Professional Documents
Culture Documents
Debt Securities
Debt securities are a class of interest rate sensitive instruments, wherein
borrowings being made in return for a predetermined stream of cash flows,
paid on a fixed schedule.
The defining feature is that there are well-defined rules governing when
there will be a payout to the holder of the security
Predetermined cash flows such as Coupons, Par value(no other asset class assures this)
With cashflows predetermined, these securities are subject to various
risks(defaults, inflation)
Cash flows promised to the holders of securities represent contractual
obligations of the respective issuers
Holders of debt securities are creditors, and the issuer is the borrower
(Governments, Corporate, Municipalities, SPVs )
Contractual obligations differ across issuers, setting rules for cashflows
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Importance of Fixed Income Securities Markets
Debt Markets.
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Classification of Debt Securities
By Issuers
Central Government, State Governments, Municipal Corporations, PSUs, PFIs,
Corporate
By Instruments
T Bills, Government Securities, SDLs, Municipal Bonds, Corporate bonds,
FRBs, Inflation Indexed, Convertibles, ABSs
By Interest rates
Fixed rate issues, Floating rate issues, Zero coupons, inflation indexed bonds
By Maturity
money market instruments (T Bills, CPs), Bonds (with 2 or more years tenor)
By Optionality, Structured Obligations
Calls, Puts & Convertibles, ABS, CDS
By Tax features
Taxable, non-taxable bonds
Sectoral/Special bonds
PUSs, Bank bonds, Infra, oil, special purpose bonds
By Derivatives
FRAs, IRFs, OIS, IRFs, Options, Caps and Floors, STRIPS
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Savings of Households
Household prefer bank deposits, savings schemes, and to an
extent debt instruments
Specific debt instruments are available for retail
investors (tax free bonds, infrastructure bonds, inflation
indexed bonds)
Savings of Households
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Issuers
Central Government primarily uses debt markets to finance
fiscal deficit
Other sub-sovereign entities extensively use debt markets for
financing & investments
(state and local governments, state sponsored SPVs,
municipal corporations)
Corporate raise money thro debt instruments
(CPs, debentures, bonds)
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Government Bonds
Maturities extended upto 40 years (coupon bonds, FRBs, Zero, IIBs, tax free, special
bonds, etc)
Banks/FIs hold government securities in their portfolio for prudential reasons
Government securities can be used as collateral to raise liquidity in the repo/CBLO
market/short sale
Yields on government securities serve important purposes
G Sec yields represent indicators of risk free rates
Government securities yields serve as benchmark yields for rest of the sector
Used for derivative pricing
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State Sponsored Institutions
Municipal bonds(ULBs)
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Municipal Bonds
Municipal issues are in the nature of revenue bonds, with fixed
interest rate, with government guarantee, maturity 7-15 years,
are in the form of Structured Obligations(SO)
AMC Guarantee by
DFIs/MDBs
Bonds
Principal
+ ULBs
Interest Loan/Bonds
Project Cash
Fl ows
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Corporate Securities
CPs/CDs, Corporate bonds, Corporate bonds with embedded options,
Perpetual bonds, Securitized Papers (Asset Backed Securities, Mortgage
Backed Securities), equity linked debentures
SEBI issues guidelines for corporate debt issuance and also for their listing
on stock exchanges.
Privately placed debt paper of banks, institutions and corporates requires an
investment grade credit rating
Relatively less liquid when compared with G-sec market
Trading takes place typically through OTC market/ Telephone market
Credit ratings determine Spreads/ pricing of debt instruments
Spread as per ratings over the relevant benchmark rates
Ratings and rating migration depend on the state of the economy
The Insolvency and Bankruptcy Code passed by the Parliament protects
creditors rights in insolvency resolution
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Primary Dealers
Primary Dealers are those banks & securities firms that are
approved to transact directly with the Reserve Bank in auctions.
Advantage of primary dealer system is that the Reserve Bank will
be in a position to conduct its auctions efficiently with a small
number of well capitalized institutions.
Primary dealers are expected to
Participate in auctions
Underwrite Auction
Act as "Market Makers
RBI provides liquidity support
PDs have access to the RBIs open market operations
PDs are permitted to borrow and lend in the money market
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Primary Dealers
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Government Debt Operations
G-SECs issued by the Order of the President of India
thro the Ministry of Finance(Department of Economic
Affairs: Budget Division)
RBI manages the entire government debt operations at its
IDM
Both the initial sale of securities and subsequent transfers
are handled by the RBI
Settlement thro a computerized book-entry system called the
SGL and constituents SGL Accounts
Settlement System is Delivery versus payment (DvP)/RTGS
with T+0, T+1 as the conditions of deals
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Sovereign Liabilities & Public Debt
Sovereign Liabilities = Public Debt + Other Liabilities
Other Liabilities = Small savings, provident funds, special deposits,
reserve funds of departmental commercial undertakings, etc
Public debt = Internal Debt + External Debt
Internal debt
Market Borrowings
Dated Securities
Treasury Bills,
Special Securities (UTI, Oil companies, Nationalized banks, etc)
Compensation and other bonds
Nonnegotiable, non-interest bearing rupee securities issued to international
financial institutions
External Debt
Multilateral
Bilateral official
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Debt Management framework
Constitution of India
Art 292 (Centre) and 293 (States)
Limit on Public Debt ( Parliament)
Secured against the Consolidated Fund
RBI Act
Section 20/21
RBI Sole Manager of Public Debt
Of Centre - By Statute
Of States By Agreement
Public Debt Act 1944 replaced with GS
Act 2006
Issue and Servicing of Debt
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Union Budget
Formulation of borrowing program
Calendars
Issuance
Objectives of debt management
Lower cost
Minimal roll over risk
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Government Financing Options
BorrowingRequirements (inlocalcurrency) FinancingItems(inlocalcurrency)
Revenues(T) 60,000 DomesticBorrowing(60%)24,000
Tax&nontaxrevenues
ShortTerm(30%)7,200
Expenditures(G)80,000 Treasurybills
Generalgovernmentexpenditures(GE)70,000 Ways&Meansadvances
Interestpayments(IR)10,000
LongTerm(70%)16,800
BudgetDeficit(TG=BD)20,000 Domesticloans
Treasurybonds/notes
Totalnetborrowingrequirement(TG)20,000 Retailinstruments
TotalRedemption(TR) 20,000
Shorttermdebt5,000 ExternalBorrowing(40%)16,000
Longtermdebt15,000 Grants
Loans
Grossborrowingrequirements(TR+BD)40,000 Bondfinance
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Methods of Government Debt
Issuance
Governments use several methods to sell securities such as
On-Tap issuance,
Syndication
Retail issuance
Auction
Auction based issuing techniques are most common form
Half-yearly issuance calendars
Cash shortfalls are part of liquidity management
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Primary Issuance Framework
Auctions(1992)
Pricediscovery
Auctionformats
UniformPrice
MultiplePrice
Electronicbidding(2002)
Widerreach
Operationalease
Shorteningofprocessingtime
Resultssameevening
AuctionProcessisSTP(StraightThroughProcessing)
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Institutional Arrangements
Regulator
Government of India (through the Public Debt Act of 1944, replaced with GS
Act, 2006) empowers RBI to regulate primary issuance of debt securities,
issuance and redemption; Lien/Pledge /Hypothecation, STRIPS
SEBI regulates primary issuance of debt securities other than government
securities
Primary Issuance
Auction
Primary dealership
Trading
Direct, Broker driven (OTC markets generally predominate)
Anonymous Order Driven
Platforms
NDS-OM
CBLO/CROMS/F-TRAC
Clearing & Settlement
CCIL
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Organization
Negotiated Dealing System (NDS)
NDS of RBI provides an electronic platform for negotiating trades in
government securities.
NDS Order Matching (NDS-OM)
NDS-OM is an electronic, screen based, anonymous, order driven
trading system, introduced by RBI as part of the existing NDS system to
facilitate electronic dealing in government securities
WDM Segment of NSE Trading System
BSE and NSE to have in place for bond trading
NSEs Wholesale Debt Market (WDM) segment offers a fully automated
screen based trading platform through the NEAT (National Exchange for
Automated Trading) system
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Debt market serves as important
conduits for monetary policy
Key route for monetary policy applications
Management of liquidity in the financial markets
Statutory liquidity requirements for banks and financial
institutions are met using government securities markets
Debt markets signal long run prospects of the economy
Signals inflationary expectations, in term structure of interest
rates
Links money markets and foreign exchange markets
Yield Curve
Provides the long run anchor of the economy
Inflationary expectations and long run interest
rates
The shape and shift in the YC impacts the trading
behaviour in the bond market
Indian YC are seen significant gyrations in recent
times
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Shape & Shifts of the Yield Curve
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Indian bond market is illiquid
Traded prices are not available for all bonds
Corporate bonds are extremely illiquid
Marked-to-Market valuation of bond portfolios becomes
difficult
The mutual fund industry and insurance companies (for their
ULIPs portfolio) follow a daily mark-to-market valuation
approach
Banks mark-to-market their portfolio on a monthly basis
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Secondary Bond Markets
Banks typically hold a substantial portion for bonds,
effectively to maturity, to a smaller extent for short term
trading purpose
Large portion of HTM portfolio as against the trading
portfolio
Contractual saving institutions mainly focus on long term
bonds, buy-hold investors in general
Captive nature of holdings create market distortions in
yield and illiquidity (Pension funds, mutual funds,
insurance companies)
Price discovery processes must be as efficient as possible
such that true market prices that accurately reflect
conditions in the economy
Liquidity
Illiquidity is primarily due to buy-hold nature of
investments
Cost of illiquidity: This leads to lower price realization of
an asset
Value of an illiquid asset would be lower to the extent of
the present value of expected future transaction costs
There are other elements of costs associated with trading
an asset
Bid-ask spread of an asset
Price impact while trading an asset
Opportunity costs associated with the waiting to trade
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Government Securities - Market Liquidity Indicators(8/9/2017)
Liquid Securities
1A Bid Ask Spread Spread Spread (`) Spread (bps) Spread
(Ratio) Range (`)
Aug-17 0.02% 0.0252 0.4067 0.19-0.0025
Jul-17 0.02% 0.0210 0.3343 0.0905-
0.0025
Semi-Liquid Securities
1B Bid Ask Spread Spread Spread (`) Spread (bps) Spread
(Ratio) Range (`)
Aug-17 0.12% 0.1280 2.1694 1.44-0.01
Jul-17 0.18% 0.1997 3.6725 1.7-0.01
Illiquid Securities (Orderbook was available
for only a few days)
1C Bid Ask Spread Spread Spread (`) Spread (bps) Spread
(Ratio) Range (`)
Aug-17 0.52% 0.6167 7.9817 1.75-0.03
Jul-17 0.29% 0.3312 12.6707 1.5-0.02
Daily Average Deals
2 Average No. of Trades G-Sec SDLs T-Bills Total
Aug-17 2985 63 55 3103
Jul-17 4142 69 57 4267
3 Average Orderbook Size No. of Order Value (` Traded Value (` Trades
Orders Cr.) Cr.)
Aug-17 5465 112915 34800 3103
30.82% 56.78%
Jul-17 6949 136684 46892 4267
34.31% 61.41%
4 Impact Cost (%) Offer Bid Average
Aug-17 0.0227 0.0222 0.0224
Jul-17 0.0191 0.0204 0.0198
5A Turnover Ratio - G-Sec SDLs
Components T-Bills Special
Aug-17 1.64% 0.25% 1.88% 0.00%
Jul-17 2.26% 0.29% 1.62% 0.03%
5B Turnover Ratio Market Outright Repo
Innovations
Repo, CLBO(collateralized borrowing and lending
obligation)
Floating Rate Bonds
When Issued Markets
STRIPs
Inflation Index Bonds
Short sales
FRAs, Swaps, Overnight index swaps
Interest Rate Futures(IRF)
Currency futures
Credit Default Swaps(CDS)
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Arbitrage
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Benchmarks
Market follows FIMMDA valuation methods for
interest rate benchmarks
FEDAI provided forex benchmarks
Independent benchmark company (FBIL)
provides MIBOR & FC Rupee Option volatility
MIFOR, CD and CP based curves yet to be
established
RBIs Reference Rate - polling window of one
hour
FIMMDA-CRISIL Corporate bond spreads
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Benchmarks
Thank You
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