and /olatility* Because o1 all these 1actors, deter+ining the pre+iu+ o1 an option is
co+plicated*
T:+es o8 O+tions
There are t)o +ain types o1 options#
A*eri;an o+tions can =e e4ercised at any ti+e =et)een the date o1
purchase and the e4piration date* -ost e4change&traded options are
o1 this type*
E/a*+,e
The ,n1osys stock price as o1 :ec !
th
, $00( stood at 6s*50!$* The cost o1 the :ec $2
th
, $00(
e4piring Call option )ith Strike "rice o1 6s*5$00 on the ,n1osys Stock )as 6s*00* This )ould
+ean that to =reak&e/en the person =uying the Call Gption on the ,n1osys stock, the stock
price )ould ha/e to cross 6s*5$00 as o1 :ec $2
th
, $00(JJ

Business & ,T -odel . Cards /%*00% "age $$ o1 $00
Euro+ean o+tions can only =e e4ercised at the end o1 their li1e*
Long-Ter* O+tions are options )ith holding period o1 one or +ore years, and they are called
VQI"S 7Vong&Ter+ Q<uity Inticipation Securities8* By pro/iding opportunities to control and
+anage risk or e/en speculate, they are /irtually identical to regular options* VQI"S, ho)e/er,
pro/ide these opportunities 1or +uch longer periods o1 ti+e* VQI"S are a/aila=le on +ost )idely&
held issues*
E/oti; O+tions: The si+ple calls and puts are re1erred to as Splain /anillaS options* Non&
standard options are called e4otic options, )hich either are /ariations on the payo11 pro1iles o1 the
plain /anilla options or are )holly di11erent products )ith SoptionalityS e+=edded in the+*
O+en &nterest is the nu+=er o1 options contracts that are open? these are contracts that ha/e not
e4pired nor =een e4ercised*
!Aa+s
S)aps are the e4change o1 cash 1lo)s or one security 1or another to change the +aturity 7=onds8
or <uality o1 issues 7stocks or =onds8, or =ecause in/est+ent o=Kecti/es ha/e changed* For
e4a+ple, one 1ir+ +ay ha/e a lo)er 1i4ed interest rate, )hile another has access to a lo)er
1loating interest rate* These 1ir+s could s)ap to take ad/antage o1 the lo)er rates*
Curren;: !Aa+ in/ol/es the e4change o1 principal and interest in one currency 1or the sa+e in
another currency*

Business & ,T -odel . Cards /%*00% "age $( o1 $00
ForAard !Aa+ agree+ents are created through the synthesis o1 t)o di11erent s)aps, di11ering in
duration, 1or the purpose o1 1ul1illing the speci1ic ti+e1ra+e needs o1 an in/estor* So+eti+es
s)aps donRt per1ectly +atch the needs o1 in/estors )ishing to hedge certain risks* For e4a+ple, i1
an in/estor )ants to hedge 1or a 1i/e&year duration =eginning one year 1ro+ today, they can enter
into =oth a one&year and si4&year s)ap, creating the 1or)ard s)ap that +eets the re<uire+ents
1or their port1olio*
!Aa+tions - In option to enter into an interest rate s)ap* The contract gi/es the =uyer the option
to e4ecute an interest rate s)ap on a 1uture date, there=y locking in 1inancing costs at a speci1ied
1i4ed rate o1 interest* The seller o1 the s)aption, usually a co++ercial or in/est+ent =ank,
assu+es the risk o1 interest rate changes, in e4change 1or pay+ent o1 a s)ap pre+iu+*
Case !tud:
The World Bank =orro)s 1unds internationally and loans those 1unds to
de/eloping countries* ,t charges its =orro)ers a cost plus rate and hence needs
to =orro) at the lo)est cost*
,n %0'% the 9S interest rate )as at % percent, an e4tre+ely high rate due to
the anti&in1lation tight +onetary policy o1 the Fed* ,n West Ger+any the
corresponding rate )as %$ percent and S)itzerland ' percent*
,B- enKoyed a /ery good reputation in S)itzerland, percei/ed as one o1 the
=est +anaged 9S co+panies* ,n contrast, the World Bank su11ered 1ro+ =ad
i+age since it had used se/eral ti+es the S)iss +arket to 1inance risky third
)orld countries* Pence, World Bank had to pay an e4tra $0 =asis points 70*$A8
co+pared to &B$
,n addition, the pro=le+ 1or the World Bank )as that the S)iss go/ern+ent
i+posed a li+it on the a+ount World Bank could =orro) in S)itzerland* The
World Bank had =orro)ed its allo)ed li+it in S)itzerland and West Ger+any
It the sa+e ti+e, the World Bank, )ith an III rating, )as a )ell esta=lished
na+e in the 9S and could get a lo)er 1inancing rate 7co+pared to ,B-8 in the 9S
:ollar =ond +arket =ecause o1 the =acking o1 the 9S, Ger+an, Japanese and
other go/ern+ents* ,t )ould ha/e to pay the Treasury rate E 20 =asis points*
,B- had large a+ounts o1 S)iss 1ranc and Ger+an deutsche +ark de=t and
thus had de=t pay+ents to pay in S)iss 1rancs and deutsche +arks*
World Bank =orro)ed dollars in the 9*S* +arket and s)apped the dollar
repay+ent o=ligation )ith ,B- in e4change 1or taking o/er ,B-Rs SF6 and :Q-
loans*
,t =eca+e /ery ad/antageous 1or ,B- and the World Bank to =orro) in the
+arket in )hich their co+parati/e ad/antage )as the greatest and s)ap their
respecti/e 1i4ed&rate 1unding*
Case !tud:
The World Bank =orro)s 1unds internationally and loans those 1unds to de/eloping
countries* ,t charges its =orro)ers a cost plus rate and hence needs to =orro) at the
lo)est cost*
,n %0'% the 9S interest rate )as at % percent, an e4tre+ely high rate due to the anti&
in1lation tight +onetary policy o1 the Fed* ,n West Ger+any the corresponding rate )as %$
percent and S)itzerland ' percent*
,B- enKoyed a /ery good reputation in S)itzerland, percei/ed as one o1 the =est
+anaged 9S co+panies* ,n contrast, the World Bank su11ered 1ro+ =ad i+age since it
had used se/eral ti+es the S)iss +arket to 1inance risky third )orld countries* Pence,
World Bank had to pay an e4tra $0 =asis points 70*$A8 co+pared to &B$
,n addition, the pro=le+ 1or the World Bank )as that the S)iss go/ern+ent i+posed a
li+it on the a+ount World Bank could =orro) in S)itzerland* The World Bank had
=orro)ed its allo)ed li+it in S)itzerland and West Ger+any
It the sa+e ti+e, the World Bank, )ith an III rating, )as a )ell esta=lished na+e in
the 9S and could get a lo)er 1inancing rate 7co+pared to ,B-8 in the 9S :ollar =ond
+arket =ecause o1 the =acking o1 the 9S, Ger+an, Japanese and other go/ern+ents* ,t
)ould ha/e to pay the Treasury rate E 20 =asis points*
,B- had large a+ounts o1 S)iss 1ranc and Ger+an deutsche +ark de=t and thus had
de=t pay+ents to pay in S)iss 1rancs and deutsche +arks*
World Bank =orro)ed dollars in the 9*S* +arket and s)apped the dollar repay+ent
o=ligation )ith ,B- in e4change 1or taking o/er ,B-Rs SF6 and :Q- loans*
,t =eca+e /ery ad/antageous 1or ,B- and the World Bank to =orro) in the +arket in
)hich their co+parati/e ad/antage )as the greatest and s)ap their respecti/e 1i4ed&rate
1unding*

1.C. F&AC&AL $A(DET!

F&AC&AL $A(DET!
B#AT A(E F&AC&AL $A(DET!E
I 1inancial transaction is one )here a 1inancial asset or instru+ent, such as cash, check, stock,
=ond, etc are =ought and sold* Financial -arket is a place )here the =uyers and sellers 1or the
1inancial instru+ents co+e together and 1inancial transactions take place*
T%"E! OF F&AC&AL $A(DET!
"ri*ar: $arkets
"ri+ary +arket is one )here ne) 1inancial instru+ents are issued 1or the 1irst ti+e* They pro/ide
a standard institutionalized process to raise +oney* The pu=lic o11erings are done through a
prospectus* I prospectus is a docu+ent that gi/es detailed in1or+ation a=out the co+pany, their
prospecti/e plans, potential risks associated )ith the =usiness plans and the 1inancial instru+ent*
!e;ondar: *arkets
Secondary -arket is a place )here pri+ary +arket instru+ents, once issued, are =ought and
sold* In in/estor +ay )ish to sell the 1inancial asset and encash the in/est+ent a1ter so+e ti+e
or the in/estor +ay )ish to in/est +ore, =uy +ore o1 the sa+e asset instead, the decision
in1luenced =y a /ariety o1 possi=le reasons* They pro/ide the in/estor )ith an easy )ay to =uy or
sell*

T@e Di88erent Finan;ia, $arkets
I 1inancial +arket is kno)n =y the type o1 1inancial asset or instru+ent traded in it* So there are
as +any types o1 1inancial +arkets as there are o1 instru+ents* Typical e4a+ples o1 1inancial
+arkets are#
Stock +arket
Bond 7or 1i4ed inco+e8 +arket
-oney +arket
Foreign e4change 7Fore4 or FW 1or short8 +arket 7also called the
currency +arket8*
Stock and =ond +arkets constitute the capital +arkets* Inother =ig 1inancial +arket is the
deri/ati/es +arket*
CA"&TAL $A(DET!
B@: =usinesses need ;a+ita,E
Ill =usinesses need capital, to in/est +oney up1ront to produce and deli/er the goods and
ser/ices* G11ice space, plant and +achinery, net)ork, ser/ers and "Cs, people, +arketing,
licenses etc* are Kust so+e o1 the co++on ite+s in )hich a co+pany needs to in/est =e1ore the
=usiness can take o11* Q/en a1ter the =usiness takes o11, the cash or +oney generated 1ro+ sales
+ay not =e su11icient to 1inance e4pansion o1 capacity, in1rastructure, and products F ser/ices
range or to di/ersi1y or e4pand geographically* So+e 1inancial ser/ices co+panies need to raise
additional capital periodically in order to satis1y capital ade<uacy nor+s*
B@at is t@e ro,e o8 Ca+ita, $arketsE

Business & ,T -odel . Cards /%*00% "age $! o1 $00
For =usinesses to thri/e and gro), presence o1 /i=rant and e11icient capital +arkets is e4tre+ely
i+portant* Capital +arkets ha/e 1ollo)ing 1unctions#
%* Channeling 1unds 1ro+ 3sa/ings pool5 to 3in/est+ent pool5 & channeling 1unds 1ro+ 3those
)ho ha/e +oney5 to 3those )ho need 1unds 1or =usiness purpose5*
$* "ro/iding li<uidity to in/estors & i*e* +aking it easy 1or in/estors, to =uy and sell 1inancial
assets or instru+ents* Capital +arkets achie/e this in a nu+=er o1 )ays and it is particularly
i+portant 1or institutional in/estors )ho trade in large <uantities* ,lli<uid +arkets do not allo)
the+ to trade large <uantities =ecause the orders +ay si+ply not get e4ecuted co+pletely or
+ay cause drastic 1luctuations in price*
(* "ro/iding +ultitude o1 in/est+ent options to in/estors . this is i+portant =ecause the risk
pro1ile, in/est+ent criteria and pre1erences +ay di11er 1or each in/estor* 9nless there are
+any in/est+ent options, the capital +arkets +ay 1ail to attract the+, thus a11ecting the
supply o1 capital*
2* "ro/iding e11icient price disco/ery +echanis+ . e11icient =ecause the price is deter+ined =y
the +arket 1orces, i*e* it is a result o1 transparent negotiations a+ong all =uyers and sellers in
the +arket at any point* So the +arket price can =e considered as a 1air price 1or that
instru+ent*
!TOCD $A(DET!
Stock +arkets are the =est kno)n a+ong all 1inancial +arkets =ecause o1 large participation o1
the 3retail in/estors5* The i+portant stock e4changes are as 1ollo)s#
Ne) Dork Stock Q4change 7NDSQ8
National Issociation o1 Securities :ealers Iuto+ated Uuotations
7NIS:IU8
Vondon Stock Q4change 7VSQ8
Bo+=ay Stock Q4change 7BSQ8,
National Stock Q4change o1 ,ndia 7NSQ8
Stock Q4changes pro/ide a syste+ that accepts orders 1ro+ =oth =uyers and sellers in all shares
that are traded on that particular e4change* Q4changes then 1ollo) a +echanis+ to auto+atically
+atch these trades =ased on the <uoted price, ti+e, <uantity, and the order type, thus resulting in
trades* The +arket in1or+ation is transparent and a/aila=le real&ti+e to all, +aking the trading
e11icient and relia=le*
Qarlier, =e1ore the proli1eration o1 co+puters and net)orks, the trading usually took place in an
area called a 3Trading 6ing5 or a 3"it5 )here all =rokers )ould shout their <uotes and 1ind the
3counter&party5* The trading ring is no) replaced in +ost e4changes =y ad/anced co+puterized
and net)orked syste+s that allo) online trading, so the +e+=ers can log in 1ro+ any)here to
carry out trading* For e4a+ple, BGVT o1 BSQ and Super:GT o1 NDSQ*
B@at deter*ines t@e s@are +ri;e and @oA does it ;@angeE
The share price is deter+ined =y the +arket 1orces, i*e* the de+and and supply o1 shares at each
price* The de+and and supply /ary pri+arily as the percei/ed /alue o1 the stock 1or di11erent
in/estors /aries* ,n/estor )ill consider =uying the stock i1 the +arket price is less than the
percei/ed /alue o1 the stock according to that in/estor and )ill consider selling i1 it is higher* I
large nu+=er o1 1actors ha/e a =earing on the percei/ed /alue* So+e o1 the+ are#
"er1or+ance o1 the co+pany
"er1or+ance o1 the industry to )hich it =elongs

State o1 the country;s econo+y )here it operates as )ell as the
glo=al econo+y
-arket senti+ent or +ood relating to the stock and on the +arket as
a )hole
Ipart 1ro+ these, +any other 1actors, including per1or+ance o1 other 1inancial +arkets, a11ect the
de+and and supply*
BOD $A(DET!
Is the na+e suggests, =onds are issued and traded in these +arkets* Go/ern+ent =onds
constitute the =ulk o1 the =onds issued and traded in these +arkets* Bond +arkets are also
so+eti+es called Fi4ed ,nco+e +arkets* While so+e o1 the =onds are traded in e4changes, +ost
o1 the =ond trading is conducted o/er&the&counter 7GTC8, i*e* =y direct negotiations =et)een
dealers* Vately there ha/e =een e11orts to create co+puter&=ased +arket place 1or certain type o1
=onds*
"arti;i+ants in t@e Bond $arket
Since Go/ern+ent is the =iggest issuer o1 =onds, the central =ank o1 the country such as Federal
6eser/e in 9S and 6eser/e Bank o1 ,ndia in ,ndia, is the =iggest player in the =ond +arket* Vike
stock +arkets, one needs to =e an authorized dealer o1 Go/t* securities, to su=scri=e to the =ond
issues* Typically, the Go/t* =ond issues are +ade =y )ay o1 auctions, )here the dealers =id 1or
the =onds and the price is 1i4ed =ased on the =ids recei/ed* The dealers then sell these =onds in
the secondary +arket or directly to third parties, typically institutions and co+panies*
&8 t@e interest rate is 8i/ed 8or ea;@ =ond7 A@: do t@e =ond +ri;es 8,u;tuateE
Bond prices 1luctuate =ecause the interest rates as )ell as the perceptions o1 in/estors on the
direction o1 interest rates change* 6e+e+=er, =ond pays interest at a 1i4ed coupon rate
deter+ined at the ti+e o1 issue, irrespecti/e o1 the pre/ailing +arket interest rate* -arket interest
rates are =ench+ark interest rates, such as Treasury =ill rates, )hich are su=Kect to change
=ecause o1 /arious 1actors such as in1lation, +onetary policy change, etc* So )hen the pre/ailing
+arket interest rates change, price o1 the =ond 7and not the coupon8 adKusts, so that the e11ecti/e
yield 1or a =uyer at the ti+e 7i1 the =ond is held to +aturity8 +atches the +arket interest rate on
other =onds o1 e<ual tenure and credit rating 7risk8*
So )hen the +arket interest rates go up, prices o1 =onds 1all and /ice&/ersa* Thus, since price o1
=onds changes )hen +arket interest rate changes, all =onds ha/e an interest rate risk* ,1 the
+arket interest rates shoot up, then the =ond price is a11ected negati/ely and an in/estor )ho
=ought the =ond at a high price 7)hen interest rates )ere lo)8 stands to lose +oney or at least
+akes lesser returns than e4pected, unless the =ond is held to +aturity*

Business & ,T -odel . Cards /%*00% "age $' o1 $00
FO(E&' EFC#A'E $A(DET
Foreign e4change +arkets are )here the 1oreign currencies are =ought and sold* For e4a+ple,
i+porters need 1oreign currency to pay 1or their i+ports* Go/ern+ent needs 1oreign currency to
pay 1or its i+ports such as de1ense e<uip+ent and to repay loans taken in 1oreign currency*
Foreign e4change rates e4press the /alue o1 one currency in ter+s o1 another* They in/ol/e a
1i4ed currency, )hich is the currency =eing priced and a /aria=le currency, the currency used to
e4press the price o1 the 1i4ed currency* For e4a+ple, the price o1 a 9S :ollar can =e e4pressed in
di11erent currencies as# 9S: 79S :ollar8 % > ,ndian 6upee 7,N68 2!, 9S: % > Great Britain "ound
7GB"8 0*!%$5, 9S: % > Quro 0*''0 etc* ,n this e4a+ple, 9S: is the 1i4ed currency and ,N6,
GB", Quro are the /aria=le currencies*
9S :ollar, British Sterling 7"ound8, Quro and Japanese Den are the +ost traded currencies
)orld)ide, since +a4i+u+ =usiness transactions are carried out in these currencies*
The e4change rate at any ti+e depends upon the de+and . supply e<uation 1or the di11erent
currencies, )hich in turn depends upon the relati/e strength o1 the econo+ies )ith respect to the
other +aKor econo+ies and trading partners*
"arti;i+ants
Gnly authorized 1oreign e4change dealers can participate in the 1oreign e4change +arket* Iny
indi/idual or co+pany, )ho needs to sell or =uy 1oreign currency, does so through an authorized
dealer* Currency trading is conducted in the o/er&the&counter 7GTC8 +arket*
T@e ro,e o8 t@e Centra, Bank in t@e 8oreign e/;@ange *arket
The central =ank regulates the +arkets to ensure its s+ooth 1unctioning* The degree o1 regulation
depends on the econo+ic policies o1 the country* The central =ank +ay also =uy or sell their
currency to +eet unusual de+and . supply +is+atches in the +arkets*
The 1oreign e4change rate and transactions are closely +onitored =ecause the 1luctuations in
1ore4 +arkets a11ects the pro1ita=ility o1 i+ports and e4ports o1 do+estic co+panies as )ell as
E/a*+,e
Bond "rice calculation can =e su++ed =y an easy 1or+ula#
)here B represents the price o1 the =ond and CF$ represents the $th cash 1lo) )hich is +ade
up o1 coupon pay+ents* The Cash Flo) 7CF8 1or the last year includes =oth the coupon
pay+ent and the "rincipal*
What )ould =e the =ond price 1or a (&Dear, 6s*%00 principal, =ond )hen the interest rate
7i8 is %0A and the Coupon pay+ents are 6s*5 annuallyL
Would the =ond price increaseFdecrease i1 the coupon is reducedL What )ould =e happen
to =ond price i1 the interest rates ca+e do)nL

pro1ita=ility o1 in/est+ents +ade =y 1oreign co+panies in that country* 6egulators try to ensure
that the 1luctuations are not caused =y any 1actor other than the +arket 1orces*
$OE% $A(DET
-oney +arket is 1or short ter+ 1inancial instru+ents, usually a day to less than a year* The +ost
co++on instru+ent is a 3repo5, short 1or repurchase agree+ent* I repo is a contract in )hich the
seller o1 securities, such as Treasury Bills, agrees to =uy the+ =ack at a speci1ied ti+e and price*
Treasury =ills o1 /ery short tenure, co++ercial paper, certi1icates o1 deposits etc* are also
considered as +oney +arket instru+ents*
Since the tenure o1 the +oney +arket instru+ents is /ery short, they are generally considered
sa1e* ,n 1act they are also called cash instru+ents* 6epos especially, since they are =acked =y a
Go/t* security, are considered /irtually the sa1est instru+ent* There1ore the interest rates on
repos are the lo)est a+ong all 1inancial instru+ents*
$one: *arket instru*ents are typically used =y =anks, institutions and co+panies to park e4tra
cash 1or a short period or to *eet t@e regu,ator: reser<e reGuire*ents* For short&ter+ cash
re<uire+ents, +oney +arket instru+ents are the =est )ay to =orro)*
"arti;i+ants
Whereas in stock +arket the typical +ini+u+ in/est+ent is e<ui/alent o1 the price o1 % share, the
+ini+u+ in/est+ent in =ond and +oney +arkets runs into hundreds o1 thousands o1 6upees or
:ollars* Pence the +oney +arket participants are +ostly =anks, institutions, co+panies and the
central =ank* There are no 1or+al e4changes 1or +oney +arket instru+ents and +ost o1 the
trading takes place using proprietary syste+s or shared trading plat1or+s connecting the
participants*
(E')LAT&O OF CA"&TAL $A(DET!
There are +any reasons )hy the 1inancial +arkets are regulated =y go/ern+ents#
Since the capital +arkets are central to a thri/ing econo+y,
Go/ern+ents need to ensure their s+ooth 1unctioning*
Go/ern+ents also need to protect s+all or retail in/estors; interests
to ensure there is participation =y a large nu+=er o1 in/estors,
leading to +ore e11icient capital +arkets*
Go/ern+ents need to ensure that the co+panies or issuers declare
all necessary in1or+ation that +ay a11ect the security prices and that
the in1or+ation is readily and easily a/aila=le to all participants at the
sa+e ti+e*

E/a*+,e
The Bank o1 Japan plays the role o1 central =ank in Japan* ,t strictly +onitors the e4change
rates to ensure that the i+portersFe4porters are not hurt due to any e4change rate
1luctuations* Still, the 9S:FJ"D, )hich is the second +ost traded currency pair in the )orld,
+aintains a long&standing reputation o1 sharp increases in short&ter+ /olatilities*

Business & ,T -odel . Cards /%*00% "age (0 o1 $00
Typically the go/ern+ent designates one or +ore agencies as regulator7s8 and super/isor7s8 1or
the 1inancial +arkets* Thus ,ndia has !e;urities and E/;@ange Board o8 &ndia 1!EB&3 and the
9S has Securities and Q4change Co++ission 7SQC8* These regulatory =odies 1or+ulate rules
and nor+s 1or each acti/ity and each category o1 participant* For e4a+ple,
Qligi=ility nor+s 1or a co+pany to =e allo)ed to issue stock or =onds,
6ules regarding the a+ount o1 in1or+ation that +ust =e +ade
a/aila=le to prospecti/e in/estors,
6ules regarding the issue process,
6ules regarding periodic declaration o1 1inancial state+ents, etc*
6egulators also +onitor the capital +arket acti/ity continuously to ensure that any =reach o1 la)s
or rules does not go unnoticed* To help this 1unction, all +e+=ers and issuers ha/e to su=+it
certain periodic reports to the regulator disclosing all rele/ant details on the transactions
undertaken*
F&AC&AL $A(DET !%!TE$!
The de+ands o1 the capital +arket transactions, the need 1or tracking and +anaging risks, the
pressure to reduce total transaction costs and the o=ligation to +eet co+pliance re<uire+ents
+ake it i+perati/e that the 1unctions =e auto+ated using ad/anced co+puter syste+s* So+e o1
the +aKor types o1 syste+s in capital +arket 1ir+s are =rie1ly descri=ed =elo)*
Trading !:ste*s
The /olu+e o1 transactions in capital +arkets de+ands ad/anced syste+s to ensure speed and
relia=ility* :ue to proli1eration o1 ,nternet technology, the trading syste+s are also no) accessi=le
online allo)ing e/en +ore participants 1ro+ any part o1 the )orld to transact, helping to increase
e11iciency and li<uidity* The trading syste+s can =e di/ided into 1ront&end order entry and =ack&
end order processing syste+s*
Grder entry syste+s also o11er 1unctions such as order tracking, calculation o1 pro1it and loss
=ased on real&ti+e price +o/e+ents and /arious tools to calculate and display risk to the /alue o1
in/est+ents due to price +o/e+ent and other 1actors*
Back&o11ice syste+s /alidate orders, route the+ to the e4change7s8, recei/e +essages and
noti1ications 1ro+ the e4changes, inter1ace )ith e4ternal agencies such as clearing 1ir+, generate
+anage+ent, in/estor and co+pliance reports, keep track o1 +e+=er account =alances etc*
E/;@ange s:ste*s
T@e ;ore e/;@ange syste+ is the trading plat1or+ that accepts orders 1ro+ +e+=ers, displays
the price <uotes and trades, +atches =uy and sell orders dyna+ically to 1ill as +any orders as
possi=le and sends status +essages and trade noti1ications to the parties in/ol/ed in each trade*
,n addition, e4changes need syste+s to +onitor the transactions, generate reports on
transactions, keep track o1 +e+=er accounts, etc*
"ort8o,io $anage*ent !:ste*s
These syste+s allo) t@e in<est*ent *anagers to choose the instru+ents to in/est in, =ased on
the re<uire+ents or inputs such as a+ount to =e in/ested, e4pected returns, duration 7or tenure8
o1 in/est+ent, risk tolerance etc* and analysis o1 price and other data on the instru+ents and
issuers* The ter+ 3port1olio5 re1ers to the =asket o1 in/est+ents o)ned =y an in/estor* I port1olio
o1 in/est+ents allo)s one to di/ersi1y risks o/er a li+ited nu+=er o1 instru+ents and issuers*

Business & ,T -odel . Cards /%*00% "age (% o1 $00
A;;ounting !:ste*s
The accounting syste+s take care o1 present /alue calculations, pro1it H loss etc*& o1 in/est+ents
and 1unds and not the 1inancial accounts o1 the 1ir+s*

Business & ,T -odel . Cards /%*00% "age ($ o1 $00
!)$$A(%
Financial +arkets 1acilitate 1inancial transactions, i*e* e4change o1
1inancial assets such stocks, =onds, etc*
Financial +arkets =ring =uyers and sellers in a 1inancial instru+ent
together, thus reducing transaction costs, channeling 1unds,
i+pro/ing li<uidity and pro/ide a transparent price disco/ery
+echanis+*
Qach 1inancial +arket is seg+ented into a "ri+ary +arket, )here
ne) instru+ents are issued and a Secondary +arket, )here the
pre/iously issued instru+ents are =ought and sold =y in/estors*
Stock +arkets, =ond +arkets, +oney +arkets, 1oreign e4change
+arkets and deri/ati/es +arkets are pro+inent e4a+ples o1 1inancial
+arkets*
Shares 7stock8 o1 a co+pany are issued and traded in the stock
+arkets*
Bond +arkets are )here =onds such as treasury =onds, treasury
notes, corporate =onds, etc* are traded*
-oney +arkets, like =onds +arkets, are also 1i4ed inco+e +arkets*
,nstru+ents traded in +oney +arkets ha/e /ery short tenure*
Foreign e4change +arkets trade in currencies*
:eri/ati/es +arkets trade deri/ati/es, )hich are co+ple4 1inancial
instru+ents, )hose returns are =ased upon the returns 1ro+ so+e
other 1inancial asset called as the underlying asset*
"rice o1 any 1inancial instru+ent depends =asically on de+and and
supply, )hich in turn depend upon +ultiple di11erent 1actors 1or
di11erent +arkets*
Qach 1inancial instru+ent has a di11ering le/el o1 inherent risk
associated )ith it* -oney +arket instru+ents are considered the
sa1est due to their /ery short tenure*
6egulators play a /ery i+portant role in the de/elop+ent and /ia=ility
o1 1inancial +arkets* 6egulators try to ensure that the +arkets
1unction in a s+ooth, transparent +anner, that there is su11icient and
ti+ely disclosure o1 in1or+ation, that the interest o1 s+all in/estors is
not co+pro+ised =y the large in/estors, and so on, )hich is critical
1or o/erall /i=rancy, e11iciency and gro)th o1 the +arket and the
econo+y*

Business & ,T -odel . Cards /%*00% "age (( o1 $00
2. BAD&'

2.1. &T(OD)CT&O TO BAD&'

&T(OD)CT&O TO BAD&'
B#AT &! A BADE
The ter+ @Bank1 is used generically to re1er to any 1inancial institution that is licensed to a;;e+t
de+osits and issue ;redit t@roug@ ,oans.
Banks are the =ack=one o1 any econo+y, as all +onetary transactions end up touching =anks*
The +ain 1unctions o1 =anks are to#
Channelize Sa/ings
"ro/ide credit 1acilities to =orro)er
"ro/ide in/est+ent a/enues to in/estors
Facilitate the trade and co++erce dealings
"ro/ide 1inancial =ack=one to support econo+ic gro)th o1 the
country
-ini+ize Cash Transactions
"ro/ide Ser/ices
B#% DO BE EED A BADE
They pro/ide a return 7pay interest8 on our sa/ing
Sa1ety o1 principal and interest
Con/enience o1 =eing a=le to )rite checks and use de=it cards
6aising 1unds )hen )e need
Fro+ the =usiness or econo+ic point o1 /ie), ho)e/er, =anks are the pri+ary source o1 1inance*
Since the deposits o1 the s+all in/estors are protected, =ank deposits are considered a lo) risk
in/est+ent a/enue* :ue to their access to a large source o1 1unds at /ery lo) cost, o)ing largely
to the lo) interest rate on sa/ings and ter+ deposits, =anks are in the =est position to lend to
=usinesses and indi/iduals at co+petiti/e interest rates*
B#AT &! T#E CET(AL BAD AD B#AT A(E &T! (OLE!E
The Central =ank o1 any country can =e called the =anker;s =ank* ,t acts as a regulator 1or other
=anks, )hile pro/iding /arious 1acilities to 1acilitate their 1unctioning* ,t also acts as the
Go/ern+ent;s =ank* The Federal 6eser/e is the central =ank o1 the 9nited States, )hile 6eser/e
Bank o1 ,ndia is the central =ank in ,ndia*
The +ain o=Kecti/e o1 a central =ank is to pro/ide the nation )ith a sa1er, +ore 1le4i=le, and +ore
sta=le +onetary and 1inancial syste+* They ha/e the 1ollo)ing responsi=ilities#
Conducting the nationRs +onetary policy* Central =anks de1ine the
+onetary policy and then take necessary actions to create an
en/iron+ent to +ake those policies 1easi=le* Q*g* i1 the central =ank
)ants to +aintain so1t interest rate, they can reduce the C66 to
pu+p in +ore +oney in the econo+y*
Super/ising and regulating =anking institutions and protecting the
rights o1 consu+ers
-aintaining the sta=ility o1 the 1inancial syste+, i*e* sta=ility o1
interest rates and 1oreign e4change rate*
Qnsuring that the interest rates re+ain at such a le/el as to +ake
=usiness /ia=le

Business & ,T -odel . Cards /%*00% "age (! o1 $00
Qnsuring that su11icient 1unds are a/aila=le 1or long ter+ in/est+ent
to =usinesses as )ell as go/ern+ent, )ithout causing in1lation to rise
"ro/iding certain 1inancial ser/ices to the go/ern+ent, the pu=lic,
1inancial institutions, and 1oreign o11icial institutions
-onitoring the 1oreign currency assets and lia=ilities and +onitoring
the in1lo) and out1lo) o1 1oreign currency
BAD!7 ECOO$% AD A$O)T OF $OE%
Banks 1acilitate the creation o1 +oney in the econo+y* The pri+ary 1unction o1 =anks is to put
account holdersR +oney to use =y lending it out to others )ho can then use it to =uy ho+es,
=usinesses etc*
Vet;s look at an e4a+ple as ho) =anks do this* The a+ount o1 +oney that =anks can lend is
directly a11ected =y the reser/e re<uire+ent set =y the Central Bank* That is, e/ery =ank needs to
+aintain a certain percentage o1 its total deposits as cash, to ensure li<uidity* This reser/e
re<uire+ent is also kno)n as the C66 7Cash 6eser/e 6atio8* When a =ank gets a deposit o1
B%00, assu+ing a reser/e re<uire+ent o1 %0A, the =ank can then lend out B00* That B00 goes
=ack into the econo+y, purchasing goods or ser/ices, and usually ends up deposited in another
=ank* That =ank can then lend out B'% o1 that B00 deposit, and that B'% goes into the econo+y to
purchase goods or ser/ices and ulti+ately is deposited into another =ank that proceeds to lend
out a percentage o1 it* ,n this )ay, +oney gro)s and 1lo)s throughout the co++unity in a +uch
greater a+ount than physically e4ists* This is also called +ultiplier e11ect* ,n the picture =elo), an
initial deposit o1 B%00 has created a reser/e o1 B$, and loan o1 B$22* Thus, =anks 1acilitate the
in/estingFspending o1 +oney that +ultiply 1unds through circulation and this is kno)n as 3-oney
-ultiplier5 e11ect*

#OB DO BAD! $ADE $OE%E
Banks are like any other regulated =usiness? the product they deal )ith is 3-oney5* So they
=orro) +oney 1ro+ indi/idual or =usinesses 3)ho ha/e +oney5, and lend it to those 3)ho need
+oney5, =y adding a +ark up, to pay 1or e4penses and pro1it* The di11erence =et)een the rates,
)hich =anks o11er to depositors and lenders, is generally re1erred to as 3Spread5* 9nderstanda=ly,
the spread in this =usiness is lo)? hence increasing the turno/er 7/olu+e8 is the key to +aking
pro1it* Pence, in practice, =anks o11er a nu+=er o1 options . o1ten ter+ed as 3products5 & to =oth
in/estors and =orro)ers to +eet their di11erent re<uire+ents and pre1erences and thus increase
=usiness* They also pro/ide 1ee&=ased ser/ices such as +anaging cash 1or corporate clients, to
increase =usiness and i+pro/e pro1it +argin*

!E(V&CE OFFE(&'! OF BAD!
Ser/ice o11erings o1 =anks are organized along 1ollo)ing di/isions#
Corporate Banking
o Trade Finance
o Cash -anage+ent
6etail Banking
o Qlectronic Banking
o Credit Card ser/ices
o 6etail Vending . "ersonal Voans, Po+e -ortgages, Consu+er Voans, Mehicle Voans
o "ri/ate Banking
o Isset -anage+ent
,n/est+ent Banking
o "ri/ate Q<uity
o Corporate Id/isory
o Capital 6aising
o "roprietary Trading
o Q+erging -arkets

Business & ,T -odel . Cards /%*00% "age (' o1 $00
o Sales, Trading H 6esearch
Q<uity
Fi4ed ,nco+e
:eri/ati/es
TO" 50 BAD! & T#E )! B% A!!ET !&>E
As o8 $ar;@ 2004 1H $i,,ion3
!i no. Co*+an: a*e Tota, Assets Tota, De+osits
1 Citigroup, ,nc* %,(%,' 200,%'0
2 J*"* -organ Chase H Co* %,%$0,!!' 50$,'$!
C Bank o1 I+erica Corporation %,0%!,$2 5(,(5!
4 Wacho/ia Corporation 2%0,00% $($,(('
5 Wells Fargo H Co+pany (0,(52 $2',(!0
I 9*S* Bancorp %0$,00( %%',0!2
J SunTrust Banks, ,nc* %2',$'( 0!,!!%
K National City Corporation %$',200 ,%$$
L
IBN I-6G North I+erica
Polding Co+panyC %$,%52 5(,$'0
10 PSBC North I+erica ,nc*C %$5,050 '!,$2'
11 Citizens Financial Group, ,nc*C %%',0'! '2,!2
12 BBHT Corporation 02,$'$ !2,%$5
1C Fi1th Third Bancorp 0(,($ 55,$50
14 State Street Corporation 0$,'0! 5(,5%$
15 Bank o1 Ne) Dork Co+pany, ,nc* 0$,!0( 55,0!%
1I XeyCorp '2,22' 20,0(%
1J 6egions Financial Corporation '0,$5 52,%0
1K
"NC Financial Ser/ices Group,
,nc* 2,%%5 2',%$5
1L -errill Vynch Bank 9SIC !!,!2( 5(,$0'
20 -BNI CorporationC 50,%$! (%,'!%
21 Co+erica ,ncorporated 52,2!' 2(,5$(
22 SouthTrust Corporation 5$,!( (5,5%5
2C -HT Bank Corporation 50,'($ ((,(2%
24 I+South Bancorporation 2,2%5 (%,525
25 9nionBanCal Corporation 2!,%0$ (0,00!
2I BancWest CorporationC 2(,'%2 (0,02
2J Northern Trust Corporation 20,%0 $',22'
2K Bank+ont Financial Corp*C (',! $%,00'
2L "opular, ,nc* (',%0$ %',!0(
C0 -arshall H ,lsley Corporation (5,2! $(,%5%
C1 -ellon Financial Corporation ((,'0' $0,(0!
C2
Puntington Bancshares
,ncorporated ((,'5 $0,0(5
CC Tions Bancorporation $0,00 $%,2'!
C4 Co+pass Bancshares, ,nc* $,2'% %!,5$2
C5 First Porizon National Corporation $,0'2 %,%$
CI Banknorth Group, ,nc* $!,''0 %,05'
CJ North Fork Bancorporation, ,nc* $!,%' %0,%!2

!i no. Co*+an: a*e Tota, Assets Tota, De+osits
CK Co++erce Bancorp, ,nc* $2,055 $$,''(
CL Capital Gne Bank $2,5%5 %$,$%(
40 Syno/us Financial Corp* $$,$'! %!,$%2
41
I+erican Q4press Centurion
Bank $0,2%( ','5'
42 Issociated Banc&Corp %0,$52 %$,(5
4C 6BC Centura Banks, ,nc* %0,$($ 0,(2
44 :isco/er Bank %0,%0 %(,200
45 Pi=ernia Corporation %',% %2,''$
4I T: Waterhouse Group, ,nc* %,00 0,!(0
4J Colonial BancGroup, ,nc* %!,200 %0,050
4K We=ster Financial Corporation %5,000 ',!('
4L Co++erce Bancshares, ,nc* %2,2'5 %0,$5(
50
-errill Vynch Bank H Trust
Co+pany %2,( %$,$5$

)&VE(!AL BAD&'
The uni/ersal =anking concept per+its =anks to pro/ide co++ercial =ank ser/ices, as )ell as
in/est+ent =ank ser/ices at the sa+e ti+e*
',ass-!teaga,, Ict o1 %0((, created a Chinese )all =et)een co++ercial =anking and securities
=usinesses in 9S* That act )as intended to address the percei/ed causes o1 =ank 1ailures during
the Great :epression o1 %0$0*
Today, Glass&Steagall restrictions ha/e =eco+e outdated and unnecessary* ,t has =eco+e clear
that pro+oting sta=ility and =est practices cannot =e done through arti1icially separating these
=usiness areas* G/er the years, =anks and securities 1ir+s ha/e =een 1orced to 1ind /arious
loopholes in the Glass&Steagall =arriers* The restrictions under+ined the a=ility o1 I+erican
=anks to co+pete )ith the other glo=al =anks )hich )ere not co/ered =y such legislation*
-ost o1 Glass&Steagall pro/isions ha/e =een repealed in the 9S in %000s ena=ling the =anks to
o11er a 1ull range o1 co++ercial and in/est+ent =anking ser/ices to their custo+ers*

E/a*+,e
,n the late %000s, =e1ore legislation o11icially eradicated the Glass&Steagall Ict;s restrictions,
the in/est+ent and co++ercial =anking industries )itnessed an a=undance o1 co++ercial
=anking 1ir+s +aking 1orays into the ,&=anking )orld* The +ania reached a height in the
spring o1 %00'* ,n %00', NationsBank =ought -ontgo+ery Securities, SociYtY GYnerale
=ought Co)en H Co*, First 9nion =ought Wheat First and Bo)les Pollo)ell Connor, Bank o1
I+erica =ought 6o=ertson Stephens 7and then sold it to BankBoston8, :eutsche Bank =ought
Bankers Trust 7)hich had =ought Ile4* Bro)n +onths =e1ore8, and Citigroup )as created in a
+erger o1 Tra/elers ,nsurance and Citi=ank*
While so+e co++ercial =anks ha/e chosen to add ,&=anking capa=ilities through ac<uisitions,
so+e ha/e tried to =uild their o)n in/est+ent =anking =usiness* J*"* -organ stands as the
=est e4a+ple o1 a co++ercial =ank that has entered the ,&=anking )orld through internal
gro)th* J*"* -organ actually used to =e =oth a securities 1ir+ and a co++ercial =ank until
1ederal regulators 1orced the co+pany to separate the di/isions* The split resulted in J*"*
-organ, the co++ercial =ank, and -organ Stanley, the in/est+ent =ank* Today, J*"* -organ
has slo)ly and steadily cla)ed its )ay =ack into the securities =usiness, and -organ Stanley
has +erged )ith :ean Witter to create one o1 the =iggest ,&=anks on the Street*

Business & ,T -odel . Cards /%*00% "age 2% o1 $00
!)$$A(%
Banks are an integral part o1 any econo+y channelizing sa/ings 1ro+
lenders to =orro)ers
Bank deposits are lo) risk in/est+ents
The Central =ank is the 3Bankers; Bank5 and it regulates other =anks
in an econo+y*
Central =anks de1ine a nation;s +onetary policy
I =ank +akes a pro1it =y in/esting or lending +oney that is earning a
higher rate o1 interest than it pays to its depositors*
I =ank is re<uired to keep a certain a+ount o1 Scash reser/esS =y
regulation to +aintain li<uidity, i*e* to ensure that the =anking syste+
does not 1ace a cash crunch due to higher )ithdra)als, )hich can
lead to panic a+ong in/estors and a run on a =ank*
Banks create a 3-oney -ultiplier5 e11ect
Banks are generally organized as corporate =anking, in/est+ent
=anking, retail =anking, and pri/ate =anking 1unctions*
9ni/ersal =anks pro/ide co++ercial =anking as )ell as in/est+ent
=ank ser/ices under one roo1

Business & ,T -odel . Cards /%*00% "age 2$ o1 $00
2.2. (ETA&L BAD&'

Business & ,T -odel . Cards /%*00% "age 2( o1 $00
(ETA&L BAD&'
(ETA&L !E(V&CE
Banking A;;ounts
Banking account can classi1ied as =elo) =ased on their 1eatures, cost and use1ulness*
C@e;king A;;ounts
Uuick, con/enient and, 1re<uent&access to the +oney*
Checks are used to )ithdra) +oney, pay =ills, purchasing, trans1er
+oney to another accounts and +any other co++on usage*
So+e =anks pay interest )hile +any do not*
,nstitutions +ay i+pose 1ees on checking accounts, =esides a
charge 1or the checks ordered* Iny co+=ination o1 the 1ollo)ing
three )ays can =e used =y the =anks#
o Flat 1ee regardless o1 the =alance +aintained or nu+=er o1 transactions*
o Idditional 1ee i1 a/erage =alance goes do)n =elo) a speci1ied a+ount*
o I 1ee 1or e/ery transaction conducted*
$one: $arket De+osit A;;ounts
In interest&=earing account )ith checks )riting 1acility, called a
+oney +arket deposit account 7--:I8*
"ays a higher rate o1 interest than a checking or sa/ings account
--:Is o1ten re<uire a higher +ini+u+ =alance to start earning
interest
Qach +onth, nu+=ers o1 transactions are li+ited to si4 trans1ers to
another account or to other people, and only three o1 these trans1ers
can =e =y check*
-ost institutions i+pose 1ees on --:Is*
!a<ings A;;ount
Illo)s +aking )ithdra)als, =ut checks )riting 1acility is not there*
Nu+=er o1 )ithdra)als or trans1ers one can +ake on the account
each +onth is li+ited*
"ass=ook sa/ings . The pass =ook +ust =e presented )hen you
+ake deposits and )ithdra)als
State+ent sa/ings . ,nstitution regularly +ails a state+ent that
sho)s )ithdra)als and deposits 1or the account*
,nstitutions +ay assess /arious 1ees on sa/ings accounts, such as
+ini+u+ =alance 1ees*
Ti*e De+osits 1Certi8i;ates o8 De+osit3

Guaranteed rate o1 interest 1or a ter+ or length o1 ti+e speci1ied =y
the account holder*
Gnce the ter+ speci1ied, one cannot )ithdra) the principal )ithout
attracting penalties*
Gne can )ithdra) the interest earned on the principal*
The rate o1 interest is o1ten higher than sa/ings or any other account
C:s rene) auto+atically, so i1 not noti1ied =e1ore +aturity, C:s )ill
roll o/er 1or another ter+* -ost o1 the institutions noti1y the account
holder =e1ore +aturity*
Basi; or o Fri,, Banking A;;ounts
Checking accounts, =ut )ith a li+it on the nu+=er o1 checks one can
)rite and the nu+=er o1 deposits and )ithdra)als one can +ake
,nterest is generally not paid*
Fees is generally lo)er than checking accounts
Bran;@ Banking
I =anking syste+ in )hich there is a head o11ice and interconnected
=ranches pro/iding 1inancial ser/ices in di11erent parts o1 the country
Today 0A o1 custo+ers use +ore than one contact channel
o Po)e/er, 5%A o1 custo+ers still pre1er =ranch =anking . =ranch loyalty
Q/idence 1ro+ the trends o1 ne) =ranch openings
o 550 o/er three years at Bank o1 I+erica
o %00 o/er 1i/e years at J"-organ Chase
o $50 this year alone at Washington -utual
Branch net)orks ha/e re&e+erged as co+=ined centers 1or ad/ice&
=ased product sales and ser/ice, as )ell as +ore traditional =anking
transactions
Custo+ers are looking 1or a 1ull&ser/ice center 1or all their needs &&
1ro+ =anking products to =rokerage ser/ices
Branches are =eing trans1or+ed 1ro+ transaction processing centers
into custo+er&centric, 1inancial sales and ser/ice centers
This trans1or+ation is helping Banks to achie/e =otto+ line =usiness
=ene1its like
o ,ncreased custo+er pro1ita=ility
o 6etention o1 +ost pro1ita=le custo+ers
o ,ncreased =ranch re/enue
o ,ncreased sta11 producti/ity
o 6educed operational costs
I typical 6etail =ranch at a Bank pro/ides t)o pri+ary 1unctions
o Teller Gperations & Iccept and process custo+er transactions at the teller
)indo)

o Sales and custo+er ser/ice Gperations & Tasks, such as ne) account opening,
account +aintenance and product sales
Te,,er O+erations
Teller 1unctionality
o Cash ad/ances
o Consu+er F+ortgage loan pay+ents
o Currency and coin orders
o :eposits, including co++ercial deposits
o Fee collection
o Foreign currency e4change
o "ay+ents
o Stop pay+ents
o Trans1ers
o Wire trans1ers
o Withdra)als
!a,es and Custo*er !er<i;e
Sales and Ser/ice "lat1or+ Functions
o Iccount and contact histories
o Bank in1or+ation and 1ee schedules
o Ca+paign +anage+ent
o Co+plaint reporting and tracking
o Custo+er contact and e/ent tracking and +anage+ent
o Custo+er pro1ile and relationships
o :ecision tracking
o Vead generators
o -arketing and sales planners
o "ro1iling
o 6e1erral processing
$u,ti-=ran;@ =anking
,t is a special 1acility that allo)s a custo+er to operate his SB or Current Iccount through a
net)ork o1 =ranches o1 the =ank )here he has an account* Ill -ulti Branch Banking account
holders are eligi=le 1or -ulti City Che<ue 7"ay It par Che<ue8 1acilities*
-ulti&=ranch =anking 1unctions
o 9nder this ser/ice, the custo+er o1 one =ranch is a=le to transact on her
account, 1ro+ any other net)orked =ranch o1 the Bank*
o Typical ser/ices pro/ided through 3-ulti Branch Banking5 include
o Cash :eposits
o Cash "ay+ents
o Trans1er o1 1unds
o Balance ,n<uiry

Business & ,T -odel . Cards /%*00% "age 2! o1 $00
o -arking Stop "ay+ent o1 a Check
AT$ Banking
Banking ena=led through a ter+inal used to +ake transactions
)ithout a hu+an teller* ,n recent years it has =eco+e one o1 the
+ost popular =anking +edia*
IT- gro)th )as 0*( percent per year 1ro+ %0'( to %005 =ut
increased to %5*5 percent 1ro+ %00! to $00$
o G11&pre+ise IT-s account 1or nearly !0 percent o1 total 9*S* IT-s
Iccess to IT- =y +eans o1 a card, typically a dual IT-Fde=it card
Transaction directly linked to the consu+er;s =ank account & a+ount
de=ited against the 1unds in that account
Typical Ser/ices
o Cash )ithdra)al . Vi+it per day restricted =y respecti/e =ank guidelines
o -oney Trans1er =et)een accounts
o CashF Check :eposits
o 9tility Bill "ay+ents
o Balance en<uiry FIccount State+ents
T:+es o8 AT$s
"roprietary Syste+
o Gperated =y a 1inancial institution that purchases or leases IT-s,
o Ic<uires the necessary so1t)are or de/elops it in&house, installs the syste+ and
+arkets it, and issues cards o1 its o)n design
Shared F 6egional Syste+
o I net)ork that co+es into =eing )hen custo+ers o1 one or +ore 1inancial
institutions ha/e access to transaction ser/ices at IT-s o)ned or operated =y
other 1inancial institutions*
National F ,nternational Syste+
o I net)ork )hich ena=les an IT- +achine in Ne) Dork to connect )ith another
in Vos Ingeles* Through ser/ice agree+ents )ith regional and proprietary
net)orks, national net)orks link IT- +achines coast to coast*
$one: Trans8er
Che<uesFChecks
o Bearer Checks
o Iccount "ayee Checks
o Tra/elers; Checks
o Bankers Checks
:e=it Cards
ATM Systems
Proprietary Systems
Shared/Regional
Systems
National/International
Systems

:e+and :ra1ts
Iuto+ated Clearing Pouse 7ICP8
Standing ,nstructions
Qlectronic Trans1er

Business & ,T -odel . Cards /%*00% "age 2' o1 $00
ELECT(O&C BAD&'
Qlectronic =anking, also kno)n as electronic 1und trans1er 7QFT8, uses co+puter and electronic
technology as a su=stitute 1or checks and other paper transactions* QFTs are initiated through
de/ices like IT- cards or codes that let one to access your account* -any 1inancial institutions
use IT- or de=it cards and "ersonal ,denti1ication Nu+=ers 7",Ns8 1or this purpose*
The 1ederal Qlectronic Fund Trans1er Ict 7QFT Ict8 co/ers +ost 7not all8 electronic custo+er
transactions* The Ict does not co/er 3stored /alue5 cards like prepaid telephone cards, +ass
transit passes, and so+e gi1t cards* These Sstored&/alueS cards, as )ell as transactions using
the+, +ay not =e co/ered =y the QFT Ict*
ELECT(O&C F)D T(A!FE(!
QFT o11ers the 1ollo)ing ser/ices to the custo+ers#
Auto*ated Te,,er $a;@ines 1AT$s3
IT-s are electronic ter+inals that let custo+ers =ank al+ost any ti+e* The custo+er generally
inserts an IT- card and enters hisFher ",N to )ithdra) cash, +ake deposits, or trans1er 1unds
=et)een accounts, So+e 1inancial institutions and IT- o)ners charge a 1ee, particularly to
custo+ers )ho donRt ha/e accounts )ith the+ or on transactions at re+ote locations*
Dire;t De+osit
Custo+ers can authorize speci1ic deposits, such as paychecks and Social Security checks, to
their account on a regular =asis*
Dire;t De=its.E,e;troni; Bi,,s "resent*ent
Custo+ers can pre&authorize direct )ithdra)als 7QCS under ,ndian conte4t8 so that recurring
=ills, such as insurance pre+iu+s, +ortgages, and utility =ills, are paid auto+atically*
"a:-=:-"@one !:ste*s
They let custo+ers call their 1inancial institution )ith instructions to pay certain =ills or to trans1er
1unds =et)een accounts* For such transactions, custo+ers need to ha/e an e4plicit agree+ent
)ith their =anks*
"ersona, Co*+uter Banking
Custo+ers do +any =anking transactions through their personal co+puter* For e4a+ple,
custo+ers can /ie) their account =alance, re<uest trans1ers =et)een accounts, and pay =ills
electronically*
7
E/;er+ted 8ro* Federa, Trade Co**ission Ae=site @tt+:..AAA.8t;.go<

"oint-o8-!a,e Trans8ers
Custo+ers can pay 1or their purchases )ith a de=it card, )hich also +ay also dou=le up as the
IT- card* :e=it card purchase trans1ers +oney & 1airly <uickly & 1ro+ the custo+er;s =ank
account to the storeRs account* So the custo+er should ha/e the re<uired 1unds in hisFher account
=e1ore the use o1 de=it card*
E,e;troni; C@e;k Con<ersion
QCC con/erts a paper check into an electronic pay+ent at the point o1 sale or else)here* ,n a
store, the custo+er can present a check to a store cashier* The check can =e processed through
an electronic syste+ that captures the =anking in1or+ation and the a+ount o1 the check* Gnce
the check is processed, the custo+er signs a receipt authorizing the store to present the check to
the =ank electronically and deposit the 1unds into the store;s account* The custo+er gets a
receipt o1 the electronic transaction and the check is returned to the custo+er* ,t should =e /oided
or +arked =y the +erchant so that it canRt =e used again*
EFT (E')LAT&O!
Dis;,osures
The docu+ents 7usually 1ine print8 supplied =y the issuer o1 the 3access de/ice5 co/er the legal
rights and responsi=ilities regarding an QFT account* Be1ore using QFT ser/ices, the institution
+ust tell the custo+er the 1ollo)ing in1or+ation#
I su++ary o1 custo+er;s lia=ility 1or unauthorized trans1ers*
The telephone nu+=er and address o1 the person to =e noti1ied in
the e/ent o1 an unauthorized trans1er, a list o1 the institutionRs
S=usiness daysS, and the nu+=er o1 days to report suspected
unauthorized trans1ers*
The type o1 trans1ers, 1ees 1or trans1ers, and any li+its on the
1re<uency and dollar a+ount o1 trans1ers*
I su++ary o1 right to recei/e docu+entation o1 trans1ers, to stop
pay+ent on a pre&authorized trans1er, and the procedures to 1ollo)
to stop pay+ent*
"rocedures to report an error on a receipt 1or an QFT or periodic
state+ent and to re<uest +ore in1or+ation a=out a trans1er listed on
the state+ent, and the nu+=er o1 days to report*
I su++ary o1 the institutionRs lia=ility i1 it 1ails to +ake or stop certain
transactions*
Circu+stances under )hich the institution )ill disclose in1or+ation to
third parties concerning custo+er;s account*
Charges 1or using IT-s )here the custo+er does not ha/e an
account*
(e;ei+ts and !tate*ents
The custo+ers are entitled 1or ter+inal receipts and periodic state+ents* Custo+ers are entitled
to a ter+inal receipt )hen they initiate an electronic trans1er, )hether it is an IT- or a point&o1&
sale electronic trans1er* The receipt +ust sho) the a+ount and date o1 the trans1er, and its type,
such as S1ro+ sa/ings to checking*S

No ter+inal receipts )ould =e issued 1or regularly occurring electronic pay+ents that are pre&
authorized, like insurance pre+iu+s, +ortgages, or utility =ills* ,nstead, these trans1ers )ill
appear on your periodic state+ent*
Custo+ers are also entitled to a periodic state+ent 1or each state+ent cycle in )hich an
electronic trans1er is +ade* The state+ent +ust sho) the a+ount o1 any trans1er, the date o1
credit or de=it to their account, the type o1 trans1er and type o1 account7s8 to or 1ro+ )hich 1unds
)ere trans1erred, and the address and telephone nu+=er 1or in<uiries*
Errors
Custo+ers ha/e !0 days 1ro+ the date a state+ent is recei/ed to noti1y errors to the =ank* The
=est )ay is to noti1y the 1inancial institution =y )ay o1 a certi1ied letter, return receipt re<uested*
9nder 9S 1ederal la), the institution has no o=ligation to conduct an in/estigation i1 the custo+er
+issed out the !0&day deadline*
The 1inancial institution has %0 =usiness days to in/estigate the error* The institution has to
co++unicate the results o1 its in/estigation )ithin three =usiness days a1ter co+pletion and +ust
correct the error )ithin one =usiness day a1ter detecting the error* ,1 the institution needs +ore
ti+e, it +ay take up to 25 days to co+plete the in/estigation & =ut only i1 the +oney in dispute is
returned to the custo+er;s account )ith due noti1ication o1 the credit* It the end o1 the
in/estigation, i1 no error has =een 1ound, the institution +ay take the +oney =ack a1ter sending a
)ritten e4planation*
Lost or !to,en AT$ or De=it Cards
9nlike a credit card, i1 so+eone loses the IT- or de=it card, custo+er can lose +uch +ore* ,1
the custo+er reports the loss o1 an IT- or de=it card to the card issuer =e1ore itRs used )ithout
hisFher per+ission, heFshe canRt =e held responsi=le 1or any unauthorized )ithdra)als*
,1 unauthorized use occurs =e1ore reporting, the lia=ility o1 the custo+er /aries depending on the
delay in reporting the loss to the card issuer*
Within t)o =usiness days . Via=ility li+ited to B50 1or unauthorized
use*
Bet)een $ & !0 days . Via=ility li+ited to B500 =ecause o1 an
unauthorized trans1er*
,1 the loss is not reported )ithin !0 days, the lia=ility has no li+its*
,1 the custo+er 1ailed to noti1y the institution )ithin the ti+e periods allo)ed =ecause o1
e4tenuating circu+stances, such as lengthy tra/el or illness, the issuer +ust reasona=ly e4tend
the noti1ication period* ,n addition, i1 state la) or the indi/idual contract i+poses lo)er lia=ility
li+its, those lo)er li+its apply instead o1 the QFT act li+its*
Li*ited !to+-"a:*ent "ri<i,eges
The QFT Ict does not gi/e the right to the custo+er to stop pay+ent* ,1 a purchase is de1ecti/e or
an order is not deli/ered, itRs up to the custo+er to resol/e the pro=le+ )ith the seller*
The custo+er can stop pay+ent only 1or regular pay+ents out o1 hisFher account to third parties,
such as insurance co+panies* The institution has to =e noti1ied at least three =usiness days
=e1ore the scheduled trans1er*
Ilthough 1ederal la) pro/ides only li+ited rights to stop pay+ent, indi/idual 1inancial institutions
+ay o11er +ore rights or state la)s +ay re<uire the+*

ELECT(O&C B&LL&' "(E!ETAT&O AD "A%$ET
&ntrodu;tion
Qlectronic Billing "resentation and "ay+ent 7QB""8 is the use o1 electronic +eans, such as e+ail
or a short +essage, 1or rending a =ill*
Ad<antages
The ad/antage o1 QB"" o/er traditional +eans is pri+arily the sa/ings to the operator in ter+s o1
the cost to produce, distri=ute, and collect =ills*
)se in $o=i,e Co**uni;ations
QB"" +ay =e used in lieu o1 a standard paper =ill as a +eans to reduce operational costs* So+e
operators +ay /ie) QB"" as an alternati/e to prepay as so+e operators /ie) prepay ser/ice
strictly as an alternati/e to traditional =illing, =ut it usually has +ost /alue as an alternati/e
+echanis+ 1or =illing post&paid custo+ers* Po)e/er, QB"" can also =e used si+ply as an
in1or+ational tool to in1or+ the custo+er o1 charges le/ied against the account*
Bi,,ing and C@arging to T@ird "arties
QB"" is an e11icient +echanis+ to =ill or in1or+ third parties o1 charges* For e4a+ple, the 1ather
o1 a son in college +ay )ant to kno) ho) +uch the child is spending on +o=ile phone ser/ice
prior to the =ill =eco+ing to high*
"a:ing t@e Bi,,
So+e QB"" syste+s re<uire so1t)are 1or pay+ent )hile others re<uire only standard =ro)ser
so1t)are 1or accesses a )e= site 1or secure pay+ent* Ilternati/ely, the =illing arrange+ent can
=e +ade in ad/ance 1or 1unds to =e auto+atically de=ited 1ro+ a custo+er;s account )ith a
1inancial institution* Po)e/er, the +ore attracti/e +odel 1or +ost )ill =e to ha/e control o/er )hen
the =ill is actually paid, rather than ha/e it =e paid at a predeter+ined date*
Future o8 EB""
QB"" is e4pected to =eco+e an increasingly attracti/e alternati/e as +o=ile operators continue
to search 1or )ays to reduce operational costs* Po)e/er, the e4tent to )hich QB"" is proli1erated
)ill depend entirely on user acceptance and diligence to actually pay 1or =ills in a ti+ely and
7pre1era=ly8 electronic 1ashion*

FEDB&(E
Fed)ire is an electronic trans1er syste+ de/eloped and +aintained =y the Federal 6eser/e
Syste+* The syste+ connects Federal 6eser/e Banks and Branches, the Treasury and other
go/ern+ent agencies, and +ore than 0,000 on&line and o11&line depository institutions and thus
plays a key role in 9S pay+ents +echanis+* The syste+ is a/aila=le on&line depository
institutions )ith co+puters or ter+inals that co++unicate directly )ith the Fed)ire net)ork*
These users originate o/er 00 percent o1 total 1unds trans1ers* The re+aining custo+ers ha/e o11&
line access to Fed)ire 1or a li+ited nu+=er o1 transactions*
Fed)ire trans1ers 9*S* go/ern+ent and agency securities in =ook&entry 1or+* ,t plays a signi1icant
role in the conduct o1 +onetary policy and the go/ern+ent securities +arket =y increasing the
e11iciency o1 Federal 6eser/e open +arket operations and helping to keep the +arket 1or
go/ern+ent securities li<uid*
:epository institutions use Fed)ire +ainly to +o/e =alances to correspondent =anks and to send
1unds to other institutions on =ehal1 o1 custo+ers* Trans1ers on =ehal1 o1 =ank custo+ers include
1unds used in the purchase or sale o1 go/ern+ent securities, deposits, and other large, ti+e&
sensiti/e pay+ents*
Fed)ire and CP,"S, a pri/ate&sector 1unds trans1er net)ork specializing in international
transactions, handle +ost large&dollar trans1ers* ,n $000, so+e %0' +illion 1unds trans1ers )ith a
total /alue o1 B('0 trillion )ere +ade o/er Fed)ire && an a/erage o1 B(*5 +illion per transaction*
Ill Fed)ire trans1ers are co+pleted on the day they are initiated, generally in a +atter o1 +inutes*
They are guaranteed to =e 1inal =y the Fed as soon as the recei/ing institution is noti1ied o1 the
credit to its account*
9ntil %0'0, Fed)ire ser/ices )ere o11ered 1ree to Federal 6eser/e +e+=er co++ercial =anks*
Po)e/er, the :epository ,nstitutions :eregulation and -onetary Control Ict o1 %0'0 re<uired the
pricing o1 Fed ser/ices, including 1unds and securities trans1ers, and ga/e non+e+=er depository
institutions direct access to the trans1er syste+* To encourage pri/ate&sector co+petition, the la)
re<uires the FedRs 1ees to re1lect the 1ull cost o1 pro/iding the ser/ices, including an i+plicit cost
1or capital and pro1ita=ility*
#oA FedAire Borks
Trans1ers o/er Fed)ire re<uire relati/ely 1e) =ookkeeping entries* Suppose an indi/idual or a
pri/ate or go/ern+ent organization asks a =ank to trans1er 1unds* ,1 the =anks o1 the sender and
recei/er are in di11erent Federal 6eser/e districts, the sending =ank de=its the senderRs account
and asks its local 6eser/e Bank to send a trans1er order to the 6eser/e Bank ser/ing the
recei/erRs =ank* The t)o 6eser/e Banks settle )ith each other through the ,nter&district
Settle+ent Fund, a =ookkeeping syste+ that records Federal 6eser/e inter&district transactions*
Finally, the recei/ing =ank noti1ies the recipient o1 the trans1er and credits its account* Gnce the
trans1er is recei/ed, it is 1inal and the recei/er +ay use the 1unds i++ediately* ,1 the sending and
recei/ing =anks are in the sa+e Federal 6eser/e district, the transaction is si+ilar, =ut all o1 the
processing and accounting are done =y one 6eser/e Bank*

OT#E( T(A!FE( !%!TE$!
Clearing Pouse ,nter=ank "ay+ent Syste+ 7CP,"S8 is a pri/ate sector 1unds trans1er net)ork
+ainly 1or international transactions* CP,"S trans1ers are settled on a net =asis at the end o1 the
day, using FedAire 1unds trans1ers to and 1ro+ a special settle+ent account on the =ooks o1 the
eA %ork Fed.

,n addition to Fed)ire, the Federal 6eser/e Banks pro/ide net settle+ent ser/ices 1or participants
in pri/ate&sector pay+ents syste+s, such as check clearing houses, auto+ated clearing house
associations 7ICP8, and pri/ate electronic 1unds trans1er syste+s that nor+ally process a large
nu+=er o1 transactions a+ong +e+=er institutions* et sett,e*ent in<o,<es +osting net de=it
and net ;redit entries +ro<ided =: su;@ organiMations to t@e a;;ounts t@at t@e a++ro+riate
de+ositor: institutions *aintain at t@e Federa, (eser<e.
In auto+ated clearing house processes and deli/ers electronic de=it and credit pay+ents a+ong
participants*

!)$$A(%
6etail =anking is =anking ser/ices pro/ided 1or indi/iduals* Co++on
ser/ices include .
o Branch Banking
o Custo+er Care
o Teller Ser/ices
o :eposit and Voan "roducts
o Gnline Banking
o Financial Id/isory
IT- =anking has =eco+e increasingly popular o/er the last 1e)
decades
There are +any types o1 Banking Iccounts
o Checking Iccounts
o -oney -arket :eposit Iccounts
o Sa/ings Iccount
o Ti+e :eposits 7Certi1icates o1 :eposit8
o Basic or No Frill Banking Iccounts
Qlectronic =anking, also kno)n as electronic 1und trans1er 7QFT8,
uses co+puter and electronic technology as a su=stitute 1or checks
and other paper transactions*
QFT;s are initiated through de/ices like IT- cards or codes that let
one to access your account* -any 1inancial institutions use IT- or
de=it cards and "ersona, &denti8i;ation u*=ers 1"&s3 8or t@is
+ur+ose.
The 1ederal Qlectronic Fund Trans1er Ict 7QFT Ict8 co/ers +ost 7not
all8 electronic custo+er transactions*
QFT o11ers the 1ollo)ing ser/ices to the custo+ers#
o Auto*ated Te,,er $a;@ines 1AT$s3
o :irect :eposit
o :irect :e=itsFQlectronic Bills "resent+ent
o "ay&=y&"hone Syste+s
o "ersonal Co+puter Banking
o "oint&o1&Sale Trans1ers
o Qlectronic Check Con/ersion
QB"" is an upco+ing +ode o1 transaction in/ol/ing the use o1
electronic +eans, such as e+ail or a short +essage, 1or rending a
=ill*
FedWire is an electronic trans1er syste+ de/eloped and +aintained
=y the Federal 6eser/e Syste+* The syste+ connects Federal
6eser/e Banks and Branches, the Treasury and other go/ern+ent
agencies, and depository institutions and thus plays a key role in 9S
pay+ents +echanis+
C,earing #ouse &nter=ank "a:*ent !:ste* 1C#&"!8 is a pri/ate
sector 1unds trans1er net)ork +ainly 1or international transactions.
C#&"! trans8ers are sett,ed on a net =asis at t@e end o8 t@e da:7

using Fed)ire 1unds trans1ers to and 1ro+ a special settle+ent
account on the =ooks o1 the eA %ork Fed.

2.C. CO!)$E( LED&'

(ETA&L LED&'
6etail Vending is one o1 the +ost i+portant 1unctions per1or+ed =y a =ank* ,t enco+passes the
1ollo)ing#
"ersona, ,oans7 ;onsu*er ,oans
Asset =ased ,oans - auto ,oans7 @o*e ,oans
O+en ended ,oans
Lease7 #ire "ur;@ase
Credit ;ards
"ersona, Loans . Consu*er Loans
"ersonal loans are a+ount =orro)ed =y indi/iduals to co/er their personal e4penses* The details
o1 such e4penses are ne/er o1 any interest to the lenders*
The 1inancer is not interested in the intention o1 the loan*
No security
Short ter+ loans
6ate o1 interest is /ery steep*
,deally should =e used only in case o1 an e+ergency
Ill =anksF1inance co+panies o11er these loans
Voan a+ount is directly linked to =orro)er;s repay+ent capacity*

Asset Based Loans
Such loans are a+ount =orro)ed =y indi/iduals to =uy so+e asset, )hich is hypothecated to the
lender* Thus the lender is 1ully a)are o1 the purpose o1 the loan* The interest rate charged is
lo)er than personal loans =ecause the loan is secured =y the hypothecation o1 the asset to the
lender*
TAo *ain t:+es 5 auto ,oans7 @ousing ,oans
,nterest rate is lo)er as co+pared to "ersonal loans
Pypothecation o1 the Isset to the 1inancer*
6epay+ent through Q-,;s*
Thu+= rules 1or calculation o1 -a4i+u+ loan a+ount
a* Not greater than ( ti+es the yearly inco+e G6
=* The Q-, should =e less than !0 pct o1 the gross +onthly inco+e*
Loan against !e;urities
G/erdra1t 1acility can =e a/ailed against pledge o1 e<uity Shares,
-utual Fund units*
:ra)ing po)er is usually !0&0 A o1 the /alue o1 the pledged
instru+ents*
O+en Ended Loans- se;ured

Gpen ended loan allo) the =orro)er to =orro) additional a+ount su=Kect to the +a4i+u+ a+ount
less then a set /alue*
Si+ilar to o/erdra1t 1acilities pro/ided =y =anks*
,nterest is calculated on the daily outstanding =alance*
9sually a card 7si+ilar to a Credit Card8 is issued =y the lending
institution*
The lending institution has tie&ups )ith /arious +erchant
esta=lish+ents*
Ilso allo) you to )ithdra) Cash*
,+portant Ter+s?
;. Li*it 1L3 5 *a/ outstanding a,,oAed
d. $argin 1$3 5 +er;entage o8 ,i*it t@at ;an =e draAn
e. Asset <a,ue 1AV3 5 <a,ue o8 under,:ing asset
8. DraAing "oAer 1D"3 - ,oAer o8 L and 11-$3-AV
Q4a+ple#
Vi+it >B %000? -argin > (0A? Isset Malue 7initial8 > B%000
Date Asset Va,ue 1AV3 DraAing "oAer 1D"3
%st Jan $002 B%000 B00
%st Fe= $002 B%!00 B%000
%st -ar $002 B$000 B%000
%st Ipr $002 B500 B(50
Lease . #ire "ur;@ase
Vease is a long&ter+ rental agree+ent 1or the asset, )hile Pire "urchase is allo)s the user to
o)n the asset a1ter all the pay+ents ha/e =een +ade to the lender*
Lease
T)o +ain types . operating, 1inancial
The Financier o)ns the asset*
:epreciation is clai+ed =y the 1inancier*
Ta4 deduction can =e clai+ed 1or the 1ull /alue o1 the rental paid*
Financier takes care o1 +aintenance, insurance etc*
#ire "ur;@ase
The asset is o)ned =y the 1inancier*

:epreciation can =e clai+ed =y the =orro)er*
Ta4 deduction can =e clai+ed only to the e4tent o1 the interest
repay+ent*
(etai, Lending C:;,e
%* Voan application +anage+ent and processing
6eceipt o1 loanFcard application
Ipplication "rocessing
o :uplicate check
o Negati/e list check
o :ocu+ent Meri1ication
o Calculate loan eligi=ility, ,66, processing 1ees
o Credit scoring
o Field ,n/estigation
o Credit Ippro/al
Dis=urse*ent
o Che<ue issuance
o Credit to account
o "ay+ent to third party
For+ulating the repay+ent schedule*
$* Voan repay+ents and ter+ination
"ost-Dated C@eGues
o ":C;s are collected H their in1or+ation captured*
o Che<ues are presented in clearing on due dates
o BouncedF hold che<ues are +arked 1or 1urther action*
Salary deductions
o Q+ployer )ise receipt =atches are created*
o Q+ployer che<ue details are captured
o "ay+ent receipt is +arked 1or corresponding e+ployees*
:irect receipts
o CashFChe<ue in1or+ation is captured
o Che<ues are cleared in =atches*
Iuto pay+ents F :irect de=its
o Bank )ise recei/a=le =atches are created*
o Short receipts are +arked*
o 6elease receipt =atch to +ark receipts
Xinds o1 repay+ents
o E$& 5 sa*e insta,,*ent a*ount
o Fi/ed "rin;i+a, 5 ;onstant +rin;i+a,7 de;reasing interest a*t
o !te+-u+ 5 +rin;i+a, a*ount in;reases in ste+s

Business & ,T -odel . Cards /%*00% "age !0 o1 $00
o !te+-doAn 5 +rin;i+a, a*ount de;reases in ste+s
o Ba,,oon 5 notiona, a*ount initia,,:7 ,arge ,ast +a:*ent
o Bu,,et 5 interest +a:*ent initia,,:7 entire +rin;i+a, at one s@ot
o (ando* 5 s;@edu,e N a*ount o8 insta,,*ents unde;ided
o !+e;ia, +rodu;ts 5 ;o*=ination o8 a=o<e
(* :elin<uencies identi1ication and collections
Case "rocessing
o Categorization o1 cases =ased on prede1ined rules
o Illocation o1 cases to collectors
Standard Cases
o Collector 1ollo)&up 7deskF1ield8
o 6epay+ent =y custo+er
o Che<ue issuance
Q4ception Cases 7deathF1raud etc*8
o ,nitiate process =ased on case speci1ics 7legalFother +eans8
o TrackF1ollo) up the case de/elop+ents till repay+ent
o Case closed
&nterest (ates
Fi/ed (ate o8 &nterest
The rate o1 interest applica=le is guaranteed not to change during the 1i4ed rate period* Borro)er
H =ank protected 1ro+ ad/erse interest rate +o/e+ents*
F,oating (ate o8 &nterest
The rate o1 interest is linked to one o1 the rates pre/ailing in the +arket, 1or e4a+ple it can =e
linked to "L( 1"ri*e Lending (ate3 or L&BO( 1London &nter=ank O88ered (ate3. Borro)er
=ene1its 1ro+ 1alling int* rate, e4posed to up)ard +o/e+ent o1 int* rate*
,+portant ter+s areO Ca+7 8,oor7 ;o,,ar7 =en;@*ark.=ase.an;@or rate7 *ark-u+.s+read rate7
reset date N 8reGuen;:
Submit Proposal
OK
Appraisal
Decision
OK
Disbursement Compliance Conditions for borrower
Monitoring
NO
Repayment Follow -up/Action
Scrutinize

Business & ,T -odel . Cards /%*00% "age !% o1 $00
I
n
t
e
r
e
s
t

r
a
t
e

S
p
r
e
a
d
C
o
l
l
a
r
Cap
Current rate
Base rate
Floor
Co,,atera,
In asset than can =e repossessed =y the lender i1 the =orro)er de1aults* They are o1 the
1ollo)ing types
"ri+ary 7sa+e asset 1or )hich 1inance is taken8
Secondary 7asset =acking the loan di11erent8
C@arge T:+es
"ledge . gold, =ank has possession
Pypothecation . /ehicle, =orro)er has possession
Vien . against =ank deposits
Issign+ent . insurance policies, rights get trans1erred to =ank
Shares & periodic dra)ing po)er calculation
-ortgage . i++o/a=le property
$O(T'A'E!
I loan secured =y the collateral o1 so+e speci1ied real estate property that o=liges the =orro)er
to +ake a predeter+ined series o1 pay+ents* ,1 the =orro)er doesn;t keep up the loan
repay+ents, the lender can repossess the real estate property and sell it in order to get the
+oney =ack*
The rate o1 interest applica=le is lo)er than personal loans and co+para=le to other asset =ased
loans*
To co+pare the cost o1 di11erent -ortgages deals one should look at the A"( 5 Annua,
"er;entage (ates. Ill 1ir+s that <uote an I"6 +ust calculate it in a standard )ay, so one can
co+pare like )ith like* The I"6 1or a loan is a single 1igure, )hich takes into account#
The a+ount o1 interest you are charged

Business & ,T -odel . Cards /%*00% "age !$ o1 $00
When and ho) o1ten the interest +ust =e paid
Gther charges . 1or e4a+ple, an arrange+ent 1ee or co+pulsory
pay+ent protection insurance . i1 they +ust =e =ought 1ro+ the
lender as a condition o1 the loan
When and ho) o1ten these charges +ust =e paid
Dinds o8 $ortgages
-ortgages can =e classi1ied =ased on the interest rates deals#
&nterest (ate Dea, #oA it Aorks
Standard /aria=le
rate
The pay+ents go up and do)n as the +ortgage rate changes*
Standard /aria=le
rate )ith cash =ack
Sa+e as a standard /aria=le rate loan & =ut one recei/e a su=stantial
cash su+ 7Q4a+ple (.5A o1 the a+ount =orro)ed8 )hen you take up
the loan*
Base rate tracker
Si+ilar to a standard /aria=le rate +ortgage =ut the interest rate is
guaranteed to =e a set a+ount a=o/e the =ase rate and alters in line
)ith changes in that rate*
Fi4ed interest rate
The pay+ents are set at a certain le/el 1or a set period o1 ti+e . 1or
e4a+ple, one year, t)o years, or 1i/e years* It the end o1 the period,
one is usually charged the lender;s standard /aria=le rate 7or
so+eti+es a ne) 1i4ed rate is o11ered8*
:iscounted interest
rate
The pay+ents are /aria=le, =ut they are set at less than that lender;s
going rate 1or a 1i4ed period o1 ti+e* It the end o1 the period, one is
charged the lender;s standard /aria=le rate*
Capped rate
The pay+ents go up and do)n as the +ortgage rate changes =ut are
guaranteed not to go a=o/e a set le/el 7the @cap;8 during the period o1
the deal*
So+eti+es, they cannot 1all =elo) a set +ini+u+ le/el either 7the
@collar; or @1loor;8* It the end o1 the period, one is charged the lender;s
standard /aria=le rate*
(e+a:*ent $et@ods
(e+a:*ent *ortgage
-onthly pay+ents o/er the agreed nu+=er o1 years 7Called the
+ortgage @ter+;8 goes partly to)ards the interest and partly to)ards
the principal*

Business & ,T -odel . Cards /%*00% "age !( o1 $00
,1 all the +onthly pay+ents agreed )ith the lender are +ade, the
)hole loan )ill =e repaid =y the end o1 the ter+*
-onthly pay+ents could increase i1 interest rates rise*
&nterest-on,: *ortgage
The +onthly pay+ents to the lender co/er only the interest on the
loan* They do not pay o11 any a+ount one has =orro)ed*
Gne usually +akes separate pay+ents into a sa/ings sche+e each
+onth to =uild up a lu+p su+, )hich is then used to pay o11 the
)hole a+ount one has =orro)ed, in one go at the end o1 the
+ortgage ter+ or sooner*
This in/ol/es so+e in/est+ent risk in =uilding up a su+ o1 +oney to
repay the loan*
,t is one;s responsi=ility to sa/e enough +oney to repay the loan at
the end o1 its ter+*
EndoA*ent *ortgage

To repay an interest&only loan, one can take an endo)+ent policy,
)hich is designed to end at the sa+e ti+e as the +ortgage*
The +oney one pays into an endo)+ent policy is in/ested in stocks
and shares and other in/est+ents* It the end o1 a set nu+=er o1
years 7the policy @ter+;8, the policy @+atures; and one gets a lu+p
su+, )hich is used to repay the +ortgage loan*
In endo)+ent policy pro/ides li1e insurance and so+eti+es other
insurance =ene1its too*
&nterest-on,: *ortgage ;o*=ined Ait@ stake@o,der +ension
Ilongside an interest&only loan, one can +ake pay+ents into a
personal or stakeholder pension* When one start to take the pension
7=et)een age 50 and 58, one can take part o1 the pension 1und as a
ta4&1ree lu+p su+, )hich is used to pay o11 the +ortgage loan*
&*+ortant )! &nstitutions in $ortgage $arket
Freddie $a;7 'innie $aes N Fannie $ae
Federa, ationa, $ortgage Asso;iation 1F$A or Fannie $ae37 'o<ern*ent ationa,
$ortgage Asso;iation 1'$A or 'innie $ae3 and Federa, #o*e Loan $ortgage
Cor+oration 1F#L$C or Freddie $a;3 are all Sse;ondar: *arket ,endersP.
Banks issue loansF+ortgages )ith so+e collateral 1or security* These loansF+ortgages are
=ought =y the 3secondary +arket lenders5 1ro+ the =anks thus 1reeing the+ to turn around and
issue +ortgage to ne) custo+ers*
Their ;ore =usiness ;onsists o8 *ortgage ,oan se;uritiMation* They =u: *ortgages 8ro*
=anks and +oo, t@e* into =onds to =e so,d or @e,d* These co+panies guarantee the
credit)orthiness o1 these =onds, =ut not the interest&rate risk* They @edge t@eir oAn e/+osure
to interest-rate risk t@roug@ deri<ati<e ;ontra;ts.
G1ten +any retail lenders actually recei/e their 1unds 1ro+ a secondary +arket lender* These
secondary lenders ha/e assisted the national +ortgage +arket =y allo)ing +oney to +o/e easily
1ro+ state&to&state* The +o/e+ent o1 loan 1unds helps to a/oid a situation )here +ortgages are
only a/aila=le in certain areas or states* Ilso, the secondary lenders ha/e esta=lished regulations
and guidelines that help the general pu=lic*
A)TO LOA!
Iuto Voans is =asically lending to the indi/idual custo+ers 1or a t)o or 1our )heeler or their
personal use* The 1ollo)ing section descri=es the +ultiple +echanis+s =y )hich the 1inancing 1or
auto loans is nor+ally done*
T:+es o8 Finan;ing $e;@anis*
Dire;t Lending: The Bank or the 1inance co+pany directly lends to
the =uyer or the =orro)er in this case* I nu+=er o1 lending
institutions are o11ering such loans on their )e=sites*

Dea,er 8inan;ing# This is a type o1 loan a/aila=le through the dealer*
The lending and repay+ents are done =yFto the dealer* Basically the
dealer tells the custo+er ho) +uch do)n pay+ent and +onthly
,nstall+ent is to =e paid against the /ehicle* The e11ecti/e cost to the
custo+er +ost o1 the ti+es is generally +ore than the original price*
Veasing # MehicleF Iuto lease is a contract =et)een the =orro)er and
a auto leasing co+pany* The =orro)er agrees to pay the leasing
co+pany 1or the use o1 the /ehicle 1or a certain a+ount o1 ti+e,
usually $2 to (! +onths* :uring that ti+e the =orro)er agrees to
+ake +onthly lease pay+ents, keep the car in good repair, insure
the car and not dri/e the car +ore +iles that stipulated in the
contract*
T@e De: entities in a ,ease agree*ent are t@e ,essee or t@e ,essor.
Vessee or the =orro)er# The party to )ho+ the /ehicle is leased* ,n a consu+er lease, the lessee
is the consu+er* The lessee is re<uired to +ake pay+ents and to +eet other o=ligations
speci1ied in the lease agree+ent*
Vessor or the lender or the lending institution is the original o)ner o1 the /ehicle or property =eing
leased
The lease can =e closed ended or open ended as de1ined =elo)#
Closed end lease & I lease agree+ent that esta=lishes a non&
negotia=le residual /alue 1or the leased auto and 1ee a+ounts due at
the end o1 the lease ter+*
Gpen Qnd lease & I lease ter+ that re<uires the lessee to pay the
di11erence =et)een residual /alue and 1air +arket /alue at the end o1
the lease ter+ i1 the 1air +arket /alue is lo)er
,n a lease, the 1actors such as the o)nership, up 1ront costs and +onthly pay+ents as against the
direct lending are#
G)nership# Dou do not o)n the /ehicle* Dou get to use it =ut +ust
return it at the end o1 the lease unless you choose to =uy it*
9p&1ront costs# 9p&1ront costs +ay include the 1irst +onthRs pay+ent,
a re1unda=le security deposit, a capitalized cost reduction 7like a
do)n pay+ent8, ta4es, registration and other 1ees, and other
charges*
-onthly pay+ents# -onthly lease pay+ents are usually lo)er than
+onthly loan pay+ents =ecause you are paying only 1or the /ehicleRs
depreciation during the lease ter+, plus rent charges 7like interest8,
ta4es, and 1ees*
The Xey Qntities in an Iuto Voan syste+ are#
Borro)er# is the one )ho needs to useFo)n the auto+o=ile and
approaches a dealerFlender 1or getting 1inancing 1or the sa+e
:ealer# Typically a 1ranchisee o1 the +anu1acturer, in/ol/ed in selling
and deli/ery o1 the /ehicle to the =uyer
Vender# "ro/ides capital to the =orro)er 1or =uying the /ehicle* This
can =e the =ank or the dealer or any 1inancing institution*

Business & ,T -odel . Cards /%*00% "age !! o1 $00
Credit =ureau# Tracks and +aintains credit history o1 =orro)ers and
1or)ard it to lenders during ne) application processing* This is used
1or deciding )hether the loan should =e pro/ided to a custo+er or
not*
Ippraiser# Issesses and esta=lishes the 1air +arket /alue o1 a
collateral o11ered as underlying security to the credit asked 1or*
,nsurer# The ,nsurance co+pany insures the /ehicle o)ner against
speci1ic lia=ilities caused to and 1ro+ the /ehicle during the course o1
its use upon the pay+ent o1 a pre+iu+ and signing o1 a contract
Voan ser/icer# is the one )ho pro/ides /arious ser/ices during the
li1e cycle o1 a loan starting 1ro+ loan origination to loan closure*
!T)DET LOA!
Student Voans are Voans a/ailed =y eligi=le students to pursue graduate and post graduate
studies in 9S SchoolsFCollegesF9ni/ersities* These loans are usually pro/ided =y =anks, Credit
9nions and other 1inancial institutions )hich are guaranteed =y state sponsored Guarantors
T:+es o8 !tudent Loans
Students Voans o11ered can =e categorized =roadly into t)o types#
Federally sponsored loans . These loans are 1ederally insured and
pro/ide protection against de1ault* The depart+ent o1 Qducation
guarantees upto 0'A and e/en %00A in so+e cases
Non&1ederally sponsored loans . These are insured =y the pri/ate
sector and ha/e no go/ern+ent =acking* The guarantee in this case
is only 1ro+ the pri/ate insurers or 1ro+ the reser/es pledged to
securitization
Federally sponsored loans are o1 t)o types
Federal Fa+ily Qducation Voan "rogra+ 7FFQV"8& These loans are
+ade =y 1inancial institutions pri+arily )ith a 1loating rate that is
adKusted once a year* The interest rate is capped at '*$5A and the
Fed su=sidizes the di11erence =et)een the actual loan rate and the
rate cap through Special Illo)ance "ay+ents7SI"8* The rates are
usually speci1ied =y inde4ing the+ to the 9S Treasury =ill rates*
Federal :irect Voan 7F:V"8& )here the depart+ent o1 Qducation
directly pro/ides the loans
FFQV" or the Federal Fa+ily Qducation Voan "rogra+ can 1urther =e di/ided into three types
Federal Sta11ord .Federal Sta11ord loans are the +ost co++on
source o1 education loan 1unds in the 9S* This is a/aila=le to =oth
graduate and undergraduate students* This loan could =e either
su=sidized or unsu=sidized=y the 1ederal go/ern+ent* The interest
rate is a 1loating rate that is inde4ed to the 0% day T&Bill and is
capped at '*$5A* Sa+ple rates o1 during the year $00(&02 )ere
o $*'$A in school, grace and de1er+ent
o (*2$A in repay+ent and 1or=earance

Federal "V9S & "V9S loans are a/ailed =y the parents o1 a 1ull& or
hal1&ti+e undergraduate student *This re<uires a credit check and
hence the parent +ust ha/e a good credit history and should ha/e
=een a citizen or per+anent resident o1 9S* The loans don;t re<uire
any collateral and the interest pay+ents are ta4 deducti=le*
Consolidation loans & I consolidation loan in/ol/es t)o or +ore
e4isting 1ederally sponsored loans into one single loan* The interest
rate 1or this is deter+ined =y the )eighted a/erage o1 the loan rates
pre/ailing at that ti+e and capped at '*$5A
There are three principal ad/antages
Con/enience . By co+=ining loans the =orro)er is a=le to 1ocus on
repaying one single loan than handle +ultiple loans
,nterest rate . ,n a lo) rate scenario the =orro)er can reduce his
cost o1 =orro)ing =y taking a ne) loan at the lo) pre/ailing lo) rates
6epay+ent . The repay+ent period is e4tended to (0 years and this
reduces the install+ent to paid each +onth
The Xey Qntities in the Student Voan Syste+ are Federal
go/ern+ent, Schools, Venders Ser/icers and guarantors and the
=orro)er*
Federal go/ern+ent# Sponsors and authorizes 1unds 1or grants and
loan progra+s*
School# The school is certi1ied =y the depart+ent o1 education as an
eligi=le school to participate in the FFQV" or F:V" loan progra+s*
Schools are responsi=le 1or deter+ining =orro)er;s eligi=ility,
reco++ends and certi1ies loan a+ounts, +onitors the enroll+ent
status
Venders # are the institutions appro/ed =y the :GQ 1or /oluntary
participation in any or all o1 the FFQV" student loan progra+s*
Typical lenders are usually Banks, credit unions, SHV institutions,
insurance co+panies and other institutions*

Business & ,T -odel . Cards /%*00% "age !' o1 $00
Ser/icer# is an entity )ho collects pay+ents on a loan and per1or+s
other ad+inistrati/e tasks associated )ith +aintaining a loan
port1olio* The nor+al 1unctions include dis=urse loans 1unds, +onitor
loans )hile the =orro)ers are in school, collect pay+ents, process
de1er+ents and 1or=earances, respond to =orro)er in<uiries and
ensuring regulatory co+pliance*
Guarantor is a state agency, )hich guarantees or insures the loan
and is a not&1or&pro1it agency* ,t protects the lenders against loss
due to =orro)er de1ault, death o1 =orro)er, total and per+anent
disa=ility, =ankruptcy, closed school, and ineligi=le =orro)er*
Borro)er # is the student )ho a/ails o1 the loan*

!)$$A(%
The loans gi/en to retail custo+er co+e under Consu+er Vending*
There are 1our +aKor types o1 Consu+er Vending .
o "ersonal loans
o -ortgages
o Iuto Voans
o Student Voans
"ersonal loans nor+ally ha/e the highest interest rates charge )hile
+ortgages ha/e the lo)est*
6etail lending cycle includes &
o Voan application +anage+ent and processing
o Voan repay+ents and ter+ination
o :elin<uencies identi1ication and collections
Types o1 interest rates
o Fi4ed interest rate
o Fle4i=le interest rate
o Py=rid interest rates
-ortgages are Voans gi/en to consu+ers 1or the purpose o1
purchase, construction or repair o1 real estate*
Iuto loans are loans 1inanced 1or /ehicles 1or personal use
Student loans are loans pro/ided to eligi=le students to pursue
graduate and post graduate studies in 9S
SchoolsFCollegesF9ni/ersities

2.4. CO$$E(C&AL AD B#OLE!ALE BAD&'

Business & ,T -odel . Cards /%*00% "age % o1 $00
CO("O(ATE LED&'
CO("O(ATE LED&'
Corporate Vending re1ers to /arious 1or+s o1 loans e4tended =y =anks to corporate =odies like
proprietorship, partnership, pri/ate li+ited co+panies or pu=lic li+ited co+panies* Banks lend to
such entities on the strength o1 their =alance sheet and =usiness cash 1lo)s* Corporate loans are
pro/ided =y =anks 1or /arious purposes like ne) proKects, capacity e4pansion or plant
+odernization, daily cash 1lo) re<uire+ents 7)orking capital8 etc* :epending on the nature o1 the
re<uire+ent, loans +ay =e long&ter+ or short&ter+ in nature*
Voans can =e either secured or unsecured in nature* ,n case o1 secured loans, i1 the corporate
de1aults on pay+ent o1 principal or interest on the loan, the =ank can take possession o1 the
security and sell o11 the sa+e to +eet principal or interest pay+ent on the loan* Security is usually
in the 1or+ o1 land, =uildings, plant and +achinery, physical stock o1 the ra) +aterial, goods 1or
sale etc*
CO("O(ATE LED&' "(OCE!!
The 1ollo)ing is the typical stages in a corporate lending process#
Corporate approaches the relationship +anager o1 the =ank )ith a
re<uest 1or a loan* The corporate pro/ides details like# past 1inancial
state+ents, details o1 the loan re<uire+ent, cash 1lo) proKection 1or
the period o1 the loan, details o1 the security =eing pro/ided etc*
:epending on the loan type and =ank re<uire+ents, /arious other
in1or+ation )ould need to =e pro/ided =y the corporate*
The concerned di/ision o1 the =ank prepares the detailed analysis o1
the corporate 1inancial state+ents* I detailed study is also done on
the corporate;s products, +arket seg+ent, co+petitors etc to
ascertain the strength o1 the corporate;s =usiness* I report is
prepared to capture the a=o/e details*
Based on the a=o/e report, the concerned di/ision o1 the =ank
assigns a rating to the corporate* The rating captures /arious 1actors
like strength o1 =usiness, 1inancial state o1 the corporate, a=ility to
repay the loan =ased on cash 1lo) proKections, pro+oter =ackground
etc*
I co++ittee o1 the =ank e/aluates the loan proposal and decides to
sanctionFreKect the sa+e*
Gnce sanctioned, the =ank pro/ides a sanction letter to the corporate
pro/iding details o1 the loan ter+s and conditions*
I1ter the corporate accepts the sa+e, a loan agree+ent is signed
=et)een the =ank and the corporate* The loan agree+ent captures
/arious conditions o1 the loan like repay+ent +ode, repay+ent
period, interest paya=le, security pro/ided, other conditions etc* The
loan =eco+es @co++itted; at this stage*
The =ank dis=urses the re<uired a+ount under the loan co++itted*
This a+ount is called the @dis=ursed a*ountQ under the loan* 'i<e
t@e *one:

,nterest is usually paid on the dis=ursed a+ount o1 the loan* ,n so+e cases, a no+inal interest i1
also paya=le on the co++itted a+ount o1 the loan* Ilso, in +ost cases, the corporate )ould ha/e
to pay a certain a+ount as processing 1ees 1or the loan* This )ould co/er the =ank;s o/erhead
costs in the loan process*
CO("O(ATE C(ED&T (AT&'
Be1ore sanctioning a loan to a corporate, the =ank does a detailed assess+ent o1 its 1inancials
and =usiness strength as discussed in the earlier section* This process ends )ith the =ank
assigning a rating to the corporate 1or the loan 1acility*
6atings are usually speci1ied in alphanu+eric ter+inologies* 6ating le/els +ight /ary 1ro+ III
7highest8, IIE, II& to de1ault ratings like :* 6ating ter+inologies +ight /ary across =anks and
across /arious loan tenures* The rating le/el speci1ies a certain pro=a=ility o1 de1ault o1 the loan* ,t
also takes in to account the protection o11ered =y the security o1 the loan*
For corporates )ith higher ratings, =anks pro/ide loans at lo)er interest rates and /ice /ersa* ,n
+ost cases, =anks do a rating process 1or each o1 its corporate clients at the end o1 say, e/ery
year or e/ery <uarter* This helps =anks to continuously track the 1inancials and +arket position o1
the corporate*
Credit en@an;e*ents
Credit enhance+ent is a +echanis+ used to increase the original rating o1 a loan 1or a corporate*
Credit enhance+ents can =e in the 1or+ o1 pledge o1 shares, cash collateral, corporate or =ank
guarantees etc*
E/a*+,e:
I corporate rated BB 7lo) rating8 re<uires a loan o1 9S: 5*0 +illion 1ro+ a =ank* To enhance the
loan rating and thus reduce interest paya=le on the loan, the pro+oters pledges their share
holding in the co+pany )ith the =ank* Thus, )hene/er there is a de1ault on repay+ent o1 the
loan, the =ank has the right to sell the shares in the +arket* Based on the historic /olatility o1 the
shares and the current +arket /alue o1 9S: !*0 +n, the =ank upgrades the rating o1 the loan to
BBBE*

T%"E! OF LOA!
Ter* ,oans
These loans can either =e short ter+ loans or long ter+ loans*
Vong&ter+ loans are e4tended 1or purposes like ne) proKects, capacity e4pansion or plant
+odernization* These loans are usually repaya=le o/er a $& year period a1ter an initial
+oratoriu+ period 7period during )hich loan repay+ents are not re<uired8 to help the corporate
co+plete i+ple+entation o1 the proKect =e1ore re/enue generation takes place*
E/a*+,e
On A+ri, 157 20047 ATNT =orroAs a ter* ,oan o8 )!D 200 *i,,ion 8ro* Citi=ank 8or 8unding
t@eir &T *oderniMation +roRe;t a;ross t@e nation. T@e ,oan is re+a:a=,e in 1I Guarter,:
insta,,*ents starting A+ri, 157 20057 a8ter an initia, *oratoriu* o8 4 Guarters. T@e interest

+a:a=,e Aou,d =e L&BO(20.5S +a:a=,e Guarter,:. T@e ,oans Aou,d =e se;ured =: ATNT
eGui+*ent at t@eir #?7 Aort@ )!D C00 *n.
Short ter+ loans are e4tended usually 1or +eeting )orking capital re<uire+ents* The loans can
=e repaya=le in /arious tenures starting 1ro+ a )eek to as long as % year* The loans are either
repaya=le in 1i4ed install+ents or in one =ullet install+ent at the end o1 the period* ,n so+e cases,
short ter+ loans are =acked =y pro+issory notes )hich are legal instru+ents that guarantee
pay+ent o1 a certain a+ount on a speci1ied due date*
Cor+orate =onds
Corporate =onds are used 1or the sa+e purpose as ter+ loans, =ut the loan is =acked =y a
trans1era=le instru+ent )hich guarantees pay+ent 1ro+ the corporate as per speci1ied
conditions* Thus, corporate =onds are trada=le and =anks can sell the+ to a third party )ho
recei/es the right to get pay+ents 1ro+ the corporate* Bonds are rated depending on the rating o1
the corporate and depending on the rating, the +arket de+ands /arying a+ounts o1 interest* I
certain class o1 =onds called Kunk =onds is issued =y corporates )ith /ery lo) credit ratings and
carries /ery high rates o1 interest*
Borking Ca+ita,
For any =usiness, there )ould =e current assets in the 1or+ o1 cash, recei/a=les, ra) +aterial
in/entory, goods 1or sale in/entory etc )hile there )ould =e current lia=ilities in the 1or+ o1
paya=les and other short ter+ lia=ilities* "art o1 the current assets )ould =e 1unded through
current lia=ilities )hile the rest )ould ha/e to =e 1unded through a +i4ture o1 short ter+ and long
ter+ loans* Is per nor+s, $5A o1 the )orking capital gap )ould ha/e to =e 1unded =y long ter+
sources like e<uity or ter+ loans )hile the rest 5A can =e 1unded through short ter+ loans and
o/erdra1t li+its*
Banks conduct a detailed assess+ent o1 the current assets and lia=ilities 1or a corporate and
arri/e at a suita=le )orking capital li+it* For purpose o1 calculating li+its, =anks typically include
only recei/a=les )hich are less than ! +onths old* Ilso )ithin the speci1ied li+it, =anks keep
re/ie)ing the current asset and current lia=ility position o1 a co+pany to arri/e at the dra)ing
po)er 1or each +onth* Corporates are allo)ed to =orro) up to the )orking capital li+it or the
dra)ing po)er, )hiche/er is lo)er*
G/erdra1t li+its are e4tended to help the corporate +anage the day&to&day cash 1lo) needs o1 the
=usiness* The =ank +akes a/aila=le a certain su+ o1 +oney 1or a period o1 ti+e 7say, 9S: $0*0
+illion 1or a period o1 % year8* There )ould =e a separate account called the o/erdra1t account
created to +onitor )ithdra)als under this loan* Whene/er the corporate has a de1icit in its +ain
=usiness account, it can dra) +oney 1ro+ the o/erdra1t account 7up to the li+it o1 9S: $0*0
+illion8* ,t can also put =ack +oney in the o/erdra1t account as and )hen they ha/e surpluses in
the =usiness account* ,nterest is calculated =y the =ank on the /arious end&o1&day de1icits in the
o/erdra1t account and is usually paya=le =y the corporate at the end o1 e/ery +onth*
Lines o8 ;redit
These are short ter+ loans sanctioned 1or a 1i4ed /alidity period, allo)ing the corporate to dra)
the loan as and )hen re<uired )ithin the /alidity period and repay the loan a1ter a certain period
7repay+ent period8* ,nterest is either repaya=le in certain inter/als or in one =ullet install+ent at
the end o1 the repay+ent period* ,n +any cases, the lines o1 credit are o1 a re/ol/ing nature* The
sa+e is e4plained /ia the e4a+ple pro/ided =elo)#

E/a*+,e
Citi=ank sanctions a line o1 credit o1 9S: %0*0 +n to ITHT, /alid 1or a period o1 ( years* Within
the ( year period, ITHT can =orro) any a+ount at any point o1 ti+e, such that the cu+ulati/e
outstanding is =elo) 9S: %0*0 +n on any date* Qach o1 these =orro)als are repaya=le )ith
interest at the end o1 (0 days 1ro+ the date o1 =orro)al* Since ITHT can thus @re/ol/e; the li+it
any nu+=er o1 ti+es )ithin the speci1ied li+it and /alidity period, these are called re/ol/ing lines
o1 credit*
Bi,, dis;ounting
Bill discounting is another 1or+ o1 )orking capital 1inancing* I =ill 7Bill o1 Q4change8 is a 1inancial
instru+ent =y )hich one party pro+ises to pay the other party a certain a+ount o1 +oney on a
speci1ied due date* This is trans1era=le and the 1inal holder o1 the =ill holds the right to recei/e the
pay+ent 1ro+ the concerned party* The corporate )ould ha/e =ills o1 e4change )hich are dra)n
on their dealers, )hich entitle the corporate to recei/e certain a+ounts o1 +oney 1ro+ the dealer
a1ter a pre&de1ined credit period* The corporate can then trans1er the =ill to the =ank and get a
discounted a+ount up1ront* The =ank collects the interest on the =ill a+ount 1or the speci1ied
period up1ront in this process called =ill discounting* Gn the due date, the =ank collects the
pay+ent 1ro+ the concerned party directly*
Co**er;ia, "a+er
Co++ercial "aper 7C"s as co++only kno)n8 is an instru+ent =y )hich a corporate =orro)s
+oney 1ro+ =anks 1or short periods o1 ti+e* I C" =inds the corporate to +ake a pay+ent e<ual
to the 1ace /alue o1 the C" to the issuing =ank on a speci1ied due date* ,n this sense, a C" is like
a short ter+ unsecured loan* Po)e/er, a C" is trada=le in the +arket . the =ank can sell the C"
to a third party* For this reason, =anks charge lesser interest on C"s than nor+al short ter+
loans* Po)e/er, since C"s are unsecured and are to =e trada=le in the +arket, =anks pro/ide C"
lending to only highly rated corporates*
Leasing
Veasing is another 1or+ o1 =ank 1inancing* ,n leasing, the =ank purchases real estate, e<uip+ent,
or other 1i4ed assets on =ehal1 o1 the corporate and grants use o1 the sa+e 1or a speci1ied ti+e to
the corporate in e4change 1or pay+ent, usually in the 1or+ o1 rent* The o)ner o1 the leased
property is called the lessor, the user the lessee* Vease pay+ents 7)hich include principal and
interest pay+ents usually8 can =e sho)n =y corporates as operating e4penses and hence leases
are used =y so+e corporates as a su=stitute 1or loans to get =etter ta4 =ene1its*
!u++,ier and dea,er ,oans
These are short ter+ loans pro/ided =y =anks to suppliers and dealers o1 large co+panies*
These loans usually ha/e conditions )hich ensure that there is su11icient support 1ro+ the
corporate in case the supplier or a dealer de1aults* Thus, using the support 1ro+ the corporate,
the suppliersFdealers can =orro) +oney 1ro+ the =ank at a lo)er rate o1 interest than other)ise
possi=le* Such loans help the corporates to de/elop a stronger =ase o1 suppliers and dealers,
)hich o1ten helps the+ in i+pro/ing their =usiness*

Asset !e;uritisation ,oans
Isset Securitisation loans are loans )hich are =acked =y speci1ied 1uture cash 1lo)s or other
assets o1 the corporate* These loans help corporates to release e4cess cash 1lo)s 1ro+ e4isting
recei/a=les or 1uture recei/a=les*
E/a*+,e
Citi=ank pro/ides a loan o1 9S: $50*0 +n to 6oyal :utch Shell, securitizing cash 1lo)s 1ro+
1uture +onthly sale o1 oil e4plored 1ro+ its speci1ied o11shore rig* ,n this case, there )ould =e a
+echanis+ to ensure that +oney 1ro+ +onthly sale o1 oil e4plored 1ro+ the speci1ied rig 1or the
period o1 the loan )ould =e used to ser/ice pay+ent o1 interest and principal o1 the loan to
Citi=ank* Citi=ank )ould do a detailed assess+ent o1 oil e4ploration potential, study oil prices and
ensure proper cash 1lo) trapping +echanis+s =e1ore dis=ursing the loan to 6oyal :utch Shell*
CLA!!&F&CAT&O OF LOA! B% T#E BAD
1. C,assi8i;ation o8 DraAn Loans
Voans are classi1ied and accounted 1or as 1ollo)s#
A;;rua,TLoans that +anage+ent has the intent and the a=ility to hold 1or the 1oreseea=le 1uture
or until +aturityFloan payo11* Iccrual loans are reported on the =alance sheet at the principal
a+ount outstanding, net o1 charge&o11s, allo)ance 1or loan losses, unearned inco+e, and any net
de1erred loan 1ees*
#e,d-8or-sa,eZVoan or loan port1olios that +anage+ent intends to sell or securitize*
TradingZVoans )here +anage+ent has the a=ility and intent to trade or +ake +arkets 7i*e*,
sellFhedge the credit risk*8 Voans held 1or trading purposes are included in Trading Issets and are
carried at 1air /alue, )ith the gains and losses included in Trading 6e/enue pro/ided that the
criteria outlined in this policy are +et*
2. C,assi8i;ation o8 )ndraAn Loan Co**it*ents
Voan co++it+ents are generally classi1ied as accrual and recorded o11&=alance sheet*
:i11erences =et)een loan and co++it+ent are as 1ollo)s? &
Loans are re8,e;ted in t@e asset side o8 t@e =ankQs =a,an;e s@eet. Co**it*ents are
Uo88-=a,an;e s@eetQ ite*s and are re8,e;ted in t@e ;ontingent asset side o8 t@e =a,an;e
s@eet.
The a+ount o1 the loan that is dis=ursed is credited to the account o1 the =orro)er* ,n
case o1 a co++it+ent, there is no dis=urse+ent or credit to a =orro)er;s account*
The 1ee charged on a loan is a 1unction o1 the dis=ursed a+ount* The 1ee charged on
co++it+ent is a 1unction o1 the a+ount o1 co++it+ent that is not utilized*

C(ED&T DE(&VAT&VE!
Credit deri/ati/es are 1inancial contracts that trans1er credit risk 1ro+ one party to another,
1acilitating greater e11iciency in the pricing and distri=ution o1 credit risk a+ong +arket players*
E/a*+,e
The holder o1 a de=t security issued =y WDT Corp* enters into a contract )ith a deri/ati/es dealer
)here=y he )ill +ake periodic pay+ents to the dealer in e4change 1or a lu+p su+ pay+ent in the
e/ent o1 de1ault =y WDT Corp* during the ter+ o1 the deri/ati/es contract* Is a result o1 such a
contract, the in/estor has e11ecti/ely trans1erred the risk o1 de1ault =y WDT Corp* to the dealer* ,n
+arket parlance, the corporate =ond in/estor in this e4a+ple is the =uyer o1 protection, the dealer
is the protection seller, and the issuer o1 the corporate =ond is called the re1erence entity*
)ses o8 Credit Deri<ati<es
Vike any other deri/ati/e instru+ent, credit deri/ati/es can =e used either to take on +ore risk or
to a/oid 7hedge8 it* I +arket player )ho is e4posed to the credit risk o1 a gi/en corporation can
hedge such an e4posure =y =uying protection in the credit deri/ati/es +arket* Vike)ise, an
in/estor +ay =e )illing to take on that credit risk =y selling protection and thus enhance the
e4pected return on his port1olio*
Credit deri/ati/es can =e used to create positions that can other)ise not easily =e esta=lished in
the cash +arket* For instance, consider an in/estor )ho has a negati/e /ie) on the 1uture
prospects o1 a gi/en corporation* Gne strategy 1or such an in/estor )ould =e to short the =onds
issued =y the corporation, =ut the corporate repo +arket 1or taking short positions in corporates is
not )ell de/eloped* ,nstead, the in/estor can =uy protection =y )ay o1 credit de1ault s)ap* ,1 the
corporation de1aults, the in/estor is a=le to =uy the de1aulted de=t 1or its reco/ery /alue in the
open +arket and sell it to its credit deri/ati/es counterparty 1or its 1ace /alue*
Banks use credit deri/ati/es =oth to di/ersi1y their credit risk e4posures and to 1ree up capital
1ro+ regulatory constraints* Is an e4a+ple, consider a =ank that )ants to di+inish its e4posure
to a gi/en client, =ut does not )ant to incur the costs o1 trans1erring loans +ade to that client to
another =ank* The =ank can, )ithout ha/ing to noti1y its client, =uy protection against de1ault =y
the client in the credit deri/ati/es +arket# Q/en though the loans re+ain on the =ankRs =ooks, the
associated credit risk has =een trans1erred to the =ankRs counterparty in the credit deri/ati/e
contract*
The a=o/e e4a+ple can also =e used to illustrate =anksR usage o1 credit deri/ati/es to reduce
their regulatory capital re<uire+ents* 9nder current Basle standards, 1or a corporate =orro)er,
the =ank is generally re<uired to hold ' percent o1 its e4posure as a regulatory capital reser/e*
Po)e/er, i1 its credit deri/ati/es counterparty happens to =e a =ank located in an GQC: country,
and the =ank can de+onstrate that the credit risk associated )ith the loans has =een e11ecti/ely
trans1erred to the GQC: =ank, then the =ankRs regulatory capital charge 1alls 1ro+ ' percent to
%*! percent*
E/a*+,e
Vet us /isualize a =ank, say Bank I )hich has specialized itsel1 in lending to the o11ice
e<uip+ent seg+ent* Gut o1 e4perience o1 years, this =ank has ac<uired a specialized
kno)ledge o1 the e<uip+ent industry* There is another =ank, Bank B, )hich is, say,
specialized in the cotton te4tiles industry* Both these =anks are specialized in their o)n
seg+ents, =ut =oth su11er 1ro+ risks o1 port1olio concentration* Bank I is concentrated in the
o11ice e<uip+ent seg+ent and =ank B is 1ocused on the te4tiles seg+ent* 9nderstanda=ly,
=oth the =anks should di/ersi1y their port1olios to =e sa1er*
Gne o=/ious option 1or =oth o1 the+ is# Bank I should in/est in an unrelated port1olio, say
te4tiles* Ind Bank B should in/est in a port1olio in )hich it has not in/ested still, say, o11ice
e<uip+ent* :oing so )ould in/ol/e ine11iciency 1or =oth the =anks# as Bank I does not kno)
enough o1 the te4tiles seg+ent as =ank I does not kno) anything o1 the o11ice e<uip+ent
seg+ent*
Pere, credit deri/ati/es o11er an easy solution# =oth the =anks, )ithout trans1erring their
port1olio or reducing their port1olio concentration, could =uy into the risks o1 each other* So
=ank B =uys a part o1 the risks o1 the port1olio that is held =y Bank I, and /ice /ersa, 1or a 1ee*
Both continue to hold their port1olios, =ut =oth are no) di/ersi1ied* Both ha/e di/ersi1ied their

Business & ,T -odel . Cards /%*00% "age o1 $00
T:+es o8 Credit Deri<ati<es
Credit deri/ati/es can =e classi1ied in t)o +ain groups# Single na+e instru+ents are those that
in/ol/e protection against de1ault =y a single re1erence entity* -ulti&na+e credit deri/ati/es are
contracts that are contingent on de1ault e/ents in a pool o1 re1erence units*

T(EA!)(% !E(V&CE!
T@e Treasur: !er<i;es de+art*ent is ;on;erned Ait@ *anaging t@e 8inan;ia, risks o8 t@e
=ank. Pence, the treasurerRs Ko= is to understand the nature o1 these risks, the )ay they interact
)ith the =usiness, and to +ini+ize or to o11set the+* ,n +any cases, the treasury ser/ices
depart+ent also pro/ides cash +anage+ent solutions 1or custo+ers o1 the =ank* The Treasury
ser/ices depart+ent o1 a =ank per1or+s the 1ollo)ing 1unctions#
-anaging the cash position o1 the =ank, +anaging li<uidity and
associated risks
Fore4 ser/ices# pro/ides 1ore4 ser/ices to corporates, enters in to
deals )ith +ultiple counterparties to +aintain a risk&+anaged
position 1or the =ank*
6isk +anage+ent ser/ices# pro/ides risk +anage+ent products like
s)aps, options etc to corporates and enters in to +ultiple deals )ith
/arious counterparties to +aintain a risk&+anaged position 1or the
=ank*
Conducts research on /arious +arket 1actors, +onitors interest rate
and econo+ic scenario etc
Cash -anage+ent ser/ices 1or corporates . +anaging collections
and pay+ents
Typically, the treasury has a 1ront o11ice desk )hich enters in to trades 7in 1ore4, +oney +arkets,
e<uity, treasury securities etc8 )ith /arious +arket participants and a +iddle o11iceF=ack o11ice
desk )hich +onitors positions and pro/ides operational support*
-ost large in/est+ent =anks pro/ide Treasury Ser/ices to their clients* Treasury do+ain
includes
Fi/ed &n;o*e : In in/est+ent that pro/ides a return in the 1or+ o1
1i4ed periodic pay+ents and e/entual return o1 principle at +aturity*
9nlike a /aria=le&inco+e security )here pay+ents change =ased on
so+e underlying +easure, such as short&ter+ interest rates, 1i4ed&
inco+e securities pay+ents are kno)n in ad/ance*
$one: $arkets # The +oney +arket is a su=section o1 the 1i4ed
inco+e +arket* The di11erence =et)een the +oney +arket and the
1i4ed inco+e +arket is that the +oney +arket specializes in /ery
short&ter+ de=t securities 7de=t that +atures in less than one year8*
-oney +arket in/est+ents are also called cash in/est+ents
=ecause o1 their short +aturities* So+e o1 the popular +oney
+arket instru+ents include Certi1icates o1 :eposit 7C:8, Co++ercial
"aper 7C"8, Treasury Bills 7T&Bills8
Foreign E/;@ange # The +arket 1or =uying and selling o1 currencies
is called the Foreign Q4change +arket 7FW 8* ,t is a $2 hour non&stop
+arket* So+e o1 the +aKor Currency traded include . The 9S
:ollar 79S:8, The Japanese Den 7J"D8, The Quro 7Q968, The Great
Britain "ound 7GB"8, The S)iss Frank 7CPF8* FW rates e4press the
/alue o1 one currency in ter+s o1 another currency* They in/ol/e
o The co++odity currency & the currency =eing priced, usually % unit or a 1i4ed a+ount o1
currency*
o The ter+s currency & the currency used to e4press the price o1 the co++odity, in
/arying a+ounts o1

OTC Deri<ati<es : G/er the counter 7GTC8 +arkets are a 1or+ o1
Secondary +arkets* World o/er Secondary +arkets are classi1ied
as Visted and GTC* Visted +arkets typically are e4changes )here a
security is listed and traded* I decentralized +arket o1 securities not
listed on a e4change )here +arket participants trade o/er the
telephone, 1acsi+ile or electronic net)ork instead o1 a physical
trading 1loor or electronic order +atching syste+s* There is no
central e4change or +eeting place 1or this +arket* Typically
Currency instru+ents are traded GTC* I deri/ati/e contract deri/es
its /alue =ased on the /alue o1 so+e =asic underlying* The
underlying +ay =e any instru+ent like a =ond, a stock or a +arket
inde4, currency or interest rates* So+e o1 the instru+ents traded
GTC include
o ForAard (ate Agree*ent 1F(A3 & I contract that deter+ines the rate o1 interest,
or currency e4change rate, to =e paid, or recei/ed, on an o=ligation =eginning at a so+e
1uture start date* ,t is also re1erred to as Future 6ate Igree+ent*
o &nterest (ate !Aa+ 1&(!8 & I deal =et)een =anks or co+panies )here =orro)ers s)itch
1loating&rate loans 1or 1i4ed rate loans in another country* These can =e either the sa+e
or di11erent currencies* The +oti/e +ay =e the co+petiti/e ad/antage o1 one co+pany to
ha/e access to lo)er 1i4ed rates than another co+pany* The other co+pany +ay =e
co+petiti/ely placed to ha/e access to lo)er 1loating rates* I s)ap )ould =e =ene1icial
to =oth* The s)ap is +easured =y its notional principal*
FF O+tions : Fore4 Gptions gi/e the holder the right to =uy or sell a
currency in ter+s o1 another currency at a particular rate on a
particular date or )ithin a period o1 ti+e* The option to =uy is called
as a Call Gption and the option to sell is called as a "ut Gption*
EGuit: O+tions . These are si+ilar to FW options the only di11erence
is the underlying* The underlying in case o1 Q<uity Gptions are
stocks or stock +arket indices* When the underlying is a stock
+arket inde4 the ter+ used is ,nde4 Gption and the ter+ used to
re1er options on indi/idual stocks is Stock Gption
Credit Deri<ati<es - "ri/ately held negotia=le =ilateral contracts that
allo) users to +anage their e4posure to credit risk* Credit
:eri/ati/es are 1inancial assets like 1or)ard contracts, s)aps, and
options 1or )hich the price is dri/en =y the credit risk o1 econo+ic
agents 7pri/ate in/estors or go/ern+ents8* For e4a+ple, a =ank
concerned that one o1 its custo+ers +ay not =e a=le to repay a loan
can protect itsel1 against loss =y trans1erring the credit risk to another
party )hile keeping the loan on its =ooks*
Fun;tions o8 t@e Treasur: $anager
Qnsure a/aila=ility o1 1unds . In integrated treasury typically )ould
include de=t +arket, +oney +arket and 1ore4 transactions* Treasury
+anager needs to ensure that ade<uate 1unds are a/aila=le to co/er
the settle+ent o=ligations o1 the said transactions*
-anage all 1oreign currency transactions 1or the =ank
-anage /arious risks#
o Vi<uidity . 6isk o1 asset and lia=ility cash 1lo) +is+atch* I =ank +ay not ha/e ade<uate
1unds 1or the settle+ent o1 its transactions or to pay its custo+ers =ecause o1
+is+atches in the tenor o1 its recei/a=les

Business & ,T -odel . Cards /%*00% "age '0 o1 $00
o ,nterest rate . 6isk due to /olatility o1 interest rates* I =ank +ay ha/e =orro)ed at
1loating rates o1 interest and lent at 1i4ed rate o1 interest and the interest rates +o/es up
o Currency . 6isk due to /olatility in e4change rates* I =ank +ay ha/e its pay+ent
o=ligations in a currency say 9S: and the rate to purchase the said currency goes up
Co++odity . 6isk due to /olatility in co++odity prices* I =ank +ay
ha/e an o=ligation to deli/er a co++odity in the 1uture and the price
o1 the co++odity +o/es up
Cash -anage+ent Ser/ices & C-S is a ser/ice pro/ided =y =anks to
its corporate clients 1or a 1ee to reduce the 1loat on collections and to
ease the =ulk pay+ent transactions o1 the client* The three ele+ents
o1 C-S are#
o 6ecei/a=les -anage+ent .Pelps the co+pany to +anage collection o1 its sale proceeds
1ro+ re+ote upcountry regions
o "aya=les -anage+ent . Pelps the co+pany to +anage its pay+ents to its regular
suppliers )ithout keeping nu+erous =ank accounts 1or /arious locations and then
reconciles the+ periodically in a highly +anual F paper&=ased en/iron+ent
o Vi<uidity -anage+ent . Pelps the co+pany =y ensuring direct and instant access to its
=ank accounts* ,t should not happen that a co+pany has e4cess 1unds in one =ank
account and it needs to pay through another =ank account )here there are no 1unds
-anaging Vi<uidity H ,nterest 6ate risks
o Isset Via=ility -anage+ent . I =ank;s assets and lia=ilities need to necessarily +atch*
,1 they don;t the =ank +ay ha/e li<uidity pro=le+s )hich )ould endanger its sol/ency*
The long ter+ assets should not =e 1inanced =y short ter+ sources o1 1unds* The =ank
)ould not =e a=le to ser/e its lenders i1 the ti+ings o1 its in1lo)s do not +atch its
out1lo)s* I =ank typically uses +athe+atical tools like :uration, Gap Inalysis to 1ind out
+is+atches and take correcti/e actions
E/a*+,e
I =ank =orro)s 9S: %00-- at (*00A 1or one year
The =ank uses this =orro)ed +oney to lend to a highly&rated =orro)er 1or 5 years at (*$0A*
For si+plicity, assu+e interest rates are annually co+pounded and all interest accu+ulates to the
+aturity o1 the respecti/e o=ligations* The net transaction appears pro1ita=leZthe =ank is earning
a $0 =asis point spreadZ=ut it entails considera=le risk*
It the end o1 one year, the =ank )ill ha/e to 1ind ne) 1inancing 1or the loan, )hich )ill ha/e 2
+ore years =e1ore it +atures* Issu+e interest rates are at 2*00A at the end o1 the 1irst year*
The Bank )ill no) ha/e to pay a higher rate o1 interest 72*00A8 on the ne) 1inancing than the
1i4ed (*$0 it is earning on its loan* ,t is going to =e earning (*$0A on its loan and paying
2*00A on its 1inancing*
The pro=le+ in this si+ple e4a+ple )as caused =y a +aturity +is+atch =et)een assets and
lia=ilities* Is long as interest rates e4perienced only +odest 1luctuations, losses due to asset&
lia=ility +is+atches are s+all or tri/ial* Po)e/er, in a period o1 /olatile interest rates, the
+is+atches )ould =eco+e serious*

Business & ,T -odel . Cards /%*00% "age '% o1 $00
The treasury asset-,ia=i,it: *anage*ent 1AL$3 group assesses asset&lia=ility risk and all =anks
ha/e IV- co++ittees co+prised o1 senior +anagers to address the risk* Techni<ues 1or
assessing asset&lia=ility risk ca+e to include gap analysis, duration analysis and scenario
analysis* 'a+ ana,:sis ,ooks at a*ount o8 assets and ,ia=i,ities in <arious *aturit: =u;kets
A@i,e Duration ana,:sis ,ooks at Aeig@ted a<erage *aturit: o8 ;as@ 8,oAs to ;o*+are
assets and ,ia=i,ities. Since li<uidity +anage+ent is closely linked to asset&lia=ility
+anage+ent, assess+ent and +anage+ent o1 li<uidity risk is also a 1unction o1 IV-
depart+ents and IV- co++ittees* IV- strategies o1ten include securitization, )hich allo)s 1ir+s
to directly address asset&lia=ility risk =y re+o/ing assets or lia=ilities 1ro+ their =alance sheets*
This not only eli+inates asset&lia=ility risk? it also 1rees up the =alance sheet 1or ne) =usiness*
,nterest rate risk +anage+ent
o -anage risks due to /olatility o1 interest rates & :e+and and supply o1 +oney go on
changing 1ro+ ti+e to ti+e +aking interests rates /olatile* I =ank +ay ha/e accepted
deposits at a 1i4ed rate o1 interest historically* Po)e/er current +arket rates +ay =e
lo)er )hen it )ishes to lend* The =ank;s port1olio /alue o1 in/est+ents in =onds and
treasury also /aries in/ersely )ith the interest rates* I higher interest rate di+inishes the
/alue o1 a =ank;s port1olio and /ice /ersa* ,nstru+ents like interest rate s)aps and
currency s)aps help to address ,nterest 6ate risks
Causes o8 interest rate risk
The causes o1 interest rate risk +ight /ary#
(e+ri;ing risk: The pri+ary 1or+ o1 interest rate risk arises 1ro+
ti+ing di11erences in the +aturity 71or 1i4ed rate8 and repricing 71or
1loating rate8 o1 =ank assets, lia=ilities and o11&=alance&sheet 7GBS8
positions* For instance, a =ank that 1unded a long&ter+ 1i4ed rate
loan )ith a short&ter+ deposit could 1ace a decline in =oth the 1uture
inco+e arising 1ro+ the position and its underlying /alue i1 interest
rates increase*
%ie,d ;ur<e risk: Dield cur/e risk arises )hen unanticipated shi1ts o1
the yield cur/e 7a plot o1 in/est+ent yields against +aturity periods8
ha/e ad/erse e11ects on a =ankRs inco+e or underlying econo+ic
/alue* Dield cur/es can shi1t parallel or change in steepness, posing
di11erent risks* For instance, the underlying econo+ic /alue o1 a long
position in %0&year go/ern+ent =onds hedged =y a short position in
5&year go/ern+ent notes could decline sharply i1 the yield cur/e
steepens, e/en i1 the position is hedged against parallel +o/e+ents
in the yield cur/e*
Basis risk: Basis risk arises 1ro+ i+per1ect correlation in the
adKust+ent o1 the rates earned and paid on di11erent instru+ents )ith
other)ise si+ilar repricing characteristics* For e4a+ple, a strategy o1
1unding a one year loan that reprices +onthly =ased on the one
+onth 9*S* Treasury Bill rate, )ith a one&year deposit that reprices
+onthly =ased on one +onth Vi=or, e4poses the institution to the risk
that the spread =et)een the t)o inde4 rates +ay change
une4pectedly*
O+tiona,it:: In additional and increasingly i+portant source o1
interest rate risk arises 1ro+ the options e+=edded in +any =ank
assets, lia=ilities and GBS port1olios* Gptions +ay =e stand alone

Business & ,T -odel . Cards /%*00% "age '$ o1 $00
instru+ents such as e4change&traded options and o/er&the&counter
7GTC8 contracts, or they +ay =e e+=edded )ithin other)ise
standard instru+ents* They include /arious types o1 =onds and notes
)ith call or put pro/isions, loans )hich gi/e =orro)ers the right to
prepay =alances, and /arious types o1 non&+aturity deposit
instru+ents )hich gi/e depositors the right to )ithdra) 1unds at any
ti+e, o1ten )ithout any penalties* ,1 not ade<uately +anaged, the
asy++etrical payo11 characteristics o1 instru+ents )ith optionality
1eatures can pose signi1icant risk particularly to those )ho sell the+,
since the options held, =oth e4plicit and e+=edded, are generally
e4ercised to the ad/antage o1 the holder and the disad/antage o1 the
seller*
$anaging interest rate risk
Bank treasuries +easure interest rate sensiti/ity o1 securities 7assets or lia=ilities8 through
:uration analysis* :uration is a +athe+atical concept )hich can =e used to +easure the
sensiti/ity o1 a 1inancial instru+ent;s price to changes in interest rate* Gn the =asis o1 duration
analysis, =anks can increaseFdecrease holdings o1 long ter+ and short ter+ securities in
response to anticipated changes in interest rate*
Banks also use deri/ati/e instru+ents like interest rate s)aps and options to +anage interest
rate risks 7I deri/ati/e is a generic ter+ o1ten used to categorize a )ide /ariety o1 1inancial
instru+ents )hose /alue 3depends on5 or is 3deri/ed 1ro+5 the /alue o1 an underlying asset,
re1erence rate or inde48* So+e o1 the+ are#
o &nterest (ate !Aa+: In agree+ent to e4change net 1uture cash 1lo)s* ,n
its co++onest 1or+, the 1i4ed&1loating s)ap, one counterparty pays a 1i4ed rate
and the other pays a 1loating rate =ased on a re1erence rate, such as Vi=or*
There is no e4change o1 principal* The interest rate pay+ents are +ade on an
agreed notional a+ount*
o ForAard (ate Agree*ent 1F(A3: I F6I allo)s purchasers F sellers to 1i4
the interest rate 1or a speci1ied period in ad/ance* Gne party pays 1i4ed, the other
an agreed /aria=le rate* -aturities are generally out to t)o years and are priced
o11 the underlying yield cur/e* The transaction is done in respect o1 an agreed
no+inal a+ount and only the di11erence =et)een contracted and actual rates is
paid*
o &nterest (ate 'uarantee: In option on a 1or)ard rate agree+ent 7F6I8,
also kno)n as a F6Ition* "urchasers ha/e the right, =ut not the o=ligation, to
purchase a F6I at a predeter+ined strike* Caps and Floors are strips o1 interest
rate guarantees*
o !Aa+tion: In option to enter an interest rate s)ap* I payer s)aption gi/es
the purchaser the right to pay 1i4ed 7recei/e 1loating8, a recei/er s)aption gi/es
the purchaser the right to recei/e 1i4ed 7pay 1loating8*
Fore/ $anage*ent . Si+ilar to interest rates, the 1ore4 rates o1
countries )ho ha/e not pegged their currencies /ary 1ro+ ti+e to
ti+e* This e4poses its +arket participants to risk o1 ad/erse
+o/e+ents o1 e4change rates* FW For)ards and Fore4 Gptions
pro/ide a +eans o1 reducing e4change rate risks =y entering into
contracts at 1i4ed rates there=y +aking the outco+e predicta=le

Business & ,T -odel . Cards /%*00% "age '( o1 $00
Foreign e4change is essentially a=out e4changing one currency 1or another* Fore4 rates =et)een
t)o currencies at any point o1 ti+e are in1luenced =y a /ariety o1 1actors like state o1 the econo+y,
interest rates H in1lation rate, e4change rate syste+s 71i4edF1loating8, te+porary de+and&supply
+is+atches, 1oreign trade position etc*
Foreign e4change e4posures 1or a 1inancial entity arise 1ro+ +any di11erent acti/ities* I co+pany
)hich =orro)s +oney in a 1oreign currency is at risk )hen the local currency depreciates /is&[&/is
the 1oreign currency* In e4porter )ho sells its product in 1oreign currency has the risk that i1 the
/alue o1 that 1oreign currency 1alls then the re/enues in the e4porterRs ho+e currency )ill =e
lo)er* In i+porter )ho =uys goods priced in 1oreign currency has the risk that the 1oreign
currency )ill appreciate there=y +aking the cost in local currency greater than e4pected*
Generally the ai+ o1 1oreign e4change risk +anage+ent is to sta=ilise the cash 1lo)s and reduce
uncertainty 1ro+ 1inancial 1orecasts*
Since a =ank is usually a counter party to the a=o/e transactions, it 1aces si+ilar 1ore4 6isk )hen
the re/erse happens*
Basi;s o8 8ore/
Currencies are <uoted in one o1 the t)o )ays#
:irect Uuotation 7% 9S: > ,N6 25*$!8 H
,ndirect Uuotation 7,N6 %00 > 9S: $*$%8*
@:irect; or @,ndirect; are al)ays /is&[&/is the 9S dollar percepti/e* ,n practice, all currencies e4cept
the British "ound are <uoted in the direct <uotation +ethod* Since rates 1or all currencies are
<uoted /is&[&/is the 9S dollar, cross currency rates 7e4a+ple# ,N6FQuro8 )ould =e o=tained =y
co+=ining the t)o pri+ary currency <uotes /is&[&/is the 9S dollar*
Ilso, <uotes usually ha/e t)o parts# the =id rate 7rate at )hich the =ank )ill purchase 9S dollars
against ho+e currency in case o1 direct <uotes8 and the ask rate 7rate at )hich the =ank )ill sell
9S dollars against ho+e currency in case o1 direct <uotes8* The =id rate )ill al)ays =e lesser
than the ask rate to co/er 1or operational charges and pro1it +argins o1 the =anks* Q4a+ples are#
,N6F9S: <uote# 25*$!F*(! 7here, 0*0% is the s+allest count, re1erred
to as one @pip;8
Q96F9S: <uote# %*$25'F*$2!% 7here, 0*000% is the s+allest count,
re1erred to as one @pip;8
While the deri/ed cross currency rate )ould =e#
,N6FQuro <uote# 725*$!C%*$2!%8F 725*(!C%*$25'8 > 5!*20F*5%
Foreign currency deals in a particular currency necessary ha/e to =e settled in the ho+e nation o1
the currency* Pence, =anks taking part in international transactions need to +aintain accounts in
/arious countries to ena=le transacting in those currencies* These accounts are o1 +ultiple types#
Nostro 7GurF+y account )ith you8# Current account +aintained =y
one =ank )ith another =ank a=road in the latter;s ho+e currency
Mostro 7Their account )ith +eFus8# Current account +aintained in the
ho+e currency =y one =ank in the na+e o1 another =ank =ased
a=road
Typically, =anks @a<e <ostro.nostro a;;ounts Ait@ *u,ti+,e 8oreign =anks.
!+ot and ForAard Foreign E/;@ange Contra;ts

The +ost =asics tools o1 1ore4 risk +anage+ent are RspotR and R1or)ardR contracts* These are
contracts =et)een end users and 1inancial institutions that speci1y the ter+s o1 an e4change o1
t)o currencies* ,n any 1ore4 contract there are a nu+=er o1 /aria=les that need to =e agreed upon
and they are#
The currencies to =e =ought and sold & in e/ery contract there are
t)o currencies the one that is =ought and the one that is sold
The a+ount o1 currency to =e =ought or sold
The date at )hich the contract +atures
The rate at )hich the e4change o1 currencies )ill occur
The e4change rates ad/ertised either in the ne)spapers 7and that +entioned a=o/e8 or on the
/arious in1or+ation ser/ices assu+e a deal )ith a +aturity o1 t)o =usiness days ahead & a deal
done on this =asis is called a spot deal* ,n a spot transaction the currency that is =ought )ill =e
recei/a=le in t)o days )hilst the currency that is sold )ill =e paya=le in t)o days* This applies to
all +aKor currencies )ith the e4ception o1 the Canadian :ollar*
-ost +arket participants )ant to e4change the currencies at a ti+e other than t)o days in
ad/ance =ut )ould like to kno) the rate o1 e4change no)* This is done through a 1or)ard
contract to e4change the currencies at a speci1ied e4change rate at a speci1ied date* ,n
deter+ining the rate o1 e4change in si4 +onths ti+e there are t)o co+ponents#
the current spot rate
the 1or)ard rate adKust+ent
The spot rate is si+ply the current +arket rate as deter+ined =y supply and de+and* The
1or)ard rate adKust+ent is a slightly +ore co+plicated calculation that in/ol/es the interest rates
o1 the currencies in/ol/ed*
ForAard rate 1Lo;a, ;urren;:.)!D3 9 !+ot rate -112 interest rate in )!3 . 112 ,o;a, interest
rate37 )ith interest rates adKusted 1or the period o1 the 1or)ard rate* The concept =ehind this
e<uation is that i1 you de1er the /alue date o1 a spot transaction each party )ill ha/e the 1unds
that they )ould ha/e paid to in/est* The di11erence =et)een a 1ore4 spot rate and the 1or)ard rate
1or a particular tenure is called the 1or)ard pre+iu+ 1or that tenure* Currencies can ha/e 1or)ard
pre+iu+s or 1or)ard discounts /is&[&/is the 9S dollar*
Fore4 risk can also =e co/ered through 1ore4 1uture contracts* Futures are e4actly si+ilar to
1or)ards, e4cept 1or the 1act that these deals are =rokered through an e4change, non&
custo+iza=le 7only standard deals a/aila=le8 and hence, not prone to counter&party risk*
Bi8ur;ation o8 A,, *aRor *arkets 1EGuities7 Bond7 FF7 Deri<ati<es3
S+all and Varger Grders . Q<uity +arkets are characterized =y
s+aller orders as co+pared to the +arkets 1or other 1inancial
instru+ents =ecause o1 +ore retail participation
Vi<uidity . Q4change traded instru+ents are +ore li<uid
,n/estor "ro1ile . Q<uity +arkets ha/e a +ore retail in/estor pro1ile
as co+pared to +arkets 1or other 1inancial instru+ents
6outing . :eals in the Q<uity +arkets are routed to +ultiple
destinations )here as deals in 1ore4 as )ell as de=t +arkets are
3+atched5 internally
"u=lic /Fs "ri/ate & -arkets 1or e<uities are listed )hereas certain
:eri/ati/es are GTC

Treasur: a++,i;ations seg*ents N <endors
Treasury -anage+ent Syste+s . ,nter&=ank
Cross&Isset Trading and 6isk
Sungard F Front Irena & F6GNT I6QNI is the de1initi/e integrated
solution 1or sales, trading and risk +anage+ent, operations and
distri=ution across +ultiple asset classes* ,ts rich 1unctionality
ena=les traders to +ake critical decisions )ith assurance* ,t is
1le4i=le across a range o1 =usiness areas gi/es )hich gi/es traders a
co+petiti/e edge in trading acti/ities*
Su++it & Su++it is a core solution 1or treasury +anage+ent 1or
=oth 1inancial and corporate institutions* Su++it;s trading
applications interact )ith operations and risk +anage+ent plat1or+s
to pro/ide a straight&through&processing solution* This allo)s 1ront to
=ack +anage+ent o1 all products )ithin 1our pri+ary =usiness areas
/iz Treasury, Fi4ed ,nco+e, :eri/ati/es and Co++ercial lending
Calypso & Calypso Technologies the )orld;s leading so1t)are
pro/ider o1 credit deri/ati/es, cross
asset trading, risk +anage+ent, and processing* ,t o11ers a 1ront&to&
=ack o11ice syste+ that allo)s traders 1le4i=ility to plug in their o)n
products*
Wall Street Syste+s & Wall Street Syste+s deli/ers single&ser/er,
enterprise&)ide solutions to the )orldRs leading 1inancial institutions
and corporations The Wall Street Syste+ 1inancial trading and
treasury engine pro/ides a +ulti&entity, +ulti&currency, +ulti&asset
class en/iron+ent )hich supports all 1ront, +iddle and =ack o11ice
operations*
Treasury Sales . Bank to Custo+er
Single&=ank plat1or+
Cognotec . Cognotec is the )orldRs leading pro/ider o1 auto+ated
trading solutions to 1inancial enterprises across the glo=e* They
pro/ide 1ore4 dealing solutions* They ha/e partnered )ith )orld&
leading technology pro/iders, +ulti&=ank plat1or+s and industry
organizations*
,ntegral & ,ntegral is at the 1ore1ront o1 the eFW +arket in de/eloping
ne), highly inno/ati/e products* ,ntegral is the pro/ider o1 integrated
electronic trading syste+s, o11ering intuiti/e and inno/ati/e products
that auto+ate and strea+line the entire trading cycle*
-ulti&=ank plat1or+
6euters 6QT & 6euters Qlectronic Trading pro/ides a
co+prehensi/e FW and +oney +arkets trading solution 1or =anks** ,t
includes Iuto+ated :ealing, an internet =ased FW and +oney
+arket auto+ated dealing capa=ility, to ena=le the BankRs dealing
roo+ to price, e4ecute, con1ir+ and +anage FW and +oney +arket
trading*

Business & ,T -odel . Cards /%*00% "age '! o1 $00
CA!# $AA'E$ET
Cas@ $anage*ent !er<i;e 1C$!3 is a ser/ice pro/ided =y =anks to its clients 1or a 1ee to
reduce the 1loat on collections and to ease the =ulk pay+ent transactions o1 the client* Varge
Corporations like G- or Ford need to +anage cash )ell since they ha/e#
"ay+ents to +ultiple parties at /arious locations . "ay+ents need to
=e +ade to suppliers across the country* Typically these ha/e
suppliers across the country to reduce dependence on one or a 1e)
suppliers
Collections 1ro+ +ultiple parties at /arious locations & Po) does a
co+pany collect its sale proceeds 1ro+ re+ote upcountry regionsL
-ultiple =anking accounts at /arious locations
o Qnsure local de1icits and surpluses are +anaged . I corporate +ay =e paying its
e+ployees salaries out o1 one =ank account )hereas it +ay =e =anking its recei/a=les in
another =ank account another location leading to surpluses and de1icits in their =ank
accounts
o Qnsure net surplus is in/ested properly . ,1 a corporate is una=le to identi1y surpluses, a
corporate +ay risk keeping +oney idle leading to loss o1 interest inco+e i1 it does not
prudently in/est its net surpluses leading to
o 6educe operational costs associated )ith pay+ents H collections . I C-S )ould help
opti+ize )asted operational cost on pay+ents and collections
Cash -anage+ent solutions help corporations#
o :e/ise an e11ecti/e account H in/est+ent strategy to +anage surpluses and de1icits .
"ooling, Netting, Tero&=alance structures
o Auto*ate ;o,,e;tions and +a:*ents +ro;ess 8,oAs
o Gutsource collections and pay+ents ad+inistration H reconciliation
E/a*+,e
Consider a consu+er goods co+pany in -id&)est 9S, )ith dealerships spread through %$ states*
The co+pany has a +anu1acturing 1acility in -ichigan and 2 depots, one each in Ghio, -ichigan,
,llinois and Te4as* The co+pany transports goods to the 2 depots )hich ser/es the respecti/e
local dealers and in so+e cases dealers in neigh=oring states* Ill the depots are treated as
independent cost centers, )ith sales 1ro+ respecti/e regions and salaries and general e4penses
1or these regions +arked to the depot concerned* Collections 1ro+ dealers in /arious locations
are +anaged =y local sales tea+s, one tea+ 1or each state* The co+pany )ants to#
Qnsure daily +onitoring o1 collections 1ro+ /arious states
S)eep all local collections daily to a central =ank account at -ichigan
Qnsure that local accounts do not re+ain in de=it )hen the central account is in credit*
"ro/ide 1acility 1or te+porary intra&day o/erdra1t 1or the local accounts
Qnsure that surplus +oney in the central account is in/ested in an opti+al 1ashion )hile
allo)ing su11icient li<uidity
Ill pay+ents 1ro+ local accounts a=o/e B%0,000 re<uire an appro/al 1ro+ the CFG sitting in
-ichigan

This is a typical case )here the co+pany needs the ser/ices o1 a =ank to +anage its cash
collections and pay+ents* The co+pany needs =oth cash +anage+ent 1acilities and -,S o1
collections and pay+ents that can allo) it to track re/enue and e4penses in the +anner re<uired*
Co+panies rarely 1ail =ecause they are insol/ent* They do 1ail =ecause they are illi<uid*
Co+panies +ust 1ocus on precise )orking capital +anage+ent as a critical co+ponent o1
treasury strategy* Co+panies re<uire#
rich in1or+ation, to parallel the co+pany;s cash 1lo) cycle
glo=al cash concentration, through pooling +echanis+s
auto+ated internal 1unding +echanis+s 1or de1icit positions
,n/est+ent options to +atch indi/idual pro1iles 1or li<uidity, risk and
return*
So+e o1 the o11erings in Cash -anage+ent Ser/ices are &
"a:*ent . Dis=urse*ent O88erings
"ay+ent ser/ice 1or corporationsFretail custo+ers
o Banks process pay+ents on =ehal1 o1 corporations . C-S pro/ides its custo+ers the
pay+ent processing ser/ices )hich help corporations to reduce ad+inistrati/e hassles
and costs in doing so*
o ,nstru+ents & ChecksFde+and dra1tsF Qlectronic Fund Trans1er 7QFT8 help in processing
pay+ents
"ay+ent ,nitiation
o -anual instruction . Banks can act on +anual instructions gi/en =y the corporations to
their =ankers 1or processing pay+ents* They typically take the 1or+ o1 che<ues or dra1ts
o FloppyFQlectronic +edia instructions . I list o1 =ene1iciaries and the corresponding
a+ounts are gi/en in either a 1loppy or an other electronic +edia to their =anks in the
re<uired 1or+ats )hich are used =y the =anks 1or processing pay+ents
o Qlectronic =anking applications . Qlectronic applications like QCS F QFT or indi/idual
=ank speci1ic so1t)are packages can =e +ade use o1 =y corporations to e11ect trans1ers
Bulk pay+ents
C-S is /ery =ene1icial 1or processing repetiti/e F =ulk pay+ents in the nature listed =elo)*
Qcono+ies o1 scale and reduction o1 ad+inistrati/e and related costs can =e gained =y
corporations
o "ayroll processing
o :i/idend )arrants
o 6ede+ptions
Co,,e;tions !er<i;es
Collect 1unds around the glo=e . C-S pro/ides accurate and ti+ely
collection o1 recei/a=les )orld)ide
Funds are credited to the cash +anage+ent account
o Vocal collections . 6e1er to collections 1ro+ suppliers F de=tors )ho issue local che<ues
o Gutstation collections & 6e1er to collections 1ro+ custo+ers not in the =ase location o1
the corporation

Business & ,T -odel . Cards /%*00% "age '' o1 $00
Banks ha/e responded to the call 1or e/ol/ed cash +anage+ent concepts* Iccelerating accounts
recei/a=le and strea+lining accounts paya=le /ia a single =anking syste+ inter1ace pro/ide the
stepping stone to achie/e opti+al cash 1lo) +anage+ent* So+e =anks also pro/ide aligned cash
+anage+ent )ith li<uidity and in/est+ent o11erings* They do so =y#
de/eloping opti+al account structures
applying cash concentration techni<ues like pooling and s)eeping
pro/iding in/est+ent /ehicles to +a4i+ize cash 1lo)s
i+ple+enting 1oreign e4change and interest rate e4posure netting
syste+s
Qsta=lishing regional treasury and shared ser/ice centers*
The 1inal o=Kecti/e o1 +ost o1 these cash +anage+ent solutions is to e11ecti/ely outsource the
corporate;s recei/a=les and paya=les process and ensure the =est possi=le li<uidity and short
ter+ in/est+ent +anage+ent strategy* -oreo/er, increasingly, cash +anage+ent 7=oth
pay+ents and collections8 are +o/ing o/er to a )e=&=ased en/iron+ent )here the corporate can
+anage his recei/a=les, paya=les and li<uidity position online* ,n +any cases, there is al+ost&
co+plete integration =et)een the =ank and the co+pany;s supply chainFQ6" syste+ )hich
+anages collection and pay+ents data internally* So+e o1 the co++on +ethods used 1or cash
+anage+ent are descri=ed =elo)*
C@eGue Co,,e;tions 5 Lo;k Bo/ ser<i;e
There are possi=ilities 1or opti+izing and strea+lining a co+pany;s inco+ing pay+ent 1lo)s* The
+ost co++on collection +echanis+ is a Che<ues lock =o4 ser/ice . a collecting ser/ice )hich
ena=les co+panies to collect and settle che<ues locally 7,n a typical case, each o1 the corporate;s
de=tors )ould send che<ues along )ith accepted in/oices to a designated post =o4, hence the
lock =o4 na+e8* Banks undertake to collect che<ues at /arious pre&de1ined locations on =ehal1 o1
the custo+er, send the+ 1or clearing and credit the a+ount s to a speci1ied custo+er account*
Gnce the che<ues are collected =y the =ank through person, courier or deli/ered =y the co+pany
representati/e#
the che<ues are sorted and =atched
post dated che<ues are kept 1or processing on the /alue date
the i+age o1 the che<ues and the re+ittance ad/ices are captured
and sent to the corporate
che<ues are sent 1or clearing, i1 re<uired
realized che<ues are tallied and a+ounts credited to the corporate;s
=ank account
the in1or+ation on che<ues collected is trans+itted to the corporate
1or electronic reconciliation
,n enhanced /ersions o1 this 1acility, the =ank +anage the recei/a=le =ooks o1 the corporate &
+anaging collections, +onitoring recei/a=les ageing and pro/iding reconciled collection reports
)hich can =e directly uploaded to corporate in1or+ationFsupply chain syste+s*
>ero =a,an;e stru;ture - "oo,ing
"ooling allo)s a co+pany or se/eral co+panies =elonging to the sa+e group pro1it 1ro+ e11icient
li<uidity +anage+ent, centralized treasury and credit&line +anage+ent and opti+ization o1
interest results* Banks o11er =oth do+estic and cross =order zero =alancing )here=y all /alue
=alances o1 a set o1 RparticipatingR accounts are centralized at the end o1 each day in one central

account* Thus the participating accounts )ill not =ear any credit or de=it interest, and all =alances
are concentrated in the central account ena=ling opti+al +anage+ent o1 your cash position*
etting
Netting is the 1unda+ental +ethod 1or centralising and o11setting intra co+pany and third party
pay+ents* Netting not only signi1icantly reduces pay+ent 1lo)s and costs, =ut also pro/ides
in/alua=le +anage+ent in1or+ation* Banks o11er =oth do+estic and cross&=order netting
solutions*
C,earing ser<i;es
Banks o11er clearing ser/ices to other =anks* ,n such cases, a =ank )ith strong local =ranch
co/erage o11ers to participate in clearing arrange+ents on =ehal1 o1 other =anks )ith no physical
presence at these locations* Ilso clu==ed under correspondent =anking ser/ices, this 1acility
pri+arily helps use the =ranch net)orks o1 /arious =anks on a co+pli+entary =asis*
eA A;t - C@e;k 21
The Check Clearing 1or the $%st Century Ict 7Check $%8 )as signed into la) on Gcto=er $',
$00(, and =eca+e e11ecti/e on Gcto=er $', $002* The la) 1acilitates check truncation =y
creating a ne) negotia=le instru+ent called a su=stitute check, )hich per+its =anks to
truncate original checks, to process check in1or+ation electronically, and to deli/er su=stitute
checks to =anks that )ant to continue recei/ing paper checks* I su=stitute check is the legal
e<ui/alent o1 the original check and includes all the in1or+ation contained on the original
check* The la) does not re<uire =anks to accept checks in electronic 1or+ nor does it re<uire
=anks to use the ne) authority granted =y the Ict to create su=stitute checks*
o Qlectronic trans+ission o1 che<ues =y Check i+aging & Banks 1ind that e4changing
electronic i+ages o1 checks )ith other =anks is 1aster and +ore e11icient than physically
transporting paper checks* To address this need, Check $% allo)s a =ank to create and
send a su=stitute check that is +ade 1ro+ an electronic i+age o1 the original check*
o Faster F e11icient che<ue realization . Since the electronic i+age o1 the che<ue can =e
<uickly trans+itted electronically, ti+e re<uired 1or transporting the physical paper
che<ues is greatly reduced there=y e11ecting 1aster che<ue realizations
DEVELO"$ET! & T(EA!)(% N CA!# $AA'E$ET
Asset !e;uritisation
Financial institutions and =anks need to raise 1resh capital to 1und continuous asset gro)th and
port1olio +anage+ent* This has =eco+e a +aKor challenge 1or +any 1inancial institutions and
=anks due to tough capital +arket conditions and other +arket related 1actors* Isset
securitisation can o11er an alternati/e cost e11icient 1inancing tool, ena=ling the+ to =etter +anage
li<uidity and 1unding re<uire+ents*
Isset securitisation transactions ha/e one =asic concept# the identi1ication and isolation o1 a
separa=le pool o1 assets that generate re/enue strea+s independently 1ro+ the originating entity*
The securities issued on these assets are then sold to in/estors )ho =ase their returns
e4clusi/ely on the underlying assets; per1or+ance* The structure is illustrated =elo)#

Ill these entities need not =e present in e/ery transaction* The nu+=er o1 entities depends on the
co+ple4ity o1 the transaction* In e4a+ple )ould help understand the concept =etter*
E/a*+,e
Bank o1 I+erica 7Griginator8 has 5000 ho+e loans totaling +ore than B!00 +illion* The indi/idual
loans are o1 /arious credit pro1iles and /arious repay+ent periods* Bank o1 I+erica is
constrained =y lack o1 1unds and )ishes to sell o11 its loans to raise +oney* Thus, it decides to
@sell; a=out $000 ho+e loans totaling B$00 +illion* The steps 1ollo)ed are sho)n =elo)#
Bank o1 I+erica conducts an internal study o1 the port1olio and ascertains that the a/erage
+aturity o1 the pool o1 loans is a=out %$ years and the a/erage credit rating )ould =e II&* ,t
realizes that historically %0A o1 the total ho+e loan o)ners de1ault* So it )ould only realize
B%'0 +illion instead o1 B$00 +illion*
Bank o1 I+erica )ants to enhance the rating so that it can @sell; the loans at a =etter price* ,t
decides to pro/ide a cash security o1 B%0 +illion 7Credit enhance+ent8 in the scenario o1 any
repay+ent de1ault =y ho+e loan =orro)ers*
Bank o1 I+erica appoints Credit rating agency W )hich analyses the pool o1 loans, and taking
into account the cash security pro/ided rates it IIE*
Bank o1 I+erica @sells; the pool o1 housing loans a+ounting to B$00 +illion to a independent
1ir+, "le4us S"M Vtd*
Backed =y these ho+e loan;s 1uture cash 1lo)s, "le4us S"M Vtd* issues de=t certi1icates 1or
B$00 +illion to in/estors* "le4us pays =ack the in/estors the +oney 1ro+ the repay+ents
done =y the ho+e loan =orro)ers*
"le4us S"M Vtd* pays B%0' +illion to Bank o1 I+erica a1ter deducting ser/ice charges to
co/er operational costs*
Fro+ no) on, all Q-, repay+ents on these ho+e loans +ade =y retail in/estors )ould 1lo)
through "le4us S"M Vtd and then reaches the in/estors*
The a=o/e e4a+ple captures the gist o1 any securitisation transaction, =ut there are a lot o1
structuring issues and legal and regulatory challenges in/ol/ed in any such transaction*

Fannie -ae and Ginnie -ae are e4a+ples o1 institutions specializing in securitisation
transactions o1 +ortgage loans 1or 9S =anks* They help 9S =anks in ha/ing enough 1resh 1unds
1or ho+e loan dis=urse+ents*
(ea, Ti*e 'ross !ett,e*ent 1(T'!3
The current pay+ent syste+ in/ol/es settle+ent o1 pay+ents on a @settle+ent day; and interest is
in/aria=ly co+puted to accrue on a daily =asis* Q/en in the )holesale +arkets 1or 1oreign
e4change and +oney +arkets contracts, @spot; transactions +ean t)o&=usiness days* Settle+ent
1or clearing che<ues presented to the clearing houses takes place on a netting =asis at a
particular ti+e either sa+e day or on the ne4t day* This syste+ gi/es rise to risks such as credit
risk, li<uidity risk, legal risk, operational risk and syste+ic risk*
6TGS is a syste+ pro/ides online settle+ent o1 pay+ents =et)een 1inancial institutions* ,n this
syste+ pay+ent instructions =et)een =anks are processed and settled indi/idually and
continuously throughout the day* This is in contrast to net settle+ents )here pay+ent instructions
are processed throughout the day =ut inter&=ank settle+ent takes place only a1ter)ards typically
at the end o1 the day* "articipant =anks )ill ha/e to +aintain a dedicated 6TGS settle+ent
account )ith the central =ank 1or out)ard and in)ard 6TGS pay+ents*
6TGS syste+s do not create credit risk 1or the recei/ing participant =ecause they settle each
pay+ent indi/idually, as soon as it is accepted =y the syste+ 1or settle+ent*
6TGS syste+ can re<uire relati/ely large a+ounts o1 intraday li<uidity =ecause participants need
su11icient li<uidity to co/er their outgoing pay+ents*
Continuous Linked !ett,e*ent 1CL!3
The a/erage daily turno/er in glo=al 1ore4 transactions stand at al+ost 9S: $ trillion, )ith
participants in the +arket spread across /arious geographies and ti+e zones* Po)e/er, the
di11erence in ti+e zones and hence lack o1 synchronization o1 transactions has resulted in
considera=le a+ount o1 syste+atic risk* Typically, one leg o1 a 1ore4 trade is a11ected at one point
o1 ti+e and there )ould =e a delay =e1ore the other leg is e4ecuted =ecause o1 ti+e&zone
di11erences* ,n such a situation, there is a heightened risk o1 one party de1aulting*
CVS eli+inates this @te+poral; settle+ent risk, +aking sa+e&day settle+ent =oth possi=le and
1inal* This is +ade possi=le =y le/eraging on the 1act that there are signi1icant o/erlaps =et)een
the +ain ti+e zones* CVS pro/ides a speci1ic ti+e )indo) in )hich /arious settle+ent ti+e zones
can interact and pass settle+ent +essages* The CVS syste+ consists o1 the 1ollo)ing entities#
CL! Bank: The CVS =ank is the central node 1or the CVS syste+*
CVS Bank is o)ned =y nearly 0 o1 the )orld;s largest 1inancial
groups throughout the 9S, Qurope and Isia "aci1ic, )ho are
responsi=le 1or +ore than hal1 the /alue trans1erred in the )orldRs FW
+arket*
!ett,e*ent $e*=ers: They are shareholders o1 the CVS =ank, )ho
can each su=+it settle+ent instructions directly to CVS Bank and
recei/e in1or+ation on the status o1 their instructions* Qach
Settle+ent -e+=er has a +ulti&currency account )ith CVS Bank,
)ith the a=ility to +o/e 1unds* Settle+ent -e+=ers ha/e direct
access and input deals on their o)n =ehal1 and on =ehal1 o1 their
custo+ers* They can pro/ide a =randed CVS ser/ice to their third&
party custo+ers as part o1 their agree+ent )ith CVS Bank*

)ser $e*=ers: 9ser -e+=ers can su=+it settle+ent instructions
1or the+sel/es and their custo+ers* Po)e/er, 9ser -e+=ers do not
ha/e an account )ith CVS Bank* ,nstead they are sponsored =y a
Settle+ent -e+=er )ho acts on their =ehal1* Qach instruction
su=+itted =y a user +e+=er +ust =e authorized =y a designated
Settle+ent -e+=er* The instruction is then eligi=le 1or settle+ent
through the Settle+ent -e+=erRs account*
T@ird +arties: Third parties are custo+ers o1 settle+ent and user
+e+=ers and ha/e no direct access to CVS* Settle+ent or user
+e+=ers +ust handle all instructions and 1inancial 1lo)s, )hich are
consolidated in CVS*
ostro agents: These agents recei/e pay+ent instructions 1ro+
Settle+ent -e+=ers and pro/ide ti+e&sensiti/e 1und trans1ers to
Settle+ent -e+=ersR accounts at CVS Bank* They recei/e 1unds
1ro+ CVS Bank, 9ser -e+=ers, third parties and others 1or credit to
the Settle+ent -e+=er account*
The =ene1its o1 the CVS syste+ are +any#
Traders can e4pand their FW =usiness )ith counterparty =anks
)ithout increasing li+its*
Treasury +anagers ha/e +ore certainty a=out intraday and end&o1&
day cash positions*
Glo=al settle+ent can rationalize nostro accounts and le/erage
+ulti&currency accounts*
The /olu+e and o/erall /alue o1 pay+ents is reduced, as are cash&
clearing costs*
Costly errors are +ini+ized and any pro=le+s can =e resol/ed 1ast*
Auto*ated C,earing #ouse 8a;i,ities 1AC#3
ICP transactions are electronic clearing transactions in )hich in1or+ation a=out de=its and
credits are passed across the clearing syste+ through electronic data 1iles rather than physical
instru+ents like che<ues, dra1ts etc* ICP electronic transactions are distinguished 1ro+ )ire
trans1ers in that they are high /olu+e, regularly scheduled, usually =et)een the sa+e parties,
and are initiated /ia speci1ically 1or+atted electronic 1iles* Such transactions +ust usually =e
initiated one to t)o days prior to the settle+ent date, since they are =atch processed and not 1or
i++ediate pay+ent* The +ost co++on ICP pay+ent applications are#
:irect deposit o1 payroll, )here the =ank de=its the corporate
account and credits e+ployee accounts on the =asis o1 a electronic
1ile trans+ittedFpro/ided =y the corporate
Corporate :is=urse+ent Ser/ice, )here the =ank de=its a clientRs
account to initiate pay+ents to /endors on their =ehal1
Corporate Collection Ser/ice, )here the =ank ena=les it;s clients to
collect pay+ents and re+ittance data 1ro+ /endors or trading
partners*
Collection o1 consu+er pay+ents o/er the telephone, through the
,nternet or /ia check&to&ICP con/ersion*

ICP Iccounts 6ecei/a=le Check Con/ersion ena=les con/erting
checks collected at a lock=o4 or re+ittance&processing center to
ICP electronic de=its, speeding pay+ent collections and i+pro/ing
1unds a/aila=ility*
These ser/ices allo) the custo+er to increase transaction speed and i+pro/e accuracy and ease
o1 reconciliation =y electronic +eans and a/oidance o1 physical instru+ents and clearing delays*
ICP has =een an area o1 /ery strong gro)th, )ith o/er '*5 =illion transactions =eing e11ected
through this route in $00$* Po)e/er, se/eral security issues re+ain to =e resol/ed in this area*

T(ADE F&ACE
The +ain o=Kecti/e o1 trade 1inance is to 1acilitate transactions* There are +any 1inancing options
a/aila=le to 1acilitate international trade such as pre&ship+ent 1inance to produce or purchase a
product, and post&ship+ent 1inance o1 the recei/a=les*
"(E !#&"$ET LOA!
Banks pro/ide "re&ship+ent 1inance & )orking capital 1or purchase o1 ra) +aterials, processing
and packaging o1 the e4port co++odities*
"O!T !#&"$ET LOA!
"ost&ship+ent 1inancing assists e4porters to =ridge their li<uidity needs )here e4ports are +ade
under de1erred pay+ent =asis* I typical e4a+ple o1 post&ship+ent 1inancing is =ills discounting*
Bills discounting 1acility ser/es to pro/ide li<uidity to an e4porter =y ad/ancing hi+Fher a portion
o1 the 1ace /alue o1 a trade =ill dra)n =y the e4porter, accepted =y the =uyer and endorsed to the
Bank*
,n co+petiti/e supply situations, 1a/ora=le ter+s o1 pay+ent o1ten ensure that the order is
)on* In e4porter usually )ants to get paid as <uickly as possi=le and an i+porter )ill )ant to pay
as late as possi=le . pre1era=ly a1ter they ha/e sold the goods* Trade 1inance is o1ten re<uired to
=ridge these t)o disparate o=Kecti/es*
FACTO(! & C#OO!&' T#E $ODE OF F&AC&'
Costs: The cost o1 di11erent 1inancing +ethods can /ary, =oth in
ter+s o1 interest rates and 1ees* These costs )ill i+pact the /ia=ility
o1 a transaction
Ti*e Fra*e: :epending on the need, short, +ediu+ and long&ter+
1inance 1acilities +ay =e a/aila=le* The di11erent possi=ilities should
=e e4plored )ith the 1inance pro/ider prior to concluding a
transaction* Vong&ter+ re<uire+ents should also =e considered to
ensure 1ees are not =eing paid out on a re/ol/ing 1acility that could
=e sa/ed =y using a di11erent 1inancing structure
(isk Fa;tors: The nature o1 the product or ser/ice, the =uyers;
credit rating and countryFpolitical risks can all a11ect the security o1 a
trading transaction* ,n so+e cases it )ill =e necessary to o=tain
e4port insurance or a con1ir+ed letter o1 credit* ,ncreased risks )ill
nor+ally correspond to increased cost in a transaction and )ill
Uuestion
"re&ship+ent 1inance is li<uidated only through realizations o1 e4port =ills or a+ounts recei/ed
through e4port incenti/es* "re ship+ent 1inance should not nor+ally re+ain outstanding
=eyond the original stipulated ship+ent date* ,n case it re+ains outstanding, can the non&
adKusted a+ount =e then trans1erred as post ship+ent 1inanceL

nor+ally +ake the 1unding o1 a particular transaction, harder to
o=tain
'o<ern*ent 'uarantee "rogra*s: These can so+eti+es =e
o=tained )here there is so+e <uestion o/er the e4porter;s a=ility to
per1or+ or )here increased credit is needed* ,1 o=tained, these +ay
ena=le a lender to pro/ide +ore 1inance than their usual under)riting
li+its )ould per+it*
E/+ortersQ Funds: ,1 the e4porter has su11icient resources, heFshe
+ay =e a=le to e4tend credit )ithout the need 1or third party
1inancing* Po)e/er, an esta=lished trade 1inance pro/ider, o11ers
other =ene1its like e4pert credit /eri1ication and risk assess+ent as
)ell as an international net)ork o1 o11ices and sta11 to ensure that the
transaction is co+pleted sa1ely and satis1actorily
B&LL OF LAD&'
I =ill o1 lading or BGV is#
I contract =et)een a carrier and a shipper 1or the transportation o1
goods*
I receipt issued =y a carrier to a shipper 1or goods recei/ed 1or
transportation*
Q/idence o1 title to the goods in case o1 a dispute*
The BGV grants the carrier the right to su=&contract its o=ligations on any ter+s and )ould =ind a
shipper e/en i1 it +eant that the shipperRs goods could =e detained and sold =y the su=&
contractor*
C(ED&T C#ECD
,nsuring pay+ent starts long =e1ore a contract is signed* The seller, or his representati/e,
per1or+s @due diligence; or a reasona=le assess+ent o1 the risks posed =y the potential =uyer*
The sources o1 in1or+ation include#
Cha+=ers o1 co++erce, Business Bureaus or their e<ui/alents
Credit rating ser/ices such as T6W and :un H Bradstreet )hich
ha/e international a11iliates
Trade associations and trade pro+otion organizations
Freight 1or)arders, =rokers, and =anks
:irect re1erences 1ro+ the =uyer
"A%$ET $ET#OD!
Gnce accepta=le risks ha/e =een deter+ined then the +ost appropriate pay+ent +ethod can =e
selected* The +ost co++on pay+ent +ethods are descri=ed =elo)#
Cash in ad/ance
Vetter o1 credit
:ocu+entary collection
Gpen account or credit
Counter&trade or Barter

CA!# & ADVACE
Cash in ad/ance is risk&1ree e4cept 1or potential non&deli/ery o1 the goods =y the seller* ,t is
usually a )ire trans1er or a check* Ilthough an international )ire trans1er is +ore e4pensi/e, it is
o1ten pre1erred =ecause it is speedy and does not =ear the danger o1 the check not =eing
honored* The check can =e at a disad/antage i1 the e4change rate has changed signi1icantly =y
the ti+e it arri/es, clears and is credited* Gn the other hand, the check can +ake it easier to shop
1or a =etter e4change rate =et)een di11erent 1inancial institutions*
For )ire trans1ers the seller +ust pro/ide clear routing instructions in )riting to the =uyer or the
=uyer;s agent* These include#
Full na+e, address, telephone, and tele4 o1 the seller;s =ank
Bank;s SW,FT andFor IBI nu+=ers
Seller;s 1ull na+e, address, telephone, type o1 =ank account, and
account nu+=er*
CO$$E(C&AL LETTE( OF C(ED&T
The letter o1 credit 7VC8 allo)s the =uyer and Seller to contract a trusted inter+ediary 7a =ank8
that )ill guarantee 1ull pay+ent to the seller pro/ided that he has shipped the goods and
co+plied )ith the ter+s o1 the agree+ent*
Features
The VC ser/es to e/enly distri=ute risk =et)een =uyer and seller*
The seller is assured o1 pay+ent )hen the conditions o1 the VC are
+et and the =uyer is reasona=ly assured o1 recei/ing the goods
ordered* This is a co++on 1or+ o1 pay+ent, especially )hen the
contracting parties are un1a+iliar )ith each other*
Since =anks deal )ith docu+ents and not )ith products, they +ust
pay an VC i1 the docu+ents are presented =y the seller in 1ull
co+pliance )ith the ter+s, e/en i1 the =uyer ne/er recei/es the
goods* Goods lost during ship+ent or e+=argoed are so+e
e4a+ples* ,ra< 1or e4a+ple, ne/er recei/ed goods that )ere shipped
=e1ore its e+=argo =ut the VCs had to =e paid any)ay*
VCs are typically irre/oca=le, )hich +eans that once the VC is
esta=lished it cannot =e changed )ithout the consent o1 =oth parties*
There1ore the seller, especially )hen ine4perienced, ought to present
the agree+ent 1or an VC to an e4perienced =ank or 1reight 1or)arder
so that they can /eri1y i1 the VC is legiti+ate and i1 all the ter+s can
=e reasona=ly +et* I trusted =ank, other than the issuing or =uyer;s
=ank can guarantee the authenticity o1 the docu+ent 1or a 1ee*
Disad<antages
,1 there are discrepancies in the ti+ing, docu+ents or other
re<uire+ents o1 the VC the =uyer can reKect the ship+ent* I reKected
ship+ent +eans that the seller +ust <uickly 1ind a ne) =uyer,

usually at a lo)er price, or pay 1or the ship+ent to =e returned or
disposed*
Gne o1 the +ost costly 1or+s o1 pay+ent guarantee . 9sual cost is
0*5A to %A* So+eti+es, the costs can go up to 5 percent o1 the total
/alue*
VCs take ti+e to dra) up and usually tie up the =uyer;s )orking
capital or credit line 1ro+ the date it is accepted until 1inal pay+ent,
reKection 1or nonco+pliance, e4piration or cancellation 7re<uiring the
appro/al o1 =oth parties8
The ter+s o1 an VC are /ery speci1ic and =inding* Statistics sho)
that appro4i+ately 50A o1 su=+issions 1or VC pay+ent are reKected
1or 1ailure to co+ply )ith ter+s* For e4a+ple, i1 one o1 the re<uired
docu+ents is inco+plete or deli/ered late, then pay+ent )ill =e
)ithheld e/en i1 all other conditions are 1ul1illed and the ship+ent
recei/ed in per1ect order* The =uyer can so+eti+es appro/e the
release o1 pay+ent i1 a condition is not 1ul1illed? =ut changing ter+s
a1ter the 1act is costly, ti+e consu+ing and so+eti+es i+possi=le*
T@e *e;@anis*
9sually, 1our parties are in/ol/ed in any transaction using an VC#
1. Bu:er or A++,i;ant
The =uyer applies to his =ank 1or the issuance o1 an VC* ,1 the =uyer does not ha/e a credit
arrange+ent )ith this issuing =ank then he +ust pay in cash or other negotia=le securities*
2. &ssuing =ank
The issuing or applicant;s =ank issues the VC in 1a/or o1 the =ene1iciary 7Seller8 and routes
the docu+ent to the =ene1iciary;s =ank* The applicant;s =ank later /eri1ies that all the ter+s,
conditions, and docu+ents co+ply )ith the VC, and pays the seller through his =ank*
C. Bene8i;iar:Qs =ank
The seller;s or =ene1iciary;s =ank /eri1ies that the VC is authentic and noti1ies the =ene1iciary*
,t, or another trusted =ank, can act as an ad/ising =ank* The ad/ising =ank is used as a
trusted =ridge =et)een the applicant;s =ank and the =ene1iciary;s =ank )hen they do not
ha/e an acti/e relationship* ,t also 1or)ards the =ene1iciary;s proo1 o1 per1or+ance and
docu+entation =ack to the issuing =ank* Po)e/er, the ad/ising =ank has no lia=ility 1or
pay+ent o1 the VC* The =ene1iciary, or his =ank, can ask an ad/ising =ank to con1ir+ the VC*
The con1ir+ing =ank charges a 1ee to ensure that the =ene1iciary is paid )hen he is in
co+pliance )ith the ter+s and conditions o1 the VC*
4. Bene8i;iar: or !e,,er
The =ene1iciary +ust ensure that the order is prepared according to speci1ications and
shipped on ti+e* Pe +ust also gather and present the 1ull set o1 accurate docu+ents, as
re<uired =y the VC, to the =ank*

Letter O8 Credit Diagra*
K

%* Buyer and seller agree on a co++ercial transaction*
$* Buyer applies 1or a letter o1 credit*
(* ,ssuing =ank issues the letter o1 credit 7VC8
2* Id/ising =ank ad/ises seller than an VC has =een opened in his or her 1a/or* Seller sends
+erchandise and docu+ents to the 1reight 1or)arder*
5* Seller sends copies o1 docu+ents to the =uyer*
!* Freight 1or)arder sends +erchandise to the =uyer;s agent 7custo+s =roker8*
* Freight 1or)arder sends docu+ents to the ad/ising =ank*
'* ,ssuing =ank arranges 1or ad/ising =ank to +ake pay+ent*
0* Id/ising =ank +akes pay+ent a/aila=le to the seller*
%0* Id/ising =ank sends docu+ents to the issuing =ank*
%%* Buyer pays or takes loan 1ro+ the issuing =ank*
%$* ,ssuing =ank sends =ill o1 lading and other docu+ents to the custo+s =roker*
%(* Custo+s =roker 1or)ards +erchandise to the =uyer*
Vetters o1 credit can =e 1le4i=le* So+e VC /ariations include# 6e/ol/ing, Negotia=le, Straight, 6ed
Clause, Trans1era=le, and 6estricted* But perhaps the sa1est type o1 letter o1 credit 1ro+ the
seller;s point o1 /ie), is the Stand=y letter o1 credit*
8
Letter o8 Credit Diagra* and t@e 14 ste+s @a<e =een re+rodu;ed 8ro* AAA.Ae=.Aor,d=ank.org

E/a*+,e
An Asian Bu:er 8ro* a !Aedis@ E/+orting ;o*+an: stated A@en @e ;on<in;ed t@e
E/+orter to se,, to t@e* on o+en a;;ount ter*s. T@e Asian Bu:er o=tained I0 da:s ;redit7
A@i;@ Aas to =e ;a,;u,ated 8ro* t@e date o8 t@e in<oi;e. T@e <a,ue o8 t@e order Aas )!D
1007 000 and t@e goods Aere dis+at;@ed and in<oi;ed =: t@e !Aedis@ E/+orter on t@e 15t@
Vu,: 200C.
T@e +a:*ent 8ro* Asia Aas due on t@e 14t@ !e+t 200C. T@e +a:*ent e<entua,,: arri<ed on
t@e 21st o< 200C7 o<er tAo *ont@s ,ate. T@e de,a: in +a:*ent ;ost t@e E/+orter )!D 1J00
as it resu,ted in @is a;;ount =eing o<erdraAn =: t@is a*ount 8or IK da:s at LS +er annu*.
What if confirmed Letter of Credit had been required?
,1 S)edish Q4porter had insisted on recei/ing a con1ir+ed Vetter o1 Credit through Illied S)edish
Banks plc* The 1ollo)ing costs 7appro4i+ations8 )ould ha/e applied#
Con1ir+ation Fee 9S: B$50
Icceptance Co++ission 7\ %*5A pa 1or !0 days8 9S: B$50
Negotiation F "ay+ent Fee 9S: B%50
Gut o1 "ocket Q4penses 7esti+ate8 9S: B!0
Total Vetter o1 Credit Cost 9S: B%0
,nterest Cost as a result o1 late pay+ent 9S: 7B%,008
Bene1it o1 using Vetter o1 Credit 9S: B000
Ad<antages o8 Letter o8 Credit
I Guarantee o1 pay+ent on the due date 1ro+ Illied S)edish Banks*
7"ro/ided the ter+s and conditions o1 the Vetter o1 Credit )ere
co+plied )ith8*
I de1initi/e date 1or the receipt o1 1unds, particularly i+portant 1or
de/ising proper currency hedging strategies*
The opportunity to recei/e the pay+ent in ad/ance o1 the due date
through non&recourse discounting o1 the recei/a=le*

Ilso note that the costs incurred in chasing the de=t 1ro+ the Isian =uyer has not =een
accounted 1or the ,rish Q4porter* ,n addition i1 the Q4porter had sold his 1oreign currency
recei/a=le on a 1or)ard =asis to his =ank 1or the original due date, they +ay ha/e incurred a
1urther cost in canceling or rearranging the 1or)ard contract* Vetters o1 Credit pro/ide real and
tangi=le =ene1its to co+panies* ,n this case the S)edish e4porter only lost 9SB %00* G1 course i1
the Isian =uyer had not paid at all they )ould ha/e lost the )hole 9S: %00,000
The stand=: LC is like a =ank guarantee* ,t is not used as the pri+ary pay+ent +ethod =ut as a
1ail sa1e +ethod or guarantee 1or long&ter+ proKects* This VC pro+ises pay+ent only i1 the =uyer
1ails to +ake an arranged pay+ent or 1ail to +eet pre&deter+ined ter+s and conditions* Should
the =uyer de1ault, the seller +ust then apply to the =ank 1or pay+ent & a relati/ely si+ple process
)ithout co+plicated docu+entation* Since the stand=y VC can re+ain /alid 1or years 7Q/ergreen
Clause8 it eli+inates the cost o1 separate VCs 1or each transaction )ith a regular client*
Ba;k to Ba;k LC allo)s a seller to use the VC recei/ed 1ro+ his =uyer as collateral )ith the =ank
to open his o)n VC to =uy inputs necessary to 1ill his =uyer;s order*
DOC)$ETA(% COLLECT&O
The seller sends a dra1t 1or pay+ent )ith the related shipping docu+ents through =ank channels
to the =uyer;s =ank* The =ank releases the docu+ents to the =uyer upon receipt o1 pay+ent or
pro+ise o1 pay+ent* The =anks in/ol/ed in 1acilitating this collection process ha/e no
responsi=ility to pay the seller should the =uyer de1ault unless the dra1t =ears the a/al 7ad
/alute+8 o1 the =uyer;s =ank* ,t is generally sa1er 1or e4porters to re<uire that =ills o1 lading =e
3+ade out to shipper;s order and endorsed in =lank5 to allo) the+ and the =anks +ore 1le4i=le
control o1 the +erchandise*
:ocu+entary collection carries the risk that the =uyer )ill not or cannot pay 1or the goods upon
receipt o1 the dra1t and docu+ents* ,1 this occurs it is the =urden o1 the seller to locate a ne)
=uyer or pay 1or return ship+ent* :ocu+entary collections are /ia=le only 1or ocean ship+ents,
as the =ill o1 lading 1or ocean 1reight is a /alid title to the goods and is a negotia=le docu+ent
)hereas the co+para=le air)ay =ill is not negotia=le as an o)nership title*
Dra8ts
I dra1t 7so+eti+es called a =ill o1 e4change8 is a )ritten order =y one party directing a second
party to pay a third party* :ra1ts are negotia=le instru+ents that 1acilitate international pay+ents
through respected inter+ediaries such as =anks =ut do not in/ol/e the inter+ediaries in
guaranteeing per1or+ance* Such dra1ts o11er +ore 1le4i=ility than VCs and are trans1era=le 1ro+
one party to another* There are t)o =asic types o1 dra1ts# sight dra1ts and ti+e dra1ts*
!ig@t Dra8t
I1ter +aking the ship+ent the seller sends a sight dra1t, through his =ank to the =uyer;s =ank,
acco+panied =y agreed docu+entation such as the original =ill o1 lading, in/oice, certi1icate o1
origin, phyto&sanitary certi1icate, etc* The =uyer is then e4pected to pay the dra1t )hen he sees it
and there=y recei/e the docu+entation that gi/es hi+ o)nership title to the goods that )ere
shipped* There are no guarantees +ade a=out the goods other than the in1or+ation a=out
<uantities, date o1 ship+ent, etc* )hich appears in the docu+entation* The =uyer can re1use to
accept the dra1t there=y lea/ing the seller in the unpleasant position o1 ha/ing shipped goods to a
destination )ithout a =uyer* There is no recourse )ith the =anks since their responsi=ility ends
)ith the e4change o1 +oney 1or docu+ents*

Business & ,T -odel . Cards /%*00% "age %0% o1 $00
Ti*e Dra8ts.BankersW a;;e+tan;es
BankersW a;;e+tan;es are negotia=le instru+ents 7ti+e dra1ts8 dra)n to 1inance the e4port,
i+port, do+estic ship+ent or storage o1 goods* ,t de+ands pay+ent a1ter a speci1ied ti+e or on a
certain date a1ter the =uyer accepts the dra1t and recei/es the goods* I =ankersR acceptance is
SacceptedS )hen a =ank )rites on the dra1t its agree+ent to pay it at +aturity* I =ank +ay accept
the dra1t 1or either the dra)er or the holder*
In ordinary acceptance is a dra1t or =ill o1 e4change order to pay a speci1ied a+ount o1 +oney at
a speci1ied ti+e* I dra1t +ay =e dra)n on indi/iduals, =usinesses or 1inancial institutions*
In acceptance doesnRt reduce a =ankRs lending capacity* The =ank can raise 1unds =y selling the
acceptance* Ne/ertheless, the acceptance is an outstanding lia=ility o1 the =ank and is su=Kect to
the reser/e re<uire+ent unless it is o1 a type eligi=le 1or discount =y the Federal 6eser/e Bank*
#%B(&D $ET#OD!
,n practice, international pay+ent +ethods tend to =e <uite 1le4i=le and /aried* Fre<uently,
trading partners )ill use a co+=ination o1 pay+ent +ethods* For e4a+ple# the seller +ay re<uire
that 50A pay+ent =e +ade in ad/ance using a )ire trans1er and that the re+aining 50A =e
+ade =y docu+entary collection and a sight dra1t*
O"E ACCO)T
Gpen account +eans that pay+ent is le1t open to an agreed&upon 1uture date* ,t is one o1 the
+ost co++on +ethods o1 pay+ent in international trade and +any large co+panies )ill only =uy
on open account* "ay+ent is usually +ade =y )ire trans1er or check* This can =e a /ery risky
+ethod 1or the seller, unless he has a long and 1a/ora=le relationship )ith the =uyer or the =uyer
has an e4cellent credit rating* Still, there are no guarantees and collecting delin<uent pay+ents is
di11icult and costly in 1oreign countries especially considering that this +ethod utilizes 1e) legally
=inding docu+ents* Contracts, in/oices, and shipping docu+ents )ill only =e use1ul in securing
pay+ent 1ro+ a recalcitrant =uyer )hen his country;s legal syste+ recognizes the+ and allo)s
1or reasona=le settle+ent o1 such disputes*
OT#E( "A%$ET $ET#OD!
Consign*ent
The consign+ent +ethod re<uires that the seller ship the goods to the =uyer, =roker or distri=utor
=ut not recei/e pay+ent until the goods are sold or trans1erred to another =uyer* So+eti+es e/en
E/a*+,e
Banker;s Icceptances sell at a discount 1ro+ the 1ace /alue#
Face /alue o1 Bankers Icceptance B%,000,000
-inus $A per annu+ co++ission 1or one year &B$0,000
I+ount recei/ed =y e4porter in one year B0'0,000

Business & ,T -odel . Cards /%*00% "age %0$ o1 $00
the price is not pre&1i4ed and )hile the seller can /eri1y +arket prices 1or the sale date or hire an
inspector to /eri1y the standard and condition o1 the product, he ulti+ately has /ery little recourse*
Credit Card
So+e =anks o11er =uyers special lines o1 credit that are accessi=le /ia credit card to 1acilitate
e/en su=stantial purchases* ,t is con/enient 1or =oth parties & =ut the seller should con1ir+ the
=ank charges and also =ear in +ind that the la)s that go/ern do+estic credit card transactions
di11er 1ro+ those go/ern international use*
Counter-trade and Barter
Counter&trade or =arter is +ost o1ten used )hen the =uyer lacks access to con/erti=le currency or
1inds that rates are un1a/ora=le or can e4change 1or products or ser/ices desira=le to the seller*
Counter&trade indicates that the =uyer )ill co+pensate the seller in a +anner other than trans1er
or +oney or products*
Fa;toring
Factoring is a discounting +ethod )ithout re;ourse* ,t is an outright sale o1 e4port accounts
recei/a=le to a third party, 7the 1actor8 )ho assu+es the credit risk* The 1actor +ay =e a 1actoring
house or a depart+ent o1 a =ank* The ad/antage to the e4porter is the re+o/al o1 contingent
lia=ilities 1ro+ its =alance sheet, i+pro/ed cash 1lo) and eli+ination o1 =ad de=t risk*
Factoring is 1or short&ter+ recei/a=les 7under 00 days8 and is +ore related to recei/a=les against
co++odity sales*
For8aiting
The e4porter sells accounts recei/a=les to a 1or1aiter on a 3non-re;ourse discount5 =asis, and
the e4porter e11ecti/ely passes all risks associated )ith the 1oreign de=t to the 1or1aiter* The
1or1aiter +ay =e a 1or1aiting house or a depart+ent o1 a =ank* The =ene1its are sa+e as 1actoring &
+a4i+ize cash 1lo) and eli+inate the pay+ent risk* ,t is a 1le4i=le 1inance tool that can =e used in
short, +ediu+ and long&ter+ contracts*
For1aiting can =e 1or recei/a=les against )hich pay+ents are due o/er a longer ter+, o/er 00
days and e/en up to 5 years*

Business & ,T -odel . Cards /%*00% "age %0( o1 $00
FO(E&' C(ED&T &!)(ACE )DE(B(&TE(! AD B(ODE(!
The purpose o1 1oreign credit insurance is to insure repay+ent o1 e4port credit against
nonpay+ent due to political andFor co++ercial causes* ,t insures co++ercial risks o1
nonpay+ent =y i+porters =ecause o1 insol/ency or other =usiness 1actors and political risks o1
)ar, e4propriation, con1iscation, currency incon/erti=ility, ci/il co++otion, or cancellation o1
i+port per+its*
T#E BADE(! A!!OC&AT&O FO( FO(E&' T(ADE 1BAFT3
The Bankers Issociation 1or Foreign Trade 7BIFT8 is a collection o1 =anking institutions,
dedicated to pro+oting I+erican e4ports, international trade, and 1inance and in/est+ent
=et)een 9*S* 1ir+s and their trading partners* BIFT has set up a trade 1inance data=ase )ith a
grant 1ro+ the 9*S* :epart+ent o1 Co++erce* The data=ase ser/es as an essential resource 1or
assisting e4porters seeking trade 1inance and =anks that pro/ide 1inancial ser/ices*
E/a*+,e
In Isian ,+porter )ants to purchase +achinery that he is un)illing or una=le to pay 1or in
cash until that +achinery =egins to generate inco+e*
It the sa+e ti+e, the e4porter )ants i++ediate pay+ent in 1ull in order to +eet his on&going
=usiness co++it+ents
For1aiting solution )orks as 1ollo)s
%* Co++ercial contracts are negotiated su=Kect to 1inance?
$* The i+porter arranges 1or an ,rre/oca=le Vetter o1 Credit to =e issued or 1or a series o1
"ro+issory Notes or Bills o1 Q4change to =e dra)n in 1a/our o1 the e4porter )hich the
i+porter arranges to ha/e guaranteed =y his local =ank?
(* The e4porter contacts the discounting =ank 7the 1or1aiter8 1or a rate o1 discount )hich
is then agreed?
2* The goods are shipped?
5* The notes or =ills are sent )ith shipping docu+entation and in/oices to the
discounting =ank /ia the e4porter 7)ho endorses the notes or =ills S)ithout recourseS
to the order o1 the discounting =ank8?
!* The discounting =ank purchases the guaranteed notes or =ills 1ro+ the e4porter at the
agreed rate*
(esu,t# the e4porter recei/es pay+ent in 1ull i++ediately a1ter shipping 7against
presentation o1 satis1actory docu+entation to the 1or1aiter8? the i+porter gets his goods
and can pay 1or the+ in install+ents o/er ti+e? and the 1or1aiter has title to an asset )hich
he +ay retain as an in/est+ent*

&TE(AT&OAL "A%$ET &!T()$ET! CO$"A(&!O C#A(T
L
9
T@e a=o<e X&nternationa, "a:*ents Co*+arison C@artY is re+rodu;ed 8ro* )! De+art*ent o8
Agri;u,ture Ae=site - www.ams.usda.go! "ub.

2.5. CA(D! AD "A%$ET!

Business & ,T -odel . Cards /%*00% "age %0! o1 $00
C(ED&T CA(D!
The 9*S* pay+ents industry has undergone a signi1icant shi1t in recent years* Check usage is
declining )hile the adoption o1 electronic pay+ent 1or+s is gro)ing* :uring calendar year $00(,
22*5 =illion electronic pay+ents )ere originated in the 9nited States )ith a /alue o1 B$*2 trillion*
This represents a CIG6 o1 (*'A since $000, )hich is t)ice the real G:" gro)th 7%*0A8*
Non&cash "ay+ent instru+ents in the 9S can =e classi1ied as 1ollo)s#
C@e;k-=ased "a:*ents
9ntil recently, checks )ere the +ost used pay+ent instru+ent in the 9S* To)ards the end o1
$002, Cards&=ased pay+ent instru+ents ha/e o/ertaken the+* Their popularity has =een due to
their ease o1 use at the point o1 sale, 1or =ill pay+ents, and 1or person&to&person pay+ents* The
latest de/elop+ent in this pay+ent instru+ent is the introduction o1 Check $% Ict, )hich is
related to the truncation o1 checks to electronic 1or+* I recent study =y Federal 6eser/e indicates
that )hile checks paid decreased =y o/er 5 =illion 1ro+ $000 to $00(, the nu+=er o1 electronic
pay+ent transactions increased =y o/er %( =illion* ,t is esti+ated that =e1ore the end o1 the
decade credit cards and de=it cards )ill indi/idually e4ceed the nu+=er o1 paid checks*
Cards-=ased "a:*ents
:e=it
:e=it cards ena=le the holder to +ake purchases and to charge those purchases directly to a
current account at the =ank issuing the pay+ent card* :e=it cards are either on&line 7",N&=ased8
or o11&line 7Signature&=ased8* Gn&line de=it cards ha/e =een a/aila=le 1or se/eral decades and
ha/e seen tre+endous gro)th since the early %000;s* G11&line de=it cards are a +ore recent
inno/ation and consu+ers are increasingly using the+ at +erchant locations that accept
=ankcards* G1 all cards&=ased pay+ents, de=it has seen the highest gro)th*
IT-
Financial institutions issue IT- cards to consu+ers to pro/ide on&line access to account
in1or+ation and to allo) consu+ers to +ake )ithdra)als and deposits at IT-s* -any 1inancial
institutions no) o11er IT- cards that can also =e used as de=it cards 1or "GS transactions at
participating retailers*
Credit
These include general&purpose credit cards and pri/ate&la=el credit cards 7discussed later8*
Co+pared to other electronic pay+ent instru+ents, credit cards ha/e sho)n a relati/ely
+oderate gro)th since $000*
Chip Cards
These cards ha/e the capa=ility to store 1unds electronically in an e+=edded chip, )hich updates
the 1unds a/aila=le data as transactions are +ade* While "repaid cards are =est kno)n 1or their
use as a gi1t card, they are increasingly used 1or payroll, incenti/es, insurance, re1unds and other
purposes* So+e stored /alue cards +ay also =e s+art cards i1 they contain an integrated
+icrochip* The integrated chip can store /alue and per1or+ other 1unctions, such as consu+er
authentication, health care progra+s, go/ern+ent&1unded =ene1its progra+s, transportation
ser/ices, etc* The chip +ight also contain consu+er pre1erences and loyalty progra+ in1or+ation
1or +arketing purposes*
Auto*ated C,earing #ouse 1AC#3
In ICP transaction is a =atch&processed, /alue&dated electronic 1unds trans1er =et)een
originating and recei/ing 1inancial institutions* ICP pay+ents are used in a /ariety o1 pay+ent
en/iron+ents* Griginally, consu+ers pri+arily used the ICP 1or paycheck direct deposit* No),

they increasingly use the ICP 1or =ill pay+ents 7o1ten re1erred to as direct pay+ents8, corporate
pay+ents 7=usiness&to&=usiness8, and go/ern+ent pay+ents 7e*g*, ta4 re1unds8, and electronic
check present+ent* There are t)o national ICP operators . Qlectronic "ay+ent Net)orks, a
pri/ate processor )ith a (0A +arket share )hile the rest o1 the +arket is ser/ed =y the Federal
6eser/e Banks*
E*erging "a:*ents
Gnline Bill "ay 7QB"", Q,""8
Gnline ser/ices that ena=le custo+ers to recei/e, re/ie), and e4ecute pay+ent o1 their =ills o/er
the ,nternet*
"erson&to&"erson "ay+ents 7"$"8
Gn&line "$" pay+ents, or e&+ail pay+ents, use e4isting retail pay+ent net)orks to pro/ide an
electronically initiated trans1er o1 /alue 1ro+ one indi/idual to another*
,nternet Currencies F :igital Cash F e&Wallets
Si+ilar to "$" pay+ents, indi/iduals can trans1er electronic cash /alue to other indi/iduals or
=usinesses* -ost electronic cash applications e4ist on the ,nternet* Consu+ers can use the cash
pay+ent instru+ents 1or purchases at retailers; We= sites or they can trans1er cash to other
indi/iduals through e&+ail* ,ndi/iduals use a credit card or signature&=ased de=it card nu+=er to
pre&1und the We= certi1icate or electronic account, and recipients redee+ the /alue )ith the
,ssuer*
Qlectronic Bene1its Trans1er 7QBT8
Qlectronic syste+ that allo)s a recipient to authorize trans1er o1 hisFher go/ern+ent =ene1its 1ro+
a Federal account to a retailer account to pay 1or products recei/ed* QBT is currently used to
issue 1ood sta+ps and other =ene1its in the 9S*
'eneri; Fra*eAork 8or "a:*ent &nstru*ents
The diagra+ =elo) depicts the co++on +odel on )hich +ost pay+ent syste+s are =ased**
While the 1lo) o1 1unds, in1or+ation, and data are di11erent, in +ost cases, the set o1 participants
are si+ilar* The initiator o1 the pay+ent 7payer8 is typically a consu+er and the recipient o1 the
pay+ent 7payee8, typically a +erchant* The payer and the payee are sho)n to ha/e a
relationship )ith their respecti/e 1inancial institutions* The pay+ent net)ork routes the
transactions =et)een the 1inancial institutions
Credit Card $arket O<er<ieA
Financial Institution
orThirdparty
Network
orThirdparty
Payer
Payee
Four Corner PaymentSystemModel
Goods/ Services
PresentNon -cashPaymentinstrument
Solidlineindicatesflowof information
orThirdparty
orThirdparty
Network Network
orThirdparty
orThirdparty
Payer
Payee
Four Corner PaymentSystemModel
Goods/ Services
PresentNon -cashPaymentinstrument
Solidlineindicatesflowof information

Business & ,T -odel . Cards /%*00% "age %0' o1 $00
Credit card acti/ities in the 9S represent +ore than $5 =illion indi/idual transactions purchasing
B%* trillion dollars in products and ser/ices e<ualing +ore than %0A o1 G:"* There are %*$ =illion
credit cards 7including store and gas credit cards8 in circulation in the 9S held =y o/er %!0 +illion
indi/iduals* The a/erage household possesses %2*$ credit cards )ith an a/erage household
credit =alance o1 B0,250 in $00(
%0
* Credit card 1ees paid =y consu+ers e4ceed B%5 =illion*
I Credit card is a type o1 a pay+ent card product* I pay+ent card product is a set o1
entitle+ents* ,t allo)s the client to access the 1eatures the pro/ider 7e*g*, 1inancial institution8
attaches to the card*
I sa+ple o1 possi=le pay+ent card entitle+ents is sho)n =elo)#
Access +on#enience Affora/ility
+reit <orl;ie acce'tance 5nterest rate
"e'osits 3& hour a#aila/ility Fees
Merchants -orta/ility Benefits
ATMs Monthly statements -ayment terms
To create an actual pay+ent card product, these entitle+ents are grouped together to appeal to a
target seg+ent . consu+er or =usiness* I card is issued to a cardholder and usually displays
cardholder na+e, account nu+=er, e4piration date, location acceptance logos 7e*g*,
MisaF-asterCard8 and issuing organization* -ost cards are plastic )ith a +agnetic stripe* So+e
o1 the ne) cards contain chips that store in1or+ation such as additional custo+er in1or+ation and
stored /alue* I card usually is linked to so+e type o1 1inancial account 7e*g*, credit card to a credit
line and a de=it card to a checkingFsa/ings account8*
Credit Cards
I credit card indicates that the holder has =een granted a line o1 credit ena=ling the cardholder to
+ake purchases andFor dra) cash up to a pre&arranged a+ount* ,nterest is charged on the
a+ount o1 the unpaid credit =alance and cardholders are o1ten charged an annual user 1ee*
The do+inant pay+ent card types that are in use at this ti+e in de/eloped =anking en/iron+ents
are those e+ploying the use o1 3+agnetic stripe5 technology* "art o1 the reason 1or this is the
relati/ely lo)er cost o1 "oints&o1&Sale 7"GS8 ter+inals and the 1or+ation o1 )ell&esta=lished
speci1ications that allo)s these +agnetic&stripe cards to =e used in /irtually any card&=ased "GS
de/ice )orld)ide* The production costs o1 the stripe card are also lo)* Idditionally, ad+inistrati/e
support re<uire+ents are )ell de/eloped*
Po)e/er, s+art cards, introduced a decade ago, are +aking signi1icant inroads in so+e countries
)here, in addition to, regulated pilots =eing undertaken so+e signi1icant sche+es are already in
place* These plastic cards, )hich are e+=edded )ith a co+puter chip, o11er a nu+=er o1
signi1icant =ene1its to 1inancial institutions, retailers, and cardholdersZranging 1ro+ i+pro/ed
security to a host o1 inno/ati/e ne) 1eatures*
But )hile s+art card usage has =een rapidly increasing thanks to a di/erse set o1 applications
1ro+ )ireless telephones to loyalty progra+s, the predicted +ass +igration o1 pay+ent
applications 1ro+ con/entional +agnetic&stripe cards to s+art cards has not yet +aterialized* Gne
o1 the =iggest hurdles, until no), has =een the lack o1 uni/ersally accepted speci1ications 1or
s+art card =ased pay+ents? ho)e/er, consensus on Q-M 7Quropay F -asterCard F Misa8
speci1ications 1or s+art cards is no) set to change this situation and s+art cards are poised to
challenge the $E =illion +agnetic&stripe cards in circulation around the glo=e*
Credit Card $arket 5 $aRor Business Entities and t@eir A;ti<ities
&ssuer: Polds contractual agree+ents )ith and issues cards to cardholders* The key
acti/ities o1 an issuer can =e represented in the 1ollo)ing +anner .
!
Source" #ilson $eport

A;Guirer: :oes =usiness )ith +erchants ena=ling the+ to accept credit cards* Ic<uirers =uy
7ac<uire8 the +erchantRs sales slips and credit the ticketsR /alue to the +erchantRs account*
Ic<uirer;s key acti/ities can =e su++arized as .
:ue to high 1actors such as high /olu+es and lo) pro1it +argins, +ost 9S =anks ha/e sold
their ac<uirer =usinesses to non&=anking entities that specialize in this 1ield* Follo)ing are the
,nco+e and Q4pense sources in an Ic<uirer =usiness .
,nco+e#
-erchant discount 7%.2A o1 transaction /alue8
"rocessing 1ees 7B 0*$0 . B 0*20 per transaction8
-onthly +ini+u+ 1ees
Custo+er ser/ice 1ees
"GS Q<uip+ent salesFser/ice
Q4pense#
,nterchange 1ees paid to ,ssuer

Business & ,T -odel . Cards /%*00% "age %%0 o1 $00
,SGF-S" 1ees
:ata processing H Co++unications e4penses
6isk -anage+ent
Vosses on -erchant Charge=acks H Fraud
"ro;essor 1T@ird "art: Entities3# "ro/ides credit card processing, =illing, reporting and
settle+ent, and operational ser/ices to the ,ssuerFIc<uirer* The Card "rocessing +arket is a
highly concentrated +arket )ith players like First :ata and TSDS processing +ore than hal1
o1 all 9S card transactions* The t)o +ain ser/ices that the Third "arty "rocessors o11er are
,ssuing Ser/ices and Ic<uiring Ser/ices &
,ssuing ser/ices
Functions# -ost acti/ities o1 card ,ssuers
,nco+e > Transaction "rocessing 1ees E So1t)are Vicensing H -aintenance
Q4pense > :ata processing H Co++unications e4pense
Ic<uiring ser/ices
Functions# -ost acti/ities o1 card Ic<uirers
,nco+e > -erchant 1ees E "rocessing 1ees E ,SGF-S" 1ees
Q4pense > :ata processing H Co++unications e4pense E Vosses on
Charge=acks E :epreciation
&nde+endent !a,es OrganiMation 1&!O3# In outside co+pany 7not -asterCardFM,SI
+e+=er, non&=ank8 that o11ers +erchant accounts and +ay process credit card transactions
1or a transaction 1ee* ,SGs enter into a contract )ith Ic<uiring =anks to o11er =ankcard
ac<uiring ser/ices, through registered or unregistered sales agents or e+ployees
Asso;iation# In organization o)ned =y +e+=ers, )hich ser/ices and o=tains processing
ser/ices 1or +e+=ers* -e+=ers include co++ercialFretail =anks, credit unions etc* Follo)ing
are 1e) +ain characteristics o1 Issociation &
Vicense +e+=ers 7,ssuers, Ic<uirers8 to issue H accept pay+ent cards
Po)e/er, associations the+sel/es do NGT issue cards F set card 1ees F set credit
li+its F set interest rates, or solicit +erchants F set discount rates
Ser/e as the ner/e center connecting the issuing H ac<uiring sides
"ro/ide the interchange syste+s to trans1er data and 1unds =et)een +e+=ers
7transaction processing . MisaNet, BankNet8
G11er a /ariety o1 product progra+s and ser/ices to i+pro/e +e+=er pro1ita=ility and
+ini+ize +e+=er risk
Q*g* @Meri1ied =y Misa;, SQT
,+ple+ent rules and regulations that go/ern the interchange o1 transactions =et)een
+e+=ers
9ndertake =rand ad/ertising and pro+otional ca+paigns
I card Issociation &
"ro<ide T@ese Fun;tions Do ot "ro<ide T@ese Fun;tions

Business & ,T -odel . Cards /%*00% "age %%% o1 $00
6eco++end, +onitor H pro/ide support ser/ices
o Byla)s
o Gperating rules H regulations
Brand ad/ertising H pro+otional ca+paigns
Iuthorization H settle+ent syste+s
SecurityF6isk +anage+ent
Issess+ent H 1ee =ased ser/ices
:e/elop ne) products H ser/ices
,ssue cards
Set credit li+its
Set card 1ees
Set interest rates
Solicit +erchants
Set discount rates
$er;@ant# I retailer, or any other person, 1ir+, or corporation that, according to a -erchant
Igree+ent, agrees to accept credit cards, de=it cards, or =oth, )hen properly presented*
Card@o,der# The person to )ho+ a 1inancial transaction card is issued or an additional
person authorized to use the card

Business & ,T -odel . Cards /%*00% "age %%$ o1 $00
The 1ollo)ing diagra+ depicts typical acti/ities in transaction processing using a card
in/ol/ing all the entities descri=ed a=o/e &
The 1ollo)ing ta=le sho)s lists the description o1 the /arious entities in/ol/ed in a Credit card
processing
Entit: Des;ri+tion
,ssuing Bank
This is a =ank F 1inancial institution that issues a credit product
Cardholder
Iccount
Cardholder port1olio account is created )hen a credit application is
appro/ed*
Business "ort1olio
Iccount
This de1ines the processing rules 1or all the accounts under a =usiness
/enture o1 the sa+e card o11ering type* This entity +ay hold =illing rules,
auth li+its, collection strategies, and other properties that can =e de1ined
at this le/el* Q4a+ples o1 Business port1olio account +ay include Chase
Misa Classic, Chase Misa Gold, etc
Card "roduct
,denti1ies the di11erent card types that the Credit syste+ supports*
Q4a+ples +ay =e proprietary cards, Misa, -asterCard
Iuthorization
Qngine
Iuthorization engines are used to authorize credit transactions* The
authorization engine uses the account in1or+ation, +erchant in1or+ation,
and other related in1or+ation to appro/e F decline F re1er an authorization
transaction* There can =e +ore than one authorization engines 1or a
=usiness port1olio*
Credit Bureau
"ro/ides credit scores that are used =y ,ssuers to process card
applications
Collection Igency
Third party to )ho+ ,ssuer outsources the cardholder collection acti/ities
,ssuer "rocessor
In outside co+pany )ith )hich the ,ssuer contracts to pro/ide cardholder
transaction processing acti/ities*
,ssuer Clearing
Bank
Bank designated =y the ,ssuer to recei/e the ,ssuer;s daily net settle+ent
ad/ise+ent* The clearing =ank 7+ay =e the ,ssuer itsel18 )ill also conduct
1unds trans1er acti/ities )ith the net settle+ent =ank and +aintain the
,ssuer;s clearing account*
Ic<uirer
This is a =ank F 1inancial institution that ac<uires +erchant transactions
Ic<uirer Clearing
Bank
Bank designated =y Ic<uirer to recei/e the Ic<uirer;s daily net settle+ent
ad/ise+ent* The clearing =ank 7+ay =e the Ic<uirer itsel18 )ill also
conduct 1unds trans1er acti/ities )ith the net settle+ent =ank and +aintain
the Ic<uirer;s clearing account*
Ic<uirer "rocessor
In outside co+pany )ith )ho+ the Ic<uirer contracts to pro/ide
+erchant processing ser/ices
-erchant Iccount
I +erchant account is created )hen a +erchant application is appro/ed*
I +erchant account is necessary 1or a +erchant to accept pay+ent =y
credit card
Clearing 1ile
Contains present+ents and other 1inancial +essages that need to =e
+atched )ith corresponding authorizations
Funding 1ile
This 1ile is 1or ena=ling +e+=er settle+ent
Transa;tion T:+es
Entit: Transa;tion T:+e (e*arks
Cardholder
transactions
"urchase
IuthorizationFMeri1ica
tion
"reauthorization
-erchandise return
Triggered =y the cardholder*
IuthorizationFMeri1ication is the de1ault
transaction type* ,1 no type is indicated
)hen su=+itting transactions to the
gate)ay, the gate)ay )ill assu+e that the
transaction is o1 the type
Syste+
Generated
Transactions
6e/ersal
This transaction is an action on a pre/ious
transaction and is used to cancel the
pre/ious transaction and ensure it does not
get sent 1or settle+ent*
Q4ception
Transactions
IdKust+ent
Charge=ack H
Charge=ack 6e/ersal
6epresent+ent
9sed to correct errors that occur at point o1
transaction or in a participant;s syste+
Gthers
Id+inistrati/e
Net)ork
6econciliation
File -aintenance
Fee transactions
These are routine transactional acti/ities to
ensure co+pletion o1 the /arious acti/ities
in/ol/ed in a transaction processing cycle
C@arge=a;k N C@arge=a;k (e<ersa,s 5
It any ti+e 7currently li+ited to !0 days a1ter state+ent date8, cardholder +ay contact the ,ssuer
to <uestion )hether a transaction is legiti+ate and re<uest a copy o1 the transaction 1ro+ the
+erchant* ,1 the cardholder does not recei/e a copy o1 transaction, she +ay re<uest a
charge=ack . a 1inancial re/ersal o1 the transaction* Q/en i1 the retrie/al re<uest is 1ul1illed,
cardholder still +ay re<uest the ,ssuer to initiate a charge=ack* Po)e/er, i1 the +erchant disputes
the charge=ack, the disputed transaction is dealt )ith through a de1ined dispute process*
Follo)ing diagra+ depicts the process o1 charge=ack and charge=ack re/ersal
$aRor ",a:ers
The 1ollo)ing ta=le sho)s so+e o1 the leading 9S card organizations and their respecti/e roles in
the Credit card industry#
Leading )! $arket Card OrganiMations
Banks on-Banks Asso;iation .
OrganiMation
Citigroup
7,ssuer8
-BNI I+erica
7,ssuer8
J"-organ Chase F
Bank Gne
7Ic<uirer H ,ssuer8
Bank o1 I+erica
7Ic<uirer H ,ssuer8
Capital Gne
7,ssuer8
Wells Fargo
7Ic<uirer H ,ssuer8
Wacho/ia
7,ssuer8
First :ata Corp 7"rocessor8
TSDS 7"rocessor8
Mital 7Ic<uirer H "rocessor8
I+erican Q4press 7Ic<uirer, Card
Grganization H ,ssuer8
:isco/er 7Ic<uirer, Card Grganization
H ,ssuer8
:iners Clu= 7Card Grganization H
,ssuer8
Q<ui1a4 7"rocessor8
Sears 7 Ic<uirer, Card Grganization H
,ssuer8
GQ Card Ser/ices 7"rocessor8
9S Go/ern+ent 7Ic<uirer H ,ssuer8
Misa
7Card
Issociation,
"rocessor8
-asterCard
7Card
Issociation,
"rocessor8
JCB 7Card
Issociation8
!)$$A(%
Cards are one o1 the +ost )idely used +echanis+s 1or transactions
)orld )ide* There are se/eral types o1 cards used .
o :e=it cards
o IT- cards
o Credit cards
o Chip cards
o S+art cards
ICP ena=les =atch&processed, /alue&dated electronic 1unds trans1er
=et)een originating and recei/ing 1inancial institutions*
Q+erging pay+ents syste+s are .
o Gnline Bill "ay+ent 7QB"", Q,""8
o "erson to "erson "ay+ents 7"$"8
o ,nternet currencies, digital cash, e&Wallet
o Qlectronic Bene1it Trans1er 7QBT8
There are /arious entities in/ol/ed in the credit card transaction
processing cycle &
o ,ssuer
o Ic<uirer
o Third party "rocessor
o ,ndependent Sales organization
o Issociation
o -erchant
o Card holder
Charge=ack and Charge=ack re/ersals are legiti+ate )ays to cancel
the credit card transactions )ithin a li+ited ti+e 1ra+e
2.I. &VE!T$ET $AA'E$ET
"(&VATE BAD&' . BEALT# $AA'E$ET
"ri/ate Banking co/ers =anking ser/ices, including lending and in/est+ent +anage+ent, "ri/ate
=anking pri+arily is a credit ser/ice, and is less dependent on accepting deposits than retail
=anking*
The Federal 6eser/e Super/isory Vetter de1ines pri/ate =anking as personalized ser/ices such
as +oney +anage+ent, 1inancial ad/ice, and in/est+ent ser/ices 1or high net )orth clients*
Ilthough high net Aort@ is not de8ined7 it is genera,,: taken at a @ouse@o,d in;o*e o8 at
,east B%00,000 or net )orth greater than B500,000* Varger pri/ate =anks o1ten re<uire e/en
higher thresholds & Se/eral no) re<uire their ne) clients to ha/e at least B% +illion o1 in/esta=le
assets* Is per the World Wealth 6eport $00% =y -errill Vynch F Cap Ge+ini, there are currently
o/er *$ +illion +illionaires in the )orld )ith a co+=ined asset =ase e4ceeding 9SB $ trillion
)hich is proKected to gro) to o/er 9SB 25 trillion =y the end o1 $005*
CL&ET !E(V&CE!
I typical pri/ate =anking di/ision o1 a large =ank )ould o11er the 1ollo)ing 1inancial ser/ices to its
"ri/ate clients#
&n<est*ent $anage*ent and Ad<i;e
I client relationship -anager understands the client;s li<uidity, capital and in/est+ent needs* Pe
stri/es to de/elop an integrated approach to +anage client in/est+ents and capital +arkets
trading* Iccess to specialist ad/ice and e4tensi/e research is a key 1eature o1 pri/ate =anking*
!e,8-dire;ted or non-dis;retionar:# This is largely in/est+ent ad/isory in )hich the =ank o11ers
in/est+ent reco++endations =ased on the Client;s appro/al* The client +ay choose to ignore
this*
Dis;retionar:# ,n this case, the =ank;s port1olio +anagers +ake in/est+ent decisions on =ehal1
o1 the custo+er*
(isk $anage*ent
Stri/es to reduce e4posures 1or its clients across the )orld through a /ariety o1 hedging tools,
taking positions in deri/ati/e +arkets etc
LiGuidit:
-anage+ent o1 a Client;s li<uidity 7cash etc8 needs through short&te+ credit 1acilities, 1le4i=le
cash +anage+ent ser/ices etc* In e4clusi/e cash +anage+ent ser/ice )ith SsAee+S 1acility is a
"ri/ate Banking 1eature* The s)eep auto+atically trans1ers e4cess 1unds o/er a pre&deter+ined
li+it out o1 your current account into a higher yielding reser/e account, opti+izing your return on
short&ter+ cash* Funds are on call so they re+ain easy to access*
!tru;tured Lending
"ro/ides tailored lending to pro/ide long&ter+ li<uidity to clients, or in/est+ent capital
En@an;ed =anking 8a;i,ities
"ri/ate clients enKoy a /ariety o1 e4clusi/e =anking ser/ices such as#
,nsurance
Foreign e4change transactions
Iuto+atic credit entitle+ents etc
&ssuer Ca+ita, 8or*ation
"ro/iding clients )ith access to in/est+ent =anking and other institutional ser/ices
"ri/ate Bankers are high&end relationship +anagers, as )ell as +oney +anagers and ad/isors*
"ri/ate clients trade in larger /olu+es, the 1ees and co++issions are larger*
Changes in the regulatory en/iron+ent ha/e rede1ined the co+petiti/e landscape o1 )ealth
+anage+ent =y allo)ing in/ol/e+ent o1 =anks in insurance acti/ities* I success1ul )ealth
+anager +ust harness and deploy not Kust the standard acti/ities o1 e<uity and 1i4ed inco+e
in/est+ent +anage+ent, =ut a plethora o1 other products and ser/ices# ta4 and estate planning,
insurance products, 20%7k8 rollo/ers, and +ore*
-ost pri/ate =anks segregate their clients =ased on net )orth, in/esti=le assets, age etc* For
e4a+ple, one classi1ication could =e =et)een young a11luent and retired a11luent*
"ri/ate =anking clients typically de+and higher returns on their in/est+ent, and as a result =anks
o11ering these ser/ices are hea/ily dependent on e11icient "ort1olio Inalysis and Isset Illocation
techni<ues to achie/e this* The conse<uent in/est+ent in technology is also /ery high*
"ri/ate =anking is a 1ee&dri/en =usiness* Banks o11ering these ser/ices charge anything =et)een
%&2 A 1or their ser/ice, depending on the nature o1 the ser/ice rendered* 6eturn on e<uity 1or
=anks o11ering these ser/ices could =e as high as $5A*
CO$$O "(&VATE BAD&' "(OD)CT!
"ersona, &n<est*ent Co*+anies 1"&Cs3
I ",C is a shell co+pany set up =y a "ri/ate Bank;s o11shore di/ision 7e*g* trust di/ision8 1or a
client, usually in a ta/ @a<en ,ike t@e Ca:*an &s,ands* The ",C has its o)n legal entity and the
in/estor enKoys con1identiality as )ell as ta4 =ene1its* There is su=stantial startup 1ee in/ol/ed 1or
these, and =anks charge annual ad+inistration 1ees*
"a:a=,e T@roug@ A;;ount 1"TA3
"TIs are transaction deposit accounts that allo) =anks in one country to o11er their 1oreign clients
o1 a 1oreign =ank, such ser/ices as check&)riting* The 1oreign =ank in this case plays the role o1 a
correspondent =ank* These accounts usually ha/e a high transaction /olu+e and attract dollar
deposits 1ro+ the 1oreign custo+ers*
#edge Funds
This is a pri/ate in/est+ent partnership, and is usually run =y "ri/ate Banks* Pedge 1unds are
highly speculati/e and they use a /ariety o1 techni<ues such as le/erage, short&selling, and use o1
deri/ati/es* Se/eral hedge 1unds also utilize so+e 1or+ o1 ar=itrage, such as those )here they
can take ad/antage o1 +o/e+ents e4pected to occur in the stock price o1 t)o co+panies
undergoing a +erger or other si+ilar e/ent* ,n +ost cases, in/estors in a hedge 1und need to =e
duly accredited*
B#O OFFE(! "(&VATE BAD&' !E(V&CE!E
-ost Banks ha/e separate di/isions o11ering dedicated pri/ate =anking ser/ices* There +ay =e
Qdge Corporations or Foreign su=sidiaries o1 large national =anks as )ell, )hich o11er these
ser/ices*
The large Quropean =anks like 9BS, Credit Suisse are industry leaders* There are a nu+=er o1
standalone "ri/ate Banks as )ell* ,n =anks such as -ellon and Bank Gne, "ri/ate Banking takes
place in the Trust or &n<est*ent $anage*ent di/ision* -any =anks o11er "ri<ate C,ient
!er<i;es 7"CS8 to clients in other countries as )ell, through 1oreign su=sidiaries, or e/en
a11iliated =anks*
B#% '(OB "(&VATE BAD&' B)!&E!!E
-ost pri/ate =anks target return on e<uity o1 at least $5A )hich is
considera=ly higher than that o1 the a/erage co++ercial =ank*
Gpportunities 1or o11&=alance sheet inco+e are an additional
incenti/e* 9nlike depository accounts, securities and other
instru+ents held in the clients; in/est+ent accounts are not re1lected
on the =alance sheet o1 the institution =ecause they =elong to the
client*
#ow hae aerage hedge fund returns $erformed is%a%is market &ee&s?
3-ulti=illion dollar Uuantu+ Fund +anaged =y the legendary George Soros, 1or instance,
=oasted co+pound annual returns e4ceeding (0A 1or +ore than a decade*5
3G11 Shore Pedge Funds# Sur/i/al and "er1or+ance# %0'0&%005,S a study =y Dale and ND9
Stern econo+ists, indicates that, during that si4&year period, the a/erage annual return 1or
o11shore hedge 1unds )as %(*!A, )hereas the a/erage annual gain 1or the SH" 500 )as
%!*5A* Q/en )orse, the rate o1 closure 1or 1unds rose to o/er $0A per year, so choosing a
long&ter+ hedge 1und is trickier e/en than choosing a stock in/est+ent*
're hedge funds not immune to risk?
Ved =y Wall Street trader John -eri)ether and a tea+ o1 1inance )izards and "h*:s, Vong
Ter+ Capital -anage+ent i+ploded in the late %000s* ,t nearly sank the glo=al 1inancial
syste+ and had to =e =ailed out =y Wall StreetRs =iggest =anks* ,n $000 George Soros shut
do)n his Uuantu+ Fund a1ter sustaining stupendous losses*
Po)e/er, the institution can earn su=stantial 1ees 1or +anaging client
assets or per1or+ing other cash +anage+ent and custodial ser/ices*
To gro), pri/ate =anks need to lure ne) )ealthy in/estors a)ay
1ro+ direct in/esting or 1ro+ in/esting )ith +aKor +utual 1unds such
as Fidelity or -errill Vynch*
CO(E F)CT&O! & "(&VATE BAD&'
Sales and -arketing F Client "rospecting
Client -anage+ent, Ser/icing and deli/ery
Financial "lanning
"ort1olio Inalysis and Gpti+ization
-arket Icti/ities
6esearch
Co+pliance controls*
"(&VATE BAD&' BO(DFLOB
The high&le/el process 1lo) 1or pri/ate =anking is sho)n =elo)* The roles and responsi=ilities o1
the /arious players are outlined =elo)#
Client 6epresentati/e#
Ser/icing specialist
-iddle o11ice
Back o11ice
The diagra+ =elo) sho)s the /arious depart+ents in the "ri/ate Banking di/ision o1 a =ank*
&VE!T$ET $AA'E$ET
,n/est+ent -anage+ent can =e de1ined as the process o1 +anaging +oney, )hich includes
in/est+ents such as real estate, 1inancial instru+ents such as stock, +utual 1und, =onds or
e<uip+ent that has +onetary /alue that could =e realized i1 sold* Mery o1ten, ter+s such as
+oney +anage+ent, asset +anage+ent etc* are used interchangea=ly*
&VE!T$ET $AA'E$ET 'OAL!
,n/est+ent -anage+ent ai+s at the 1ollo)ing goals#
-anage in/estors +oney e11iciently and cost e11ecti/ely
Generate superior in/est+ent returns
&n<esting 'oa, 9lti+ate o=Kecti/e is to deli/er e<uity type returns
)ith lesser /olatility risk and achie/e capital preser/ation
,n achie/ing the a=o/e goals, an ,n/est+ent -anager uses the 1ollo)ing approachesFprinciples#
Asset $i/ is the pri+ary deter+inant o1 port1olio return, opti+u+
port1olios are designed using asset allocation tools
&nternationa, Di<ersi8i;ation - ,n/est+ent in )orld )ide stocks
reduces risk and i+pro/es returns
!;reens.Fi,ters - Mariety o1 <uantitati/e and <ualitati/e screens to
identi1y candidate in/est+ents, inter/ie)s )ith 1und +anagers prior
to in/esting and continuous due diligence*
Ca+ita, +reser<ation & "reser/e the )ealth o1 in/estors and ensure
erosion 1ree in/est+ent
A,ternati<e &n<est*ents - ,n/esting in hedge 1und and 1utures to
ha/e strong returns* These assets generally earn returns consistent
)ith those o1 e<uities* By co+=ining alternati/e in/est+ents )ith
e<uities, the asset +anager can generate superior returns )hile
reducing the ups and do)ns o1 the port1olio*
,n/est+ent +anage+ent ser/ices are usually o11ered =y 1ir+s that
specialize in +anaging an in/estor;s +oney* These 1ir+s e+ploy
indi/iduals kno)n as port1olio +anagers )ho are responsi=le 1or
taking the decision on )hich type o1 assets to in/est it to =est suit the
in/estors needs*
T#E &VE!T$ET "(OCE!!
-aking in/est+ent decisions is not an easy task and re<uires
specialized skills and ser/ices and in/ol/es a nu+=er o1 =usiness
processes*
The diagra+ =elo) depicts so+e o1 the key stepsFprocess in/ol/ed
in the in/est+ent +anage+ent li1e&cycle*
&VE!T$ET $AA'E$ET C%CLE
" o r t 1 o l i o
- a n a g e + e n t
- o n i t o r i n g
a n d
6 e p o r t i n g
, n / e s t + e n t
G p e r a t i o n s
T r a d i n g
6 e s e a r c h
a n d
I n a l y s i s
Q 4 t e r n a l
, n 1 o r + a t i o n
" r o / i d e r s
B r o k e r s a n d
T r a d i n g
N e t ) o r k s
C l e a r i n g a n d
S e t t l e + e n t
C u s t o d i a n s
- a r k e t a n d I n a l y t i c a l
: a t a
" r i c e s
T r a d e G r d e r s
T r a d e s
S e t t l e + e n t s
T r a d i n g
: a t a
(E!EA(C#
6esearch is one o1 the pri+ary inputs to)ards deciding )hat kind o1 asset or 1inancial instru+ent
to in/est in* ,t in/ol/es per1or+ing a /ariety o1 <ualitati/e and <uantitati/e analysis to deter+ine
the ideal port1olio +i4* Pis includes an in depth analysis a=out the institution issuing the
instru+ent, esti+ating 1uture gro)th, industry analysis, trend analysis o1 historical prices etc*
So+e o1 the pre&re<uisites 1or per1or+ing +eaning1ul research to aid in/est+ent decision +aking
are as 1ollo)s#
(esear;@ tea*
The 1irst step is to put together a dedicated research tea+* ,t is critical that the tea+ +e+=ers not
only understand the 1inancial +arket dyna+ics =ut also ha/e kno)ledge on -odel =uilding and
Qcono+etrics* The success o1 the research tea+ is usually e/aluated relati/e to a =ench+ark
return*
Data
The research tea+ +ust ha/e easy access to a /ariety o1 data* The collection and +aintenance
o1 the data=ase is /ery i+portant* Tactical decisions need to =e +ade <uickly as ne) data keeps
pouring in* ,t is =est to in/est in a data=ase syste+ that takes the ne) data and auto+atically
runs the <uantitati/e analyses*
Co*+uting
While +ost top&do)n data +anage+ent e4ercises can =e handled )ithin Q4cel, the =otto+ up
proKects are not 1easi=le )ithin a spreadsheet* The =otto+&up proKects +ay include up to %0,000
securities along )ith /ectors o1 attri=utes 1or each security*
A!!ET ALLOCAT&O
"assi<e A++roa;@
The port1olio +anager has to decide on the +i4 o1 assets that +a4i+izes the a1ter&ta4 returns
su=Kect to the risk and cash 1lo) constraints* Thus the in/estor;s characteristics deter+ine the
right +i4 1or the port1olio* ,n co+ing up )ith the +i4, the asset +anager uses di/ersi1ication
strategies? asset classes tend to =e in1luenced di11erently =y +acro econo+ic e/ents such as
recessions or in1lation* :i/ersi1ying across asset classes )ill yield =etter trade o11s =et)een risk
and return than in/esting in any one risk class* The sa+e o=ser/ation can =e +ade a=out
e4panding port1olios to include =oth do+estic and 1oreign assets*
A;ti<e A++roa;@
"ort1olio +anagers o1ten de/iate 1ro+ the passi/e +i4 =y using 3-arket ti+ing5* To the e4tent that
port1olio +anagers =elie/e that they can deter+ine )hich +arkets are likely to go up +ore than
e4pected and )hich less than e4pected, they )ill alter the acti/e&passi/e +i4 accordingly* Thus, a
port1olio +anager )ho =elie/es that the stock +arket is o/er /alued and is ripe 1or a correction,
)hile real estate is under /alued, +ay reduce the proportion o1 the port1olio that is allocated to
e<uities and increase the proportion allocated to real estate* -arket strategists at all o1 the +aKor
in/est+ent 1ir+s in1luence the asset allocation decision*
There ha/e =een 1e)er success1ul +arket ti+ers than success1ul stock pickers* This can =e
attri=uted to the 1act that it is 1ar +ore di11icult to gain a di11erential ad/antage at +arket ti+ing
than it is at stock selection* For instance, it is unlikely that one can ac<uire an in1or+ational
ad/antage o/er other in/estors at ti+ing +arkets* But it is still possi=le, )ith su11icient research
and pri/ate in1or+ation, to get an in1or+ational ad/antage at picking stocks* -arket ti+ers
contend that they can take e4isting in1or+ation and use it +ore creati/ely or in =etter +odels to
arri/e at predictions 1or +arkets, =ut such approaches can =e easily i+itated*
A""(OAC#E! TO A!!ET ALLOCAT&O
Fund +anagers generally adopt an indi/idual in/est+ent +anage+ent style* The 1ollo)ing are
the t)o <uantitati/e approaches to tactical glo=al asset +anage+ent#
To+ DoAn A++roa;@
The Stop do)nS in/estor =egins =y looking at the 3=ig picture5 & econo+y or =road trends in
society to identi1y indi/idual countries and then sectors that )ill =ene1it 1ro+ the pre/ailing
conditions* For e4a+ple, a Stop do)nS in/estor +ight say that since the huge =a=y&=oo+er
generation is aging and +o/ing to)ard retire+ent, co+panies that pro/ide products and ser/ices
to older people should =ene1it 1ro+ that trend* This +ight lead to =uying phar+aceutical stocks or
health care shares or, stocks o1 insurers that pro/ide retire+ent annuities*
I Stop do)nS in/estor +ay also +ake in/est+ents =ased on )hat he or she thinks lies ahead 1or
the econo+y* So, 1or e4a+ple, i1 a Stop do)nS in/estor =elie/ed that a resurgent econo+y +ight
re&ignite in1lation 1ears, then he or she +ight consider =uying gold or natural resource stocks, or
Kettisoning long&ter+ =onds in 1a/or o1 Treasury =ills* So a Stop do)nS in/estor starts )ith a
concept and then looks 1or stocks that are co+pati=le )ith it*
Then they )ork syste+atically do)n 1ro+ this /ery =road perspecti/e translating these top&do)n
/ie)s into +ore speci1ic econo+ic and +arket 1orecasts* This is an analytical process? trying to
identi1y those pro1ound structural changes in glo=al econo+ies and societies, seeing )hat e11ects
are likely to 1ilter do)n and in ti+e a11ect the /alue o1 ordinary in/est+ents*
In illustrati/e +odel o1 3top do)n5 approach )ill look as 1ollo)s#
Build country&=y&country 1orecasting +odels =ased on =ench+ark
return
Malidation o1 +odels
Forecast out o1 sa+ple returns
Sort country returns
,n/est in port1olio o1 highest e4pected return countries
,n1or+ation in =oth the /olatility and correlation is used in
deter+ining opti+al port1olio )eights
SPedgeS strategies are also possi=le* This in/ol/es taking long positions in the highest e4pected
returns countries and short positions in the lo)est e4pected returns countries*
Botto* )+ A++roa;@
The idea is to select indi/idual securities* Fro+ a /ariety o1 +ethods, 1orecasted )inners are
purchased and 1orecasted losers are sold* 3Botto+ upS in/estor )ould try to 1ind in/est+ents that
are attracti/e =ecause o1 so+ething particular to the+ && i*e*, their terri1ic gro)th potential, say, or
the 1act that their assets are selling 1or less than their intrinsic )orth* So an in/estor )ho practices
the S=otto+ upS approach +ight screen through a long list o1 stocks to 1ind ones that look like a
=uy on the =asis o1 their 1unda+entals*
"O(TFOL&O EFEC)T&O
There are +any indi/idual strategies that +ay sho) pro+ise in ter+s o1 =eating the +arket*
Po)e/er, /ery 1e) port1olio +anagers actually acco+plish the sa+e o=Kecti/e* Gne /ery
i+portant reason is the 1ailure on the part o1 +ost studies to 1actor in =oth the di11iculties and the
costs associated )ith e4ecuting strategies*
There are three di+ensions to port1olio e4ecution#
Cost o8 e/e;ution
There are three co+ponents to this cost*
Bid&ask spread, )hich leads in/estors to =uy at a high price and sell at a lo)er price* For lo)&
priced stocks, this cost can =e as high as $0A o1 the price o1 the stock*
"rice i+pact that in/estors ha/e )hen they trade, pushing the price up as they =uy and do)n as
they sell* ,n illi<uid +arkets, this cost can =e signi1icant especially 1or large trades*
Ta4 i+pact associated )ith trading, )hich =eco+es a 1actor )hen )e consider the o=Kecti/e in
port1olio +anage+ent is +a4i+izing a1ter&ta4 returns*
When considered in aggregate, the trading costs )ill )ork out to =e high* The trading costs )ill
/ary )idely across di11erent in/est+ent strategies, depending upon the trading 1re<uency and
urgency associated )ith each strategy*
Trading s+eed
The need to trade 1ast and the desire to keep transactions costs lo) )ill co+e into con1lict*
,n/estors )ho are )illing to accept trades spread out o/er longer periods )ill generally =e a=le to
ha/e +uch lo)er trading costs than in/estors )ho need to trade <uickly* Vong ter+ /alue
in/estors )ill =e less a11ected =y trading costs than short ter+ in/estors trading on in1or+ation*
"ort8o,io (isk $anage*ent
"ort1olio risk characteristics change o/er ti+e and it is the port1olio +anager;s Ko= to keep the
port1olio risk at desired le/els at +ini+u+ costs* The deri/ati/es +arkets pro/ide port1olio
+anagers )ith additional tools that can =e used to hedge risk and add to returns o/er ti+e*
&VE!T$ET "#&LO!O"#&E!
"ort1olio -anagers 1ollo) di11erent in/est+ent philosophies* So+e e4a+ples are#
"assi<e Di<ersi8i;ation
So+e "ort1olio -anagers =elie/e that +arkets are e11icient? e/en i1 they are ine11icient, the cost o1
e4ploiting the ine11iciency is +ore the returns that can =e earned* Pence, they are )illing to
accept +arket returns* They try to construct port1olios that rese+=le the +arket inde4, o1ten
inde4ing to =roadest possi=le indices*
"assi<e Va,ue &n<esting
-arkets syste+atically under/alue certain co+panies* "ort1olio -anagers identi1y such
co+panies )ith para+eters like lo) "Q, Pigh di/idend yield, lo) "rice to Book Malue, lo)
"riceF6eplace+ent Malue etc* The leading e4a+ples are the likes o1 "eter Vynch and Warren
Bu11et* Such "ort1olio -anagers ha/e long ti+e horizons, lo) turno/er 7i*e*8 =uying and selling,
and transactions costs
$o*entu* &n<esting
-arkets tend to stay in trends# i1 prices ha/e gone up 7do)n8 <uickly, they )ill tend to keep going
up 7do)n8* "ort1olio -anagers )ho su=scri=e to this school, use price +o+entu+ indicators,
relati/e strength indicators and charts* They ha/e short ti+e horizons and speedy e4ecution
styles*
$arket Ti*ing
,t is possi=le to 1orecast the direction o1 +arkets 7i*e* to ti+e +arkets8 using identi1ied /aria=les
like +arket ti+ing +odelsFindicators* Such "ort1olio -anagers usually take large =ets on the
+arket 7in either direction8, atte+pt tactical Isset Illocation in sectors, and use Pedge 1unds
7selling o/er/alued and =uying under/alued asset classes8* In e4a+ple )ould =e George Soros
and his Uuantu+ Fund*
Contrarian &n<esting
-arkets tend to correct the+sel/es? i1 prices ha/e gone up 7do)n8 <uickly, they )ill tend to go
do)n 7up8* ,1 in/estors are too =ullish 7=earish8, stocks are +ore likely to go do)n 7up8* Such
"ort1olio -anagers ha/e usually short ti+e horizons, are )illing to hold unpopular in/est+ents
and use specialist short sales*
&VE!T$ET $AA'E$ET VA(&AT!
Ilthough )e ha/e seen the generic de1inition and a typical in/est+ent +anage+ent process 1lo)
there are a nu+=er o1 /ariants in in/est+ent +anage+ent that ha/e e/ol/ed o/er the years to
address speci1ic needs o1 ,n/estors* This section 1ocuses on so+e o1 the in/est+ent options that
are a/aila=le to in/estors*
E/a*+,e# ,n the +iddle o1 -arch this year, the )ar )ith ,ra< )as Kust starting* The SI6S
epide+ic )as raging across Isia* Tra/ellers, )hether 1or =usiness or pleasure, )ere staying
at ho+e in 1ear o1 terroris+ . )hether in the guise o1 che+ical or =iological )ar1are, or old
1ashioned high e4plosi/es* The airline, touris+, and hotel industries )ere )arning o1 the )orst
conditions in li/ing +e+ory* The FTSQ %00 inde4 1ell to an eight&year lo) o1 (,(00*
The contrarians, +ean)hile, )ere ru==ing their hands )ith glee*
Guess )hatL ,1 you had in/ested then, at the pit o1 +isery you )ould ha/e +ade $ per cent
in around three +onths to the +iddle o1 June*
&!T&T)T&OAL A!!ET $AA'E$ET
,nstitutional +oney +anagers are independent 1inancial ad/isory 1ir+s organized and licensed
under the Security and Q4change Co++ission or Banking Va)sR o/ersight agency o1 the country*
,nstitutional Isset -anage+ent ser/ice can =e =oth Id/isory or Fund handling and in/esting on
=ehal1 o1 the custo+er*
,nstitutional +oney +anagers are distinguished =y the 1act that#
They are under greater regulatory scrutiny 1ro+ =oth state and
1ederal authorities
They pro/ide e4clusi/e ser/ice to their clientele )ho are typically
institutions ha/ing port1olios in e4cess o1 se/eral +illion dollars*
They are /ery selecti/e in the clientele they ser/ice and 1irst do an
independent analysis o1 that clientRs 1inancial needs, goals,
o=Kecti/es, and risk tolerance*
They charge co+petiti/e 1ees due to the 1act that their clients entrust
+illions o1 dollars to the+ 1or in/esting* Iccordingly they are under
greater scrutiny to pro/ide attracti/e per1or+ance returns*
Ill +aKor international =anks o11er asset +anage+ent ser/ices* So+e key players include#
-organ Stanley
Bankers Trust
Boston "artners
"aci1ic ,n/est+ent -anage+ent Co* 7",-CG8
$)T)AL F)D!
I +utual 1und is a 1und that pools together +oney 1ro+ +any in/estors and in/ests it on =ehal1 o1
the group, in accordance )ith a stated set o1 o=Kecti/es* -utual 1unds raise the +oney =y selling
shares o1 the 1und to in/estors that includes indi/iduals and institutions, +uch like any other
co+pany can sell stock in itsel1 to the pu=lic* These 1unds take the proceeds o1 the +oney 1ro+
the sale o1 the shares and in/est it in other instru+ents like =onds, stocks etc* ,n return 1or the
+oney they gi/e to the 1und )hen purchasing shares, shareholders recei/e an e<uity position in
the 1und and, in e11ect, in each o1 its underlying securities* For +ost +utual 1unds, shareholders
are 1ree to sell their shares at any ti+e, although the price o1 a share in a +utual 1und )ill
1luctuate daily, depending upon the per1or+ance o1 the securities held =y the 1und*
No) you +ust =e )ondering that )hy do people =uy +utual 1unds )hen they can directly =uy the
instru+ents that these +utual 1unds in/est in* a1ter all )hat is the need o1 ha/ing a +iddle+anL
There are nu+erous reasons 1or in/esting in the +utual 1und* They are#
Diversi'ication2 With a +utual 1und one can di/ersi1y the in/est+ent =oth across co+panies
and across asset classes* When so+e assets are 1alling in price, others are likely to =e rising,
so di/ersi1ication results in less risk than i1 you purchased Kust one or t)o in/est+ents*
Liquidity2 -ost +utual 1unds are li<uid and it is easy to sell the share o1 a +utual 1und*
Low Invest(ent "ini(u(s2 Gne doesn;t need to =e )ealthy to in/est in +utual 1unds* -ost
+utual 1unds )ill allo) you to =uy into the 1und )ith as little B%,000 or B$,000*
Convenience2 When you o)n a +utual 1und, you donRt need to )orry a=out tracking the
dozens o1 di11erent securities in )hich the 1und in/ests? rather, all you need to do is to keep
track o1 the 1undRs per1or+ance*
Low &ransaction Costs2 -utual 1unds are a=le to keep transaction costs lo) =ecause they
=ene1it 1ro+ reduced =rokerage co++issions 1or =uying and selling large <uantities o1
in/est+ents at a single ti+e*
3egulation2 -utual 1unds are regulated stringently =y the go/ern+ent* Thus this reduces the
risk 1or the end in/estor*
#ro'essional "anage(ent2 -utual 1unds are +anaged =y a tea+ o1 pro1essionals, )hich
usually includes one +utual 1und +anager and se/eral analysts*
So +utual 1unds are 1ull o1 =ene1its* No) you +ust =e )ondering i1 the +utual 1und )hat the
disad/antages o1 +utual 1unds are* There are plenty o1 disad/antages#
Fees and E)penses2 -ost +utual 1unds charge +anage+ent and operating 1ees that pay 1or
the 1undRs +anage+ent e4penses 7usually around %*0A to %*5A per year8* -oreo/er a 1e)
+utual 1unds charge high sales co++issions*
#oor #er'or(ance2 -utual 1unds do not guarantee a 1i4ed or high return* Gn an a/erage +ore
than hal1 o1 the +utual 1unds 1ail to do =etter than the +arket returns*
Loss o' Control2 The +utual 1und +anagers are the people )ho decide upon the strategy to
in/est* Thus the in/estor loses the control o1 his +oney to the 1und +anager*
Ine''iciency o' Cas 3eserves2 Nor+ally a -utual 1und +aintains a large cash reser/e to
pro/ide protection against si+ultaneous )ithdra)als* This pro/ides in/estors )ith li<uidity,
=ut due to the large cash reser/e the +utual 1unds do not in/est all cash in asset and thus
pro/ide in/estor )ith lo)ered returns*
T:+es o8 *utua, 8unds
-utual 1unds co+e in +any /arieties* For e4a+ple, there are inde4 1unds, stock 1unds, =ond
1unds, +oney +arket 1unds*
(nde) funds
S,nde4 1undS descri=es a type o1 +utual 1und or 9nit ,n/est+ent Trust 79,T8 )hose in/est+ent
o=Kecti/e typically is to achie/e the sa+e return as a particular +arket inde4, such as the SH"
500 Co+posite Stock "rice ,nde4, the 6ussell $000 ,nde4, or the Wilshire 5000 Total -arket
,nde4*
Stock funds
SStock 1undS and Se<uity 1undS descri=e a type o1 in/est+ent co+pany 7+utual 1und, closed&end
1und, 9nit ,n/est+ent Trust 79,T88 that in/ests pri+arily in stocks or Se<uitiesS* The types o1
stocks in )hich a stock 1und )ill in/est )ill depend upon the 1und;s in/est+ent o=Kecti/es,
policies, and strategies* For e4a+ple, one stock 1und +ay in/est in +ostly esta=lished, S=lue
chipS co+panies that pay regular di/idends )hereas another stock 1und +ay in/est in ne)er,
technology co+panies that pay no di/idends =ut that +ay ha/e +ore potential 1or gro)th*
*ond funds
SBond 1undS and Sinco+e 1undS are ter+s used to descri=e a type o1 in/est+ent co+pany 7+utual
1und, closed&end 1und, or 9nit ,n/est+ent Trust 79,T88 that in/ests pri+arily in =onds or other
types o1 de=t securities* The securities that =ond 1unds hold )ill /ary in ter+s o1 risk, return,
duration, /olatility, and other 1eatures*
Money market funds
I +oney +arket 1und is a type o1 +utual 1und that is re<uired =y la) to in/est in lo)&risk
securities* These 1unds ha/e relati/ely lo) risks co+pared to other +utual 1unds and pay
di/idends that generally re1lect short&ter+ interest rates* 9nlike a S+oney +arket deposit accountS
at a =ank, +oney +arket 1unds are not 1ederally insured*
-oney +arket 1unds typically in/est in go/ern+ent securities, certi1icates o1 deposits, co++ercial
paper o1 co+panies, and other highly li<uid and lo)&risk securities* While in/estor losses in
+oney +arket 1unds ha/e =een rare, they are possi=le*
et Asset Va,ue
Net asset /alue,S or SNIM,S o1 an in/est+ent co+pany or a +utual 1und is the co+panyF1und;s
total assets +inus its total lia=ilities* For e4a+ple, i1 an in/est+ent co+pany has securities and
other assets )orth B%00 +illion and has lia=ilities o1 B%0 +illion, the in/est+ent co+pany;s NIM
)ill =e B00 +illion* Because an in/est+ent co+pany;s assets and lia=ilities change daily, NIM )ill
also change daily* NIM +ight =e B00 +illion one day, B%00 +illion the ne4t, and B'0 +illion the
day a1ter*
The in/est+ent co+panyF1und calculates the NIM o1 a single share 7or the Sper share NIMS8 =y
di/iding its NIM =y the nu+=er o1 shares that are outstanding*
So+e o1 the leading co+panies that o11er +utual 1unds are#
Fidelity ,n/est+ents
Mangaurd
,NG :irect
-ellon
!E"A(ATEL% $AA'ED ACCO)T!
I separately +anaged account is a port1olio o1 securities o)ned directly =y the in/estor and
+anaged =y pro1essional +oney +anager in lieu o1 an asset&=ased 1ee* S-I or the separately
+anaged accounts pro/ides the indi/idual in/estors the sa+e <uality o1 ser/ice as o11ered to
institutional in/estors*
Separately +anaged accounts help in/estors =uild and +anage their )ealth =y 1ocusing on the
in/estorRs indi/idual in/est+ent goals, ti+e horizon, and risk tolerance* To deter+ine these, a risk
pro1ile <uestionnaire is used* Clients recei/e a personalized ,n/est+ent "olicy State+ent that
outlines goals and the in/est+ent /ehicles necessary to help achie/e the+* Fro+ there, the
1inancial consultant chooses an asset allocation strategy that is used as a road +ap to achie/e
o=Kecti/es* The 1inancial consultant then reco++ends the in/est+ent +anagers =est suited to
+anage the o/erall port1olio* Vastly, ongoing +onitoring and re/ie) o1 the port1olio takes place at
=oth the 1inancial consultant and in/est+ent +anager le/el*
De: Features
The key 1eatures o1 S-I are &#
Direct ownersip# The port1olio is held in a personal account rather than held as a part o1
1und, there=y gi/ing direct control to the in/estors*
E)clusivity2 The arrange+ent gi/es e4clusi/ity to the in/estor as in/est+ent pre1erence,
o=Kecti/es and ta4 lia=ility are not necessarily shared across a pool o1 in/estors
Custo(i4ation2 The security to =e held and the in/est+ent pattern can =e custo+ized to
indi/idual needs* e*g* a custo+er +ay not )ant to in/est in those co+panies that are in
to=acco =usiness* The port1olio can =e custo+ized to cater to his indi/idual needs and
pre1erences*
&a) advantages2 ,n the case o1 traditional +utual 1unds, indi/idual ta4es are not an issue*
Po)e/er, in case o1 S-I ta4 ad/antages to in/estor results 1ro+ ta4 loss har/esting strategy
Ad<antages and Disad<antages
Separately +anaged accounts pro/ide the client )ith the 1ollo)ing =ene1its#
The in/estors get access to top ,n/est+ent +anagers at an a11orda=le rate that they
)ould ha/e =een di11icult other)ise*
The 1ee structure is asset =ased and not co++ission =ased )hich o11er a signi1icant
/alue to the custo+er*
The client is relie/ed o1 port1olio +anage+ent 1unctionality and he can concentrate on
other +atters*
The client gets =etter ta4 planning =ecause o1 the ta4&har/esting ele+ent in S-I*
The transactions and the operations are +ore transparent to the custo+er as co+pared
to traditional +utual 1und*
The client gets custo+ized reports a=out his port1olio*
Disad<antages
There is no re<uire+ent 1or the reporting o1 the holding and there is no speci1ic go/erning
regulation unlike the +utual 1unds
There is no =oard in case o1 S-I, one hires the +anager to +anage the asset and there is
no =oard to sue i1 so+ething goes )rong
Closing an S-I )ould re<uire +o/ing the indi/idual;s security to another +anager, )hich is
a co+plicated and ti+e consu+ing e4ercise*
,t is di11icult to 1ind an appropriate co+para=le to =ench+ark the per1or+ance o1 S-I*
Di88eren;e =etAeen !$A and $utua, Funds
The key di11erence =et)een a +utual 1und and an S-I is that an S-I o11ers in/estors a
custo+ized approach to in/esting, rather than a generic product* 9sually, the process =egins )ith
an assess+ent =y an ad/iser o1 the indi/idual;s 1inancial needs and goals* The ad/iser can then
reco++end a /ariety o1 port1olio strategy options, )hich are custo+ized to +eet each in/estor;s
needs* Gnce the strategy has =een agreed, a pro1essional port1olio +anager =uys and sells
stocks and =onds in the port1olio on the in/estor;s =ehal1* The 1inancial ad/iser then keeps a
close eye on the port1olio;s per1or+ance*
Is the port1olio is tailored to +eet =oth long& and short&ter+ cash needs, an S-I, unlike a +utual
1und, can take into account personal in/est+ent pre1erences, such as not in/esting in particular
stocks 1or personal, social or en/iron+ental reasons* For e*g* an in/estor +ay speci1y that hisFher
port1olio should not contain any stock =elonging to TGBICCG co+panies*
Ilso unlike +utual 1unds, the in/estor has direct o)nership o1 the stocks and =onds )ithin the
port1olio* This can 1acilitate ta4 +anage+ent strategies*
So+e o1 the leading in/est+ent +anagers o11ering S-I ser/ices are#
-errill Vynch ,n/est+ent -anage+ent
Brandes ,n/est+ent "artners
Nu/een ,n/est+ents
Illiance Capital
-organ Stanley ,n/est+ent -anage+ent
#ED'E F)D!
Pedge 1unds are /ery si+ilar to +utual 1unds e4cept that they are targeted at Pigh Net)orth
indi/iduals as e4plained in the pre/ious chapter* Pedge 1unds are e4e+pt 1ro+ +any o1 the rules
and regulations go/erning other +utual 1und )hich allo)s the+ to acco+plish aggressi/e
in/esting goals* They are restricted =y la) to no +ore than %00 in/estors per 1und, and as a result
+ost hedge 1unds set e4tre+ely high +ini+u+ in/est+ent a+ounts, ranging any)here 1ro+
B$50,000 to o/er B% +illion* Is )ith traditional +utual 1unds, in/estors in hedge 1unds pay a
+anage+ent 1ee? ho)e/er, hedge 1unds also collect a percentage o1 the pro1its 7usually $0A8*
"E!&O F)D! 1401k7 &(A3
"ension 1unds are the 1unds launched to +eet retire+ent sa/ings o1 indi/iduals so as to pro/ide a
steady inco+e to the+ a1ter retire+ent* Since conser/ation o1 inco+e is o1 ut+ost i+portance 1or
a pension 1und their in/est+ent strategy 1ocuses on long ter+, sa1er instru+ents* ,n/est+ent in
pension 1unds also o11ers ta4 =ene1its*
!)$$A(%
"ri/ate Banking co/ers personalized ser/ices such as +oney
+anage+ent, 1inancial ad/ice, and in/est+ent ser/ices 1or high net
)orth clients* Pigh net )orth is generally taken at a household
inco+e o1 at least B%00,000 or net )orth greater than B500,000*
Varger pri/ate =anks o1ten re<uire e/en higher thresholds o1 at least
B% +illion o1 in/esta=le assets
I typical pri/ate =anking di/ision o1 a large =ank )ould o11er 1inancial
ser/ices like#
o ,n/est+ent -anage+ent and Id/ice
o 6isk -anage+ent
o Vi<uidity -anage+ent
o Structured Vending
o Qnhanced =anking 1acilities
o ,ssuer Capital 1or+ation
Core 1unctions in pri/ate =anking include the 1ollo)ing#
o Sales and -arketing F Client "rospecting
o Client -anage+ent, Ser/icing and deli/ery
o Financial "lanning
o "ort1olio Inalysis and Gpti+ization
o -arket Icti/ities
o 6esearch
o Co+pliance controls
"ri/ate Banking Front G11ice co/ers 1unctions like Sales H Client
prospecting, Contact -anage+ent, Iccount Iggregation and
Financial Id/isory ser/ices*
"ri/ate Banking -iddleFBack G11ice co/ers 1unctions like Isset
Illocation, 6esearch, "ort1olio Inalysis, 6isk -anage+ent, Trade
"rocessing, Co+pliance and :ocu+entation
,n/est+ent -anage+ent ai+s at +anaging in/estors; +oney

e11iciently and cost e11ecti/ely to generate superior in/est+ent
returns* The ulti+ate o=Kecti/e is to deli/er e<uity type returns )ith
lesser /olatility risk and achie/e capital preser/ation
In Isset -anager uses the 1ollo)ing approachesFprinciples#
o Isset -i4
o ,nternational :i/ersi1ication
o ScreensFFilters
o Capital preser/ation
o Ilternati/e ,n/est+ents
Isset Illocation can =e done passi/ely or acti/ely*
o "assi/e Ipproach & The port1olio +anager has to decide on the +i4 o1 assets that
+a4i+izes the a1ter&ta4 returns su=Kect to the risk and cash 1lo) constraints* Thus the
in/estor;s characteristics deter+ine the right +i4 1or the port1olio*
o Icti/e Ipproach & "ort1olio +anagers o1ten de/iate 1ro+ the passi/e +i4 =y using
3-arket ti+ing5* To the e4tent that port1olio +anagers =elie/e that they can deter+ine
)hich +arkets are likely to go up +ore than e4pected and )hich less than e4pected,
they )ill alter the acti/e&passi/e +i4 accordingly*
Fund +anagers generally adopt an indi/idual Sin/est+ent
philosophyS )hich
o/erlays their in/est+ent +anage+ent style* The 1ollo)ing are the
t)o <uantitati/e approaches to tactical glo=al asset +anage+ent*
The Stop do)nS in/estor =egins =y looking at the 3=ig picture5 &
econo+y or =road trends in society to identi1y indi/idual countries
and then sectors that )ill =ene1it 1ro+ the pre/ailing conditions*
The 3=otto+ up5 in/estor selects indi/idual securities* Fro+ a /ariety
o1 +ethods, 1orecasted )inners are purchased and 1orecasted losers
are sold* 3Botto+ upS in/estor )ould try to 1ind in/est+ents that are
attracti/e =ecause o1 so+ething special to the security*
"ort1olio -anagers 1ollo) di11erent in/est+ent philosophies* So+e
e4a+ples are#
o "assi/e :i/ersi1ication
o "assi/e Malue ,n/esting
o -o+entu+ ,n/esting
o -arket Ti+ing
o Contrarian ,n/esting
There are se/eral /ariants o1 in/est+ent +anage+ent that ha/e
+ani1ested in ter+s o1 1ir+s o11ering products to suit speci1ic needs
o1 in/estors* So+e o1 the+ are
o ,nstitutional Isset -anage+ent
o -utual Funds
o Separately -anaged Iccounts
o Pedge Funds
o "ension Funds

2.J. &VE!T$ET BAD&' AD B(ODE(A'E
&VE!T$ET BAD&'
,n/est+ent Banks assist clients in raising +oney in order to gro) and e4pand their =usinesses*
Their acti/ities include#
Griginating and +anaging issues o1 securities
9nder)riting
-arket -aking
"rincipal =uying or selling securities on a spread =asis
The top&tier in/est+ent =anks are#
Gold+an Sachs
-errill Vynch
-organ Stanley :ean Witter
Credit Suisse First Boston
9BS
Salo+on S+ith Barney
J*"* -organ
Veh+an Brothers
Generally, the =reakdo)n o1 an in/est+ent =ank includes the 1ollo)ing areas#
CO("O(ATE F&ACE
The =read and =utter o1 a traditional in/est+ent =ank, corporate 1inance generally per1or+s t)o
di11erent 1unctions#
-ergers and ac<uisitions ad/isory & Banks assist in negotiating and
structuring a +erger =et)een t)o co+panies* ,1, 1or e4a+ple, a
co+pany )ants to =uy another 1ir+, then an in/est+ent =ank )ill
help 1inalize the purchase price, structure the deal, and generally
ensure a s+ooth transaction*
)nderAriting & The process =y )hich in/est+ent =ankers raise
in/est+ent capital 1ro+ in/estors on =ehal1 o1 corporations and
go/ern+ents that are issuing securities 7=oth e<uity and de=t8*In
9nder)riter guarantees that the capital issue )ill =e su=scri=ed to
the e4tent o1 his under)ritten a+ount* Pe )ill +ake good o1 any
short1all*

!ALE!
Salespeople take the 1or+ o1# %8 the classic retail =roker, $8 the institutional salesperson, or (8 the
pri/ate client ser/ice representati/e* Brokers de/elop relationships )ith indi/idual in/estors and
sell stocks and stock ad/ice*
,nstitutional salespeople de/elop =usiness relationships )ith large institutional in/estors*
,nstitutional in/estors are those )ho +anage large groups o1 assets, 1or e4a+ple pension 1unds
or +utual 1unds*
"ri/ate Client Ser/ice 7"CS8 representati/es lie so+e)here =et)een retail =rokers and
institutional salespeople, pro/iding =rokerage and +oney +anage+ent ser/ices 1or high net
)orth indi/iduals*
Salespeople +ake +oney through co++issions on trades +ade through their 1ir+s*
T(AD&'
Traders 1acilitate the =uying and selling o1 stock, =onds, or other securities such as currencies,
either =y carrying an in/entory o1 securities 1or sale or =y e4ecuting a gi/en trade 1or a client*
Traders deal )ith transactions large and s+all and pro/ide li<uidity 7the a=ility to =uy and sell
securities8 1or the +arket* 7This is o1ten called +aking a +arket*8 Traders +ake +oney =y
purchasing securities and selling the+ at a slightly higher price* This price di11erential is called the
S=id ask spread*S
(E!EA(C#
6esearch analysts 1ollo) stocks and =onds and +ake reco++endations on )hether to =uy, sell,
or hold those securities* Stock analysts typically 1ocus on one industry and )ill co/er up to $0
co+paniesR stocks at any gi/en ti+e* So+e research analysts )ork on the 1i4ed inco+e side and
)ill co/er a particular seg+ent, such as high yield =onds or 9*S* Treasury =onds*
Corporate 1inance =ankers rely on research analysts to =e e4perts in the industry in )hich they
are )orking* Salespeople )ithin the ,&=ank utilize research pu=lished =y analysts to con/ince their
clients to =uy or sell securities through their 1ir+*
6eputed research analysts can generate su=stantial corporate 1inance =usiness as )ell as
su=stantial trading acti/ity, and thus are an integral part o1 any in/est+ent =ank*
!%D&CATE
The hu= o1 the in/est+ent =anking )heel, syndicate pro/ides a /ital link =et)een salespeople
and corporate 1inance* Syndicate e4ists to 1acilitate the placing o1 securities in a pu=lic o11ering, a
knock&do)n drag&out a11air =et)een and a+ong =uyers o1 o11erings and the in/est+ent =anks
+anaging the process* ,n a corporate or +unicipal de=t deal, syndicate also deter+ines the
allocation o1 =onds*
&&T&AL ")BL&C OFFE(&'!
In initial pu=lic o11ering 7,"G8 is the process =y )hich a pri/ate co+pany trans1or+s itsel1 into a
pu=lic co+pany* The co+pany o11ers, 1or the 1irst ti+e, shares o1 its e<uity 7o)nership8 to the
in/esting pu=lic* These shares su=se<uently trade on a pu=lic stock e4change like the Ne) Dork
Stock Q4change 7NDSQ8 or the Nasda<* The pri+ary reason 1or going through the rigors o1 an
,"G is to raise cash to 1und the gro)th o1 a co+pany* G1ten, the o)ners o1 a co+pany +ay
si+ply )ish to cash out either partially or entirely =y selling their o)nership in the 1ir+ in the
o11ering* Thus, the o)ners )ill sell shares in the ,"G and get cash 1or their e<uity in the 1ir+*
The ,"G process consists o1 these three +aKor phases#
#iring t@e $anagers
This choosing o1 an in/est+ent =ank is o1ten re1erred to as a S=eauty contest*S Typically, this
process in/ol/es +eeting and inter/ie)ing in/est+ent =ankers 1ro+ di11erent 1ir+s, discussing the
1ir+Rs reasons 1or going pu=lic, and ulti+ately nailing do)n a /aluation* ,n +aking a /aluation, ,&
=ankers, pitch to the co+pany )ishing to go pu=lic )hat they =elie/e the 1ir+ is )orth, and
there1ore ho) +uch stock it can realistically sell* "erhaps understanda=ly, co+panies o1ten
choose the =ank that pro/ides the highest /aluation during this =eauty contest phase instead o1
the =est&<uali1ied +anager* Il+ost all ,"G candidates select t)o or +ore in/est+ent =anks to
+anage the ,"G process*
Due Di,igen;e and Dra8ting
This phase in/ol/es understanding the co+panyRs =usiness as )ell as possi=le scenarios 7called
due diligence8, and then 1iling the legal docu+ents as re<uired =y the SQC* The SQC legal 1or+
used =y a co+pany issuing ne) pu=lic securities is called the S&% 7or prospectus8 and Va)yers,
accountants, ,&=ankers, and o1 course co+pany +anage+ent +ust all toil to co+plete the S&% in
a ti+ely +anner*
$arketing
Gnce the SQC has appro/ed the prospectus, the co+pany e+=arks on a road sho) to sell the
deal* I road sho) in/ol/es 1lying the co+panyRs +anage+ent coast to coast 7and o1ten to
Qurope8 to /isit institutional in/estors potentially interested in =uying shares in the o11ering*
Typical road sho)s last 1ro+ t)o to three )eeks, and in/ol/e +eeting literally hundreds o1
in/estors, )ho listen to the co+panyRs presentations, and then ask scrutinizing <uestions* G1ten,
+oney +anagers decide )hether or not to in/est thousands o1 dollars in a co+pany )ithin Kust a
1e) +inutes o1 a presentation* The +arketing phase ends a=ruptly )ith the place+ent o1 the
stock, )hich results in a ne) security trading in the +arket*
Success1ul ,"Gs trade up on their 1irst day 7increase in share price8, and tend to succeed o/er the
course o1 the ne4t 1e) <uarters*
T#E C#&E!E BALL
Bet)een corporate 1inance and research, 1ir+s =uild )hat is kno)n as a Chinese Wall separating
research analysts 1ro+ =oth =ankers and Sales H Trading* G1ten, =ankers are pri/y to inside
in1or+ation at a co+pany =ecause o1 ongoing or potential -HI =usiness, or =ecause they kno)
that a pu=lic co+pany is in registration to 1ile a 1ollo)&on o11ering* Qither transaction is considered
+aterial non&pu=lic in1or+ation and research analysts, pri/y to such in1or+ation cannot change
ratings or +ention it, as doing so )ould e11ecti/ely ena=le clients to =ene1it 1ro+ inside
in1or+ation at the e4pense o1 e4isting shareholders* When it co+es to certain in1or+ation, a
Chinese Wall also separates salespeople and traders 1ro+ research analysts* The reason should
=e o=/ious* Inalyst reports o1ten +o/e stock prices & so+eti+es dra+atically*
Thus, a salesperson )ith access to research in1or+ation prior to it =eing pu=lished )ould gi/e
clients an un1air ad/antage o/er other in/estors* 6esearch analysts e/en disguise the na+e o1
the co+pany on a report until i++ediately =e1ore it is pu=lished* This )ay, i1 the report 1alls into
the )rong hands, the in1or+ation re+ains so+e)hat con1idential*
)DE(B(&T&'
,nsiders o1 the co+pany cannot sell any shares 1or a speci1ied period o1 ti+e, this is
kno)n as the ]]]]]]]L 7Polding "eriod, Vockup "eriod, Buy H Pold "eriod8
In 9nder)riter is a =rokerFdealer or an in/est+ent =ank* Pe guarantees that the capital issue )ill
=e su=scri=ed to the e4tent o1 his under)ritten a+ount* Pe )ill +ake good o1 any short1all* The
contract =et)een the issuer and the Lead or "anaging !nderwriter is the !nderwriting Agree(ent.
&e agree(ent states the ter+s and conditions o1 the o11ering, such as, the !nderwriting *pread
7the a+ount the under)riters +ake on sales8, the "u=lic G11ering "rice 7"G"8, and the a+ount o1
proceeds 1ro+ the o11ering that )ill go to the issuer*
Three di11erent le/els o1 =rokerFdealers handle the under)riting process#
$anaging )nderAriters & The -anager 7lead under)riter8 is the =rokerFdealer a)arded the
issue, )ho generally handles the relationship )ith the issuer and o/ersees the under)riting
process*
!:ndi;ate & To share the risk, and +ore e11iciently distri=ute the o11ering to the pu=lic,
=rokerFdealers )ill Koin together in a 5oint &rading Account* The syndicate pro1its =y selling the
securities and earning a *pread -i.e., te #,# less te a(ount paid to te issuer.* Syndicate
+e+=ers share the risk and are responsi=le 1or any unsold securities*
!e,,ing 'rou+ & co+prises o1 =rokerFdealers chosen to assist the syndicate in +arketing the
issue in a =roker 7agency8 capacity* Selling Group 1ir+s are not +e+=ers o1 the syndicate, and
are not at risk 1or the securities* Ill =rokerFdealers in/ol/ed in the under)riting o1 non&e4e+pt
securities +ust =e NIS: +e+=er 1ir+s*
9nder)riters earn ( types o1 9nder)riting Spread#
$anagerWs 8ee & The lead under)riter recei/es this 1ee on all
securities sold*
)nderAriterWs A,,oAan;e is the total spread +inus the -anagerRs
1ee* This 1ee is shared =y syndicate +e+=ers =ased on the type o1
syndicate account*
Con;ession & ,t is typically the largest part o1 the spread and is paid
to the =rokerFdealer that actually took the client;s order*
T:+es o8 )nderAriting
There are t)o =asic types o1 co++it+ents +ade =y under)riters to issuers#
%* Fir* ;o**it*ent & The issue is purchased 1ro+ the issuer, +arked&up and sold to the
pu=lic* The under)riter here is acting as a dealer and is at risk 1or the unsold securities?
)hate/er securities are not sold )ill re+ain in the under)riter;s in/entory* !tand=:
)nderAriting is al)ays used in a su=se<uent pri+ary o11ering o1 stock that is preceded =y a
su=scription or pre&e+pti/e rights o11ering* :uring the rights o11ering, the under)riter 3stands
=y5* I1ter the rights o11ering period has ended and all rights ha/e =een either e4ercised or
e4pired, the under)riters +ust take any unsu=scri=ed securities on a 1ir+ co++it+ent =asis*
$* Best-e88orts underAriting - The under)riters act as agents or =rokers 1or the issuer, and
atte+pt to sell all the securities in the +arket* The =est e11orts under)riter is not at risk, and
any unsold securities re+ain )ith the issuer* T)o su=&types o1 =est e11orts are All6or6%one
and "ini6(a)* In all&or&none under)riting +ay =e canceled =y the issuer i1 the entire issue is
not sold in a gi/en ti+e period* I +ini&+a4 under)riting re<uires a +ini+u+ a+ount to =e
sold* ,1 the under)riter sells the +ini+u+, they +ay then atte+pt to sell the +a4i+u+
7usually =eing the entire issue8* Po)e/er, i1 the +ini+u+ is not sold, the issuer +ay cancel
the under)riting*
!ECODA(% $A(DET T(AD&'
The trading o1 outstanding issues takes place in the Secondary -arkets* The secondary +arkets
are =roken do)n into 1our +arket types#
%* Listed $arket . Q4changes )here an Iuction +ethod is used at a physical location*
Specialists pro/ide li<uidity on the 1loor o1 an e4change* 7Qg8 The Ne) Dork Stock Q4change
7NDSQ8
$* O<er-t@e-Counter $arket 7GTC, Second -arket, 9nlisted8 . I negotiated +arket )ithout a
physical location )here transactions are done /ia teleco++unications* BrokerFdealers acting
as -arket -akers pro/ide the li<uidity*
(* T@ird $arket . Where listed securities are traded GTC 7o/er&the&counter8, and
=rokerFdealers acting as +arket +arkers o11er an alternati/e to trading on the e4change itsel1*
In e4a+ple )ould =e a =rokerFdealer that +aintained an in/entory o1 ,B- stock 7)hich trades
on the NDSQ8, and =uys and sells that stock to other =rokers and custo+ers using a
negotiated, o/er&the&counter +ethod o1 trading*
What is an agree+ent in )hich the under)riter is legally =ound only to atte+pt to sell the
securities in a pu=lic o11ering 1or the 1ir+L
When the in/est+ent =anker =ears the risk o1 not =eing a=le to sell a ne) security at the
esta=lished price, )hat is this is kno)n asL
Gn the day that a lock&up period e4pires, the +arket /alue o1 the stock )ill +ost likely
]]]]]]]]* 7,ncreaseFdecreaseFre+ain sa+e*8
2* Fourt@ $arket . The ,nstinet, a syste+ 1or direct o/er&the&counter institutional trading that
=ypasses =rokerFdealers and thus reduces the cost o1 large institutional Block Trades*
Ill the stock e4changes are registered )ith the SQC, and they ha/e a 3sel1 regulation5
+echanis+* The -aloney Ict o1%0(' ena=led the NIS: to =e the S6G 1or the second, third and
1ourth +arkets*
T#E FLOO( OF T#E EFC#A'E
NDSQ 7partially8 and Vondon are the only +aKor e4changes )hich still use a trading 1loor* When
an in/estor custo+er calls their =roker to place a trade, the 1ollo)ing se<uence o1 acti/ities
happen#
Brokerage Fir+ checks the custo+erRs account 1or cash =alance,
restrictions etc
Qnter the order in its Grder -atch Syste+* The rep noti1ies the
=rokerFdealer;s Grder or Wire 6oo+ to e4ecute the trade*
The Grder roo+ then )ires the order to the Co++ission Pouse Broker
7CPB8, an e+ployee o1 the =rokerFdealer )ho trades on the 1loor o1 the
e4change 1or that =rokerFdealer*
The CPB +akes their )ay o/er to the respecti/e Trading "ost*
It the post, the CPB encounters other 1olks )ho )ant to trade ,B-
stock*
Transa;tion (e+ort ,s sent to the originating =rokerage 1ir+s
7=uying and selling8* I +arket order through Super:ot to the
specialist takes an a/erage %5 seconds to co+plete*
6eports are also sent to Consolidated Tape :isplays )orld&)ide,
and to the Clearing operations*
"ost Trade "ro;essing -atching o1 =uyers and sellers && the
Co+parison process && takes place al+ost i++ediately*
This is 1ollo)ed =y a (&day Clearing and Settle+ent cycle at )hich
ti+e trans1er o1 o)nership 7shares 1or dollars or /ice /ersa8 is
co+pleted /ia electronic record keeping in the :epository*
Brokerage Fir* The transaction is processed electronically,
crediting or de=iting the custo+erRs account 1or the nu+=er o1 shares
=ought or sold*
&n<estor 6ecei/es a trade con1ir+ation 1ro+ hisFher 1ir+* ,1 shares
)ere purchased, the in/estor su=+its pay+ent* ,1 shares )ere sold,
the in/estorRs account is credited )ith the proceeds*
!+e;ia,ist
Specialists conduct the auction as a =roker or dealer and +aintain a 1air and orderly +arket =y
+atching up =uyers and sellers* The specialist is not an e+ployee o1 the e4change and +ay
trade 1or their o)n account, as )ell as trading as an agent 1or CPB orders*
Broker Dea,er
Q4ecutes orders 1or others Q4ecutes orders 1or the+sel/es
Icts as an Igent Icts as a "rincipal 7i*e*, a +arket +aker8
Charges Co++ission Charges -ark&up and -ark&do)n
In indi/idual 1ir+ could act as a =roker on one trade and a dealer on another* When acting as a
=roker, the 1ir+ is taking custo+er orders and acting as their agent to =uy or sell the security* For
this ser/ice, the =roker charges a co++ission* I 1ir+ acting as a dealer is the actual =uyer or
seller, taking the other side o1 a trade* The price at )hich +arket +akers )ill =uy or sell a
particular security is kno)n as the Bid or Isk "rice*
$arket $aker
"ro/ide continuous =id and o11er prices )ithin a prescri=ed
percentage spread 1or shares designated to the+
2 to 20 7or +ore8 +arket +akers 1or a particular stock depending on
the a/erage daily /olu+e*
"lay an i+portant role in the secondary +arket as catalysts,
particularly 1or enhancing stock li<uidity
(egistered (e+resentati<es
In indi/idual )ho has passed the NIS:Rs registration process and is
licensed to )ork in the securities industry
9sually a =rokerage 1ir+ e+ployee acting as an account e4ecuti/e
1or clients
Sell to the pu=lic? they do not )ork on e4change 1loors
Order T:+es 1Based on "ri;e3
There are 1our =asic order types*
%* $arket Orders is e4ecuted at once, Sat the +arket*S I +arket order guarantees e4ecution,
=ut does not guarantee a price* The 1inal price is deter+ined =y supply and de+and*
$* Li*it Orders & So+e in/estors +ay )ant to =uy or sell, =ut only at a speci1ic price* I Vi+it
order is e4ecuted at a set price or =etter and )ill not =e e4ecuted i1 that price is not +et* For
e4a+ple, a custo+er o)ns WDT stock, )hich is currently trading at B50Fshare* They )ould
like to sell the stock, =ut only i1 they can get a price o1 B55 or +ore* The in/estors )ould place
a Sell Vi+it at B55Fshare, an order that )ill =e e4ecuted only i1 a price o1 B55 or =etter is
a/aila=le* Si+ilarly an in/estor )ho seeks to =uy, =ut only at a certain price or =etter, +ight
enter a Buy Vi+it at B25Fshare*
(* !to+ order & ,1 the +arket price hits or passes through the stop price 7Trigger8, a +arket
order is Qlected* For e4a+ple, an in/estor =ought stock at B50Fshare* The in/estor )ants the
price o1 the stock to go up, =ut )ishes to li+it the losses i1 the stock price 1alls* Such an
in/estor +ight place a Sell Stop order at B25, and no) i1 the +arket price 1alls to B25 or
=elo), the stop is triggered and a +arket order is elected* Inother e4a+ple +ight =e a
Technical Trader )ho =elie/es that i1 the stock goes up to a certain price, it is signaling the
=eginning o1 a Bullish run* This in/estor +ight enter a Buy Stop at B5%, 1or e4a+ple* No), i1
the stock rises to B5% or a=o/e, a +arket order is triggered to =uy the stock* I potential
pro=le+ )ith a stop order is that it triggers a +arket order, )hich does not guarantee a
purchase or sale price* I stop order +ust =e triggered 7acti/ated or elected8 =e1ore e4ecution
as a +arket order*
2* !to+ Li*it order & ,1 the in/estors placed an order 1or B5% Stop, B5$ Vi+it, the order )ould
=e elected at B5%, =ut )ould not =e 1illed 7e4ecuted8 unless a price o1 B5$ or =etter )as
a/aila=le* No), the in/estor has eli+inated the risk o1 =uying the stock )ithout guaranteeing
the price* I stop li+it order, once triggered, =eco+es a li+it order*
5* Do-not-redu;e Order & ,ndicates that the order price should not =e adKusted in the case o1 a
stock split or a di/idend payout*
Order T:+es 1Based on Ti*e3
Da: Order . The order is /alid till end o1 day and i1 it is un1illed at days end, it gets cancelled*
O+en Order or 'ood Ti,, Can;e,,ed 1'TC3 . The order can re+ain open 1or up to si4 +onths* ,t
is the responsi=ility o1 the registered representati/e to cancel at the custo+er;s direction* ,n
addition, at the end o1 Ipril and the end o1 Gcto=er, all GTC orders +ust =e recon1ir+ed or
eli+inated*
Order T:+es 1Based on Vo,u*e3
Fi,, or Di,, 1FOD3 . The order +ust =e i++ediately 1illed in one trade or canceled co+pletely*
A,, or one 1AO3 - The entire order +ust =e 1illed or canceled co+pletely, =ut unlike FGX, IGN
can re+ain good till cancelled*
&**ediate or Can;e, 1&OC3 +ust i++ediately =e 1illed 1or as +uch o1 the order as possi=le in
one trade, )ith the re+ainder =eing cancelled*
$arket ot #e,d order 5 The 1loor =roker has the discretion concerning ti+e and price* I key
point is that -arket Not Peld orders are ne/er on the SpecialistRs Book*
T#E OVE(-T#E-CO)TE( 1OTC3 $A(DET
9nlike listed securities that trade on an e4change, unlisted securities trade G/er the Counter
7GTC8* -ost securities actually trade GTC, since 9*S* go/ern+ent, -unicipal and +ost corporate
securities trade GTC* Since there is no specialist =ook and no post to record transactions, GTC
price in1or+ation is either pu=lished periodically in paper 1or+, disse+inated o/er telephone lines,
or displayed real&ti+e electronically*
I sell li+it order can =e 1illed at a lo)er price than your li+it e*g* your sell li+it is at $%*0 H you
can =e 1illed at $%*0!L TrueFFalse
,1 you )ant to li+it your risk on a long position you can place a sell stop orderL TrueF1alse
,1 the +arket is currently =id %5*00 H o11ered at %5*0% you are guaranteed o1 =uying at %5*0% i1
you place a +arket orderL TrueFFalse
Vi<uidity in the GTC +arket is pro/ided =y -arket -akers 7i*e*, =rokerFdealers )ho +aintain an
in/entory o1 a particular stock, and =uy and sell the stock 1ro+ and to custo+ers8*
The largest syste+ 1or displaying GTC +arket <uotes is Nasda< 7The NIS:;s Iuto+ated
Uuotation syste+8* BrokerF:ealers su=scri=e to /arious le/els o1 the Nasda< syste+ depending on
their 1unctional needs* Ve/el % ser/ice 7i*e*, the ,nside Uuote or 6epresentati/e Uuote8 is the
highest =id and lo)est ask prices o1 all +arket +akers, and is used =y registered reps* Ve/el $
ser/ice is 1or traders, and lists all +arket +akersR 1ir+ <uotes on price and size* Ve/el ( ser/ice also
displays all <uotes, and is used =y +arket +akers to enter <uotes*
The <uotes look like the 1ollo)ing#
Bid Isk
:ealer I 0 0*5
:ealer B '*5 0*$5
:ealer C 0*% 0*'
:ealer : 0 0*5
,1 you )ere selling stock, to )ho+ )ould you sellL :ealer C has the highest =id o1 0*%, )hile a
=uyer )ould go to :ealer B )ho has the lo)est ask o1 0*$5* The inside <uote, there1ore, )ould =e
0*% . 0*$5, the highest =id and the lo)est ask*
#OB DOE! A B(ODE(A'E F&($ LOOD L&DEE
I =rokerage 1ir+ has the 1ollo)ing depart+ents#
Sales
Ne) Iccounts
Grder 6oo+
"urchase and Sales
Cashiering
-argin
Corporate Ictions
Iccounting
Co+pliance
!a,es
Sales tea+ is responsi=le 1or can/assing =usiness* They are sta11ed )ith Iccount
Q4ecuti/esFIccount -anagers )ho solicit =usiness 1ro+ retail and )holesale custo+ers*
eA A;;ounts
Ne) Iccount depart+ent is responsi=le 1or recei/ing custo+er account opening applications and
docu+enting the custo+er data* They are the custodians 1or /arious docu+ents like Ne) account
1or+, Signature cards, -argin Igree+ents, Vending Igree+ents and Gption Trading
Igree+ents* Gnly )hen the re<uired docu+ents are recei/ed, the account can legally operate*
Ne) accounts can =e o1 one o1 the 1ollo)ing types#
,ndi/idual Cash Iccount . Gnly cash transactions are per+itted* No
+argin trading is per+itted*
-argin Iccount
Joint Iccount
"o)er o1 Ittorney Iccounts
Order (oo*
Grders are taken =y dealers in order roo+ and they are e4ecuted in the =est possi=le +anner*
Q/ery order has detailed instructions like#
BuyFSell
Uuantity
Vi+itF-arket
Security details etc*
We ha/e co/ered the di11erent order types in the earlier pages*
The relationships a+ong the /arious depart+ents can =e pictorially represented as =elo)#

"ro/:
"ro/: <oting
&n8 or*a tion 8 ,oA to ;usto*er s
De+ositor :
Trans8er
Agent
!to;k (e;ord
A; ;ount nu*=ering N ;odi ng
Audit s
!e;urit: $o<e*e nt s
Di <idend
Cas@ Di <iden ds
!to ;k s+,it s
Due =i ,,s
Bond &ntere st
A;;ounting
Bookkee+ing
Dai, : ;as@ re;or d
AdR us ted tr ai, =a, an;e
Tr ai, Ba, an;e
" N L !ta te*en t
Order (oo*
E/e;ut i on re; ording
Con8ir*i ng 'TC or ders
"endi ng Orders
!a, es
A;; ount e/e;uti<e
1#o*e or Bran;@ o88i;e
$argin
A;;ount $ain tena n;e
!a,es su++ort
&ssue ;@e;ks
&te*s due
E/te nsions
C,ose 5 Out s
De,i <er : o 8 se;urities
Cas@i ers
(e;ei <e N De,i <er
Vau, ting
Bank Loan
!to;k Loan.=orroA
Tra ns8 er
(eor ganiMati on
C,earing Cor+
1C!3
"ur;@ase N !a,es 1"N!3
(e;or di ng
Figurat ion 1 in; ,udi ng a; ;rued int er est3
Co*+ arison 1re;on;i,e* ent3
Booki ng
Contra Brokers
C, ients
E/;@anges OTC $arket
Q4ecuti on
6epo rts
Con1i r+atio n
a*e A;;ounts 1a*e N Address3
O+en A;;ounts
E/e;ut ing C @a nges
6eports Gr der Tickets
Banks
Brokerages
"ur;@ase and !a,es
This depart+ent is responsi=le 1or the 1ollo)ing acti/ities#
6ecording the trade )ith a uni<ue nu+=er using codes and tickets*
Figuration to calculate the +onetary /alue o1 the transaction
6econciliation o1 custo+er trades )ith counter&party transactions
Custo+er Con1ir+ation in a legally =inding 1or+*
$argin
-argin or Credit :epart+ent +onitors the status o1 the custo+er accounts* Is e4plained in the
pre/ious pages, they are also responsi=le 1or +argin calls* The typical acti/ities o1 this
depart+ent are#
Iccount -aintenance
Sales Support
Clearing Checks
,te+s pending 7-oney due, stocks due8
Closing out
Cas@iering
They are responsi=le 1or +o/e+ent o1 securities and 1unds )ithin the =rokerage 1ir+* They take
care o1 the 1ollo)ing 1unctions#
6ecei/ing and deli/ering
Maulting
Pypothecations
Security Trans1ers
Stock Vending
Cor+orate A;tion
Corporate Iction re1ers to di/idend declarations, stock splits etc* The Corporate Iction
depart+ent +akes sure that the right1ul o)ners 7as on the 6ecord :ate8 recei/e the di/idends,
Splits etc*
A;;ounting
The Iccounting depart+ent records, processes and =alances the +o/e+ent o1 +oney in the
=rokerage 1ir+* They produce the :aily Cash 6ecords and Trial Balance, Balance Sheet and
"ro1it H Voss state+ents on a periodic =asis*
Co*+,ian;e
The Brokerage 1ir+s are regulated =y SQC, =y state regulatory agencies and industry )ide Sel1
6egulatory Grganizations* The co+pliance depart+ent is responsi=le 1or ensuring that all the
rules and regulations are co+plied )ith and reported on ti+e*
They also +ake sure that the ne)er regulations like Inti -oney Vaundering Ict are i+ple+ented
inside the 1ir+*
?uestions
%* Ill o1 these are di11erent types o1 =rokerage accounts e4ceptL
a8 -argin Iccount =8 Cash Iccount c8 ,6I Iccount d8 Nostro Iccount
$* I +arket order that e4ecutes a1ter a speci1ied price le/el has =een reached is calledL
a8 -arket Grder =8 Stop Grder c8 Fill or Xill Grder d8 :ay Grder
(* I =rokerage or analyst report )ill contain all o1 the 1ollo)ing e4ceptL
a8 a detailed description o1 the co+pany, and its industry*
=8 an opinionated thesis on )hy the analyst =elie/es the co+pany )ill succeed or
1ail*
c8 a reco++endation to =uy, sell, or hold the co+pany*
d8 a target price or per1or+ance prediction 1or the stock in a year*
e8 a track record o1 the analyst )riting the report*
$A(DET &D&CE!
,nde4 o1 +arket prices o1 a particular group o1 stocks*
&nde/ T:+es
Va,ue Beig@ted &nde/ is a stock inde4 in )hich each stock a11ects the inde4 in proportion to its
+arket /alue* Q4a+ples include Nasda< Co+posite ,nde4, SH" 500, Pang Seng ,nde4, and
QIFQ ,nde4* They are also called capitalization )eighted inde4*
"ri;e Beig@ted &nde/ is a stock inde4 in )hich each stock a11ects the inde4 in proportion to its
price per share* 7Qg8 :o) Jones ,ndustrial I/erage
De: $arket &ndi;es
The i+portant +arkets and the indices used are presented =elo)#
9S :i/ersi1ied +arket :o) Jones ,ndustrial I/erage 7:o)8
9S Technology NIS:IU %00
9X 7Vondon8 Financial Ti+es Stock Q4change ,nde4 7FTSQ8
Ger+any 7Frank1urt8 :IW
France 7"aris8 CIC
S)itzerland 7Turich8 S-,
Japan 7Tokyo8 Nikkei
Pong Xong Pang Seng
Singapore Strait Ti+es ,nde4 7ST,8
DoA Vones &ndustria, A<erage 1DV&A3
The :o) is +ade up o1 (0 large co+panies 1ro+ /arious industries* The stocks in the 1ollo)ing
chart co+prise the inde4*
(- Ilcoa
IlliedSignal I+erican Q4press
ITHT Boeing
Caterpillar Che/ron
Citigroup Coca&Cola
:u"ont Qast+an Xodak
Q44on General Qlectric
General -otors Goodyear
Pe)lett&"ackard ,B-
,nternational "aper J*"* -organ
Johnson H Johnson -c:onald
-erck "hilip -orris
"rocter H Ga+=le Sears
9nion Car=ide 9nited Technology
Wal&-art Walt :isney
2.K. (&!D $AA'E$ET
(&!D $AA'E$ET
6isk is any ele+ent o1 the operating en/iron+ent that can cause loss or 1ailure* 6isks are di11icult
to de1ine and they keep changing constantly* For e4a+ple, i1 )e ask t)o deri/ati/e traders to
identi1y the =iggest risks 1aced =y the+, )e +ay get di11erent ans)ers*
Vet us look at an e4a+ple o1 an Q4port Griented 9nit* -ost or all o1 their re/enue is earned in
1oreign e4change )here as costs are in do+estic currency* Q4penses like cost o1 ra) +aterial,
salaries, are paid out in ,ndian 6upees* ,1 rupee appreciates signi1icantly, the e4porter;s pro1its
+ay =e signi1icantly a11ected* This is su++arized )ith a nu+erical e4a+ple in the 1ollo)ing ta=le#
!;enario 1 !;enario 2
,N6F9S: 50 25
6e/enues in 9S: %00 +illion %00 +illion
6e/enues in ,N6 5000 +illion 2500 +illion
Costs 2000 +illion 2000 +illion
et "ro8it 1000 *i,,ion 500 *i,,ion
I %0A appreciation in rupee resulted in a 50A drop in pro1its* This is a case o1 e4change rate
risk* G1 course, in ti+es o1 dollar appreciation, the 1ir+ )ill end up +aking pots o1 +oneyJ
T#E (&!D (EBA(D "(&C&"LE
T@e @ig@er t@e risk :ou take7 t@e @ig@er is t@e +otentia, reAard and t@e ,oAer t@e risk7 t@e
,oAer is t@e +otentia, reAard. The lo)er the credit rating o1 the =orro)er, the higher is the risk
o1 lending +oney =ut higher also is the interest rate that can =e chargedJ Note that the )ord used
here is 3potential re)ard5* There is no set 1or+ula to say ho) +uch re)ard )ill Kusti1y a certain
a+ount o1 risk* Ilso, so+eti+es the re)ard +ay depend upon the person;s or the organization;s
a=ility to take ad/antage* Po)e/er, the risk&re)ard principle should =e the guiding principle )hile
deciding on a risk +anage+ent strategy*
' shi$ is safe in the harbor+*ut that is not what shi$s are bui&t for,
T#(EE "&LLA(! OF (&!D $AA'E$ET
DEF&&' (&!D!
The 1ollo)ing are so+e o1 the possi=le risk types*
Credit risk is the possi=ility o1 loss as a result o1 de1ault, such as )hen a custo+er de1aults on a
loan, or +ore generally, any type o1 1inancial contract*
De8ine
What are the risksL
$easure
Po) to esti+ate the riskL
$anage
Set tolerance li+its and act
LiGuidit: risk is the possi=ility that a 1ir+ )ill =e una=le to generate 1unds to +eet contractual
o=ligations as they 1all due*
O+erationa, risk is the possi=ility o1 loss resulting 1ro+ errors in instructing pay+ents or settling
transactions*
Lega, risk is the possi=ility o1 loss )hen a contract cannot =e en1orced && 1or e4a+ple, =ecause
the custo+er had no authority to enter into the contract or the contract turns out to =e
unen1orcea=le in a =ankruptcy*
$arket risk is the possi=ility o1 loss o/er a gi/en period o1 ti+e related to uncertain +o/e+ents in
+arket 1actors, such as interest rates, currencies, e<uities, and co++odities*
$EA!)(&' (&!D!
Gnce the risks ha/e =een identi1ied, the ne4t step is to choose the <uantitati/e and <ualitati/e
+easures o1 those risks* 6isk is essentially +easured in ter+s o1 the 1ollo)ing 1actors#
a* The probability o1 an un1a/ora=le e/ent occurring 7e4pressed as a nu+=er =et)een 0 and
%8
=* The esti+ated (onetary i(pact on organization =ecause o1 the e/ent
The un1a/ora=le e/ents di11er 1or di11erent types o1 risk* For e4a+ple, in case o1 +arket risk, 1uture
e/ents re1er to +arket scenarios* These scenarios i+pact each port1olio prices di11erently
depending on its co+position*
6isk +easure+ent is a co+=ination o1 +anage+ent, <uantitati/e analysis and in1or+ation
technology* Serious technology in/est+ent is re<uired 1or accurate +easure+ent and reporting*
Gne o1 the co++only used +ethodologies 1or +arket risk is 3Malue It 6isk5
Va,ue at (isk 1Va(3
Malue at 6isk is an esti+ate o1 the )orst e4pected loss on a port1olio under nor+al +arket
conditions o/er a speci1ic ti+e inter/al at a gi/en con1idence le/el* ,t is also a 1orecast o1 a gi/en
percentile, usually in the lo)er tail, o1 the distri=ution o1 returns on a port1olio o/er so+e period*
Ma6 ans)ers the <uestion# ho) +uch one can lose*
Inother )ay o1 e4pressing this is that Ma6 is the lo)est <uantile o1 the potential losses that can
occur )ithin a gi/en port1olio during a speci1ied ti+e period* For an internal risk +anage+ent
+odel, the typical nu+=er is around 5A* Suppose that a port1olio +anager has a daily Ma6 e<ual
to B% +illion at %A* This +eans that there is only one chance in %00 that a daily loss =igger than
B% +illion occurs under nor+al +arket conditions*
Suppose port1olio +anager +anages a port1olio )hich consists o1 a single asset* The return o1
the asset is nor+ally distri=uted )ith annual +ean return %0A and annual standard de/iation
(0A* The /alue o1 the port1olio today is B%00 +illion* We )ant to ans)er /arious si+ple <uestions
a=out the end&o1&year distri=ution o1 port1olio /alue#
%* What is the distri=ution o1 the end&o1&year port1olio /alueL
$* What is the pro=a=ility o1 a loss o1 +ore than B$0 +illion dollars =y year endL
(* With %A pro=a=ility )hat is the +a4i+u+ loss at the end o1 the yearL This is the Ma6 at %A*
Malue&at&6isk 7Ma68 is an integrated )ay to deal )ith di11erent +arkets and di11erent risks and to
co+=ine all o1 the 1actors into a single nu+=er )hich is a good indicator o1 the o/erall risk le/el*
Va( Ca,;u,ation
I generic step&)ise approach to calculate )ould =e#
Get price data 1or you port1olio holdings*
Con/ert price data in to log return data* 7Vog 6eturn# ui > ln 7Si F Si-18
)here Si is the price o1 the asset on day i8
Calculate standard de/iations o1 each instru+ent or each pro4y*
Calculate pre1erred con1idence le/el* 00A > $*(( C standard
de/iation*
-ultiply position holdings =y their respecti/e Standard :e/iation at a
00A con1idence le/el* This results in a position Ma6 at a 00A
con1idence le/el*
A. "onte6Carlo *i(ulation
,t is a si+ulation techni<ue* First, so+e assu+ptions a=out the distri=ution o1 changes in +arket
prices and rates 71or e4a+ple, =y assu+ing they are nor+ally distri=uted8 are +ade, 1ollo)ed =y
data collection to esti+ate the para+eters o1 the distri=ution* The -onte Carlo then uses those
assu+ptions to gi/e successi/e sets o1 possi=le 1uture realizations o1 changes in those rates* For
each set, the port1olio is re/alued* When done, youR/e got a set o1 port1olio re/aluations
corresponding to the set o1 possi=le realizations o1 rates* Fro+ that distri=ution you take the 00th
percentile loss as the Ma6*
E/a*+,e Va( Ca,;u,ation
Issu+e that you ha/e a holding in ,B- Stock )orth B%0 +illion* Dou ha/e calculated the
standard de/iation 7S:8 o1 change o/er one day in ,B- is B 0*$0*
There1ore 1or the entire position, S: o1 change o/er % day > B$00,000
The S: o1 change o/er %0 days > B$00,000 C ^7%08 > B!($,25!
The 00A Ma6 o/er %0 days > $*(( C !($,25! > B%,2(,!$%
E/a*+,e $onte-Car,o !i*u,ation
-onte&Carlo si+ulation is a co+putation process that utilizes rando+ nu+=ers to deri/e an
outco+e* So instead o1 ha/ing 1i4ed inputs, pro=a=ility distri=utions are assigned to so+e or
all o1 the inputs* This )ill generate a pro=a=ility distri=ution 1or the output a1ter the si+ulation
is ran* Pere is an e4a+ple*
I 1ir+ that sells product W under a pureFper1ect co+petition +arketC )ants to kno) the
pro=a=ility distri=ution 1or the pro1it o1 this product and the pro=a=ility that the 1ir+ )ill loss
+oney )hen +arketing it*
The e<uation 1or the pro1it is# T" > T6 & TC > 7UC"8 & 7UCMCEFC8
Issu+ptions#
The Uuantity :e+anded 7?8 1luctuates =et)een ',000 and %$,000 units
Ill other si+ilar Gutput 1actors are also si+ulated to re1lect the change*
I si+ple si+ulation )orksheet is prepared to )ith 50000 iterations 1or ?. ,t sho)s the pro1it
nu+=er 7)ith 1re<uency8 under /arious scenarios o1 <uantity sold* This translates into a near
Nor+al Cur/e )ith a -ean and Standard :e/iation*
9sing the re<uired con1idence inter/al 1ro+ the nor+al cur/e and the standard de/iation, a
Ma6 li+it is generated 1ro+ this distri=ution*
B. 7istorical *i(ulation
Vike -onte Carlo, it is a si+ulation techni<ue, =ut it skips the step o1 +aking assu+ptions a=out
the distri=ution o1 changes in +arket prices and rates* ,nstead, it assu+es that )hate/er the
realizations o1 those changes in prices and rates )ere in the past is the =est indicator 1or the
1uture*
,t takes those actual changes, applies the+ to the current set o1 rates and then uses those to
re/alue the port1olio* When done, youR/e got a set o1 port1olio re/aluations corresponding to the
set o1 possi=le realizations o1 rates* Fro+ that distri=ution, )e can calculate the standard
de/iation and take the 00th percentile loss as the Ma6*
C. /ariance6Covariance (etod
This is a /ery si+pli1ied and speedy approach to Ma6 co+putation* ,t is so, =ecause it assu+es a
particular distri=ution 1or =oth the changes in +arket prices and rates and the changes in port1olio
/alue* ,t incorporates the co/ariance +atri4 7correlation e11ects =et)een each asset classes8
pri+arily de/eloped =y J" -organ 6isk -anage+ent Id/isory Group in %00!* ,t is o1ten called
6isk -etrics -ethodology* ,t is reasona=ly good +ethod 1or port1olio )ith no option type products*
Thus 1ar, it is the co+putationally 1astest +ethod kno)n today* But this +ethod is not suited 1or
port1olio )ith +aKor option type 1inancial products*
$AA'&' (&!D!
There are +ultiple strategies to +anage risks* So+e o1 the co++only 1ollo)ed ones are#
%* :i/ersi1ication
$* Pedging or ,nsurance
(* Setting 6isk Vi+its
2* ,gnore the riskJ
Ill the a=o/e strategies )ill reduce the risk . =ut +ay not eli+inate the+* The top +anage+ent
)ill deter+ine its risk policy 7i*e*8 its appetite 1or risk* The 6isk -anager in a =ank )ill =e
responsi=le 1or identi1ying the risks, setting up tolerance li+its, +easuring the risk on a day to day
=asis and take action )hene/er the li+its are =reached*
!)$$A(%
6isk, de1ined as the de/iation 1ro+ e4pectation, is an e4tre+ely
i+portant concept 1or 1inancial ser/ices industry*
The nature o1 =anking =usiness gi/es rise to +any di11erent risks in
this =usiness* Credit risk, Vi<uidity risk, Gperational risk, Vegal risk,
-arket risk are so+e e4a+ples*
6isk +anage+ent is a (&step process# :e1ining, -easuring and
-anaging risks* 6isk is +easured in ter+s o1 the pro=a=ility and the
potential +onetary i+pact should the ad/erse e/ent occur*
6isk +easure+ent is a co+=ination o1 +anage+ent, <uantitati/e
analysis and in1or+ation technology* Serious technology in/est+ent
is re<uired 1or accurate +easure+ent and reporting* Gne o1 the
co++only used +ethodologies 1or +arket risk is 3Malue at 6isk5
There are +ultiple )ays o1 +anaging risks* 6eKecting credit i1 the
credit rating is =ad is one operational +easure to a/oid high risk*
:i/ersi1ication spreads the total risk to the =usiness o/er +ultiple
+arkets, thus reducing the i+pact o1 risk 1ro+ any one +arket on the
o/erall =usiness* Inother )ay to reduce risk is to trans1er or trade
the risk, 1or e4a+ple =y =uying insurance*
Po)e/er, any risk reduction +easure has its o)n cost* There1ore,
one has to achie/e a =alance =et)een the cost o1 risk +anage+ent
and the =ene1it o1 those risk reduction +easures*
6isk +anagers ai+ to reduce the risk to a +anagea=le and kno)n
le/el through /arious risk reduction +easures* They use risk
+anage+ent syste+s to track and analyze the risks*
I good risk +anage+ent syste+ not only calculates the risk =ased
on a set o1 para+eters, =ut also allo)s the risk +anagers to drill
do)n the risk to lo)est co+ponents, carry out sensiti/ity, )hat&i1
analyses, generates custo+iza=le reports and sends alerts
auto+atically )hen the risk crosses a de1ined tolerance li+it*
The 6isk -anager in a =ank )ill =e responsi=le 1or identi1ying the
risks, setting up tolerance li+its, +easuring the risk on a day to day
=asis and take action )hene/er the li+its are =reached*
2.L. C)!TOD% AD CLEA(&'
Custod: !er<i;es
&T(OD)CT&O
The custody ser/ice =usiness e/ol/ed 1ro+ sa1ekeeping and settle+ent ser/ices pro/ided =y
=anks to its custo+ers 1or a 1ee* Banks, as a custodian originally pro/ided only =asic sa1ekeeping
ser/ices to their custo+ers* The =anks routinely settled trades and processed inco+e 1or their
o)n in/est+ents* Their custo+ers kept and took their securities out o1 sa1ekeeping to settle
trades or 1or =ond +aturities* Is ti+e e/ol/ed, the =anks realized that their e4pertise in securities
processing and their i+age as a sa1e repository )ould =e /alua=le to their custo+ers and they
=egan to pro+ote their securities processing a=ility as an enhanced /alue&added ser/ice*
!er<i;es o88ered =: Custodians
Ser/ices pro/ided =y a =ank custodian are typically the settle+ent, sa1ekeeping, and reporting o1
custo+ers; +arketa=le securities and cash* I custody relationship is contractual, and ser/ices
per1or+ed 1or a custo+er +ay /ary*
)sers o8 Custod: !er<i;es
,nstitutional in/estors, +oney +anagers and =rokerFdealers are the pri+ary custo+ers 1or
custodians and other +arket participants 1or the e11icient handling o1 their )orld)ide securities
port1olios*
Assets @e,d )nder Custod:
Custodians hold a range o1 assets on =ehal1 o1 their custo+ers* These include e<uities,
go/ern+ent =onds, corporate =onds, other de=t instru+ents, +utual 1und in/est+ents, )arrants
and deri/ati/es*
Business Dri<ers o8 Custod: !er<i;es
The 1ollo)ing are the key dri/ers in the gro)th o1 custody ser/ices#
The )ide range o1 1inancial instru+ents and the e+erging +arkets
spreading across geographies resulted in gro)ing interest o1
in/estors* The potential =ene1its associated )ith the in/est+ents
resulted in gro)th o1 custody ser/ices*
The increasing use o1 glo=al custodians to replace their o)n
net)orks o1 local custodians =y ,n/est+ent +anagers and =anks*
The state )ithdra)ing 1ro+ its role o1 pri+ary pension pro/ider,
causing citizens to in/est in de1ined contri=ution pensions and
+utual 1unds in record nu+=ers & )ith custody =anks ser/ing the
pension 1unds and +utual 1unds, their +oney +anagers and the
=anks acting 1or high net )orth indi/iduals*
The introduction o1 1loating e4change rates and li1ting o1 e4change
controls in +any +aKor econo+ies resulted in rapid de/elop+ent o1
the +arket 1or international de=t instru+ents*
The specialist 1und +anagers running dedicated port1olios o1 1oreign
e<uities ha/e increased in recent ti+e*
The gradual increase in e<uities and cross&=order in/est+ents*
!e;urities $arket+,a;e
Securities +arketplace is a +echanis+ 1or =ringing together those seeking in/est+ent and those
seeking capital* These entities can =e indi/idual or institutional *The securities +arket can =e
classi1ied as pri+ary +arket and secondary +arket* For the purpose o1 the discussion )e )ould
concentrate on secondary +arket and its )orking +echanis+*
1.1.1 $arket Constituents
&n<estors
In in/estor is an entity that o)ns a 1inancial asset* ,n general there are t)o types o1 in/estor, the
indi/idual and the institutional in/estor*
,ndi/idual ,n/estor
,nstitutional ,n/estor
o -utual Fund -anagers
o "ension Funds
o ,nsurance co+panies
o Pedge Funds
Brokers
Broker is an inter+ediary )ho e4ecutes custo+er orders 1or a pre&de1ined co++ission* I
S=rokerS )ho specializes in stocks, =onds, co++odities act as an agent and +ust =e registered
)ith the e4change )here the securities are traded* The =rokers can =e classi1ied =ased on the
types o1 the ser/ices o11ered*
Dea,ers
:ealer is an entity )ho is ready and )illing to =uy a security 1or its o)n account 7at its =id price8
or sell 1ro+ its o)n account 7at its ask price8* They are indi/idual or 1ir+s acting as a principal in a
securities transaction*
Custodians
I custodian is responsi=le 1or sa1ekeeping the docu+entary e/idence o1 the title to property like
share certi1icates etc* The title to the custodian;s property re+ains /ested )ith the original holder,
or in their no+inee7s8, or custodian trustee, as the case +ay =e* Based on con1ir+ation 1ro+
custo+ers, clearing corporation assigns the o=ligation o1 settle+ent upon the custodian* ,n
general the ser/ices pro/ided =y the custodians are classi1ied in t)o +ain areas#
Polding o1 Securities and Cash
-o/e+ent o1 securities andFor cash
C,earing Cor+oration
Clearing Corporation is responsi=le 1or post&trade acti/ities o1 a stock e4change* ,ts responsi=le
1or clearing and settle+ent and risk +anage+ent o1 trades* The list o1 acti/ities per1or+ed =y a
clearinghouse is#
Clearing o1 trades
:eter+ining o=ligations o1 +e+=ers,
Irranging 1or pay&in o1 1undsFsecurities,
6ecei/ing 1undsFsecurities,
"rocessing 1or shortages in 1undsFsecurities,
Irranging 1or pay&out o1 1undsFsecurities to +e+=ers,
Guaranteeing settle+ent*
Q4a+ples o1 i+portant clearing corporations across the glo=e are National Stock Clearing
Corporation in 9SI 7NSCC8, Sega ,ntersettle in S)itzerland, Clearstrea+ H Quroclear o1
Quropean 9nion and so on*
De+ositor:
The depository can =e either do+estic or international securities and depending upon that they
are kno)n as either National Central Securities :epository or ,nternational Central Securities
:epositories 7,CS:s8*
Country :epository
a==re/iation
:epository Full Na+e
,ndia NS:V National Securities
:epository Vtd
9SI :TC :epository Trust Co+pany
9X C6QST Crest
Japan JIS:QC Japan Securities :epository
Center
Pong Xong CCISS Central Clearing and
settle+ent syste+
C,earing Banks
Clearing =anks are a key link =et)een the custodians and Clearing Corporation 1or 1unds
settle+ent* Q/ery custodian +aintains a dedicated settle+ent account )ith one o1 the clearing
=anks* Based on his o=ligation as deter+ined through Clearing Corporation, the clearing +e+=er
+akes 1unds a/aila=le in the clearing account 1or the pay&in and recei/es 1unds in case o1 a
payout* ,n +ost o1 the cases the custodians act as a clearing =ank also*
1.1.2 !e;urities $arket
"ri*ar: $arket: ,t is a +arket 1or ne) security issue* ,n this +arket the securities are directly
purchased 1ro+ the issuer* For e*g* an in/estor directly =uying security issued =y ,B-*
!e;ondar: $arket: I +arket in )hich an in/estor purchases a security 1ro+ another in/estor
rather than the issuer* We can di/ide the secondary +arket into )holesale and retail parts* The
)holesale +arket is the +arket in )hich pro1essionals, including institutional in/estors, trade )ith
one another* Transactions are usually large* The retail +arket is the +arket in )hich the
indi/idual in/estor =uys and sells securities*The principal GTC +arket is the National Issociation
o1 Securities :ealers Iuto+ated Uuotations 7NIS:IU8* The )holesale +arket 1or corporate
e<uities is conducted on a nu+=er o1 e4changes as )ell as o/er the counter 7GTC8* The Ne)
Dork Stock Q4change 7NDSQ8 do+inates* Gther 9*S* e4changes include the I+erican Stock
Q4change 7I-QW8, also in Ne) Dork City, and 1i/e regional e4changes . the -id)est, "aci1ic,
"hiladelphia&Balti+ore&Washington,
So+e other -arkets are#&
:ealer -arkets
Iuction -arkets
Py=rid -arkets
!a8ekee+ing
I =ank is responsi=le 1or +aintaining the sa1ety o1 custody assets held in physical 1or+ at one o1
the custodian;s pre+ises, a su=&custodian 1acility, or an outside depository* The =anks +ay hold
assets either o11&pre+ises or on .pre+ises
On-"re*ises
The =anks hold the securitiesFassets in physical 1or+ in its /ault* The securities 7e*g*, Ke)elry, art,
coins8 are kept in physical 1or+ =y the =ank *The =anks also holds the securities, )hich are not
+aintained in the =ook entry 1or+*
The =anks pro/iding the sa1ekeeping ser/ices needs to 1ollo) certain nor+s related to the
security and +o/e+ent o1 securities* The =ank pro/ides security de/ices consistent )ith
applica=le la) and sound custodial +anage+ent* The =ank ensures appropriate lighting, alar+s,
and other physical security controls* The =anks ensure that assets are out o1 the only /ault )hen
it recei/es or deli/ers the assets 1ollo)ing purchases, sales, deposits, distri=utions, corporate
actions or +aturities*
O88-"re*ises
The e/olution o1 depository has resulted in /ast +aKority o1 custodial assets =eing held in =ook
entry 1or+* Custodians reconcile changes in the depository;s position each day as a change in
the position occurs, as )ell as co+pleting a 1ull&position reconcile+ent at least +onthly*
:epository position changes are generally the results o1 trade settle+ents, 1ree deli/eries 7assets
trans1erred o11 the depository position )hen no cash is recei/ed8, and 1ree receipts 7assets =eing
deposited or trans1erred to the depository position 1or ne) accounts )hen no cash is paid out8*
T(AD&' AD !ETTLE$ET
1.1.C Trade &nitiation
The trade process is initiated in a /ariety o1 )ays in )hich a custo+er decides either to =uy or sell
securities* The custo+er goes to either a BrokerF :ealer or a =ank;s trading desk through its
in/est+ent +anager* The =ank in turn )ould coordinate )ith a =roker )ho has access to the
e4change* The client sends across his order details through co++unication net)ork* The client
order contains standard 1eatures like#
Buy or Sell
Speci1ic Uuantity
Speci1ic Security
The =rokers typically record the order i1 the order has =een placed through a =roker or other)ise
the trader directly +aintains the details o1 the order*
1.1.4 Order $anage*ent
The order is placed =y the client usually through a teleco++unication net)ork and is nor+ally
passed to either the e4change 1loor or to o/er the counter&trading desk* The order +anage+ent
process consists o1 Qntering orders, order +odi1ication, order cancellation* The order capture
process is done through appropriate trade entry applications* The process is to capture the order
details i*e* identi1ication o1 the security to =e traded, the <uantity, li+it price, order duration and
e4changes* The client places the order and speci1y the Gperation i*e* either =uyFsell, Uuantity,
Security Na+e and the "rice* The order condition can =e attached to the ti+ing? price and
<uantity o1 the order, )hich is considered )hen the =roker e4ecutesF+atch the trade *The client;s
also +odi1yF cancel the order i1 the order has not =een processed*
Order T:+es
There are t)o =asic types o1 order# +arket orders and li+it orders*
-arket orders are instructions to =uy or sell stock at the =est
a/aila=le price* They are the +ost co++on types o1 orders*
Vi+it orders tell your =roker to =uy or sell stock at the li+it price or
=etter* The li+it price is a price you set )hen placing the order* For a
gi/en purchase, it is the +ost you )ill pay? 1or a gi/en sale, it is the
+ini+u+ you )ill accept* Dou can also place a li+it order to =uy
along )ith one to sell* For e4a+ple, i1 WDT Corporation is currently
trading at B2$ per share, you can place a li+it order to =uy %00
shares o1 WDT at 20 or =etter 7less8 and to sell %00 shares WDT at 25
or =etter 7+ore8*
Order Conditions
I =uyerFseller can speci1y order conditions )ith )hich the trade is to =e e4ecuted* These are the
conditions that are typically an upper li+it in =uy price, a lo)er li+it in sell price, stop loss trade
orders, <uantity conditions and ti+e criteria*
Ti+e Conditions
Uuantity Conditions
"rice Conditions
-arket
Stop orders
Order Books
In order =ook is a placeholder 1or e/ery order entered into the syste+* Is and )hen /alid orders
are entered or recei/ed =y the trading syste+, they are 1irst nu+=ered, ti+e sta+ped and then
scanned 1or a potential +atch* ,1 a +atch is not 1ound, then the orders are stored in the =ooks as
per the priceFti+e priority* "rice priority +eans that i1 t)o orders are entered into the syste+, the
order ha/ing the =est price gets the higher priority* Ti+e priority +eans i1 t)o orders ha/ing the
sa+e price is entered, the order that is entered 1irst gets the higher priority* Best price 1or a sell
order is the lo)est price and 1or a =uy order, it is the highest price
Order $at;@ing
The =uy and sell orders are +atched =ased on the +atching priority* The =est sell order is the
order )ith the lo)est price and a =est =uy order is the order )ith the highest price* The
un+atched orders are <ueued in the syste+ =y the 1ollo)ing priority#
!TO" LO!! $ATC#&'
Ill stop loss orders entered are stored in the stop loss =ook* These orders can contain t)o prices*
Trigger "rice* ,t is the price at )hich the order gets triggered 1ro+ the
stop loss =ook*
Vi+it "rice* ,t is the price 1or orders a1ter the orders get triggered
1ro+ the stop loss =ook* ,1 the li+it price is not speci1ied, the trigger
price is taken as the li+it price 1or the order* The stop loss orders are
prioritised in the stop loss =ook )ith the +ost likely order to trigger
1irst and the least likely to trigger last* The priority is sa+e as that o1
the regular lot =ook*
The stop loss condition is +et under the 1ollo)ing circu+stances#
Sell Grder & I sell order in the stop loss =ook gets triggered )hen the
last traded price in the nor+al +arket reaches or 1alls =elo) the
trigger price o1 the order*
Buy Grder & I =uy order in the stop loss =ook gets triggered )hen the last traded price in the
nor+al +arket reaches or e4ceeds the trigger price o1 the order* When a stop loss order )ith ,GC
condition is there, the order is released in the +arket a1ter it is triggered* Gnce triggered, the
order scans the counter order =ook 1or a suita=le +atch to result in a trade or else is cancelled =y
the syste+*
1.1.5 Trade E/e;ution
The trade e4ecution is carried out on a stock e4change a1ter an order is placed* Grder
+odi1ication andFor order cancellation is re<uired to handle any a=nor+ality* In order in entered
into the trading syste+ =y the =rokers and they speci1y the in1or+ation regarding the trade
details* The trade details typically contain in1or+ation like security Na+e, Uuantity, "rice, Grder
:uration etc* The order is entered into the order =ook and gets e4ecuted as per the ti+e and
price condition as speci1ied in the order* The order +atching 1or the e4ecution takes place in the
stock e4change* The order +odi1ication and order cancellation takes place =e1ore the order gets
e4ecuted i*e* i1 the order is there in the order =ooks o1 the e4change and is )aiting to =e e4ecuted
the re<uest 1or order +odi1ication is entertained =y the stock e4change* The stock e4change
prepares a NGQ 7Note o1 Q4ecution8 )ith the trade details and sends it across to the BrokerF
:ealer and to the clearing corporation gi/ing details o1 the trade* The date the trade is e4ecuted is
kno)n as the Trade :ate, and is re1erred as 5T3 or TE0*
The order e4ecution process 1or a custo+er sell order 7indi/idual in/estor placing order through a
=roker8 goes through the 1ollo)ing cycle#
Custo+er places a sell order through the ,nternet or to the account
e4ecuti/e o1 the =rokerage group*
The account e4ecuti/e sends the order to its corresponding 1loor
=roker or to its trading desk*
The order e4ecution takes place on the 1loor o1 the e4change such
as on NDSQ, I-QW etc*
The e4change sends a Noti1ication o1 sell to the Fir+;s
representati/e on the e4change as )ell as the trading desk o1 the
=rokerage group**
The Fir+;s representati/e on the e4change 1loor send a noti1ication
o1 the sell to the 1loor =roker )hich is then +atched )ith the counter
party =roker*
The trade e4ecution results in identi1ying the 1ollo)ing trade co+ponents#
Trade :ate
Trade Ti+e
Malue :ate
Gperation
Uuantity
Security
"rice
1.1.I Trade Enri;@*ent
The process o1 trade enrich+ent in/ol/es the selection, calculation and attach+ent to a trade o1
rele/ant in1or+ation necessary 1or e11iciently ser/icing the clients* The trade co+ponents, )hich
re<uire enrich+ent, are#
Calculation o1 cash /alue# The cash /alue calculation is done
keeping the trade co+ponents in consideration*
Counter party Trade con1ir+ation re<uire+ent# The trade details
needs to =e enriched to deter+ine i1 the counter party needs the
trade con1ir+ation and i1 at all it needs the trade con1ir+ation, the
1or+at in )hich the con1ir+ation )ould =e send across to the+*
Selection o1 custodian details# The client +ight ha/e +ultiple
accounts )ith +ultiple or single custodian* The in/estor )ould send
the custodian details at )hich the settle+ent )ould take place* The
trade details are enriched )ith the account nu+=er o1 the custodian,
)hich )ill handle the cashF securities settle+ent*
-ethod o1 Transaction reporting# The transaction reporting depends
upon the security group as )ell as the country in )hich the
transaction has occurred* For e*g* the 9X e<uities +ay re<uire one
+ethod o1 reporting )hereas the international =onds )ould re<uire
another +ethod*
1.1.J Trade Va,idation
Trade /alidation is a process o1 checking the data contained in the 1ully enriched trade, in order to
reduce the possi=ility o1 erroneous in1or+ation =eing sent to the client 7in case o1 institutional
client8 also the )rong trade related in1or+ation can lead to delay in the settle+ent or e/en in
settle+ent 1ailure* The =asic trade related in1or+ation that are /alidated are 1ollo)ing#
Trade :ate
Trade Ti+e
Malue :ate
Gperation
Uuantity
Security
"rice
Trade Cash Malue
-ethods o1 Trade Malidation# The /alidation o1 trade can =e e11ected +anually or auto+atically
according to the a/aila=ility o1 the syste+*
-anual Trade Malidation
Iuto+atic Trade Malidation
1.1.K Trade C,earing
Clearing process signi1ies the e4ecution o1 indi/idual o=ligations )ith respect to a =uyer and
seller* Gnce the ter+s o1 a securities transaction ha/e =een con1ir+ed, the respecti/e o=ligations
o1 the =uyer and seller are esta=lished and agreed* This process is kno)n as clearance and
deter+ines e4actly )hat the counter parties to the trade e4pect to recei/e* Clearance is a ser/ice
nor+ally pro/ided =y a Clearing Corporation 7CC8*
Clearance can =e carried out on a gross or net =asis* When clearance is carried out on a gross
=asis, the respecti/e o=ligations o1 the =uyer and seller are calculated indi/idually on a trade&=y&
trade =asis* When clearance is carried out on a net =asis, the +utual o=ligations o1 the =uyer and
seller are o11set yielding a single o=ligation =et)een the t)o counter parties* Iccordingly,
clearance on a net =asis reduces su=stantially the nu+=er o1 securitiesFpay+ent trans1ers that
re<uire to =e +ade =et)een the =uyer and seller and li+its the credit&risk e4posure o1 =oth
counter parties*
ETT&' "(OCE!!
The Settle+ent process 1or the securities is e4pensi/e as +o/ing securities and +oney in/ol/es
costs* Since a gi/en trader +ay engage in dozens or e/en hundreds o1 trades each day, these
costs soon add up* Gne )ay to reduce these costs is through netting*
For e4a+ple, suppose you sold the shares to S+ith =ecause you e4pected the price o1 GQ to 1all
Say an hour later the price does 1all to 5 and you =uy the shares =ack at that price* By
coincidence, you =uy the+ 1ro+ S+ith* Dou and S+ith could sa/e a lot o1 transaction costs i1 you
netted the t)o transactions . your earlier sale and your later repurchase* Net, S+ith o)es you
%0,000 4 7B'0 & B58 > B50,000* i1 S+ith Kust pays you this a+ount, no securities and a lot less
+oney need change hands*
Dou could e4tend this idea =eyond Kust netting pairs o1 speci1ic transactions to a general =ilateral
netting arrange+ent )ith S+ith* Dou could keep a running ta= o1 your trading in GQ shares o/er
a period o1 ti+e, and Kust settle your net position at the end o1 the period* Dou could sa/e e/en
+ore i1 you engaged in +ulti&issue netting . netting your trade in all securities*
Continuous et !ett,e*ent
The Continuous Net Settle+ent 7CNS8 Syste+ is an auto+ated =ook&entry accounting syste+
that centralizes the settle+ent o1 co+pared security transactions and +aintains an orderly 1lo) o1
security and +oney =alances* Throughout the CNS processing cycles, the syste+ generates
reports that pro/ide participants )ith a co+plete record o1 security and +oney +o/e+ents and
related in1or+ation* CNS pro/ides clearance 1or e<uities, corporate =onds, 9nit ,n/est+ent Trusts
and +unicipal =onds that are eligi=le at The De+ositor: Trust Co*+an: 1DTC8* :TC is an
institution that pro/ides depository ser/ices in 9S*
C,earing "ro;ess
The process o1 clearing is e4plained in the 1ollo)ing e4a+ple#
I deal is struck =et)een )ith S+ith and you on -onday* That night your =ack&o11ice people and
S+ith;s each send electronic noti1ication o1 the trade to the co+puter o1 t@e ationa, !e;urities
C,earing Cor+oration 1!CC3.
The NSCC co+puter checks the t)o 3con1ir+s5 against each other* ,1 they +atch, the trade is
3co+pared5* NSCC con1ir+s to each o1 you on Tuesday +orning, )ith instructions 1or settle+ent
the sa+e Thursday* ,1 the trade does not co+pare, you are =oth noti1ied and you can sort things
out and resu=+it the trade =e1ore the settle+ent date*
Gn Wednesday, the day =e1ore the settle+ent, NSCC interposes itsel1 =et)een the t)o parties to
the transaction* That is, instead o1 the original deal =et)een you and S+ith, there are no) t)o
deals . one =et)een you and NSCC and the other =et)een NSCC and S+ith* Dou no) ha/e a
deal to sell %0,000 shares o1 GQ to NSCC at '0, and S+ith has a del to =uy the+ 1ro+ NSCC at
the sa+e price* Dou recei/e a notice to deli/er the shares to NSCC? S+ith recei/es a notice to
+ake pay+ent* By interposing itsel1 in this )ay, NSCC is guaranteeing settle+ent to =oth o1 you*
Whether or not S+ith pays up, you )ill get your +oney on ti+e* Whether or not you deli/er the
shares, S+ith )ill get %0,000 shares o1 GQ on Thursday*
The auto+ated co+parison is an i+portant 1unction o1 the clearing corporation =ecause it
ena=les the participant to ensure that the trade details agree )ith those o1 counter party prior to
settle+ent*
1.1.L Trade A88ir*ation.Con8ir*ation
The trade a11ir+ationFcon1ir+ation process occurs )hen a depository 1or)ards the selling =roker;s
con1ir+ation o1 the transaction to the =uyer;s custodian* The custodian re/ie)s the trade
instructions 1ro+ the depository and +atches the in1or+ation to instructions 1or the trade recei/ed
1ro+ its custo+er* ,1 the instructions +atch, the custodian a11ir+s the trade* ,1 the instructions do
not +atch, then the custodian )ill 5:X5 7don;t kno), or reKect8 the trade or )ill instruct the selling
=roker ho) to handle the +is+atch* The a11ir+ationFcon1ir+ation process is generally co+pleted
=y TE% in a nor+al TE( settle+ent cycle* Gn day TE$, depositories send settle+ent instructions
to the custodian =ank a1ter a11ir+ation and prior to settle+ent date* The instructions contain the
details o1 the trade that has =een a11ir+ed and agreed to =y the parties in the trade* Custodians
)ill +atch the settle+ent instructions to their records and prepare instructions to send 1unds or
e4pect 1unds 1ro+ the depository on TE( o1 the settle+ent cycle*
The 1ollo)ing +edia is used 1or the trans+ission o1 trade con1ir+ationFa11ir+ation
Fa4#
Tele4
S*W*,*F*T
e&+ail
"aper
1.1.10 Trade !ett,e*ent Fai,ure
Trade settle+ent is the act o1 =uyer and seller e4changing securities and cash on or a1ter the
/alue date in accordance to the contractual agree+ent* Settle+ent is success1ul )hen the seller
is a=le to deli/er the securities and =uyer is a=le to pay the cash it o)ns to the seller* ,n so+e
cases the settle+ent 1ails pri+arily =ecause the seller )as a)aiting the deli/ery o1 securities 1ro+
its purchase and there1ore could not deli/er the securities to the =uyer*
,t is +andatory no) days to settle trade on the /alue date and )hene/er there is a settle+ent
1ailure the authority i+poses penalties to the party concerned*
Causes o8 !ett,e*ent Fai,ure
Non.-atching settle+ent instruction
,nsu11icient Securities
,nsu11icient Cash
1.1.11 Trade !ett,e*ent
Trade settle+ent is the act o1 =uyer and seller e4changing securities and cash on or a1ter the
/alue date in accordance to the contractual agree+ent* Settle+ent is success1ul )hen the seller
is a=le to deli/er the securities and =uyer is a=le to pay the cash it o)ns to the seller* There are
di11erent settle+ent +ethods depending upon the pay+ent +echanis+, security types etc*
,n +ost o1 the +arkets the settle+ent is done on a rolling =asis* ,n a 6olling Settle+ent, all trades
outstanding at end o1 the day ha/e to =e settled, )hich +eans that the =uyer has to +ake
pay+ents 1or securities purchased and seller has to deli/er the securities sold* For instance, 9SI
and 9X 1ollo) a TE( syste+ )hich +eans that a transaction entered into on :ay % has to =e
settled on the :ay % E ( )orking days, )hen 1unds pay in or securities pay out takes place*
!ETTLE$ET T%"E!
The settle+ent process has e/ol/ed o/er the period* Traditionally the settle+ent used to take
place )ith the physical deli/ery o1 the shares, =ut )ith ad/ent o1 Certi1icate ,++o=ilization the
Book Qntry settle+ent syste+ has e/ol/ed*
"hysical Settle+ent
Book Qntry Settle+ent
!ETTLE$ET "E(&OD
The settle+ent period is the ti+e =et)een the e4ecution o1 the trade and the settle+ent o1 trade*
,t is ti+e allo)ed =e1ore the securities sold +ust =e deli/ered to the =uyer* The settle+ent
periods depend upon the type o1 the securities traded* Ippendi4 C has the list o1 the settle+ent
period 1or di11erent types o1 security*
!ETTLE$ET "(OCE!!
Trade settle+ent occurs )hen securities and +oney are e4changed to co+plete the trade*
Settle+ent occurs on TE( in a TE( settle+ent cycle* Settle+ent o1 a securities transaction
in/ol/es the deli/ery o1 the securities and the pay+ent o1 1unds =et)een the =uyer and seller*
The pay+ent o1 1unds is e11ected in the settle+ent syste+ /ia a =ankingFpay+ents syste+* I
depository typically carries out the deli/ery o1 securities* I trade is not declared settled until =oth
71unds and securities8 trans1ers are 1inal*
1.1.12 Trade A;;ounting N (e;on;i,iation
Trade accounting and 6econciliation is the internal control process used =y custodians to
+anage trade transactions* ,n this process, the custodian deter+ines that the custo+er;s
account has the necessary securities on hand to deli/er 1or sales, that the custo+er;s
account has ade<uate cash or 1orecasted cash 1or purchases* ,t +aintains the records o1
trades internally and tries to +atch it )ith outside )orld* ,t tries to +atch the positions =y
co+paring positions o1 trades 7Gpen and settled =oth8*
1.1.1C (isks asso;iated Ait@ Trading N !ett,e*ent
There are +ultiple risk associated )ith the trade e4ecution process *The 1ollo)ing e4a+ple
discusses the risk associated )ith the trading process 1ro+ the point o1 /ie) o1 a =roker
associated )ith a e4change*
Is a =roker on the 1loor o1 the Stock Q4change and you ha/e Kust agreed )ith S+ith, another
=roker, to sell hi+ %0,000 shares o1 GQ at '0* To e4ecute this transaction, you need to trans1er
o)nership o1 the shares to S+ith, and S+ith needs to trans1er the cash to you* ,n reality, once
you and S+ith agree on the ter+s, e4ecution is handed o/er to others in the 3=ack o11ice5* The
length o1 the process /aries 1ro+ +arket to +arket*
"rincipal 6isk
6eplace+ent 6isk
Vi<uidity 6isk
Gperational 6isk
Syste+ic 6isk
1.1.14 Bork F,oAs O8 Trading and !ett,e*ent
The 1ollo)ing e4a+ple discusses ho) a typical e<uity trade takes place#
Trade Date 1T3:
Step %# The transaction =egins )ith the in/estor )ishing to in/est in e<uity* Pe contacts his =roker
7=uy side8 )ith an order to =uy and si+ilarly an in/estor contacts his =roker 7sell side8 to sell the
securities*
Step $# The =rokers place trade re<uest on the e4change*
Step (# The trade e4ecution takes place in the e4change as per the conditions speci1ied in the
order* The e4change prepares a NGQ 7Notice o1 Q4ecution8 and sends out to the Brokers and the
clearing corporation*
Step 2# The clearing corporation recei/es the +atched instruction i*e* the trade details 7<uantity,
price etc8 1ro+ the e4change* The trade details are entered into the Continuous net settle+ent
syste+ to o=tain the net positions 1or a =roker at the end o1 the day* The clearing corporation
prepares a contract sheet )ith end o1 day positions 1or =roker and sends it across to the
depository*
Step 5# The Brokers sends a con1ir+ation to the client a=out the trade details and the clients in
turn in1or+ their custodians a=out the receiptFdeli/ery o1 shares*
-rade .ate /0!1 2-/0!13
Step %# The =roker recei/es trade details 1ro+ the clearing corporation and it enriches it )ith the
1ees, co++ission and other ta4 related details and send across the con1ir+ation to the client*
Step $# The client prepares an I11ir+ation order and sends it across to the custodians a=out the
possi=le pay inFout o1 securities and 1unds*
Step (# The clearing corporation prepares a 1inal pay inFpay out details =ased on the a11ir+ation
recei/ed 1ro+ the client and send it across to the depository*
Step 2# The custodians also con1ir+ )ith the depository a=out the pay inF pay out details a=out
the 1unds and securities*
Trade date 2 C1T2C3
Step %# "ay ,n o1 securities# Clearing corporation ad/ises depository to de=it account o1 sell side
custodian and credit its account and the depository does it
Step $#"ay in o1 1unds 7Clearing corporation ad/ises clearing =anks to de=it account o1 =uy side
custodian and credit its account and the clearing =ank does it8
Step (#"ay Gut o1 securities 7Clearing corporation ad/ises depository to credit account o1 =uy
side custodian and de=it its account and depository does it8
Step 2# "ay Gut o1 1unds 7Clearing corporation ad/ises clearing =anks to credit account o1 sell
side custodian and de=it its account and clearing =anks does it8
Step 5# The custodian % con1ir+s the receipt o1 shares to the =uying client*
Step !# The custodian $ con1ir+s the deli/ery o1 shares to the selling client*
A!!ET !E(V&C&'
Isset ser/icing is a 5core3 ongoing ser/ice pro/ided =y custodians* This ser/ice includes
collecting di/idends and interest pay+ents, processing corporate actions and applying 1or ta4
relie1 1ro+ 1oreign go/ern+ents on =ehal1 o1 custo+ers*
1.1.15 Cor+orate A;tions
I corporate action is an e/ent related to capital reorganization or restructure a11ecting a
shareholder* Custodians are responsi=le 1or +onitoring corporate actions 1or the securities they
hold under custody* Gnce the Custodian gets noti1ied o1 a corporate action, it identi1ies the
accounts that hold the security* ,1 the account holder has a speci1ied ti+e to decide )hether to
accept the corporate action, the custo+er should =e pro+ptly contacted* The custodians ha/e a
process to +onitor the corporate action to ensure that the custo+er has gi/en a co+plete
response =y the due date* When a custo+er;s instructions are recei/ed, the custodian sends the
instructions to the co+pany 1or e4ecution* The custodian +onitors the status o1 the action to
ensures ti+ely settle+ent* The custodian;s procedures 1or corporate actions also include
docu+entation o1 all custo+er directions*
1.1.15.1 Business "ro;ess o8 Cor+orate A;tion "ro;essing
6ecei/ing Corporate Iction# The in1or+ation regarding the corporate action is recei/ed 1ro+ a
nu+=er o1 e4ternal sources* Is the sa+e corporate action data is supplied =y +any di11erent
sources, a hierarchy o1 sources is +aintained to prioritize the o=tained data*
-aintaining Corporate Iction# The Corporate actions are classi1ied as either +andatory or
/oluntary
-andatory Ictions
,t is a type o1 corporate action )here)ith the shareholders are not
gi/en the option to conditionalize their tender* e*g* stock splits,
+ergers and ac<uisitions, li<uidations, =ankruptcies, reorganizations,
rede+ption;s, =onus issues etc
Moluntary action
,t is a type o1 corporate action )here)ith the shareholders are gi/en
the option to conditionalize their tender* They include rights o11ers,
tender o11er, purchase order, e4change order etc*
Noti1ication o1 Corporate Iction# The noti1ication is generated 1or the client o1 Moluntary and
-andatory Corporate Ictions* The noti1ication process ensures that the client recei/es the
in1or+ation o1 the corporate action* -aintaining 6esponse o1 Corporate Iction# The corporate
action response is +aintained 1or /oluntary corporate action responses against e4piration dates
on a daily =asis until the client responds )ith instructions*
"rocessing o1 Corporate Iction #,n this stage the "rocessing o1 corporate action is done to update
the records o1 the =anks* Is per the 1eed=ack recei/ed 1ro+ the client in case o1 /oluntary
actions, the records 1or the client are updated in the records o1 the =anks* I si+ilar +ethod is
1ollo)ed 1or the +andatory types o1 corporate action*
1.1.1I &n;o*e "ro;essing
Custodians are responsi=le 1or collecting inco+e pay+ents recei/ed 1ro+ the assets held under
custody* The inco+e pay+ents typically take the 1or+ o1 di/idends on e<uity securities and
interest on =onds and cash e<ui/alents* Custodians calculate the proKected pay+ents and in1or+
the custo+ers accordingly in ad/ance* This ena=les the custo+ers to plan in/est+ent decisions
and use the proceeds e11ecti/ely* The =ank;s internal controls 1or inco+e collection also include
an inco+e +ap procedure that details each client;s e4pected inco+e 1ro+ a particular security*
Contractual inco+e pay+ents are posted to the custo+er;s account on the date they are due
rather than the date they are recei/ed =y the custodian )hereas the actual inco+e pay+ents are
posted to the custo+er;s account on the date they are recei/ed =y the custodian
1.1.1I.1 Business +ro;ess o8 &n;o*e "ro;essing
6ecei/ing Corporate Innounce+ent# The custodians are dependent on e4ternal /endors to
recei/e corporate action in1or+ation* These /endors are specialized in pro/iding in1or+ation
across the glo=e* So+e o1 the co++on /endor 1eeds used are 1ro+ JJ Xenny, :TC, Telekurs,
and 6euters etc* The in1or+ation collected is announce+ents regarding interest 7coupon8
pay+ents 1or registered =onds, di/idend pay+ent 1or e<uities, inco+e pay+ent 1or I:6
securities, +utual 1unds, pri/ate place+ent securities etc*
Generating "ay+ent G=ligation# I pay+ent o=ligation is lia=ility o)ned =y a client* The pay+ent
o=ligation 1or a client is generated 1ro+ the data regarding the corporate announce+ent* The
pay+ent o=ligation is generated 1or the pending pay+ents that are due to the client* Ilso the
cash proKection 1or the client depending upon corporate announce+ents is calculated*
Iccount -aintenance# :etails regarding the trade are tracked and the corresponding account is
updated* The trade details are +aintained and the details regarding the transaction are captured
and recorded*
"ay+ent Settle+ent# The pay+ent settle+ent stage enco+passes entire process o1 "ay+ent
receipt, pay+ent reconciliation, and pay+ent re/ersal
1.1.1J "ro/: Voting
Custodians pro/ide pro4y&/oting ser/ice to clients )ho )ant to e4ercise their rights as
shareholders o1 a co+pany during the general +eetings* ,1 personal attendance is not possi=le,
the shareholder +ay appoint a representati/e to attend the +eeting and /ote =y pro4y* I
custodian helps in/estor to e4ercise their /otes =y pro/iding a pro4y /oting ser/ice 1or all +anner
o1 general +eetings )here/er this ser/ice is a/aila=le*
1.1.1J.1 Business "ro;ess &n<o,<ed in "ro/: !er<i;es
6ecei/ing Corporate Innounce+ent# The corporate announce+ent regarding the agenda o1
General Body -eeting or Q4traordinary General Body -eeting is captured 1ro+ e4ternal /endors*
Noti1ication to Client# The custodians noti1y the clients a=out the pro4y ser/ices =y pro/iding the
details o1 the corporate announce+ent*
-aintaining 6esponse o1 Client# The client;s response to the corporate announce+ent is
+aintained on a daily =asis until the client responds )ith instructions* The client response is
typically o=tained 1ro+ either e+ail, 1a4 etc* The response is typically like recei/ing client
authorization to represent hi+ at the +eeting and /ote on his =ehal1*
1.1.1K Ta/ "ro;essing
Custodians pro/ide ser/ices to +ini+ize 1oreign )ithholding ta4es or reclai+ ta4es )ithheld 1or
their custo+ers* The ta4 treaties =et)een countries o1ten reduce )ithholding ta4es and e4e+pt
capital gains 1ro+ ta4es* The purpose o1 ta4 treaties is to reduce the possi=ility o1 dou=le ta4ation
on inco+e earned in 1oreign countries* ,n addition, so+e countries pro/ide reduced ta4
)ithholding rates 1or certain types o1 in/est+ents 7go/ern+ent =onds, 1or e4a+ple8 or 1or certain
types o1 in/estors 7in/estors e4e+pt 1ro+ ta4ation in their ho+e country, 1or e4a+ple8* Ta4 treaty
=ene1its +ay pro/ide 1or reduced )ithholding ta4 at the ti+e the interest or di/idend is paid 73relie1
at source58, )hile other treaties +ay re<uire the in/estor to 1ile 1or a re1und a1ter the 1act
73reclai+58* Custodian 1iles a 1or+ or state+ent on =ehal1 o1 the client, certi1ying the in/estor;s ta4
status and country o1 residence 1or ta4 purposes* I custodian keeps track o1 the ta4 rates 1or
each o1 the countries in )hich it pro/ides custody* :i/idends, interest, and capital gains +ay all
=e ta4ed at di11erent rates* The custodian also +aintains in1or+ation a=out the ta4 treaties )ithin
its custody net)ork, and )hether its custo+ers <uali1y 1or relie1 under the treaty*
1.1.1K.1 Business "ro;ess o8 Ta/ #and,ing
-aintaining Ta4 ,n1or+ation# The ta4 related in1or+ation like standard ta4 rates, e4e+ptions and
reductions a/aila=le under local la) are +aintained* The details speci1ying the reduced rates
a/aila=le =y /irtue o1 dou=le ta4ation treaties are +ade a/aila=le to the client* The +arket ta4
reports, su++arizing local ta4es 1or each +arket are pro/ided to the client*
Ta4 Calculation# The ta4 calculation process captures trade details and applies the corresponding
ta4 rates 1or co+putation o1 the ta4*
Ta4 6ecla+ation# The ta4 recla+ation process is used to reclai+ the e4tra ta4 paid =y the client*
,t can =e o1 t)o types#
Contractual Ta4 6eclai+s# ,n this kind o1 recla+ation the clientRs cash account is credited )ith
entitle+ents to ta4 relie1 according to a pre&deter+ined schedule o1 ti+e&1ra+es, in place o1 )hen
the ta4 re1und +onies are recei/ed* The contractual ti+e 1ra+e +ay =e @n; +onths a1ter the
inco+e pay date 7)here the /alue o1 n /aries according to the +arket concerned8 or pay+ent
+ay =e +ade, less a discount, )ith inco+e pay+ent* This can greatly assist clients in +anaging
a/aila=le 1unds*
Non&contractual Ta4 6eclai+s# ,n this type )here ta4 relie1 is not o=tained at source, the e4cess
ta4 )ithholding is reclai+ed* The =ank prepares the re<uired reclai+ 1or+ and co+pletes the
associated reclai+ process, pursuing ite+s as appropriate and reporting their status to clients*
Cas@ !Aee+
Cash s)eep is a /alue added ser/ice pro/ided =y custodian =anks to its custo+ers* This ser/ice
ensures that the surplus cash in custo+ers; accounts are e11ecti/ely in/ested in short&ter+
in/est+ent 1unds i*e* ST,F 7+ay =e as short as an o/ernight 1und8 to generate additional returns*
The s)eep can =e done intra&day =ased on proKected earnings o1 the particular account or end&
o1&day =ased on actual surplus cash in the account* The ST,Fs in/est +oney in +oney +arket or
euro dollar :eposit*
(isks Asso;iated Ait@ Custod: !er<i;es
-any =anks currently o11er custodian ser/ices* The pri+ary risks associated )ith custody
ser/ices are# transaction, co+pliance, credit strategic and reputation*
Transaction 6isk
Co+pliance 6isk
Credit 6isk
Strategic 6isk
6eputation 6isk
2.10. CO("O(ATE !E(V&CE!
BEEF&T! AD$&&!T(AT&O
Q+ployee =ene1it plans are esta=lished or +aintained =y an e+ployer or =y an e+ployee
organization 7such as a union8, or =oth, that pro/ides retire+ent inco+e or de1ers inco+e until
ter+ination o1 co/ered e+ploy+ent or =eyond* There are a nu+=er o1 types o1 retire+ent plans,
including the 20%7k8 plan and the traditional pension plan, kno)n as a de1ined =ene1it plan*
The Q+ployee 6etire+ent ,nco+e Security Ict 7Q6,SI8 co/ers +ost pri/ate sector pension
plans* I+ong other things, Q6,SI pro/ides protections 1or participants and =ene1iciaries in
e+ployee =ene1it plans, including pro/iding access to plan in1or+ation* Ilso, those indi/iduals
)ho +anage plans 7and other 1iduciaries8 +ust +eet certain standards o1 conduct under the
1iduciary responsi=ilities speci1ied in the la)*
The Q+ployee Bene1its Security Id+inistration 7QBSI8 o1 the :epart+ent o1 Va=or is responsi=le
1or Id+inistering and en1orcing these pro/isions o1 Q6,SI* Is part o1 carrying out its
responsi=ilities, the agency pro/ides consu+er in1or+ation on pension plans, as )ell as
co+pliance assistance 1or e+ployers? plan ser/ice pro/iders, and others to help the+ co+ply
)ith Q6,SI*
The pri+ary e+ployee =ene1its are
:e1ined Bene1its
:e1ined Contri=ution
Pealth and Wel1are
DEF&ED BEEF&T!
:e1ined Bene1it plans are the oldest retire+ent plans that e4ist in the "ension ,ndustry* They
pro+ise to pay a speci1ied =ene1it at retire+ent age* They de1ine the a+ount o1 retire+ent inco+e
to =e paid* The actual +onthly 7or annual8 =ene1it is calculated using a speci1ic 1or+ula stated in
the plan docu+ent* The =ene1it is usually paid at a speci1ied ti+e such as attain+ent o1 age !5*
I :e1ined Bene1it "lan is an e+ployer&sponsored retire+ent plan in )hich retire+ent =ene1its are
=ased on a 1or+ula indicating the e4act =ene1it that one can e4pect upon retiring* ,n/est+ent risk
is =orne =y the e+ployer and port1olio +anage+ent is entirely under the control o1 the co+pany*
There are restrictions on )hen and ho) participant can )ithdra) these 1unds )ithout penalties*
I pri/ate de1ined =ene1it plan is typically not contri=utory i*e* there are usually no e+ployees
contri=utions, no indi/idual accounts are +aintained 1or each e+ployee* The e+ployer +akes
regular contri=utions to the entire plan to 1und the 1uture =ene1its o1 the entire cohort o1
participants* The e+ployer, rather than the participant, =ears the in/est+ent risk* 9sually, the
pro+ised =ene1it is tied to the e+ployeeRs earnings, length o1 ser/ice, or =oth*
I :e1ined Bene1it plan pro/ides a guaranteed le/el o1 =ene1its on retire+ent and the cost is
unkno)n 1or the e+ployer* ,1 the plan assets earn less than e4pected, the e+ployer +ust +ake
larger contri=utions to ensure that the plan )ill ha/e su11icient 1unds to pay pro+ised =ene1its* ,1
the plan assets earn +ore than e4pected, the e+ployerRs contri=utions )ill decrease*
De8ined Contri=ution
I :e1ined Contri=ution "lan is a type o1 retire+ent plan that sets aside a certain a+ount o1
+oney each year 1or an e+ployee* The a+ount to =e contri=uted to each participantRs account
under the plan each year is de1ined 7=y either a 1i4ed 1or+ula or =y gi/ing the e+ployer the
discretion to decide ho) +uch to contri=ute each year8* The size o1 a participantRs =ene1it )ill
depend on#
The a+ounts o1 +oney contri=uted to the indi/idualRs account =y the
e+ployer and, perhaps, =y the e+ployee as )ell?
The rate o1 in/est+ent gro)th on the principal?
Po) long the +oney re+ains in the plan 7in +ost cases, the
e+ployee, upon retire+ent, has the option o1 either recei/ing the
pay+ent in a lu+p su+ or =y taking partial pay+ents on a regular
=asis )hile the =alance continues to earn interest8? and
Whether the 1or1eitures o1 participants )ho lea/e =e1ore they are 1ully
/ested can =e shared a+ong the re+aining participants as a re)ard
to long&ter+ e+ployees*
Since =ene1its accu+ulate on an indi/idual =asis, these plans are so+eti+es re1erred to as
Sindi/idual account plans*S ,n these plans, unlike in de1ined =ene1it plans, the risk 7and re)ard8 o1
in/est+ent e4perience is =orne =y the participant* :e1ined contri=ution plans can per+it, and
so+eti+es re<uire, that e+ployees +ake contri=utions to the plan on either a pre&ta4 =asis 7as in
a 20%7k8 plan8 or an a1ter&ta4 =asis 7as in a thri1t plan8* They +ay also, =ut are not re<uired to,
per+it e+ployees to decide ho) the +onies contri=uted into their accounts )ill =e in/ested*
:e1ined contri=ution plans ha/e gained popularity as e+ployers ha/e =egun to ask their
e+ployees to share responsi=ility 1or their retire+ent* The +ain purpose o1 a de1ined contri=ution
plan is to pro/ide an in/est+ent /ehicle 1or e+ployees to accu+ulate retire+ent inco+e*
Defined Benefit Plan Defined Contribution Plan
The employer funds it. Employee and employer contributions
are allocated to individual participants
The employer bears the investment
ris !the potential for investment
"ain or loss#.
The participant bears the investment
ris.
$t is "enerally difficult to
communicate.
$t is easier to communicate.
The final benefit is defined as it is
formula driven tain" definite
parameters !lie salary% number of
years of service etc.# as input data
The final retirement benefit is unnown
as it is decided by the performance of
participant selected investment funds.
The benefit is e&pressed as an
annuity !a specified annual or
monthly payment to a pensioner
over a specified period of time or
based on life e&pectancy# payable at
normal retirement a"e% usually a"e
The benefit is e&pressed as an account
balance.
'(.
The 1ollo)ing plans are designated as de1ined contri=ution plans#
"ro1it Sharing "lans
Cash Gr :e1erred Irrange+ents Gr 20%7k8 "lans
Stock Bonus "lans Ind Q+ployee Stock G)nership "lans
Si+pli1ied e+ployee pensions 7SQ"8
Ta4 Sheltered Innuities Gr 20(7=8 Irrange+ents
Business entities in/ol/ed in the :e1ined Contri=ution "ension Id+inistration process ha/e
strong interdependency in&ter+s o1 1lo) o1 in1or+ation, 1und and assets 7stocks8*
The diagra+ =elo) depicts the +ain entities in the plan ad+inistration =usiness and their
relations )ith each other*
Fig 2.1
Sponsor delegates responsi=ilities to plan ad+inistrator
"articipant contri=utes 1or the plan to the sponsor*
Trust o)ns the 1unds o1 the plan contri=uted =y the sponsor and the
participants and delegates +anage+ent o1 the sa+e to ,n/est+ent
-anager
Trust and plan ad+inistrator su=+it co+pliance reports to Federal
Igencies )hich in turn )ould <uali1y the plan*
"articipants direct the ,n/est+ent +anager on their in/est+ent
pre1erences*
6ecord Xeepers pro/ide in1or+ation on "articipant, plan and account
in1or+ation to "lan Id+inistrators, trustee, Sponsor and "articipant*
Follo)ing diagra+ e4plains the =asic processes in/ol/ed in =ene1its ad+inistration
#EALT# AD BELFA(E
,n the early days )hen the Social Security )as adopted, Pealth insurance )as taken care =y
pri/ate sectors* Vater the escalating health costs and )age 1reezes o1 the post WW ,, era,
pro+pted +any co+panies to o11er non&cash re)ards in the 1or+ o1 Pealth care =ene1its* The
challenges due to co+petiti/e =ene1its 1or +aintaining the 1iscal responsi=ility and changes in ta4
code +ade the e+ployers to o11er greater =ene1it choices )ith certain ta4 incenti/es*
Pealth and Wel1are =ene1it plans can =e either :e1ined&Bene1it or :e1ined Contri=ution plans*
:e1ined Bene1it health and )el1are plans speci1y a deter+ina=le =ene1it, )hich +ay =e in the 1or+
o1 rei+=urse+ent to the co/ered plan participant or a direct pay+ent to pro/iders or third party
insurers 1or the cost o1 speci1ied ser/ices* Q/en )hen a plan is 1unded pursuant to agree+ents
that speci1y a 1i4ed rate o1 e+ployer contri=ution, it cannot =e a :e1ined =ene1it health and
)el1are plan*
:e1ined Contri=ution health and )el1are plans on the other hand +aintain an indi/idual account
1or each plan participant* The =ene1its a plan participant )ill recei/e are li+ited to the a+ount
contri=uted to the participant;s account, e4perience, e4penses etc* Pealth and Wel1are plans
generally are su=Kect to certain 1iduciary, reporting and other re<uire+ents o1 the Q6,SI
7Q+ployee 6etire+ent ,nco+e Security Ict, %028*
Categories o8 @ea,t@ and Ae,8are +,ans
Pealth Care
o -edical
o "rescription drug
o Beha/ioral health
o :ental
o Mision
o Vong&ter+ care
:isa=ility ,nco+e
o Sick lea/e
o Short&ter+ disa=ility
o )on" term disability
Sur/i/or Bene1its
o Term life

C. (ECET DEVELO"$ET!
(ECET DEVELO"$ET!
)!A "AT(&OT ACT
11
9S Go/ern+ent passed the 9niting and Strengthening I+erica =y "ro/iding Ippropriate Tools
6e<uired to ,ntercept and G=struct Terroris+ 79SI "IT6,GT Ict8 in response to the terrorists;
attacks o1 Septe+=er %%, $00%* The key 1eatures are#
The Ict gi/es 1ederal o11icials greater authority to track and intercept
co++unications, =oth 1or la) en1orce+ent and 1oreign intelligence
gathering*
,t /ests the Secretary o1 the Treasury )ith regulatory po)ers to
co+=at corruption o1 9*S* 1inancial institutions 1or 1oreign +oney
laundering purposes*
,t seeks to 1urther close our =orders to 1oreign terrorists and to detain
and re+o/e those )ithin 9S =orders*
,t creates ne) cri+es, ne) penalties, and ne) procedural
e11iciencies 1or use against do+estic and international terrorists*
The anti +oney laundering rules are /ery i+portant 1ro+ a =anking point o1 /ie)* They are
descri=ed in greater detail later in the chapter*
Cri*ina, &n<estigations: Tra;king and 'at@ering Co**uni;ations
Federal co++unications pri/acy la) currently 1eatures a three tiered syste+, erected 1or the dual
purpose o1 protecting the con1identiality o1 co++unications )hile ena=ling authorities to identi1y
and intercept cri+inal co++unications* The 1irst le/el prohi=its electronic ea/esdropping on
telephone con/ersations, 1ace&to&1ace con/ersations, or co+puter and other 1or+s o1 electronic
co++unications in +ost instances* Po)e/er, in serious cri+inal cases, la) en1orce+ent o11icers
+ay seek a court order authorizing the+ to secretly capture con/ersations on a statutory list o1
o11enses 1or the per+itted duration*
The ne4t tier o1 pri/acy protection co/ers telephone records, e&+ail held in third party storage,
and the like* The la) per+its la) en1orce+ent access, ordinarily pursuant to a )arrant or court
order or under a su=poena in so+e cases* There is also a procedure that go/erns court orders
appro/ing the go/ern+ent;s use o1 trap and trace de/ices and pen registers, a secret 3caller id5,
)hich identi1y the source and destination o1 calls +ade to and 1ro+ a particular telephone*
Foreign &nte,,igen;e &n<estigations
The Ict eases so+e o1 the restrictions on 1oreign intelligence gathering )ithin the 9nited States,
and a11ords the 9*S* intelligence co++unity greater access to in1or+ation unearthed during a
cri+inal in/estigation, =ut it also esta=lishes and e4pands sa1eguards against o11icial a=use* ,t
per+its 3ro/ing5 sur/eillance 7court orders o+itting the identi1ication o1 the particular instru+ent,
1acilities, or place )here the sur/eillance is to occur )hen the court 1inds the target is likely to
th)art identi1ication8*
$one: Laundering
E/tra;ted 8ro* Congressiona, (esear;@ !er<i;e7 )! and Federation o8 A*eri;an !;ientists -

AAA.8as.org
,n 1ederal la), +oney laundering is the 1lo) o1 cash or other /alua=les deri/ed 1ro+, or intended
to 1acilitate, the co++ission o1 a cri+inal o11ence* Federal authorities attack +oney laundering
through regulations, cri+inal sanctions, and 1or1eiture* The Ict =olsters 1ederal e11orts in each
area*
The Ict e4pands the authority o1 the Secretary o1 the Treasury to regulate the acti/ities o1 9*S*
1inancial institutions, particularly their relations )ith 1oreign indi/iduals and entities* 6egulations
ha/e =een pro+ulgated co/ering the 1ollo)ing areas#
Securities =rokers and dealers as )ell as co++odity +erchants,
ad/isors and pool operators +ust 1ile suspicious acti/ity reports
7SI6s8?
6e<uiring =usinesses, )hich )ere only to report cash transactions
in/ol/ing +ore than B%0,000 to the ,6S, to 1ile SI6s as )ell?
,+posing additional 3special +easures5 and 3due diligence5
re<uire+ents to co+=at 1oreign +oney laundering?
"rohi=iting 9*S* 1inancial institutions 1ro+ +aintaining correspondent
accounts 1or 1oreign shell =anks?
"re/enting 1inancial institutions 1ro+ allo)ing their custo+ers to
conceal their 1inancial acti/ities =y taking ad/antage o1 the
institutions; concentration account practices?
Qsta=lishing +ini+u+ ne) custo+er identi1ication standards and
record&keeping and reco++ending an e11ecti/e +eans to /eri1y the
identity o1 1oreign custo+ers?
Qncouraging 1inancial institutions and la) en1orce+ent agencies to
share in1or+ation concerning suspected +oney laundering and
terrorist acti/ities? and
6e<uiring 1inancial institutions to +aintain anti&+oney laundering
progra+s )hich +ust include at least a co+pliance o11icer? an
e+ployee training progra+? the de/elop+ent o1 internal policies,
procedures and controls? and an independent audit 1eature*
Cri*es# The Ict contains a nu+=er o1 ne) +oney laundering cri+es, as )ell as a+end+ents
and increased penalties 1or earlier cri+es*
Gutla)s laundering the proceeds 1ro+ 1oreign cri+es o1 /iolence or
political corruption?
"rohi=its laundering the proceeds 1ro+ cy=ercri+e or supporting a
terrorist organization?
,ncreases the penalties 1or counter1eiting?
Seeks to o/erco+e a Supre+e Court decision 1inding that the
con1iscation o1 o/er B(00,000 1or atte+pt to lea/e the country )ithout
reporting it to custo+s
"ro/ides e4plicit authority to prosecute o/erseas 1raud in/ol/ing
I+erican credit cards? and
"er+it prosecution o1 +oney laundering in the place )here the
predicate o11ence occurs*
For8eiture# The act allo)s con1iscation o1 all o1 the property o1 participants in or plans an act o1
do+estic or international terroris+? it also per+its con1iscation o1 any property deri/ed 1ro+ or
used to 1acilitate do+estic or international terroris+* "rocedurally, the Ict#
Illo)s con1iscation o1 property located in this country 1or a )ider
range o1 cri+es co++itted in /iolation o1 1oreign la)?
"er+its 9*S* en1orce+ent o1 1oreign 1or1eiture orders?
Calls 1or the seizure o1 correspondent accounts held in 9*S* 1inancial
institutions 1or 1oreign =anks )ho are in turn holding 1or1eita=le
assets o/erseas? and
:enies corporate entities the right to contest i1 their principal
shareholder is a 1ugiti/e*
A,ien Terrorists and Vi;ti*s
The Ict contains pro/isions designed to pre/ent alien terrorists 1ro+ entering the 9S, to ena=le
authorities to detain and deport alien terrorists and those )ho support the+? and to pro/ide
hu+anitarian i++igration relie1 1or 1oreign /icti+s o1 the Septe+=er %%*
Ot@er Cri*es7 "ena,ties7 N "ro;edures
eA ;ri*es: The Ict creates ne) 1ederal cri+es, 1or terrorist attacks on +ass transportation
1acilities, 1or =iological )eapons o11enses, 1or har=oring terrorists, 1or a11ording terrorists +aterial
support, 1or +oney laundering, and 1or 1raudulent charita=le solicitation*
eA "ena,ties# The Ict increases the penalties 1or acts o1 terroris+ and 1or cri+es )hich
terrorists +ight co++it*
Ot@er "ro;edura, AdRust*ents# The Ict increases the re)ards 1or in1or+ation in terroris+
cases, authorizes 3sneak and peek5 search )arrants etc
Anti $one: Laundering ')&DEL&E!
Treasury e4pects all 1inancial institutions co/ered =y the custo+er identi1ication regulations to
ha/e their custo+er identi1ication progra+ dra1ted and appro/ed =y Gcto=er %, $00( as
scheduled*
Foreign issued identi8i;ation do;u*ents:
In e11ecti/e progra+ 1or identi1ying ne) custo+ers +ust allo)
1inancial institutions the 1le4i=ility to use +ethods o1 identi1ying and
/eri1ying the identity o1 their custo+ers appropriate to their indi/idual
circu+stances* For e4a+ple, so+e 1inancial institutions open
accounts /ia the ,nternet, ne/er +eeting custo+ers 1ace&to&1ace*
6ather than dictating )hich 1or+s o1 identi1ication docu+ents
1inancial institutions +ay accept, the 1inal rule e+ploys a risk&=ased
approach that allo)s 1inancial institutions 1le4i=ility, )ithin certain
para+eters, to deter+ine )hich 1or+s o1 identi1ication they )ill
accept and under )hat circu+stances*
Po)e/er, )ith this 1le4i=ility co+es responsi=ility* When an
institution decides to accept a particular 1or+ o1 identi1ication, they
+ust assess risks associated )ith that docu+ent and take )hate/er
reasona=le steps +ay =e re<uired to +ini+ize that risk*
Federal regulators )ill hold 1inancial institutions accounta=le 1or the
e11ecti/eness o1 their custo+er identi1ication progra+s*
Idditionally, 1ederal regulators ha/e the a=ility to noti1y 1inancial
institutions o1 pro=le+s )ith speci1ic identi1ication docu+ents
allo)ing 1inancial institutions to take appropriate steps to address
those pro=le+s*
Custo*er &denti8i;ation "rogra*
The rule re<uires that 1inancial institutions de/elop a Custo+er ,denti1ication "rogra+ 7C,"8 that
i+ple+ents reasona=le procedures to#
%* Collect identi1ying in1or+ation a=out custo+ers opening an account
$* Meri1y that the custo+ers are )ho they say they are
(* -aintain records o1 the in1or+ation used to /eri1y their identity
2* :eter+ine )hether the custo+er appears on any list o1 suspected terrorists or terrorist
organizations
Co,,e;ting in8or*ation:
Is part o1 a Custo+er ,denti1ication "rogra+ 7C,"8, 1inancial institutions )ill =e re<uired to
de/elop procedures to collect rele/ant identi1ying in1or+ation including a custo+er;s na+e,
address, date o1 =irth, and a ta4payer identi1ication nu+=er . 1or indi/iduals, this )ill likely =e a
Social Security nu+=er* Foreign nationals )ithout a 9*S* ta4payer identi1ication nu+=er could
pro/ide a si+ilar go/ern+ent&issued identi1ication nu+=er, such as a passport nu+=er*
Veri8:ing identit::
I C," is also re<uired to include procedures to /eri1y the identity o1 custo+ers opening accounts*
-ost 1inancial institutions )ill use traditional docu+entation such as a dri/er;s license or passport*
Po)e/er, the 1inal rule recognizes that in so+e instances institutions cannot readily /eri1y identity
through +ore traditional +eans, and allo)s the+ the 1le4i=ility to utilize alternate +ethods to
e11ecti/ely /eri1y the identity o1 custo+ers*
$aintaining re;ords:
Is part o1 a C,", 1inancial institutions +ust +aintain records including custo+er in1or+ation and
+ethods taken to /eri1y the custo+er;s identity*
C@e;king terrorist ,ists:
,nstitutions +ust also i+ple+ent procedures to check custo+ers against lists o1 suspected
terrorists and terrorist organizations )hen such lists are identi1ied =y Treasury in consultation )ith
the 1ederal 1unctional regulators*
(e,ian;e on ot@er 8inan;ia, institutions:
The 1inal rule also contains a pro/ision that per+its a 1inancial institution to rely on another
regulated 9*S* 1inancial institution to per1or+ any part o1 the 1inancial institution;s C,"* For
e4a+ple, in the securities industry it is co++on to ha/e an introducing =roker . )ho has opened
an account 1or a custo+er . conduct securities trades on =ehal1 o1 the custo+er through a
clearing =roker* 9nder this regulation, the introducing =roker is re<uired to identi1y and /eri1y the
identity o1 their custo+ers and the clearing =roker can rely on that in1or+ation )ithout ha/ing to
conduct a second redundant /eri1ication pro/ided certain criteria are +et*
T@e 8o,,oAing 8inan;ia, institutions are ;o<ered under t@e ru,e:
Banks and trust co+panies
Sa/ings associations
Credit unions
Securities =rokers and dealers
-utual 1unds
Futures co++ission +erchants and 1utures introducing =rokers
!A(BAE! OFLE% ACT
12
The Sar=anes&G4ley Ict )as signed into la) on (0th July $00$, and introduced signi1icant
legislati/e changes to 1inancial practice and corporate go/ernance regulation* The act is na+ed
a1ter its +ain architects, Senator "aul Sar=anes and 6epresentati/e -ichael G4ley, and o1
course 1ollo)ed a series o1 /ery high pro1ile scandals, such as Qnron* ,t is also intended to Sdeter
and punish corporate and accounting 1raud and corruption, ensure Kustice 1or )rongdoers, and
protect the interests o1 )orkers and shareholdersS
,t introduced stringent ne) rules )ith the stated o=Kecti/e# Sto protect in/estors =y i+pro/ing the
accuracy and relia=ility o1 corporate disclosures +ade pursuant to the securities la)sS* ,t also
introduced a nu+=er o1 deadlines, the pri+e ones =eing#
& -ost pu=lic co+panies +ust +eet the 1inancial reporting and certi1ication +andates 1or any end
o1 year 1inancial state+ents 1iled a1ter June %5th $002
& s+aller co+panies and 1oreign co+panies +ust +eet these +andates 1or any state+ents 1iled
a1ter %5th Ipril $005*
The Sar=anes&G4ley Ict itsel1 is organized into ele/en titles, although sections (0$, 202, 20%,
200, '0$ and 00! are the +ost signi1icant )ith respect to co+pliance* ,n addition, the Ict also
created a pu=lic co+pany accounting =oard, to o/ersee the audit o1 pu=lic co+panies that are
su=Kect to the securities la)s, and related +atters, in order to protect the interests o1 in/estors
and 1urther the pu=lic interest in the preparation o1 in1or+ati/e, accurate, and independent audit
reports 1or co+panies the securities o1 )hich are sold to, and held =y and 1or, pu=lic in/estors*
Section $0% prohi=its non audit ser/ices like =ookkeeping, 1inancial in1or+ation syste+s design
and i+ple+entation, actuarial ser/ices, +anage+ent ser/ices etc 1ro+ the scope o1 practice o1
auditors* They can ho)e/er =e taken up )ith the pre appro/al o1 the audit co++ittee on a case
=y case =asis*
Section 20% speci1ies enhanced 1inancial disclosures speci1ically#
Iccuracy o1 1inancial reports
G11&=alance sheet transactions
Co++ission rules on pro 1or+a 1igures
Section 50% seeks to i+pro/e o=Kecti/ity o1 research =y reco++ending rules designed to address
con1licts o1 interest that can arise )hen securities analysts reco++end e<uity securities in
research reports* These rules are designed to 1oster greater pu=lic con1idence in securities
research, and to protect the o=Kecti/ity and independence o1 securities analysts*

%
E/tra;ted 8ro* !ar=anes-O/,e: 8oru*
BA!EL 2 CA"&TAL ADE?)AC% O($!
1C
Bank 1or ,nternational Settle+ents 7B,S8, head<uartered in Basel, S)itzerland represents the
Central Banks o1 55 +e+=er countries** The 1irst Basel Capital Iccord )as instituted in %0'' to
coordinate glo=al regulatory e11orts and institute +ini+u+ capital re<uire+ents to eli+inate the
threat posed =y undercapitalized =anks*
The %0'' Capital Iccord prescri=ed a single, standard +easure o1 risk to deter+ine +ini+al
capital re<uire+ents* The accord ai+ed, pri+arily to re/erse the steady erosion o1 =ank capital
ratios* Is a =asis 1or deter+ining aggregate capital re<uire+ents, it has per1or+ed reasona=ly
)ell* Po)e/er, this led to o11setting o1 o/er and under assessed assets across a =ank;s port1olio*
The classi1ication o1 o=ligors into so/ereigns, =anks and others 71urther di/ided =et)een GQC:
and non&GQC:8 =ears only a tenuous connection to co+parati/e credit risk*
"ost %0'', to address gro)ing co+ple4ity, /olatility, and interdependence a+ong international
1inancial +arkets, and heightened institutional and syste+ic threats, a ne) Capital Iccord )as
proposed =y the Basel Co++ittee on Banking Super/ision* The ne) Iccord )as ai+ed at
esta=lishing a +ore sophisticated 1ra+e)ork 1or =anks to +easure risk and ensure su11icient
capital to co/er losses 1ro+ +arket, credit, and operational risk* The ai+ o1 Basel ,, is to
pro+ote sa1ety and soundness in the 1inancial syste+ =y allocating capital in organizations to
re1lect risk +ore accurately*
Basel ,, )ill apply to all 1inancial ser/ices pro/iders in the %%0 countries that ha/e signed the ne)
Capital Iccord, including security 1ir+s and asset +anagers )ith operations in =anking and
Capital +arkets* Q9 +e+=er states )ill re<uire all do+estic and 1oreign 1inancial ser/ices
pro/iders to co+ply, and the G&%0 countries are including it into their regulatory en/iron+ents in
order to +eet the Basel ,, i+ple+entation deadline o1 :ece+=er $00!* -any o1 the o/er $5,000
=anks around the )orld are e4pected to adopt Basel ,, as )ell, in order to +aintain their
co+petiti/eness*
The co/erage o1 Basel ,, is likely to =e as )ide as the D$X e11ort* Inalysts; esti+ate that ,T spend
)ould =e around H22.5 =i,,ion to address Basel ,, re<uire+ents* I signi1icant portion o1 this cost
)ould co+prise o1 the ne) technological de/elop+ents and enhance+ents to the e4isting
syste+s*
T@ree "i,,ars
The underlying principle 1or the Iccord is that Sa1ety and soundness in today;s dyna+ic and
co+ple4 1inancial syste+ can =e attained only =y the co+=ination o1 e11ecti/e =ank&le/el
+anage+ent, +arket discipline, and super/ision*
The Ne) Iccord proposal is =ased on three +utually rein1orcing pillars that allo) =anks and
super/isors to e/aluate the /arious risks that =anks 1ace*
&
E/tra;ted 8ro* Bank o8 &nternationa, !ett,e*entsQ do;u*ents 5 AAA.=is.org
"i,,ar 1: $ini*u* Ca+ita, (eGuire*ents
The 1irst pillar sets out +ini+u+ capital re<uire+ents* The Ne) Iccord has 1ocused on
i+pro/e+ents in the +easure+ent o1 risks* The credit risk +easure+ent +ethods are +ore
ela=orate than those in the current Iccord* The ne) 1ra+e)ork proposes 1or the 1irst ti+e a
+easure 1or o$erationa& risk, )hile the market risk +easure re+ains unchanged*
Credit 4isk# There is a choice =et)een three increasingly sophisticated +ethods# the
Standardized, the Foundation ,nternal 6atings Based 7@,6B;8 and the Id/anced ,6B Ipproaches*
-he Standardi5ed '$$roach
The =ank allocates a risk&)eight to each o1 its assets and o11&=alance&sheet positions and
produces a su+ o1 risk&)eighted asset /alues*
,ndi/idual risk )eights currently depend on the =road category o1 =orro)er 7i*e* so/ereigns, =anks
or corporates8* The risk )eights are to =e re1ined =y re1erence to a rating pro/ided =y an e4ternal
credit assess+ent institution*
-he (nterna& 4atings based '$$roach 2(4*3
9nder the ,6B approach, =anks )ill =e allo)ed to use their internal esti+ates o1 =orro)er
credit)orthiness to assess credit risk in their port1olios, su=Kect to strict +ethodological and
disclosure standards* :istinct analytical 1ra+e)orks )ill =e pro/ided 1or di11erent types o1 loan
e4posures, 1or e4a+ple corporate and retail lending, )hose loss characteristics are di11erent*
9nder =oth the 1oundation and ad/anced ,6B approaches, the range o1 risk )eights )ill =e 1ar
+ore di/erse than those in the standardized approach, resulting in greater risk sensiti/ity* I +ore
"i,,ar 1
X?uantitati<eY
"i,,ar 2
X?ua,itati<eY
"i,,ar C
X$arket For;esY
Supervisory
Review
Market Discipline
Supervisory
Review
Market Discipline
$ini*u* Ca+ita,
(eGuire*ents
!u+er<isor:
(e<ieA
$arket Dis;i+,ine
:isclosure
re<uire+ents
Capital
structure
6isk
e4posures
Capital
ade<uacy
G/er/ie) o1
super/isory
re/ie)
Xey principles
Capital
+anage+ent
processes
,nterest rate
risk in the
=anking =ook
)
Calculation o1
capital
re<uire+ents
Credit risk
Gperational
risk
Trading =ook
changes
7+arket risk8
co+ple4 approach 7and there1ore a +ore sophisticated risk +anage+ent process8 should lead to
a lo)er capital charge*
6$erationa& 4isk# Broadly, Gperational 6isk 7G68 is de1ined as the risk o1 +onetary losses
resulting 1ro+ inade<uate or 1ailed internal processes, people, and syste+s or 1ro+ e4ternal
e/ents* The e/ents characterize the inherent risks in doing =usiness and are +ostly +anaged =y
putting in place controls* So+e ti+es controls +ay =e ine11ecti/e or also 1ail =ecause o1 )eakness
in people, processes, syste+s or e4ternal e/ents* So+e ti+es inherent risks the+sel/es +ay
change =ecause o1 the e/ents in the e4ternal en/iron+ent* Thus,
O+erationa, risks 9 &n@erent risks 8or A@i;@ ;ontro,s are not in +,a;e 2 Contro, risks
There is again a choice o1 approach# =et)een a standardized and a +ore sophisticated ,nternal
-easure+ent Ipproach 7@,-I;8*
*asic (ndicator '$$roach
This approach links the capital charge 1or operational risk to a single risk indicator 1or the )hole
=ank* Gross inco+e is proposed as the indicator, )ith each =ank holding capital 1or operational
risk e<ual to the a+ount o1 a 1i4ed percentage, alpa* The Basic ,ndicator Ipproach can =e
applied 1or any =ank regardless o1 its co+ple4ity or sophistication*
-he Standardi5ed '$$roach
,n this Ipproach, a =ank;s acti/ities are di/ided into a nu+=er o1 standardized =usiness units and
=usiness lines* Within each =usiness line, the capital charge is calculated =y +ultiplying a =ank;s
=road 1inancial indicator =y a @=eta; 1actor* The capital charge )ould continue to =e standardized
=y the super/isor* No), 1or each =usiness line gross inco+e is taken to calculate the capital
charge*
-he (nterna& Measurement '$$roach
This approach stri/es to incorporate an indi/idual =ank;s internal loss data into the calculation o1
its re<uired capital* 9nder the ,nternal -easure+ent Ipproach, a capital charge 1or the
operational risk o1 a =ank )ould =e deter+ined using an Q4posure ,ndicator 7Q,8 )ithin each
=usiness line F loss type co+=ination, "ro=a=ility o1 loss Q/ent 7"Q8, =ased on the =anks; internal
loss data and Voss Gi/en that Q/ent 7VGQ8 )ithin each =usiness line F loss type co+=ination*
C#ECD 21
The Check Clearing 1or the $%st Century Ict 7Check Truncation Ict, Check $%8 pro+otes check
i+aging through the introduction o1 a ne) pay+ent instru+ent kno)n as the su=stitute check
7also re1erred to as the ,+age 6eplace+ent :ocu+ent or ,6:8* The su=stitute check, )hich
contains an i+age o1 the check, )ill =e the legal e<ui/alent o1 the original* Check $% also
a=olishes the paying =ankRs right to de+and present+ent o1 the original paper check as a
condition o1 pay+ent, )hich allo)s the =ank o1 1irst deposit to truncate the check upon i+age
capture* The Ict is e4pected to speed the transition 1ro+ traditional processing to i+aged
processing and encourage the use o1 electronic check clearing*
Check $% )ill reduce paper 1lo) resulting 1ro+ 25& 50 =illion paper checks processed each year,
and, in +any cases, )ill eli+inate la=or& and cost&intensi/e paper check handling, transportation,
and storage issues* Banks that con/ert to check i+aging )ill realize +any other =ene1its,
including#
Sa/ings associated )ith lo)er transit costs and courier charges
Vo)er risk o1 lost ite+s andFor transit delays
Vo)er check processing errors resulting 1ro+ reduced handling and
auto+ated data capture 1ro+ check i+ages
Fully auto+ated :ay $ 7return8 processing ena=led =y i+age
e4ception ite+ processing
Co+pressed processing )indo)s to ena=le later =ranch cuto11 ti+es
,+pro/ed collection 1loat due to 1aster clearing processes
Check $% )ill lead to additional pay+ent syste+ e11iciency industry&)ide* ,t )ill allo) 1inancial
institutions to 1urther le/erage their in/est+ent in check i+aging technologies*
C@e;k 21 5 Te;@no,og: ;@a,,enges 8or =anks
Banks )ould re<uire su=stantial technology in/est+ents in +igrating to a Check $% en/iron+ent*
Inalyzing 1ro+ a process 1lo) perspecti/e, the 1ollo)ing are the +ain syste+s re<uired#
Check i+age capture 7)ith /eri1ication and receipt generation i1
re<uired8
Check i+age storage, archi/al H e4change
Check i+age processing, pattern +atching H signature /eri1ication
C6- integration . check research and adKust+ent
So+e o1 the in/est+ents can =e a/oided =y going in 1or an IS"&=ased solution )here=y all
processes like check i+age storage H archi/al, i+age e4change and processing )ork1lo) can =e
+anaged =y a third party ser/ice pro/ider on a su=scription =asis* Po)e/er, the decision on
outsourcing these acti/ities ha/e to =e taken =y =anks a1ter considera=le research on as&is
process 1lo) and technology analysis, capacity planning, security analysis and =ench+arking*
,n/est+ents 1or check capture and i+age processing )ould =e incre+ental, )hereas there )ould
=e signi1icant in/est+ent re<uired 1or storage, archi/al and e4change o1 check i+ages in a secure
en/iron+ent* This )ould =e a +aKor hurdle 1or +ost o1 the =anks* Banks )ill also ha/e to cope
)ith +ultiple technology /endors and architectural solutions )hile ensuring that they stick to
i+ple+entation ti+e lines*
4. 'LO!!A(%
Agen;: =onds: Igencies represent all =onds issued =y the 1ederal go/ern+ent, e4cept 1or those
issued =y the Treasury 7i*e* =onds issued =y other agencies o1 the 1ederal go/ern+ent8*
Q4a+ples include the Federal National -ortgage Issociation 7FN-I8, and the Guaranteed
National -ortgage Issociation 7GN-I8*
Ar=itrage: The trading o1 securities to pro1it 1ro+ a te+porary di11erence =et)een the price o1
security in one +arket and the price in another* This te+porary di11erence is o1ten called +arket
ine11iciency*
Annua,iMed "er;entage or (eturn# The periodic rate ti+es the nu+=er o1 periods in a year* For
e4a+ple, a 5A <uarterly return has an I*"*6* o1 $0A* ,t depends on the 1ollo)ing#
Po) +uch repay+ent
Po) 1re<uently
Which co+ponent o1 loan . interest or principal
Aut@oriMation 1Credit Cards3: The act o1 ensuring that the cardholder has ade<uate 1unds
a/aila=le against their line o1 credit* I positi/e authorization results in an authorization code =eing
generated, and a hold =eing placed on those 1unds* I SholdS +eans that the cardholderRs
a/aila=le credit li+it is reduced =y the authorized a+ount*
Beaut: ;ontest: The in1or+al ter+ 1or the process =y )hich clients choose an in/est+ent =ank*
So+e o1 the typical selling points )hen co+peting )ith other in/est+ent =anks 1or deals are#
SVook ho) strong our research depart+ent is in this industry* Gur analyst in the industry is a real
+arket +o/er, so i1 you go pu=lic )ith us, youRll =e sure to get a lot o1 attention 1ro+ her*S
B,oo*=erg: Co+puter ter+inals pro/iding real ti+e <uotes, ne)s, and analytical tools, o1ten
used =y traders and in/est+ent =ankers*
Bond s+reads: The di11erence =et)een the yield o1 a corporate =ond and a 9*S* Treasury
security o1 si+ilar ti+e to +aturity*
Bu,ge =ra;ket: The largest and +ost prestigious 1ir+s on Wall Street like Gold+an Sachs,
-organ Stanley :ean Witter, -errill Vynch, Salo+on S+ith Barney, Veh+an Brothers, Credit
Suisse First Boston*
Bu:-side: The clients o1 in/est+ent =anks 7+utual 1unds, pension 1unds8 that =uy the stocks,
=onds and securities sold =y the in/est+ent =anks* 7The in/est+ent =anks that sell these
products to in/estors are kno)n as the sell&side*8
Ca+ita,iMed Loan: I loan in )hich the interest due and not paid is added to the principal =alance
o1 the loan* Capitalized interest =eco+es part o1 the principle o1 the loans? there1ore, it increases
the total cost o1 repaying the loan =ecause interest )ill accu+ulate on the ne), higher principle*
Ca+ture 1Credit Cards3: Con/erting the authorization a+ount into a =illa=le transaction record*
Transactions cannot =e captured unless pre/iously authorized*
Co**er;ia, =ank: I =ank that lends, rather than raises +oney* For e4a+ple, i1 a co+pany
)ants B(0 +illion to open a ne) production plant, it can approach a co++ercial =ank 1or a loan*
Co**er;ia, +a+er: Short&ter+ corporate de=t, typically +aturing in nine +onths or less*
Co**odities: Issets 7usually agricultural products or +etals8 that are generally interchangea=le
)ith one another and there1ore share a co++on price* For e4a+ple, corn, )heat, and ru==er
generally trade at one price on co++odity +arkets )orld)ide*
Co*+ara=,e ;o*+an: ana,:sis 1Co*+s3: The pri+ary tool o1 the corporate 1inance analyst*
Co+ps include a list o1 1inancial data, /aluation data and ratio data on a set o1 co+panies in an
industry* Co+ps are used to /alue pri/ate co+panies or =etter understand a ho) the +arket
/alues and industry or particular player in the industry*
Consu*er "ri;e &nde/: The C", +easure the percentage increase in a standard =asket o1
goods and ser/ices* C", is a +easure o1 in1lation 1or consu+ers*
Cou+on rate: The 1i4ed interest paid on a =ond as a percentage o1 its 1ace /alue, each year, until
+aturity* ,n Thailand the coupon is usually paid se+i&annually or annually*
Dis;ount rate: The rate at )hich 1ederal =anks lend +oney to each other on o/ernight loans* I
)idely 1ollo)ed interest rate set =y the Federal 6eser/e to cause +arket interest rates to rise or
1all, there=y causing the 9*S* econo+y to gro) +ore <uickly or less <uickly*
Dis;ount (ate 8or Credit Cards: I s+all percentage o1 each transaction that is )ithheld =y the
Ic<uiring Bank or ,SG* This 1ee is =asically )hat the +erchant pays to =e a=le to accept credit
cards* The 1ee goes to the ,SG 7i1 applica=le8, the Ic<uiring Bank, and the Issociations*
Di<idend: I pay+ent =y a co+pany to shareholders o1 its stock, usually as a )ay to distri=ute
pro1its to shareholders*
Fed: The Federal 6eser/e, )hich +anages the countryRs econo+y =y setting interest rates*
Federa, 8unds rate: The rate do+estic =anks charge one another on o/ernight loans to +eet
Federal 6eser/e re<uire+ents* This rate tracks /ery closely to the discount rate, =ut is usually
slightly higher*
Fi/ed in;o*e: Bonds and other securities that earn a 1i4ed rate o1 return* Bonds are typically
issued =y go/ern+ents, corporations and +unicipalities*
F,oat: The nu+=er o1 shares a/aila=le 1or trade in the +arket* Generally speaking, the =igger the
1loat, the greater the stockRs li<uidity*
F,oating rate: In interest rate that is =ench+arked to other rates 7such as the rate paid on 9*S*
Treasuries8, allo)ing the interest rate to change as +arket conditions change*
',ass-!teaga,, A;t: "assed in %0(( during the 3:epression5 to help pre/ent 1uture =ank 1ailures*
The Glass&Steagall Ict split I+ericaRs in/est+ent =anking 7issuing and trading securities8
operations 1ro+ co++ercial =anking 7lending8* For e4a+ple, J*"* -organ )as 1orced to spin o11
its securities unit as -organ Stanley* Since the late %0'0s, the Federal 6eser/e has steadily
)eakened the act, allo)ing co++ercial =anks such as NationsBank and Bank o1 I+erica to =uy
in/est+ent =anks like -ontgo+ery Securities and 6o=ertson Stephens* ,n %000, Glass&Steagall
)as e11ecti/ely repealed =y the Graha+&Veach&Bliley Ict*
'ra@a*-Lea;@-Bi,e: A;t: Ilso kno)n as the Financial Ser/ices -odernization Ict o1 %000*
Qssentially repealed +any o1 the restrictions o1 the Glass&Steagall Ict and +ade possi=le the
current trend o1 consolidation in the 1inancial ser/ices industry* Illo)s co++ercial =anks,
in/est+ent =anks, and insurance co+panies to a11iliate under a holding co+pany structure*
'ross Do*esti; "rodu;t: G:" +easures the total do+estic output o1 goods and ser/ices in the
9nited States* For re1erence, the G:" gre) at a 2*$ percent rate in %000* Generally, )hen the
G:" gro)s at a rate o1 less than $ percent, the econo+y is considered to =e in recession*
#edge: To =alance a position in the +arket in order to reduce risk* Pedges )ork like insurance# a
s+all position pays o11 large a+ounts )ith a slight +o/e in the +arket*
#ig@ grade ;or+orate =ond: I corporate =ond )ith a rating a=o/e BB* Ilso called in/est+ent
grade de=t*
#ig@ :ie,d de=t 1a.k.a. Vunk =onds3: Corporate =onds that pay high interest rates to
co+pensate in/estors 1or high risk o1 de1ault* Credit rating agencies such as Standard H "oorRs
rate a co+panyRs 7or a +unicipalityRs8 =onds =ased on de1ault risk* Junk =onds rate =elo) BB*
&nstitutiona, ;,ients or in<estors: Varge in/estors, such as pension 1unds or +unicipalities 7as
opposed to retail in/estors or indi/idual in/estors8*
Lead *anager: The pri+ary in/est+ent =ank +anaging a securities o11ering* In in/est+ent
=ank +ay share this responsi=ility )ith one or +ore co&+anagers*
League ta=,es: Ta=les that rank in/est+ent =anks =ased on under)riting /olu+e in nu+erous
categories, such as stocks, =onds, high yield de=t, con/erti=le de=t, etc* Pigh rankings in league
ta=les are key selling points used =y in/est+ent =anks )hen trying to land a client engage+ent*
Le<eraged Bu:out 1LBO3: The =uyout o1 a co+pany )ith =orro)ed +oney, o1ten using that
co+panyRs o)n assets as collateral* VBGs )ere co++on in %0'0s, )hen success1ul VBG 1ir+s
such as Xohl=erg Xra/is 6o=erts +ade a practice o1 =uying up co+panies, restructuring the+,
and reselling the+ or taking the+ pu=lic at a signi1icant pro1it
L&BO(: Vondon ,nter&=ank G11ered 6ate* I )idely used short&ter+ interest rate* V,BG6
represents the rate =anks in Qngland charge one another on o/ernight loans or loans up to 1i/e
years* V,BG6 is o1ten used =y =anks to <uote 1loating rate loan interest rates* Typically the
=ench+ark V,BG6 is the three&+onth rate*
LiGuidit:: The a+ount o1 a particular stock or =ond a/aila=le 1or trading in the +arket* For
co++only traded securities, such as =ig cap stocks and 9*S* go/ern+ent =onds, they are said to
=e highly li<uid instru+ents* S+all cap stocks and s+aller 1i4ed inco+e issues o1ten are called
illi<uid 7as they are not acti/ely traded8 and su11er a li<uidity discount, i*e* they trade at lo)er
/aluations to si+ilar, =ut +ore li<uid, securities*
Long Bond: The (0&year 9*S* Treasury =ond* Treasury =onds are used as the starting point 1or
pricing +any other =onds, =ecause Treasury =onds are assu+ed to ha/e zero credit risk taking
into account 1actors such as in1lation* For e4a+ple, a co+pany )ill issue a =ond that trades S20
o/er Treasuries*S The 20 re1ers to 20 =asis points 7%00 =asis points > % percentage point8*
$aking *arkets: I 1unction per1or+ed =y in/est+ent =anks to pro/ide li<uidity 1or their clients in
a particular security, o1ten 1or a security that the in/est+ent =ank has under)ritten* The
in/est+ent =ank stands )illing to =uy the security, i1 necessary, )hen the in/estor later decides
to sell it*
$arket Ca+ita,iMation: The total /alue o1 a co+pany in the stock +arket 7total shares
outstanding 4 price per share8*
$er;@ant A;;ount: I special =usiness account set up to process credit card transactions* I
+erchant account is not a =ank account 7e/en though a =ank +ay issue it8* 6ather, it is designed
to %8 process credit card pay+ents and $8 deposit the 1unds into your 7=usiness8 checking
account 7+inus transaction 1ees8*
$one: *arket se;urities: This ter+ is generally used to represent the +arket 1or securities
+aturing )ithin one year* These include short&ter+ C:s, repurchase agree+ents, co++ercial
paper 7lo)&risk corporate issues8, a+ong others* These are lo) risk, short&ter+ securities that
ha/e yields si+ilar to Treasuries*
$ortgage-=a;ked =onds: Bonds collateralized =y a pool o1 +ortgages* ,nterest and principal
pay+ents are =ased on the indi/idual ho+eo)ners +aking their +ortgage pay+ents* The +ore
di/erse the pool o1 +ortgages =acking the =ond, the less risky they are*
$uni;i+a, =onds 1P$unisP3: Bonds issued =y local and state go/ern+ents, a*k*a* +unicipalities*
-unicipal =onds are structured as ta4&1ree 1or the in/estor, )hich +eans in/estors in +uniRs earn
interest pay+ents )ithout ha/ing to pay 1ederal ta4es* So+eti+es in/estors are e4e+pt 1ro+
state and local ta4es, too* Conse<uently, +unicipalities can pay lo)er interest rates on +uni
=onds than other =onds o1 si+ilar risk*
"a:*ent 'ateAa: Fees 1Credit Cards3: The 1ees that pay+ent gate)ays charge 1or their
ser/ices* This generally includes a +onthly 1ee and a s+all 1lat 1ee per transaction* These 1ees
+ay =e consolidated into a single =ill =y the ac<uiring =ank or ,SG, along )ith their 1ees*
"it;@=ook: The =ook o1 e4hi=its, graphs, and initial reco++endations presented =y =ankers to a
prospecti/e client )hen trying to land an engage+ent*
"it traders: Traders )ho are positioned on the 1loor o1 stock and co++odity e4changes 7as
opposed to 1loor traders, situated in in/est+ent =ank o11ices8*
".E ratio: The price to earnings ratio* This is the ratio o1 a co+panyRs stock price to its earnings&
per&share* The higher the "FQ ratio, the +ore e4pensi/e a stock is 7and also the 1aster in/estors
=elie/e the co+pany )ill gro)8* Stocks in 1ast&gro)ing industries tend to ha/e higher "FQ ratios*
"ri*e rate: The a/erage rate 9*S* =anks charge to co+panies 1or loans*
"rodu;er "ri;e &nde/: The "", +easure the percentage increase in a standard =asket o1 goods
and ser/ices* "", is a +easure o1 in1lation 1or producers and +anu1acturers*
"ro+rietar: trading: Trading o1 the 1ir+Rs o)n assets 7as opposed to trading client assets8*
"ros+e;tus: I report issued =y a co+pany 71iled )ith and appro/ed =y the SQC8 that )ishes to
sell securities to in/estors* :istri=uted to prospecti/e in/estors, the prospectus discloses the
co+panyRs 1inancial position, =usiness description, and risk 1actors*
(ed @erring: Ilso kno)n as a preli+inary prospectus* I 1inancial report printed =y the issuer o1 a
security that can =e used to generate interest 1ro+ prospecti/e in/estors =e1ore the securities are
legally a/aila=le to =e sold* Based on 1inal SQC co++ents, the in1or+ation reported in a red
herring +ay change slightly =y the ti+e the securities are actually issued*
(etai, ;,ients: ,ndi/idual in/estors 7as opposed to institutional clients8*
(eturn on eGuit:: The ratio o1 a 1ir+Rs pro1its to the /alue o1 its e<uity* 6eturn on e<uity, or 6GQ,
is a co++only used +easure o1 ho) )ell an in/est+ent =ank is doing, =ecause it +easures ho)
e11iciently and pro1ita=ly the 1ir+ is using its capital*
(isk ar=itrage: When an in/est+ent =ank in/ests in the stock o1 a co+pany it =elie/es )ill =e
purchased in a +erger or ac<uisition* 7:istinguish 1ro+ risk&1ree ar=itrage*8
(oad-s@oA: The series o1 presentations to in/estors that a co+pany undergoing an ,"G usually
gi/es in the )eeks preceding the o11ering* PereRs ho) it )orks# Se/eral )eeks =e1ore the ,"G is
issued, the co+pany and its in/est+ent =ank )ill tra/el to +aKor cities throughout the country* ,n
each city, the co+panyRs top e4ecuti/es +ake a presentation to analysts, +utual 1und +anagers,
and others attendees and also ans)er <uestions*
!a,es *e*o: Short reports )ritten =y the corporate 1inance =ankers and distri=uted to the =ankRs
salespeople* The sales +e+o pro/ides salespeople )ith points to e+phasize )hen ha)king the
stocks and =onds the 1ir+ is under)riting*
!e;urities and E/;@ange Co**ission 1!EC3: I 1ederal agency that, like the Glass&Steagall
Ict, )as esta=lished as a result o1 the stock +arket crash o1 %0$0 and the ensuing depression*
The SQC +onitors disclosure o1 1inancial in1or+ation to stockholders, and protects against 1raud*
"u=licly traded securities +ust 1irst =e appro/ed =y the SQC prior to trading*
!e;uritiMe: To con/ert an asset into a security that can then =e sold to in/estors* Nearly any
inco+e generating asset can =e turned into a security* For e4a+ple, a $0&year +ortgage on a
ho+e can =e packaged )ith other +ortgages Kust like it, and shares in this pool o1 +ortgages can
then =e sold to in/estors*
!@ort-ter* de=t: I =ond that +atures in nine +onths or less* Ilso called co++ercial paper*
!:ndi;ate: I group o1 in/est+ent =anks that )ill together under)rite a particular stock or de=t
o11ering* 9sually the lead +anager )ill under)rite the =ulk o1 a deal, )hile other +e+=ers o1 the
syndicate )ill each under)rite a s+all portion*
Transa;tion Fee 1Credit Cards3: I s+all 1lat 1ee that is paid on each transaction* This 1ee is
collected =y the ac<uiring =ank or ,SG and pays 1or the toll&1ree dial out nu+=er and the
processing net)ork*
T-Bi,, %ie,ds: The yield or internal rate o1 return an in/estor )ould recei/e at any gi/en +o+ent
on a 00&%$0 go/ern+ent treasury =ill*
To*=stone: The ad/ertise+ents that appear in pu=lications like Financial Ti+es or The Wall
Street Journal announcing the issuance o1 a ne) security* The to+=stone ad is placed =y the
in/est+ent =ank as in1or+ation that it has co+pleted a +aKor deal*
%ie,d: The annual return on in/est+ent* I high yield =ond, 1or e4a+ple, pays a high rate o1
interest*
5. (EFE(ECE!
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BOOD!
The Bank Credit Card Business . I+erican Bankers Issociation
Malue It 6isk . "hillipe Jorions
"rinciples o1 Corporate Finance . Brearley -yers
Securities Gperations . -ichael T 6eddy . Ne) Dork ,nstitute o1
Finance
I1ter the Trade is -ade . :a/id - Weiss . Ne) Dork ,nstitute o1
Finance
,n/est+ent Inalysis H "ort1olio -anage+ent & Frank X* 6eilly
H
Xeith C* Bro)n
The Warren Bu11et Way . 6o=ert Pagstro+ Jr
Gne 9p on the Wall Street . "eter Vynch

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Foundation Course in Banking

Foundation Course in Banking

,n/est+ent -anage+ent ai+s at +anaging in/estors; +oney

E/tra;ted 8ro* Congressiona, (esear;@ !er<i;e7 )! and Federation o8 A*eri;an !;ientists -

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