Financial Markets - MAINAK

Financial Markets in India
-S.B. Mainak
Chairman, CARE Ratings
Regulators of the Financial System
Regulation of Financial
System
Financial Sector February 2017

IRDA Regulations regarding
investment
Insurance companies are allowed to invest

in four broad categories as given below
and IRDA has prescribed prudential limits
for each category
Government Securities
Other Approved Securities
Infrastructure and Social Sector
All other investments as per exposure and
Prudential Norms specified in Regulation 5

Guidelines for Life Insurance
Companies:

Guidelines for Non Life Insurance
Companies

Permission to Invest in Alternative Investment Funds
IRDA through circulars dated 18th March, 2013 and 23rd

August 2013 has permitted both Life Insurance and Non
-Life Insurance Businesses to invest in Category I and
Category II AIFs, focused on certain approved
investments i.e. infrastructure entities, SMEs, Social
Venture entities and Venture Capital Undertaking
registered with SEBI under AIF regulations 2012
Overall exposure to AIFs should be 3% of the respective
fund (viz., Life Insurance Fund, Pension and Annuity Fund,
and ULIP Funds) for Life Insurance Businesses and 5% of
the investment assets for non- life insurance businesses
Exposure to a single AIF should be 10% of the venture
fund size or 20% of overall exposure, whichever is lower
for both life and non-life insurance businesses

Money market

What is this market?
Is market for borrowing and lending of short-term funds

Deals in funds and financial instruments with maturity of
one day to one year
It caters to the short-term financial needs of the economy
Helps the RBI in effective implementation of monetary
policy
Provides mechanism to achieve equilibrium between
demand and supply of short-term funds
Helps in allocation of short term funds through inter-bank
transactions and money market instruments
Provides funds in non-inflationary way to thegovernment
to meet its deficits

Instruments and players
Market for short term funds and includes

Call market
- Repos
- Overnight GSec
- Corporate bonds
- Term repos
- CBLO
- Treasury bills
Main players
Nationalized Banks, Private Banks, Foreign Banks, Co-
operative Banks, Financial Institutions, Insurance
Companies, Mutual Funds, Primary Dealers, Bank cum
Primary Dealers, NBFC, Corporate, Provident/ Pension Funds

Short Term Instruments Issued by Financial Entities
Commercial Paper
It is an unsecured promissory note issued by corporates
Maturity can be up to 365 days
It is generally issued by entities with high rating
Certificate of Deposit
Document issued by the bank to an investor who chooses to
deposit his funds in the bank for a specific amount of time.
Minimum maturity seven days and maximum maturity of 365
days, in case of banks.
The FIs can issue CDs for a period not less than 1 year and not
exceeding 3 years from the date of issue.
Short Term NCD
NCDs shall not be issued for maturities of less than 90 days from
the date of issue
Can only be issued by way of private placement

10
Short Term Instruments Issued by Financial Entities
Treasury Bill Market

This market deals in short term duration securities issued by
RBI on behalf of Government of India
At present three types of treasury bills are issued through
auctions, namely 91 day, 182 day and 364 day treasury bill.
They are highly liquid with absence of risk of default
Commercial Bills
Are short term, negotiable and money market instruments with
low risk
A bill of exchange is drawn by a seller on the buyer to make
payment within a certain period of time
Generally, the maturity period is of three months
Are purchased and discounted by commercial banks and are
rediscounted by financial institutions like EXIM banks, SIDBI,
IDBI etc.

11
CBLO
A collateralized borrowing and lending obligation (CBLO) is a

money market instrument that represents an obligation
between a borrower and a lender as to the terms and
conditions of the loan.
CBLOs were developed by the Clearing Corporation of India

(CCIL) and Reserve Bank of India (RBI). The details of the CBLO
include an obligation for the borrower to repay the debt at a
specified future date and an expectation of the lender to
receive the money on that future date, and they have a charge
on the security that is held by the CCIL.

Mutual Funds
As on March 31, 2016, 2,420 mutual fund schemes of which
Income/debt oriented schemes were 1,831 (75.7 %),
Growth/equity oriented schemes were 473 (19.5 %),
Exchange traded funds were 58 schemes (2.4 %),
Balanced schemes were 28 (1.2 %)
Fund of funds investing overseas schemes were 30 (1.2 %).
In FY16, Rs 1.34 lkh crore amount raised by all mutual funds,

Share of private sector 68.1%
Share of public sector mutual funds 31.9%.
Cumulative net assets decreased by 2.4% to Rs 12.32 lkh

crore
Total net investment Rs 72,144 crore in March 2016
In FY16, the total investment of Rs 4.42 lkh crore, of which
Rs 3.76 lkh crore in debt
Rs 66,144 crore in equity

Liquid funds
Funds investing in money market and debt

instruments with a residual maturity of up
to 91 days
The minimum investment amount should
be less than Rs 10 lakhs
Liquid fundis a category ofmutual
fundwhich invests primarily in money
market instruments like certificate of
deposits, treasury bills, commercial papers
and term deposits

Movement in AMFI Liquid fund index

Trading in money market
Average daily volumes traded in 2015-16

Market Rs cr
Call Money 22,110
Market Repo 124,500
Repo in Corporate Bond 120
Govt. of India Dated Securities 71,280
State Govt. Securities 2,750
Treasury Bills:
91-Day 4,080
182-Day 1,180
364-Day ,900

Average Call Rate
7.00
6.80
6.60
6.40
6.20
6.00
5.80
5.60
5.40
5.20
5.00
Average call rate

Average Call Volume Traded (Rs cr)
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
Vol traded (Rs cr)

T Bills Yields (%)
7.5
6.5
5.5
90 days 180 days 364 days

CP Yields (%)
8.5
7.5
6.5
180 days 364 days

MIBOR
6.9
6.8
6.7
6.6
6.5
6.4
6.3
6.2
6.1
6
MIBOR

CBLO
80000 9
7.87 8.02 7.82 71850
7.66 8
70000
6.96
60000 56114 6.23 7
51199 6
50000 48520
5
Rs cr 40000 32772 35425 4 %
30000
3
20000 2
10000 1
0 0
FY12 FY13 FY14 FY15 FY16 10M FY17
Average turnover Average rate

G Sec Market

What is a G Sec?
A Government Security (G-Sec) is a tradable instrument

issued by the Central Government or the State Governments.
It acknowledges the Governments debt obligation.
Such securities are short term (usually called treasury bills,
with original maturities of less than one year) or long term
(usually called Government bonds or dated securities with
original maturity of one year or more).
In India, the Central Government issues both, treasury bills
and bonds or dated securities while the State Governments
issue only bonds or dated securities, which are called the
State Development Loans (SDLs).
G-Secs carry practically no risk of default and, hence, are
called risk-free gilt-edged instruments.

Various dated instruments
Fixed Rate Bonds These are bonds on which the
coupon rate
Most Government bonds in India are issued as fixed rate bonds
Floating Rate Bonds (FRB) FRBs are securities which
do not have a fixed coupon rate.
The coupon is re-set at pre-announced intervals (say, every 6
months or one year) by adding a spread over a base rate.
FRBs were first issued in September 1995 in India.
Zero coupon bonds are bonds with no coupon
payments.
Like T- Bills, they are issued at a discount and redeemed at
face value.
The Government of India had started issuing such securities in
the nineties

Various dated instruments
STRIPS Separate Trading of Registered Interest and

Principal of Securities
STRIPS are the securities created by way of separating the
cash flows associated with a regular G-Sec i.e. each semi-
annual coupon payment and the final principal payment to
be received from the issuer, into separate securities.
Sovereign Gold Bond (SGB) :
SGBs are unique instruments, prices of which are linked to
commodity price viz Gold.
SGBs are denominated in multiples of gram(s) of gold with
a basic unit of 1 gram
The tenor of the SGB is for a period of 8 years with exit
option from 5th year to be exercised on the interest
payment dates

Gsec Yield (%)
8
5 years 10 years

orporate bond market

Corporate Debt Market
Outstanding debt at Rs 20.19 lkh crore
Primary issuances in FY16 (SEBI data)
Public issues: Rs 33,812 cr
Private placements: Rs 4.58 lkh cr
CMIE : Rs 4.36 lkh cr raised in FY16 ands Rs 1.89 lkh cr was by
public sector
Secondary market trading in FY16 at Rs 10.22 lkh crore
Main challenges
Not many buyers and seller
Limited liquidity and trading: Most are buy and hold
Absence of yield curve
Cumbersome procedures for public issuance
Issues on stamp duty
What constitutes corporate debt?
Debt instruments issued by companies

(including PSUs) to raise funds
Not considered as SLR securities like GSecs and
SDLs
Less incentive for the holder as it cannot be used for
regulatory compliances
Main attraction is a yield higher than GSec
Risk varies depending on rating
Have to be evaluated as standalone securities
by investors
Credit rating very important for pricing

Overview

Types Of Bonds
Long Term
Secured Non Convertible
Debentures Masala Bonds
Lower Tier II (Basel II) Zero Coupon Bonds
Optionally Partly Convertible
Tier II (Basel III) Debentures
Upper Tier II (Basel II) Inflation linked Bonds
Tier I (Basel II) (IPDI) Gold Bonds
AT1 - Additional Tier I (Basel III) Infrastructure Bonds
Perpetual Debt Unsecured Long Term Bonds
Subordinated Debt Pass Through Certificates
Deep Discount Convertible
Market Linked Debenture Bonds
Foreign Currency Convertible
Bonds Government Bonds
Short Term
Commercial Paper
Certificate of Deposit
Short Term Non Convertible
Debentures

32
Type of Bonds Issued by Bank
Infrastructure Bonds :
Senior bonds, with minimum maturity of seven years
Targetlendingfor long term projects ininfrastructureand
affordable housing.
Lower Tier II (Basel II) :
Part of Tier II capital of the banks.
Comparatively safer than Tier I bonds as there is no lock in
clause and lack of loss absorption feature.
Gradual Capital benefit reduction from five year before
redemption
Tier II (Basel III)
Part of Tier II capital of the banks.
These instruments have loss absorption feature and can be
written off or converted into common equity upon declaration
of point of non viability (PONV) by RBI.
Minimum maturity of 10 years
33
Type of Bonds Issued by Bank
Contd..
Upper Tier II (Basel II) :
UT II bonds are superior to the claims of Tier I bond investors.
However, UT II bonds are subordinate to the claims of all other
creditors.
Upper Tier II Instruments along with other components of Tier
II capital shall not exceed 100% of Tier I capital.
Minimum maturity of 15 years.
Existence of lock-in clause which may result in non payment of either
interest or principal, even at maturity, if
the banks CRAR is below the minimum regulatory requirement prescribed by RBI, or
the impact of such payment results in banks CRAR falling below or remaining below
the minimum regulatory requirement prescribed by RBI.
Tier I (Basel II) (IPDI) :
Part of Tier I capital.
Perpetual in nature, with no fixed repayment date and with
only call option
Has lock-in clause on payment of coupon (similar to UT II bonds).
34
Type of Bonds Issued by Bank Contd..
AT1 - Additional Tier I (Basel III)

RBI issued the final guidelines on Basel III regulations of
banking system in India in May, 2012. Basel III framework
was implemented from April 1, 2013 and would get fully
implemented by March 31, 2019.
The Basel III guidelines prescribe a minimum total Capital
Adequacy Ratio (CAR) of 9% and a Capital Conservation
Buffer (CCB) of 2.5% to be maintained by March 31, 2019.
Minimum Tier I capital adequacy ratio is prescribed at 7%
with a minimum common equity Tier I capital of 5.5%
thereby capping the Additional Tier I ratio at 1.5% of risk
weighted assets.
The minimum pure equity component of the capital has to
be maintained at 8% (Common Equity Tier I Capital 5.5%
+ CCB 2.5%).

35
Type of Bonds Issued by Bank Contd..
AT1 - Additional Tier I (Basel III)

Inherent risk features of AT1 Bonds (Basel III)
Lock-in clause Under Basel III, the trigger based on
minimum Common Equity Capital as compared to Total
CAR based under Basel II continues.
Coupon discretion The bank must have full discretion
at all times to cancel distributions /payments. The
interest shall not be cumulative.
Loss absorption features Breach of capital based
trigger under Basel III in a going concern scenario
would result in conversion into equity or
permanent/temporary write-off.
India adopted the use of AT1 securities on 1 April
2013. Since then,Indian bankshave issued about
Rs.10,600 Crore of Basel III-compliant AT1 securities
in the domestic market.
36
Long Term Instruments Issued by Financial Entities
Non Convertible Debentures

These cannot be converted into equity shares
These are typically listed thus provide liquidity to investors
Most prevalent debt instrument in case of NBFCs
Zero Coupon Bonds

This bond earn no interest, and are issued at discount to face value
Investor receives bullet repayment including interest earned
Convertible Debentures
Convertible debentures provide for conversion of debentures to equity shares
These can be partly, fully or optionally convertible to shares
Pass Through Certificates (PTC)

The principal and interest payments are made to certificate holders on the
basis of a pre-defined payment mechanism.
PTC holders bear all the risks and rewards (risk of interest rate variations,
prepayment etc.

37
Long Term Instruments
Contd
Inflation linked Bonds

In these bonds, the principal is indexed to an inflation metric
These bonds are designed to hedge the inflation risk of a bond holder
Gold Bonds
The returns of gold bond are benchmarked to spot price of gold
These offer investors the price appreciation, without actually holding
physical gold
Infrastructure Bonds
These are long-term bonds, issued to raise funds for infrastructure projects
The bonds provide long-term saving avenues to pension and insurance
funds
Unsecured Long Term Bonds

These bonds are issued on the general creditworthiness of the issuer
Issued by financially-sound, asset-light companies, which are unable to offer
specific lien

38
Long Term Instruments
Contd
Foreign Currency Convertible Bonds

These bonds are denominated in foreign currency and subscribed to by
foreign entities
The hedging risk and cost is borne by the issuer of these bonds
Perpetual debt
Perpetual debt instruments have no fixed repayment date, but may have call
option
These instruments are issued as plain vanilla bonds, with no option for
conversion
Taken as part of Tier I capital of the institution
Subordinate Debt
Lower priority than other bonds of the issuer
These may be secured or unsecured and carry a higher yield
Used for calculating overall capital adequacy of the institution
Market Linked Debentures
The returns from the instrument are linked to an index
They provide a customized instrument for risk-reward based on investor
preference

39
Masala Bonds
Are bonds issued outside India but denominated
in Indian Rupees
Unlike dollar bonds investor takes exchange risk
first Masala bond was issued by IFCin November
2014 when it raised Rs 1,000 crore
Later in August 2015 IFC issued green masala
bonds and raised Rs 315 cr
In July 2016 HDFC raised Rs 3,000 crore rupees
and thereby became the first Indian company to
issue masala bonds.
In the month of August 2016 public sector unit
NTPC issued first corporate green masala bonds
worth 2,000 crore rupees
Tax free bonds
Tax free bondshave emerged as a highly

popular investment option among
investors
Rs 30,000 cr in FY12
Raised by PSUs under special dispensation

Infrastructure Debt Fund (IDF)
An IDF can be either in the form of a company or an independent

fund.
An entity incorporated as a company can raise debt in the form of

various long term instruments, while a Fund can seek subscription
for its units for a period up to five years, as may be specified in the
offer document.
Operations of IDF:
An investor lends money to an IDF company, which is a pre-decided
coupon bearing liability for the fund.
The IDF company operates like a typical NBFC with specialization in
infrastructure sector lending
In case of IDF in the form of fund, it operates like any other mutual
fund
IDF is good investment option for pension and insurance funds, as it
matches the long tenor of an infra project or company with the long-
term investment or savings avenue required by the cash-rich
entities.
42
Main Players: Public Debt Issues
Source: Prime database

How they are raised?
Corp
bond
s

What goes into a debt prospectus for public issue?
Summary of business
Capital structure
Objectives of the issue
Industry overview
Financial information
Legal issues
Issue structure
Terms of issue
Credit rating received
Private placements
Number of investors cannot exceed 49

A maximum of 200 investors permitted in
a year over 4 issuances
Processes much shorter and cheaper

Main Players: Debt Private Placements
Source: Prime Database

Who raises funds through corporate
bonds?
essively banks and NBFCs are raising more funds- for shoring of capital and
uring cheaper finance respectively
Debt issuances (Rs lkh cr)
7.00
6.00 5.85
5.00 4.79
4.00
3.88 3.88
Rs lkh cr 3.10
3.00 2.71
2.00
1.00
0.00
2010-11 2011-12 2012-13 2013-14 2014-15 2015-16
For the 9 month period ending Dec Rs 4.94 lkh cr raised (Rs 4.07 lkh cr last year

Number of debt issuances
12,000
10,941
10,000
8,334
8,000
6,000 5,565 5,578

4,911
4,280
4,000
2,000
0
2010-11 2011-12 2012-13 2013-14 2014-15 2015-16

Illustration of number of players (June
2016)
Player Number
Stock exchanges 5
Depositories 2
Depository participants 858
Merchant bankers 186
Bankers to issues 65
Debenture trustees 32
Credit rating agencies 7
Registrars to issue 71
Portfolio managers 211
Custodians 19
Source: SEBI

Equity Market

Bombay Stock Exchange
Established in 1875, BSE (formerly known as
Bombay Stock Exchange Ltd.), is Asia's first &
the Fastest Stock Exchange in world with the
speed of 6 micro seconds and one of India's
leading exchange groups
More than 5500 companies are listed on BSE
making it world's No. 1 exchange in terms of
listed companies.
It is also one of the world's leading exchanges
(5th largest in September 2015) for Index
options trading
Went for IPO in Jan and mopped up Rs 1243 cr
Bombay Stock Exchange
BSE is the first exchange in India and second in the world to
obtain an ISO 9001:2000 certification.
It is also the first Exchange in the country and second in the
world to receive Information Security Management System
Standard BS 7799-2-2002 certification for its On-Line trading
System (BOLT)and an ISO 9001:2000 certification.
It operates one of the most respected capital market
educational institutes in the country (the BSE Institute Ltd.).
BSE also provides depository services through its Central
Depository Services Ltd. (CDSL) arm.
BSE's popular equity index - the S&P BSE SENSEX - is India's
most widely tracked stock market benchmark index. It is
traded internationally on the EUREX as well as leading
exchanges of the BRCS nations (Brazil, Russia, China and
South Africa)

National Stock Exchange
The National Stock Exchange (NSE) is the leading
stock exchange in India and the fourth largest in
the world by equity trading volume in 2015,
according to World Federation of Exchanges (WFE).
It began operations in 1994 and is ranked as the
largest stock exchange in India in terms of total
and average daily turnover for equity shares every
year since 1995, based on annual reports of SEBI.
NSE launched electronic screen-based trading in
1994, derivatives trading (in the form of index
futures) and internet trading in 2000, which were
each the first of its kind in India.

Equity Market
No of listed companies March 2016:
BSE: 5911 companies
NSE: 1808 companies
Market Capitalization (March 2016)
BSE: Rs 94.75 lakh crore
NSE: Rs. 93.11 lakh crore
Monthly turnover (Mar16)
BSE (cash segment): Rs 61,773 crore
NSE (cash segment): Rs 3,56,947 crore
Gross turnover at the cash market segments (FY16)
BSE Rs 7,40,089 crore
NSE Rs 42,36,983 crore

IPOs forms

Offer for Sale
OFS, introduced by SEBI, in February 2012, helps
promoters of listed companies dilute stake
through an exchange platform.
The facility is available on the Bombay Stock
Exchange and the National Stock Exchange (NSE).
Only top 200 companies by market capitalization
in any of the four completed quarters can use the
facility.
The minimum offer size is Rs 25 crore
It can be less if the aim of the issue is meeting the
public shareholding norm (25% for private companies
and 10% for government ones)

Advantages Offer for Sale
No need to fill the application form as the

system is platform-based
The process is more transparent than that
for initial public offers (IPO) as the system
runs on a real-time basis
An investor can put multiple bids above
the floor price set by the company, unlike
in IPOs
Unlike IPOs/FPOs, no physical forms are
needed to apply for shares in OFS

Equity issuances
YEAR* NO. OF ISSUE AMOUNT

ISSUES (Rs. crore)
2011-12 33 5,885
2012-13 9 6,289
2013-14 1 919
2014-15 8 2,769
2015-16 24 14,500
2016-17 21 25,282

Secondary market in equity on NSE
Avg
Annual daily
Rs cr No Cos Turnover t/o Market cap
2015-2016 1808 42,36,983 17154 93,10,471
2014-2015 1733 43,29,655 17818 99,30,122
2013-2014 1688 28,08,488 11189 72,77,720
2012-2013 1666 27,08,279 10833 62,39,035
2011-2012 1646 28,10,893 11289 60,96,518
2010-2011 1574 35,77,412 14048 67,02,616

SME IPOs
Year Amount (Rs Cr) No. of issues
2011-12 7 1
2012-13 208 24
2013-14 286 37
2014-15 250 38
2015-16 311 50
Total 1062 150

Indices
Stock market index is representative of the whole market or

a specified sector
Calculated with reference to a base period and a base index
value
Is used to give information about the price movements of
products
Financial indexes are constructed to measure price
movements of stocks, bonds, T-bills and other forms of
investments
Stock market indexes are meant to capture the overall
behaviour of equity markets
Indices serve as a benchmark for measuring performance of
the stocks or portfolios such as mutual fund investments.

Movement of Indices (%)
3-Feb- 15
17 PE days Yearly
BSE Sensex 28240.52 21.98 4.46 16.58
Nifty 50 8740.95 20.08 4.69 18.73
BSE 200 3790.41 24.32 4.93 22.02
BSE 500 11959.4 25.78 5.01 22.77
BSE Mid-Cap 13285.41 28.76 5.57 30.75
BSE Small-
Cap 13422.1 70.01 5.18 27.56
Movement of Indices (%)
3-Feb-17 PE 15 days Yearly
S&P BSE
Telecom 1272.6 50.59 10.35 6.72
S&P BSE
Finance 4596.6 24.67 8.9 33.46
S&P BSE Realty
Ind 1479.45 51.37 8.77 26.68
S&P BSE
Bankex 23354.41 27.17 8.42 35.99
S&P BSE Con
Dur 13082.27 72.78 7.48 6.86
S&P BSE Cap
Gds 15215.02 29.55 5.57 23.33
S&P BSE
Healthcare 15449.46 29.51 4.64 -3.68
S&P BSE FMCG 8977.67 40.74 4.62 19
S&P BSE IT
Sector Financial
9702.44 Sector 15.69 February -13.34
-1.94 2017
Global equity markets

BSE Large Caps

BSE Midcaps

BSE Smallcaps

BSE Sensex
32000
Sensex movements
27000
22000
17000
12000
7000
2000
Source : BSE

NSE Nifty
Sensex movement
10,000.00 Movement in
9,000.00
Nifty
8,000.00
7,000.00
6,000.00
5,000.00
4,000.00
3,000.00
2,000.00
Source : CMIE

Equity Derivatives
India is one of the vibrant markets for exchange
traded equity derivatives in the world.
Trading volumes in the equity derivatives 13.5
times more than that in cash segment in March
2016
Share in total equity derivatives turnover In March
2016
NSE share at 98.8%
BSEs share was 1.3%
Largest share of index options segment in turnover,
77.6% in NSE and 99.1% at BSE

Derivative trading
NSE commenced trading in derivatives with the launch of

index futures on June 12, 2000
F & O segment has trading in Nifty 50 Index, Nifty IT index,
Nifty Bank Index, Nifty Midcap 50 index, Nifty Infrastructure
Index, Nifty PSE Index and single
Products include derivatives instruments like Index Futures,
Index Options, Stock Options, Stock Futures
Screen based trading offers investors across the length and
breadth of the country a safe and easy way to invest
Clearing Corporation ensures that trading member
obligations are commensurate with their networth.

Derivative trading
Average daily volumes in derivatives (Rs cr)

400000
366,933
350000
300000
262,453
250000 228,833
200000
152,237
150000
125,903 126,639
100000
50000
0
2011-12 2012-13 2013-14 2014-15 2015-16 2016-17

Thank You

Commodity markets

Commodity Derivative Market
Revived in 2003 with the formation of national electronic
multi-commodity exchanges
Around 30 commodities being traded
113 are notified for trading
Two leading exchanges NCDEX and MCX

NCDEX dominant in agriculture
MCX dominant in bullion, metals and energy
Turnover around Rs 56 lkh crore in FY16 on MCX
Rs 20 lkh cr in bullion, Rs 19 lkh cr in energy and Rs 15 lkh
crore in metals
Turnover around Rs 10.2 lkh crore on NCDEX
Nearly Rs 10 lkh crore in agriculture
Commodities available
Number of Permitted Commodities for trading
Metals
Agricult other Bullio Energ
Exchanges
ure than n y
bullion
NCDEX
No. of Permitted Commodities 17 2 1 1
No. of Commodities in which contracts
have been floated 15 0 0 0
MCX
NMCE
Regional Exchanges
Important aspects of commodity
trading
Margins fixed for contracts and vary from

5-20%
Position limits set judiciously
Contract specifications mention grade,
quality, delivery etc.
Delivery at pre-designated warehouses
Strong market watch and surveillance
systems put in place by exchanges
Regulated by SEBI

Important aspects of commodity
trading
Futures presently traded

Options permission to be granted: to be
introduced soon
All are delivery based contracts
Delivery centres available
Use of margins and position limits to
ensure orderly movement of prices
Presently institutions and intangibles not
permitted to be traded

Trading on Comexes
Volumes traded in Comexes: Rs lkh cr

120.0
101.4
100.0
80.0
66.5
61.7
60.0
46.9
40.0
20.0
0.0
2013-14 2014-15 2015-16 2016-17 (8 mths)

Forex markets

Forex markets
Market for hedging forex exposures by companies

Both exporters and importers are involved
Is one of the fastest growing markets in the world
Banks the main counter-party
Also trade on own account based on limits set internally
Basically an OTC market for forwards
Forward rate spot price adjusted for cost of carry
which is interest rate
Can be used to draw expectations of future movements in
currency

Turnover in forex market
Average daily turnover in forex market ($ bn)
56.0
55.2 55.3
55.0
54.0
53.0
52.0 51.8
51.0 50.6
50.2
50.0
49.0
48.0
47.0
2012-13 2013-14 2014-15 2015-16 2016-17

Forex derivatives
Currency future is a contract to exchange one

currency for another at a specified date in the
future at a price (exchange rate) that is fixed on
the purchase date Future contract is in terms of
INR per unit of FC
Allows investors to hedge against foreign exchange
risk
Available on four currency pairs
US Dollars (USD), Euro (EUR), Great Britain Pound (GBP)
and Japanese Yen (JPY)
Currency Options offered on US Dollars and
Interest Rate Futures on 10 Y GS 7 and 91 D T-Bill.
Terminology
Spot price:The price at which a currency trades in the spot market

Futures price:The price at which contract trades in the futures
market
Contract cycle: 1-month, 2-month, and 3-month up to twelve-
month
Final settlement date:The last business day of the month
Expiry date:Last working day (excluding Saturdays) of the
contract months
Contract size: USD 1000; EUR 1000; GBP 1000 and JPY 100,000
Basis:Basis is futures price minus the spot price
Initial margin:Amount to be deposited in the margin account at
the time a futures contract is first entered into
Mark-to-market:At the end of each trading day, margin account is
adjusted to reflect the investors gain or loss depending upon the
futures closing price which is known as marking-to-market.

Forex derivatives
Relatively new market

Deals settled in rupees only
Helps hedgers cover their position
Use of RBI prices for settlement
NSE, BSE and MCX-SX offer contracts in
these derivatives
NSE launched its currency futures on 29th
August, 2008
Currency Options was introduced on October 29,
2010

Average daily volumes on NSE in forex derivatives
Average Daily volumes in forex derivatives (Rs cr)

25,000
21,706
19,479 20,156
20,000 18,603
16,445
15,000
12,705
10,000
5,000
0
2011-2012 2012-2013 2013-2014 2014-2015 2015-2016 2016-2017
In case of Option Contracts "Turnover" represents "Notional Turnover"

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