| FAQs on the Debt Markets | |||||||||||||||||||
By The Stock Exchange, Mumbai (BSE) |
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What is the Debt Market? |
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Q. A. |
What is the Debt Market?
The Debt Market is the market where fixed income securities of various types
and features are issued and traded. Debt Markets are therefore, markets for
fixed income securities issued by Central and State Governments, Municipal
Corporations, Govt. bodies and commercial entities like Financial Institutions,
Banks, Public Sector Units, Public Ltd. companies and also structured finance
instruments.
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Q. A. |
Why should one invest in fixed income securities?
Fixed Income securities offer a predictable stream of payments by way of
interest and repayment of principal at the maturity of the instrument. The debt
securities are issued by the eligible entities against the moneys borrowed by
them from the investors in these instruments. Therefore, most debt securities
carry a fixed charge on the assets of the entity and generally enjoy a
reasonable degree of safety by way of the security of the fixed and/or movable
assets of the company. |
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Q. A. |
What are the advantages of investing in Government Securities (G-Secs)?
The Zero Default Risk is the greatest attraction for investments in G-secs so
that it enjoys the greatest amount of security possible. The other advantages
of investing in G- Secs are:
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Q. A. |
Who can issue fixed income securities? Fixed income securities can be issued by almost any legal entity like Central and State Govts., Public Bodies, Banks and Institutions, statutory corporations and other corporate bodies. There may be legal and regulatory restrictions on each of these bodies on the type of securities that can be issued by each of them. |
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Q. A. |
Who regulates the fixed income markets?
The issue and trading of fixed income securities by each of these entities are
regulated by different bodies in India. For eg: Government securities and
issues by Banks, Institutions, Public Corporations are regulated by the RBI.
The issue of non-government securities comprising basically issues of
Corporate Debt is regulated by SEBI.
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Q. A. |
What are the different types of instruments, which are normally traded in this market? The instruments traded can be classified into the following segments based on the characteristics of the identity of the issuer of these securities:
The G-secs are referred to as SLR securities in the Indian markets as they are eligible securities for the maintenance of the SLR ratio by the Banks. The other non-Govt securities are called Non-SLR securities. |
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Q. A. |
What is the importance of the Debt Market to the economy? The key role of the debt markets in the Indian Economy stems from the following reasons:
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Q. A. |
What are the benefits of an efficient Debt Market to the financial system and the economy?
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Q. A. |
What are the different types of risks with regard to debt securities?
The following are the risks associated with debt securities: |
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Q. A. |
Who are the main investors of Govt. Securities in India?
Traditionally, the Banks have been the largest category of investors in G-secs
accounting for more than 60% of the transactions in the Wholesale Debt
Market.
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Q. A. |
What is Yield?
Yield refers to the percentage rate of return paid on a stock in the form of
dividends, or the effective rate of interest paid on a bond or note. There are
many different kinds of yields depending on the investment scenario and the
characteristics of the investment. |
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Q. A. |
How is the price determined in the debt markets?
The price of a bond in the markets is determined by the forces of demand
and supply, as is the case in any market. The price of a bond in the
marketplace also depends on a number of other factors and will fluctuate
according to changes in
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Q. A. |
How is Yield related to the price?
Yields and Bond Prices are inversely related. So a rise in price will decrease
the yield and a fall in the bond price will increase the yield. |
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Q. A. |
What are the main features of G-Secs and T-Bills in India?
All G-Secs in India currently have a face value of Rs.100/- and are issued by
the RBI on behalf of the Government of India. All G-Secs are normally
coupon (Interest rate) bearing and have semi-annual coupon or interest
payments with a tenor of between 5 to 25 years.. This may change according
to the structure of the Instrument. |
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Q. A. |
What are the segments in the secondary debt market?
The segments in the secondary debt market based on the characteristics of the investors and the structure of the market are:
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Q. A. |
What is the structure of the Wholesale Debt Market? The Debt Market is today in the nature of a negotiated deal market where
most of the deals take place through telephones and are reported to the
Exchange for confirmation. It is therefore in the nature of a wholesale
market.
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Q. A. |
Who are the most prominent investors in the Wholesale Debt Market in India? The Commercial Banks and the Financial Institutions are the most prominent
participants in the Wholesale Debt Market in India.
During the past few years, the investor base has been widened to include Cooperative Banks, Investment Institutions, cash rich corporates, Non-Banking Finance companies, Mutual Funds and high net-worth individuals. FIIs have also been permitted to invest 100% of their funds in the debt market, which is a significant increase from the earlier limit of 30%. The government also allowed in 1998-99 the FIIs to invest in T-bills with a view towards broadbasing the investor base of the same. |
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Q. A. |
What are the types of trades in the Wholesale Debt Market? There are normally two types of transactions, which are executed in the
Wholesale Debt Market :
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Q. A. |
What is a Repo trade and how is it different from a normal buy or sell transaction? An outright Buy or sell transaction is a one where there is no intended
reversal of the trade at the point of execution of the trade. The Buy or sell
transaction is an independent trade and is in no way connected with any
other trade at the same or a later point of time.
A Ready Forward Trade (which is normally refereed to as a Repo trade) is a transaction where the said trade is intended to be reversed at a later point of time at a rate which will include the interest component for the period between the two opposite legs of the transactions. So in such a transaction, one participant sells securities to other with an agreement to purchase them back at a later date. The trade is called a Repo transaction from the point of view of the seller and it is called a Reverse Repo transaction from point of view of the buyer. Repos therefore facilitate creation of liquidity by permitting the seller to avail of a specific sum of money (the value of the repo trade) for a certain period in lieu of payment of interest by way of the difference between the two prices of the two trades. Repos and reverse repos are commonly used in the money markets as instruments of short-term liquidity management and are also called as a Collateralised Lending and Borrowing Mechanism. Banks and Financial Institutions usually enter into reverse repo transactions to manage their reserve requirements or to manage liquidity. |
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Q. A. |
What is the concept of the broken period interest as regards the Debt Market? The concept of the Broken period interest or the accrued interest arises as
interest on bonds are received after certain fixed intervals of time to the
holder who enjoys the ownership of the security at that point of time.
Therefore an investor who has sold a bond which makes half-yearly interest payments three months after the previous interest payment date would not receive the interest due to him for these three months from the issuer. The interest on these previous three months would be received by the buyer who has held it for only the next three months but receive interest for the entire six month periods as he happens to be holding the security at the interest payment date. Therefore, in case of a transaction in bonds occurring between two interest payment dates, the buyer would pay interest to the seller for the period from the last interest payment date up to the date of the transaction. The interest thus calculated would include the previous date of interest payment but would not include the trade date. |
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Q. A. |
What are the conventions followed for the calculation of Accrued Interest? The Day Count Convention to be followed for the calculation of Accrued
Intetest in case of transactions in G-Secs is 30/360. I.e. each month is to be
taken as having 30 days and each year is to be taken as having 360 days,
irrespective of the actual number of days in the month.
So, months like February, March, January, May, July, August, October and December are to be taken as having 30 days. |
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Q. A. |
What is the Clean Price and the Dirty Price in reference to trading in G-Secs? G-Secs are traded on a clean price (Trade price) but settled on the dirty price
(Trade price + Accrued Interest). This happens, as the coupon payments are
not discounted in the price, as is the case in the other non-govt. debt
instruments.
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Q. A. |
How are the Face Value, Trade Value and the settlement value different from each other? The Cumulative face Value of the securities in a transaction is the face Value
of the Transaction and is normally the identifiable feature of each
transaction.
Say, a transaction of Rs.5,00,000 worth of G-Secs will comprise a trade of 5000 G-Secs of Rs.100 each. The Trade value is the cumulative price of the traded G-Secs (i.e. no. of securities multiplied by the price) Say, the G-Secs referred to above may be traded at Rs.102 each so that the Trade Value is Rs.5,10,000 (102 x 5000). The Settlement value will be the trade value plus the Accrued Interest. |
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Q. A. |
What is the issuance process of G-secs? G-secs are issued by RBI in either a yield-based (participants bid for the
coupon payable) or price-based (participants bid a price for a bond with a
fixed coupon) auction basis. The Auction can be either a Multiple price
(participants get allotments at their quoted prices/yields) Auction or a
Uniform price (all participants get allotments at the same price).
RBI has recently announced a non-competitive bidding facility for retail investors in G-Secs through which non-competitive bids will be allowed up to 5 percent of the notified amount in the specified auctions of dated securities. |
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Q. A. |
How can investors in India hold G-Secs? G-Secs can be held in either of the following forms:
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What are the type of transactions which take place in the market? The following two types of transactions take place in the Indian markets:
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Q. A. |
What is the role of the Exchanges in the WDM? BSE and other Exchanges offer
order-driven screen based trading facilities for Govt. securities.
The trading activity on the systems is however restricted
with most trades today being put through in the broker offices
and reported
to the Exchange through their electronic systems which provide
for reporting of “Negotiated Deals” and “Cross Deals”.
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Q. A. |
When was the BSE accorded regulatory permission for the WDM? The Reserve Bank of India, vide it’s circular
DBOD.FSC.BC.No. 39 /24.76.002/2000 dated October 25, 2000 permitted the
Banks and the
Financial Institutions in India to undertake transactions in debt instruments
among themselves or with non-bank clients through the members of The
Stock Exchange, Mumbai (BSE). This notification paved the way for the
Exchange to commence trading in Government Securities and other fixed
income instruments.
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Q. A. |
How is the settlement carried out in the Wholesale Debt Market? The settlement for the various trades is finally carried out through the SGL of
the RBI except for transfers between the holders of Constituent SGL A/cs in a
particular Bank or Institution like intra-a/c transfers of securities held at the
Banks and CCIL.
As far as the Broker Intermediated transactions are concerned, the settlement responsibility for the trades in the Wholesale market is primarily on the clients i.e. the market participants and the broker has no role to play in the same. The member only has to report the settlement details to the Exchange for monitoring purposes. The Exchange reports the trades to RBI regularly and monitors the settlement of these trades. |
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Q. A. |
What are the trading and reporting facilities offered by the BSE Wholesale Debt Segment? The BSE Wholesale Debt Segment offers trading and reporting facilities
through the GILT System, an automatic on-line trading system, which will
over a period of time provide an efficient and reliable trading system for all
the debt instruments of different types and maturities including Central and
State Govt. securities, T-Bills, Institutional bonds, PSU bonds, Commercial
Paper, Certificates of Deposit, Corporate debt instruments and the new
innovative instruments like municipal securities, securitized debt, mortgage
loans and STRIPs.
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Q. A. |
What are the three modules in the GILT system? GILT permits trading in the Wholesale Debt Market through the three
following avenues:
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Q. A. |
What is the membership criteria and charges for the membership of the BSE Wholesale Debt Segment? The membership of the debt market segment is being granted only to the
Existing Members of the Exchange. The members need to have a minimum
net worth of Rs.1.5 crores for admission to undertaking dealings on the debt
segment. No security deposit is applicable for the membership of the Debt
Segment as in other Exchanges. The annual approval/renewal charges at
present is Rs.25,000/-.
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Q. A. |
What is the settlement mode allowed in GILT? The settlements for all the trades executed on the GILT system are on a
rolling basis. Each order has a unique settlement date specified upfront at the
time of order entry and used as a matching parameter. The Exchange will
allow settlement periods ranging from T+0 to T+5.
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Q. A. |
What are the aspects for settlement of trades in G-secs in GILT? The Settlement for the securities traded
in the Debt Segment would be on a Trade by Trade DVP basis. The primary
responsibility of settling trades
concluded in the wholesale segment rests directly with the participants
who would settle the trades executed in the GILT system on their behalf
through
the Subsidiary Ledger Account of the RBI. Each transaction is settled
individually and netting of transaction is not allowed. The Exchange would
monitor the Clearing and Settlement process for all the trades executed
or reported through the ‘GILT’ system. The Members need to report the
settlement details to the Exchange for all the trades undertaken by them
on the GILT system. |
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