Decoding Global Financial

Markets

FX & Commodity
 1 Overview of financial markets
2 Participants in financial markets
3 Financial Institutions

Sections 4

5
Stock exchanges

Investment alternatives

6
FX &Commodity

7 Factors affecting financialmarkets

8 Nuances of financial markets
6 FX & Commodities

A. FX market overview and BIS report

B. Role of central bank

C. Types of commodities

D. OTC vs Exchange
BIS Triennial Central Bank Survey

The BIS Triennial Central Bank Survey is the most comprehensive source of information on the size and structure of
global foreign exchange (FX) and over-the-counter (OTC) derivatives markets

▪ It aims to increase the transparency of OTC markets and to help central banks, other authorities and market
participants monitor developments in global financialmarkets
▪ It also helps to inform discussions on reforms to OTC markets
▪ FX market activity has been surveyed every three years since 1986, and OTC interest rate derivatives market activity
since 1995

Highlights of Survey conducted in April 2019:

▪ Trading in FX markets reached $6.6 trillion per day in April 2019, up from $5.1 trillion three years earlier.
▪ Growth of FX derivatives trading, especially in FX swaps, outpaced that of spot trading
▪ The US dollar retained its dominant currency status, being on one side of 8 8 of all trades. The share of trades with
the euro on one side expanded somewhat to 3 2
▪ Currencies of emerging market economies (EMEs) again gained market share, reaching 2 5 of overall global turnover
Market Footprints

Currency’s share in FX trading (In ) Currency pair’s share in FX trading (In )

3EME – Emerging Market Economies currencies

Source: BIS

• U rk
➢ INR’s share has increased from 0.3% (2004) to 1.7% (2019)

➢ Rank has marginally improved from 18 to 16 th

Market Footprints

• U Market

E ro Mar
an k
Break-up of
forex market
turnover by
instrument
• a
•

•
N a

•
s e nd e
Break-up of
OTC forex
market
turnover by
instrument
6 FX & Commodities

A. FX market overview and BIS report

B. Role of central bank

C. Types of commodities

D. OTC vs Exchange
 Which are the major central banks

What is the role of a central bank

Sections High level balance sheet of acentral bank

Major tasks performed by acentral bank

Page 4 16 March 2021 Draft- For discussion purposes only

What is the role of a central bank
What are central banks?
Central banks are defined as government authorities which are responsible for driving the monetary policy in a country. The actions undertaken by a
central bank affect the money supply in the economy, interest rates and ultimately aggregate output and inflation
Role of central banks
Although various debates exists on the role of central banks, the most important goals of monetary policy can be summarized below:
Inflation and price stability Unemployment and output stability Economic growth Stability of markets and regulating banks
▪ The most important goal is ▪ Refers to reducingthe rates ▪ Goal of achieving a steady ▪ Promotion of stable financial
managing inflation, whichis of unemployment in the economic growth through markets is an important goal
an economic condition of economy by ensuring stable various supply side and demand of central banks to avoid
rising price level. inflation and economic side measures financial crisis and ensure
growth overall economic productivity
▪ Central banks strive to ▪ Expansionary monetary policy
achieve price stabilitywhich ▪ Many economists argue that leads to higher growth and
is defined as a regime of unemployment is more a inflation whereas restrictive
low and stable inflation function of fiscal policy monetary policy typically lead to
slower economic growth

v/s

Hierarchical mandate Dual mandate

Which are the major centralbanks
Major central banks around the world
India’ s central bank is Reserve Bank of India which is governed under the Reserve Bank of India Act, 1934. The current governor of RBI is Mr.
Shantikanta Das. Globally, while every country will have its own central banks, some of the central banks’ policy impact the global financial system.

Central banks with global impact Other important central banks

12 Regional reserve banks

Federal Reserve Bank (USA)
Central Bank of Japan
One of the most important central banks for
Federal Open Market
global financial system. Policies created for this
Committee
bank has wide reaching global implications.
Current governor is Mr. Jerome Powell

M
Board of Governors

Bank of England

Governing council of ECB

European Central Bank (ECB)

Serves as a central bank for the 19 countries People’s bank of China

which are a part of European Union.
Current governor is Mrs. ChristineLagarde
Executive Board of ECB
High level balance sheet of a central bank
High level balance sheet of a central bank
The actions undertaken by a central bank, directly impacts its balance sheet. Below is a simplified version of a central bank’s balance sheet

Assets

Securities: This covers central banks holdings of

treasury and non-treasury securities

Central bank balance sheet Loans to financial institutions: Reserves to the banking
system in form of loans to banks and other financial
Asset Liabilities institutions
Securities Currency in circulation
Loans to financial institutions Reserves Liabilities

Currency in circulation: Amount of currency inthe

hands of public and financialinstitutions

Reserves: Deposits made by the banks in central banks

in scenarios of excess liquidity
 Major tasks performed by a central bank
High level approach of a central bank
Most central banks follow a 2 pillar approach towards monetary policy implementation – Economic approach and Monetary approach

Economic analysis Monetary analysis

This primarily covers areas such as inflation targeting* and price Covers areas including money supply, currency circulation
stability, overall output, demand, unemployment, FX rates, including M3 monetary aggregate and open market
balance of payments etc. The most important task is Inflation operations to control overall liquidity in the economy. World
targeting. Typically, the transmission process targeted to control over central banks use 3 tools to control money supply and
inflation by increase/ decrease of central bank rates, also impacts liquidity in the market:
other economic variable
Reserve requirement
Asset
prices Investment
& spending
1 Reserves that the banks have to hold with the
central banks (e.g. CRR, SLR)

Central Market CPI

FX rates Lending to banks
bank rates rates
Labour
cost
2 Being a lenderof last resort in cases of liquidity
crunch, they can lend to financial institutions
LT interest
Open market operations

* Central banks generally adopt a target inflation regime (2% in India and European Union)
3 Buying or selling of securities in the open market
to provide or absorb liquidity (e.g. LTRO, operation
twist etc.)
to tackle inflation
6 FX & Commodities

A. FX market overview and BIS report

B. Role of central bank

C. Types of commodities

D. OTC vs Exchange
 Introduction to Commodity Prices

• Commodity risk, also termed as commodity price risk is the is the financial risk for the buyer or seller of commodity arising out
of fluctuating commodity prices.

• Commodity price risk can be classified in two categories

Who are they?

What affects them the most?

• Financial impact on commodity price movement

Market Footprints

Global food commodity prices, as tracked

by the FAO Food Price Index6 (FFPI), rose sharply
in November 2020, continuing the reversal since
May 2020 (Chart 1.24). All sub-indices of the FFPI
registered gains in November, with the vegetable
oil sub-index rising the most, followed by those of
sugar, cereals, dairy and meat.
Market Footprints
Impact of oil prices on countries dependent on crude
6 FX & Commodities

A. FX market overview and BIS report

B. Role of central bank

C. Types of commodities

D. OTC vs Exchange
Market Footprints
OTC Vs Exchange Market

FX Market has NSE and Commodity has MCX platform as exchange platform for derivative platform. More popular way of undertaking deal
is through OTC market

Currency derivative market is traded either on OTC platform or on exchanges. Let’s understand the use case from India perspective:

OTC (Over the Counter) ETCD (Exchange traded currency

derivative)
Forwards , Options and other swapsare traded Futures , Options and of late IRS are traded

Delivery is taken Delivery can’t be taken

Broken period is allowed Broken period is not allowed

Liquidity is ample even beyond one year Liquidity goes down with increased maturity even within one year
period
Timing of trade from 9:00 to 4:30 PM Opportunity to trade till 5 PM

Trade executed via banker over call Trade executed with SEBI certified brokers on NSE platform

Customized contracts Standardised Contracts

How does the platform look like?

Source : https://www.nseindia.com/market-data/currency-derivatives Source : Bloomberg OTC snapshot

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