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BFM MODULE – C
Chapter 20: TREASURY PRODUCTS (PART-I)
What we will study?
*What are various products of FX market?
*What is spot trade?
*What are Forward Rates?
*What are Swaps?
PRODUCTS OF FOREIGN EXCHANGE MARKET:
Characteristics of FOREIGN EXCHANGE MARKET:
1- Most Liquid Market:
Foreign exchange (forex) market is the most liquid
Market as free currencies (major currencies which
Are fully convertible, e.g., USD, EUR, GBP, JPY etc.)
Can be readily bought and sold here.
Free currencies belong to those countries, whose
Markets are highly developed and where exchange
Controls are practically dispensed with.
 Joi
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Currenci
eswhicharenotfull
yconvert
ibl
e,have
l
imiteddemandandmaynotbet radedactiv
ely
,but
theymayalsoenjoyhighli
quidi
ty,
dependingonthe
sizeandstageofdevelopmentofdomesticmarket
.

Forinstance,IndianRupee(I
NR)isonl
yparti
all
y
converti
ble,butthemar ketf
orUSD/I
NRi sf
airl
y
l
iquid,owingtol argedomesti
cmarketandhigh
growthr at
eoft heeconomy .

2-MostTr
anspar
entMar
ket
:
ForeignExchangeMar keti
sal
sothemost
transpar
entmar ketasmostofthet
ransact
ions
takeplace‘onl
ine’acr
ossthet
imezonesin
electr
onicmedium.

2-Vi
rt
ualMar
ket
:
I
tisavir
tualmarket,
withoutphysicalboundar
ies,
theonl
yli
mitat
ionforcurrencytr
adesbei ng
domesti
cregul
ationorconv er
ti
bil
ity.
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Ther
eareal
soi
nter
netsi
teswhi
chpr
ovi
det
radi
ng
pl
atf
orms.
Severalbankshav
ethei
rownsiteswhere
customerscandeali
nforei
gnexchangeon-
li
ne.

1.SpotTr
ades:
Curr
enci
esar
emost
lyboughtandsol
dinspot
tr
ades.
Spotset
tl
ementtakespl
acetwoworki
ngday
sfr
om
thet
radedat
e,i
.e.onthet
hir
dday.

01-
04-
2020=t
radedat
e
02-
04-
2020
03-
04-
2020 spotset
tl
ementdat
e

Currencymayal sobeboughtandsold,wit
h
sett
lementont hesameday ,
i.
e.today
(TOD/ Cash/Ready),
or,
onthenextday,i
.e.
tomor r
ow( TOM) .
 Joi
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01-
04-
2020=t
radedat
e:TODRat
e
02-
04-
2020:TOM Rat
e
03-
04-
2020:SPOTRat
e

Al
ltheexchanger atesquot
edonthescreen,ori
n
pr
int,
aref orspottr
adebydefaul
t,unl
essother
wise
mentioned.

TheTODandTOM r atesar
egenerall
yquotedata
discounttot
hespotrate)i
.e.t
herateisl
ess
favourabl
etothebuyerofthecur
rency.

Inanintegr
at edmar ket
,thepremium ordiscount
chargedont hecurrencyisreall
ydecidedbyt he
demandandsuppl yofbasecur rency(i
nourcasei t
i
sUS$)andov er
nightinter
estratediff
erent
ialsof
thecurr
enciesboughtandsol d.
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2.For
war
dRat
es:
Whil
espottraderef
erstocur
rentt
ransact
ion,
f
orwardsrefert
opurchaseorsal
eofacurrencyon
afut
uredate.

Theexchangeratesforfor
wardsaleorfor
ward
purchasear
equot edtoday
;hencesuch
tr
ansacti
onsarerefer
redtoasforwardcontr
act
s
betweenthebuyerandsell
er.

Treasur
ymayent erint
oforwardcont
ract
swith
customers(merchantbusi
ness)orwi
thbanks(i
nter
-bankmarket)ascounter
part
ies.
Customers,
i.
e.impor t
ers,expor t
ersandother
s,
whoexpectpay mentsorr eceiptsinf
orei
gn
curr
ency,
covertheircurrencyr i
skbyenter
ingint
o
for
wardcontractswiththeirrespecti
vebanks.
Treasuryin-
tur
ncov er
sit
scustomerexposur
eby
taki
ngr ev
erse/opposi
teposi
ti
onsinthei
nter
-bank
mar ket
.
 Joi
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Treasur
ymayalsoenteri
ntof
orwar
dcontract
s,
purelyf
ort
hepurposeofmaki
ngprofi
toutofpri
ce
mov ement
s.
Forwardexchanger
atesarenotexchangerates
for
ecastintot
hefut
ure;i
notherwords,theydonot
ref
lectpr
oject
edrat
emov ementsinthemar ket
.
Forwardexchangeratesarearr
ivedatonthebasi
s
ofint
erestr
atedif
ferenti
alsoft
wocur r
encies,
addedordeductedfrom spotexchangerat
e.

Theinter
estr atediff
erentiali
saddedt othespot
rateforl
ow- i
nterestyiel
dingcur r
ency(repr
esent
ing
forwardpremi um)anddeduct edfrom t
hespotrate
forhighi
nt er
esty i
eldi
ngcur rency(repr
esenti
ng
forwarddiscount).

Howev er,f
orwardratesful
lyref
lecti
nter
estr
ate
dif
fer
ential
sonlyinperfectmarkets,
wherethe
curr
enciesarefull
yconv er
ti
bleandwherethe
marketsarehighlyl
iquid.
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SinceRupeei snoty
etful
lyconvert
ibl
e,thedemand
forforwardcontr
actsi
nfl
uencestheforward
exchanger at
esmorethantheinter
estrate
diff
erenti
als.

3.Swaps:
Thespotandfor
wardtr
ansact
ionsar
ethepr
imar
y
product
sinf
orei
gnexchangemarket
.
Acombinat
ionofspotandforwardtr
ansact
ions,
or
acombi
nati
onoftwof orwar
dt r
ansacti
onsi
scall
ed
aswap.
Aswapt ransact
ionisal
sodescr
ibedasan
exchangeofcashf l
ows.
Buyi
ngUSD( wi
thRupees)i
nthespotmarketand
sel
li
ngthesameamountofUSDi nthef
orward
market
,orvi
cever
sa,const
it
utesaUSD/INRswap.
Simil
arl
y,si
multaneouspurchaseandsal
eof
curr
encyont woforwarddates(f
orwar
dtofor
war
d)
i
salsoaswap.
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Theswapr out
eisgeneral
lyusedf
orfundi
ng
requi
rements,
butther
eisalsoaprof
itoppor
tuni
ty
from i
nter
estr
atearbi
tr
age.
Whenwehav eUSDf unds,butweneedRupeef unds
toinvesti
nacommer ci
alpaperfor3months,we
mayent eri
ntoaUSD/ INRswapdeal–t osellUSD
atspotrate(conver
ti
ngintoRupeefunds)and
buyingbacktheUSD3mont hsforwar
d(withRupee
fundsonmat uri
tyoftheCP).
I
fthei
nterestearnedonCPishi
ghert
hanthecost
ofUSDfunds,theswapresul
tsi
naprofi
t.
ThecostofUSDf
undsconsi
stsofi
nter
estat
marketr
atepl
usf
orwar
dpremium f
orthe3-mont
h
per
iod.
Howev
er,i
nter
estar
bit
rageexist
sonlywhenoneof
t
hecurr
enci
esexchangedisnotful
lyconv
ert
ibl
e.
Theswapisother
wiseusedtoel
imi
nat
ecur
rency
andi
nter
estratemismat
ches.
 Join CAIIB WITH ASHOK on YouTube & App
BFM MODULE – C
Chapter 20: TREASURY PRODUCTS (PART-II)
What we will study?
*What is Money Market?
*What are money market instruments?
*What is Call Money, Notice Money & Term Money?

MONEY MARKET PRODUCTS:

What is money Market?

Money Markets refer to raising and deploying short-

Term resources, with maturity of funds generally not
Exceeding one year.
The inter-bank market is sub-divided into call
money, notice money and term money market.
 Joi
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1-
Cal
lMoney
:
Lendi
ngandbor
rowi
ngf
or1day
.
2-
Not
iceMoney
:
Lendi
ngandbor
rowi
ngf
or2day
sto14day
s.
3-
Ter
m Money
:
Lendi
ngandbor
rowi
ngf
or15day
sto1y
ear
.

Cal
lMoney
:
Callmoneyref
erst
ooverni
ghtpl
acements,i
.e.
fundsborr
owedbybanksneedtoberepaidonthe
nextworki
ngday.
Callmoneyr
atesi
ndi
cat
eli
qui
dit
yav
ail
abl
eint
he
i
nter-
bankmarket
.
OvernightMumbaiI nterbankOffer
edRate(
O/N
MIBOR)i stheindicati
verateforcal
lmoney
,fi
xed
dai
lyint hemorning,usedwi del
yasabenchmark
rat
ef oroverni
ghtinterestrat
eswaps.
 Joi
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Thecal
lmoneymar
keti
spur
elyani
nter
-bank
market
.
Non-bankplayer
s,suchasfi
nanciali
nsti
tut
ionsand
mutualfunds,werephasedoutofcallmoney
marketw.e.f6August2005.
Onlybanks,
pr i
marydeal
ersandco-oper
ati
vebanks
(ot
herthanlanddevel
opmentbanks)can
part
ici
patei
nt hecal
lmoneymarket.

Pr
imar
yDeal
ers:
PDisafi
rmthatbuysgov
ernmentsecur
it
ies
di
rect
lyf
rom gov
ernment
.

Not
iceMoney
:
Undercallmoneymar ket,
fundsaretr
ansact
edon
anoverni
ghtbasis,
wher easundernoti
cemoney
market
, f
undsaretransactedforaperi
odbetween2
daysand14day s.
 Joi
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Theprudenti
alli
mi t
sinrespectofbothoutst
anding
bor
rowingandl endingt
ransacti
onsincall
/noti
ce
moneymar ket:

ForSchedul
edcommer
cialbanks:

MaxAv
glendi
ngi
naf
ort
night
:
I
tcanbeupt o25%ofcapi
talf
und(
TIER-
I&TI
ER-
II
)
oft
helendi
ngbank.
Butonanypar
ti
culardayofthefort
nightl
endi
ng
canbemaximum 50%oft hecapit
alfundofl
endi
ng
bank.

MaxAv
gbor
rowi
ngi
naf
ort
night
:
I
tcanbemaximum 100%ofcapit
alf
und(
TIER-
I&
TI
ER-I
I)oft
hebor
rowingbank.
Butonanypar
ti
culardayoft
hefor
tnightbor
rowi
ng
canbemaximum 125%ofthecapi
talfundof
borr
owi
ngbank.
 Joi
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Lendi
ng:25%
Maxi
naday
:50%
Bor
rowi
ng:100%
Maxi
naday
:125%
Forco-
oper
ati
vebank:

MaxAv
eragebor
rowi
ng:

Borrowingf orStat
eCo-Operati
vebanks/ Di
str
ict
centralCo-operati
vebanks/UrbanCo-operati
v e
banksi ncallmoney /
noti
cemoneymar ket,
ona
dail
ybasisshoul dnotexceed2%oft heiraggregat
e
depositattheendofMar chofthepr
ev ious
fi
nancialyear.

MaxAv
erageLendi
ng:Nol
imi
t.
 Joi
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Forpr
imar
ydeal
ers(
PDs)
:

MaxAv
eragebor
rowi
ng:
PDscanborrowondail
yaver
agebasi
supto225%
thei
rNetOwnedFunds(NOF)att
heendofMarch
ofthepr
evi
ousfi
nanci
alyear
.

MaxAv
erageLendi
ng:
PDscanlendincal
l/
noti
cemoneymar ketondail
y
aver
agebasisupto25%thei
rNetOwnedFunds
(NOF)att
heendofMarchoftheprev
iousf i
nanci
al
year
.

Ter
m Money
:

Term moneymarketisforpl
acementoffundswi
th
banksforper
iodsinexcessof14days,
butnot
exceedi
ng1y ear
.
 Joi
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Typi
cal
lyt
erm moneyplacementsr
angefr
om 1
monthto6months,andplacement
sforl
onger
peri
odsar
enotverycommon.
Int
er-bankmar
ket
sareatt hefor
efrontoff
inanci
al
marketsandaret
hefir
sttosignalanychangesin
moneysupplyandtheresult
antl
iquidi
tyi
nthe
system.
Onanypart
icul
arday
, t
hecallmoneytr
ansact
ions
ref
lectt
hel
iqui
dit
yavail
abl
einthesyst
em.
Int
er-
bankmarketi
sconsi
der
edtobear i
sk-
free
market,t
houghi
nreal
it
y,t
hebanksdocarr
y
counter
part
yri
sk.
Howev er,
forpract i
calpur
poses,i
nter-
bankmar
ket
carr
ieslowestrisk,hencetheint
erestrat
es
prevai
li
ngininter-bankmarketconsti
tute
'
benchmar k’r
ates.
Thecal
lmoneyr ate,asindicatedbyt heoverni
ght
MumbaiInter-
bankOf f
eredRat e( O/NMI BOR)isthe
mostwidelyacceptedbenchmar krateforfl
oati
ng
rat
edebtpaper,asalsof orovernightint
erestr
ate
swaps(OIS).
 Joi
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Treasuryi
nvestssur
pluscashi
nmoneymar ket,
af
t ermeeti
ngtheCashReserveRati
o(CRR)and
Statut
oryLi
quidit
yReserv
eRatio(
SLR)sti
pulat
ed
byRBI .
Curr
entl
ytheCRRi
s3%ofbank'
sdemandandt
ime
l
iabi
li
ti
es.
CRRisanimport
antmonetarypol
icyi
nst
rumentof
RBIt
oinf
luencel
iqui
dit
yinthemarket
.
TheRBIdoesnotpayi
nter
estonCRRbal
anceshel
d
bybanks.

Banktreasur
iest
ypicall
ydeali
ninter
-bankmarkets,
butt
reasuryoper
ationsnowextendt oshort
-t
erm
i
nvestmentpaperissuedbygovernment,fi
nanci
al
i
nsti
tuti
onsandcompani esinpubli
candpr i
vat
e
sect
ors.
 Joi
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Fol
lowi
ngarethesecur
it
iesmainl
ydeal
twi
thf
or
pl
acementofshor
t-t
ermfunds.
1-Tr
easur
yBi
ll
s
2-
CashManagementBi
ll
s(CMBs)
3-
Commer
icalPaper(
CP)
4-
Cer
ti
fi
ateofdeposi
t(CD)
5-
Repo
6-
LAF
7-
MSF
8-
CBLO( Cent
ral
izedBor
rowi
ngandLendi
ng
Obl
igat
ion)
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BFM MODULE – C
Chapter 20: TREASURY PRODUCTS (PART-III)
What we will study?
*What is Treasury bill?
*What is CMB?
Bank treasuries typically deal in inter-bank markets,
But treasury operations now extend too short-term
Investment paper issued by government, financial
Institutions and companies in public and private
sectors.
Following are the securities mainly dealt with for
Placement of short-term funds.
1-Treasury Bills
2-Cash Management Bills (CMBs)
3-Commercial Paper (CP) 4-Certifiate of deposit
(CD)
5-Repo 6-LAF 7-MSF
8-CBLO (Centralized Borrowing and Lending
Obligation)
 Joi
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Tr
easur
yBi
ll
s:
Thesear
eissuedbyGovernmentofI
ndi
athr
ough
Reser
veBankformatur
it
iesof
91-
day
s,
182day
sand
364-
day
s,
f
orpr
e-det
ermi
nedamount
s.
Theint
eresti
sbywayofdi
scount
,sot
hebi
ll
sar
e
pri
cedbelowRs.100.

Yi
eldofTBi
ll
:(FV-
MV)
*365/
91
Forexample,T-
bil
lof91day si
spricedat99.26,
yi
eldi
nginter
estat2.97%p.a.{
(100–
99.
26)*365/91)
,whichisknownasi mpli
city
ield.

Thepri
ceofT-bi
ll
sisdeterminedt
hroughan
auct
ionpr
ocesswher ebanksandpri
marydeal
ers
aret
hemainparti
cipant
s.
 Joi
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Theaucti
onhowev erisopent oal
lplayer
sinthe
fi
nanci
almarkets,i
ncludingfi
nanci
alinst
it
uti
ons,
mutualf
unds,corporates,ot
herbusi
nessentit
ies,
asalsoi
ndiv
iduals.
T-
bil
lsarei
ssuedonf
ixeddat
esandf
orpr
e-f
ixed
amounts.
Cur
rent
ly,91-
dayT-
bil
lisi
ssuedweekl
yoneach
Wednesday,
182-dayT-
bil
lisi
ssuedf
ortni
ghtl
yonWednesday
precedi
ngthenon-r
epor
ti
ngFriday,
and
364-
dayT-bi
lli
salsoissuedfort
nightl
yon
Wednesdayprecedi
ngr epor
ti
ngFr i
day.
Forbanktr
easury,
investmentinT- bi
ll
si sa
conveni
entwayofparkingshort-t
er m surpl
usesi
na
ri
skfreei
nvestment,yi
eldi
nginterestgenerall
y
hi
gherthantheoverni
ghtcallmoneyr at es.
T-bi
ll
shavealiqui
dsecondarymarketandtheT-
bil
l
yi
eldsconst
it
uteav al
idbenchmar
kr at
efordebt
paper.
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FIMMDA( FixedIncomeMoneyMar ketand
Deri
vati
vesAssoci ati
onofIndia)andReut ers
coll
aborat
et opublishbenchmar kT-bil
lyi
eldsfor
oneweekt ooney earbasedont her esi
dual
maturi
tyofT- bi
ll
sincircul
ati
on.
TheT-bi
ll
,l
ikeot
hergov
ernmentsecur
it
ies,
isi
n
el
ect
ronicfor
m andi
stobeheldinaSGLaccount
.
Secondar
ymar ketsett
lementofT-bi
ll
stakesplace
thr
oughClear
ingCor porat
ionofI
ndiaLtd.(
CCIL).
CashManagementBi
ll
s(CMBs)
:
TheGov er
nmentofI ndia,
inconsul
tat
ionwit
hthe
RBI
,haddeci dedtoissueanewshor t
-ter
m
i
nstrument,knownasCashManagementBi l
ls,
to
meetthetempor ar
ycashf lowmismatchesofthe
Government.
CMBsinI
ndiaarenon-
standar
d,di
scount
ed
i
nst
rument
sissuedformaturi
ti
esl
essthan91day
s.
CMBshav
ethegener
icchar
act
erofTr
easur
yBi
l
ls.
CMBshav
ethef
oll
owi
ngf
eat
ures:
(
a)Thet
enur
e,not
if
iedamountanddat
eofi
ssueof
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theproposedCashManagementBi
ll
s(CMB)
dependsuponthetemporar
ycashr
equir
ementof
theGovernment.
Howev
er,
thetenur
eoft
hepr
oposedBi
ll
sisl
ess
t
han91days.
(b)TheBill
sareissuedatdiscountt
othefaceval
ue
throughaucti
ons,asinthecaseoftheTreasur
y
Bil
ls.
(c)
.Theannouncementoftheaucti
onoftheBil
lsi
s
bemadebyt heReser
veBankofI ndi
athr
ough
separat
ePressRel
easeissuedonedaypriort
othe
dateofauct
ion.
(
d)Theset
tl
ementoft
heauct
ioni
sonT+1basi
s.
(e)TheNon-Competit
iveBiddi
ngSchemef
or
Treasur
yBil
lsisnotextendedtoCMBs.
(f)TheBill
saretradableandqual i
fyforready
forwardfacil
it
y(Repo,MSFandRev er
seRepo
facil
it
y).
Invest
mentint heproposedBi l
lsis
reckonedasanel igi
bleinv
estmenti nGov ernment
Securit
iesbybanksf orSLRpur pose.
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BFM MODULE – C
Chapter 20: TREASURY PRODUCTS (PART-IV)
What we will study?
*What is Commercial Paper (CP)?
*What is Certificate of Deposit (CD)?
Commercial Paper (CP):
This is a short-term debt market paper issued by
corporates, with a minimum maturity of 7-day sand
maximum maturity of 1 year.

Minimum Maturity: 7 Days

Maximum Maturity: 1 Year

Corporates, primary dealers and financial

Institutions are eligible to issue commercial paper·
Minimum Amount of CP: 5 Lac
Then Multiple of 5 Lac.
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TheissueofCPi sgov er
nedbyguidelinesi
ssuedby
RBIandmar ketpract
icesprescr
ibedby
FI
MMDA( Fi
xedIncomeMoneyMar ketand
Deri
vati
vesAssociati
onofIndia)
.

AsperRBIgui
del
ines,t
heprinci
palrequi
rement
s
fori
ssui
ngCommer ci
alPaperare:

1-
t hei
ssuingcompanyhavemi
nimum cr
editr
ati
ng
ofA3aspert herat
ingsy
mbolanddef
ini
ti
on
prescr
ibedbySEBI.
2-t
het angi
blenetwor
thoft
hecompanyasperl
ast
balancesheetmustnotbebel
owRs.4cr.
3-
thecompanyshoul
dhavebeensanct
ioned
worki
ngcapi
tall
imi
tbybank/
sorFlsand
4-t
heborr
owalaccountofthecompanymustbe
undert
hestandar
dassetclassi
fi
cat
ionoft
he
fi
nanci
ngbank/i
nsti
tut
ion.
TheissueofCPshoul
dbeforami
nimum amount
ofRs.5lacsandmult
ipl
est
her
eof
.
 Joi
nCAI
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Banksarepermitt
edt
oinvestinCPonlyifi
tisi
n
dematform hencemostoftheCPsareissuedi
n
dematform.
CPistobeissuedthroughanI
PA(i
ssui
ngand
pay
ingaut
hor i
ty)whomustbeabank.
ThetotalamountofCPpr oposedtobei
ssued
shouldberai
sedwithi
naper iodoftwoweeksfr
om
thedateonwhichtheissueropensthei
ssuefor
subscri
pti
on.
CPmaybei ssuedonasingl
edateorinpartson
dif
fer
entdat
esprovi
dedthati
fissuedinpart
sthen
eachCPshallhavet
hesamemat urit
ydate.
Ever
yissueofCP,andever
yrenewalofaCP,
shal
l
betr
eatedasafreshi
ssue.
TheCPcar r
iesrel
ati
vel
ylowcr
editri
sk,
owingt
oit
s
short
-ter
m natur
eandmi ni
mum cr
editr
ati
ng
requi
rement.
TheCPi sissuedint
heform ofapromi
ssorynot
e
fordiscountedamount,i
.e.pri
ceofCPi
slessthan
thefacev alue,andt
hepricei
squotedf
orface
 Joi
nCAI
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v
alueofRs.100.
TheCPisanegot
iabl
einst
rumentandhasaf
air
ly
act
ivemar
ket
.
CPisissuedinDematf or
m, hencethepurchase
andsaleofCPisef f
ectedthroughthedeposit
ory
par
ti
cipant(DP)accountsofinvest
ors.
Bankst
endt
oinv
esti
nCPst
hrought
het
reasur
y,as
(a)Credi
tri
ski
srel
ati
vel
ylowandl
imi
tedt
oashor
t
peri
od
(
b)Yi
eldonCPishi
ghert
hani
nter
-bankmoney
mar
ketyi
eldand
(
c)CPbeingatr
adabl
einst
rument
,ther
eisno
l
iqui
dit
yri
sk.
SecondarymarketforCPsisfai
rl
yact
iveandt
he
i
ndexedreturnonCPi susedasabenchmarkr
ate
forshor
t-
term advances.
Al
lOTCtradesi
nCPshal lbereport
edwithin15
mi
nutesofthet
radet
ot hereporti
ngplatf
orm of
Cl
earcor
pDeali
ngSystem (Indi
a)Ltd.(
CDSI L)
.
 Joi
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Thesett
lementcy
clef
orOTCt
radesi
nCPshal
l
ei
therbeT+0orT+1.
Buy
backofCP:
(
a)I
ssuer
scanbuybackt
heCP, i
ssuedbyt
hem t
o
t
hei
nvest
ors,
bef
orematuri
ty.
(
b)BuybackofCPshallbet
hroughthesecondar
y
mar
ketandatprev
ail
ingmarketpri
ce.
(
c)TheCPshouldnotbeboughtbackbefor
ea
mini
mum per
iodof7daysfr
om thedateofissue.

Cer
ti
fi
cat
esofDeposi
t(CD)
:
Thisi
sadebtinstr
umentsimil
art
ocommer ci
al
paper,
buti
sissuedbybanksorotherel
igi
ble
fi
nanci
ali
nsti
tut
ion(FI
)agai
nstdeposi
toffunds.
Unli
keadepositrecei
pt,CDisanegoti
able
i
nstrumentandgenerall
ybearsi
nter
estrateshi
gher
thanregul
ardeposit
softhebank.
Iti
salsomoreexpensiv
etothebank,astheCD
att
ractsst
ampduty,andisgener
all
yrat
edbyan
 Joi
nCAI
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appr
ovedcr
edi
trat
ingagency
.
CDismeantpri
maril
yforhi
ghnetworthindi
vi
dual
s,
themi
nimum amountofthedeposi
tbeingRs.1l
ac
andmult
ipl
esther
eof.
Mi
nimum AmountofCD:1Lac
ThenMul
ti
pleof1Lac
Theperiodofmatur
it
yofCD,
issuedbybanks,
can
rangebetween7daysand1yearfr
om t
hedateof
i
ssue.
FIscanhoweveri
ssueCDsf oraperi
odnotl
ess
than1yearandnotexceedi
ng3y ear
sfr
om the
dateofi
ssue.

Mi
nimum Mat
uri
ty:7Day
s
Maxi
mum Mat
uri
ty:1Year
CDscanbeissuedeit
heri
ndematf
orm,
ori
n
phy
sicalf
orm aspr
omissor
ynot
es.
Bankscani
ssueCPandCDonl
yint
hef
ormatgi
ven
byRBI.
 Joi
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SinceCDisnegot
iabl
e,i
tisal
soaninv
est
ment
vehicl
eforcor
por
atesandbanks.
Bankscannotsanct
ionanyloanagai
nstCDsor
per
mitprematurecl
osureofCDs.
Secondar
ymarketforCDmar keti
snotver
yacti
ve
andbanksfi
nditat
tract
ive,
onlywhenli
qui
dit
y
condi
ti
onsaret
ight
.
CDsmaybei
ssuedatadi
scountonf
acev
alue.
Bankshavet omaintai
nappropri
atereser
ve
requir
ements,i
.e.
,CashReserv
eRat i
o(CRR)and
Statut
oryLi
quidit
yRatio(
SLR),ontheissuepr
iceof
theCDs.
AllOTCtradesi
nCPshal lbereportedwithi
n15
minutesofthetr
adetotheFinancialMarketTr
ade
Reporti
ngandConfi
rmationPlatform(F-TRAC)of
Clear
corpDeali
ngSystem (I
ndia)Ltd.(
CDSIL).
AllOTCtradesinCDsshallnecessar
il
ybeclear
ed
andsettl
edunderDVPImechani sm thr
oughthe
author
isedclear
inghouses.
 Join CAIIB WITH ASHOK on YouTube & App
BFM MODULE – C
Chapter 20: TREASURY PRODUCTS (PART-V)
What we will study?
*What is the security market products?

SECURITIES MARKET PRODUCTS:

Investment Business is an important part of

Integrated treasury and is composed of buying and
Selling products available in Securities Market.
Following are the security market products:
1-Government securities
2-Corporate Debt Paper
3-Debentures and Bonds
4-Convertible Bonds
5-Equities
 Joi
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Gov
ernmentSecur
it
ies:
St
atut
oryLi
qui
dit
yRat
io(
SLR)
:
Treasuryinv
estspri
mar i
lyinGover
nmentSecuri
ti
es
tocompl ywiththereser
verequi
rementofthebank,
i
.e.Statut
oryLiqui
dityRati
o(SLR),
whichis
presentl
yat18%ofbank' sdemandandt i
me
l
iabil
it
ies(DTL).
RBI,
atitsdi screti
on,canincreaseordecreasethe
SLR,subjectt oacap( max)of40%, i
norderto
cont
rolmoneysuppl yinthemar ket–infactt
he
SLRhasbeengr aduall
yreducedt o18%,from a
peakof38. 50%i nSeptember ,1990.
SLRMax=40% & SLRMi
n=0%(
ear
li
er25%)
TheBankingRegulati
onActof1949wasamended
i
n2007t oall
owRBIt ost
ipulat
eSLRbel
ow25%
(whichwastheearli
ermini
mum SLRlev
el
sti
pulat
edundertheAct.
)
Tosati
sfySLRrequi
rement,bankscanalsoinvest
i
notherapprov
edsecurit
ies,suchaspr
iori
tysector
bondsi
ssuedbySmal lI
ndustri
esDevel
opment
 Joi
nCAI
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BankofIndia(SI
DBI
)andNationalBankfor
Agri
cul
turalandRur
alDev
elopment( NABARD)
.
However,
thenumberofeligi
blebondsfort
his
pur
poseisbei
ngcurtai
ledandbanksmost l
yinvest
i
ngovernmentsecur
iti
esforthepurposeofSLR.
Bankscanalsohol
dcashorgol
dtof
ulf
il
lSLR
requi
rement
.
Whoi
ssueGov
ernmentSecur
it
ies?
GovernmentSecuri
ti
esar
eissuedbyPubl
icDebt
Off
iceofReserveBankofI
ndiaonbehal
fof
GovernmentofIndi
a.
Stat
egover
nmentsalsoi
ssueSt
ateDev
elopment
Bondst
hroughRBI.
GovernmentSecuri
ti
esar
esol
dthr
oughauct
ions
conductedbyRBI.
Bonds:
Thei nt
eresti
spaidonthef aceval
ueofthebonds
(expressedas%; mi
nimum v al
ueofbondsisRs.
10,000)atcouponrate,butthepri
ceoft
hebondsis
determinedintheaucti
onconductedbyRBI.
 Joi
nCAI
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RBIarr
ivesatacut-
offpr
icebasedonthebids
submitt
edbybanksandpr i
marydealer
sandthe
pri
cemaybehi gherorl
owerthanthefacev
alueof
Rs.100.
Governmentsecuri
ti
esareactivel
ytradedin
secondar
ymar ket
;hencethepriceandy i
eldofthe
bondswouldbeconst ant
lychangingdependingon
thedemandforbonds.
Theyiel
donbondsi
sther
efor
edi
ff
erentf
rom
couponrat
eofi
nter
est
.
Forinst
ance,
10-yearG-sec,
mat uri
nginJanuar
y
2020andcarryi
ngacouponof6. 35%iscur
rent
ly
pri
cedatRs.90.60giv
ingay i
eldof7.72%.
Thepr
iceoft
hebondsandt
hey
iel
donbondsmov
e
i
nopposit
edi
rect
ion.
OpenMar
ketOper
ati
ons(
OMO)
:
TheGov ernmentofIndi
aborrowsfr
om publi
cby
i
ssueofsecur i
ti
es,tofi
nanceit
sdefi
cit–whichi
s
thedif
ferencebetweenGovernment
'sincomeand
expenses.
 Joi
nCAI
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RBIisthei
ssuingandpayi
ngagencyf
or
governmentsecur
it
ies.
RBIal
sousesgovernmentsecur i
ti
esasapol
icy
i
nstr
umenttocontroll
iquidit
yint
hemarketi
norder
toi
nfl
uencet
heinterestrates.
RBImayabsorbliqui
dit
ybysell
ingthesecuri
ti
esin
themarketandmayi nf
usel
iqui
ditybybuyingback
thesecur
it
iesfr
om thepubl
ic.
Theseareknownasopenmar
ketoper
ati
ons(
OMO)
ofthecent
ralbank.
Ty
pesofGov
ernmentSecur
it
y:
1-Hel
dtil
lMat
uri
ty(
HTM)
:Banki
ngBook
(I
nvest
ment)
2-
Avai
labl
eforSal
e(AFS)
:Tr
adi
ngBook(
Trade)
3-
Hel
dforTr
adi
ng(
HFT)
:Tr
adi
ngBook(
Trade)
Bank'
sinvest
ment sar
eclassi
fi
edintoHeldti
ll
Matur
ity(
HTM)–consi stofsecuri
ti
esmainlyfor
i
nvest
mentpur poseandhenceplacedunderthe
Banki
ngBook,
 Joi
nCAI
IBWI
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Avail
ableforSale(AFS)andHeldf
orTradi
ng(HFT)
consistoftr
adablesecuri
ti
esandhencepl
aced
undertheTradingBook.
Secur i
ti
esunderHFTar
eacti
velytr
adedandare
mar ked-t
o-market(
MTM)r
egularl
yforaccount
ing
purpose.
Banksandinsti
tut
ionali
nvest
orsactiv
elybuyand
sel
lgovernmentsecuri
ti
esinanti
cipat
ionofpri
ce
changes.
Thev i
ewonpr i
ces/
int
erestr
atei
sbasedont he
rat
eofi nfl
ati
on,GDPgrowthandothereconomic
i
ndicators.
Theyiel
dsandpri
cesofsecur
it
iesmov
ei nt
he
opposit
edi
rect
ion–pri
cesfal
lwhenyi
elds(
int
erest
rat
es)ri
se,
andv i
cever
sa.
I
nterestratefut
ur esmar kethasal sobeenacti
vated
byRBIwi ththetradinginI nt
erestRateFutures
(I
RFs)onanot i
onalcouponbear ing10-Year
GovernmentofI ndia(Gol )Securi
tyint
roducedin
August,2009onst ockexchanges.
 Joi
nCAI
IBWI
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InDecember ,
2013,RBIal
lowedIRFsder
ivi
ngv al
ue
from t
hefoll
owingunderl
yingonther
ecognised
stockexchanges:
(
i)91-
DayTr
easur
yBi
ll
s;
(i
i)2-
year
,5-
yearand10-
yearcouponbear
ing
noti
onalGov
ernmentofI
ndiasecuri
ty.
RBIalsousest
heG-
secmar
kett
odev
elopdebt
markets.
G-secyi
eldssetbenchmarkratesforcorporat
e
bonds;RBIissuebondsf
orvariousmat uri
ti
es
rangi
ngfrom 1y eart
o30years.
RBIhasalsoissuedavar
iet
yofbonds,
withstep-
up
couponsorcouponsli
nkedtoi
nfl
ati
onindex,
or
fl
oati
ngratecoupons.
STRI
PS:
Cur r
entpr oposalsincludeissueofSTRI PS
(Separ ateTradingofRegi steredInterestand
PrincipalSecuriti
es),wheret heprincipaland
i
nterestar etradedassepar atezero-coupon
securities.
 Join CAIIB WITH ASHOK on YouTube & App
BFM MODULE – C
Chapter 20: TREASURY PRODUCTS (PART-VI)
What we will study?
*What is Corporate Debt Paper?
*What are Debentures and Bonds?

SECURITIESMARKETPRODUCTS:
Following are the security market products:
1-Government securities (see Part-V)
2-Corporate Debt Paper
3-Debentures and Bonds
4-Convertible Bonds
5-Equity
Corporate Debt Paper:
Corporate debt paper refers to medium and long-
Term bonds and debentures issued by corporates
And financial institutions, which are tradable.
 Joi
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Theyar ealsoref
erredtoasnon- SLRsecuri
ti
es,
to
dist
inguishthecorporat
edebtpaperf rom
governmentsecur i
ti
esandot herapproved
securi
ties,whi
char eeli
gibl
eformeetingSLR
requir
ementofbanks.
Tier-
2capit
albondsi
ssuedbybanksal
sof
allunder
thiscat
egory.
Treasuri
esfindcor
poratedebtpaperasan
attr
acti
veinvest
ment,asyiel
dsonbondsand
debenturesarehi
gherthantheyi
eldongover
nment
securi
ti
es.
Nowt hatmostofthecorporatedebtpaperis
i
ssuedi ndematform,t
herei sfai
rl
yacti
ve
secondarymarketandthebondsi ssuedbytop
corporat
esarehighl
yli
quid.(Banksareall
owedto
i
nvestonlyindematsecurit
ies.
)
Yiel
dsoncorporatedebtpaperdiffer
sf r
om
i
nstrumenttoinstr
ument,dependingont hecredi
t
quali
ty,
thati
s,highert
hecreditr
isk,higheri
sthe
yi
eld.
 Joi
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Mostoft
hedebti
ssueshavecredi
trat
ingbyoneof
t
hesevencr
edi
trat
ingagenci
esinthecount
ry.
Globalrati
ngsar
enecessar
yi ft
hedebtpaperi
s
beingissuedint
hei
nternat
ionalmar
kets.
Treasur
ycaninvestFCNRdeposi
tf undsandother
forei
gncur
rencysurpl
usesi
nglobaldebtpaperas
perpoli
cygui
deli
nesapprov
edbyt hemanagement .

Debent
uresandBonds:
InIndia,
conventi
onall
y,debenturesaredebt
i
nst r
ument si
ssuedbycor poratesinpr
ivat
esector
,
whilebondsareissuedbyi nsti
tuti
onsinpubl
ic
sector,t
hisdi
sti
ncti
onr eal
lyhasnomeani ngin
i
nternati
onalmarket.
Thesear
edebtinst
rument
s,i
ssuedbycorpor
ate
bodi
es,l
it
eral
lywi
thachar
geonspecif
icasset
s.
Theli
teralmeaninghasbeenl
ostinpr
acti
ceand
debenturesandbondsmaybeissuedwit
hor
wit
houtsecurit
y.
 Joi
nCAI
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I
npr acti
ce,CompanyLawr equir
esthatdebentur
es
i
ssuedbycompani esarealwayssecured;hence
debenturesaregeneral
lysecuredbymor tgageor
wit
haf loati
ngchargeoral ienonassets.
Bonds,
thoughissuedbypubli
csectorcompanies,
donotimplyguarant
eebythegover
nment ,
unlessit
i
ssoment i
onedspecifi
cal
lyi
nthetermsofthe
i
ssue.
Debentur
esaregov
ernedbyrel
evantpr
ovi
sionsof
CompanyLawandar etr
ansf
erabl
eonlyby
regi
str
ati
on.
Bondsont
heot
herhandarenegot
iable
i
nstr
ument
sgover
nedbylawofcontracts.
Debent
uremaybeconv erti
bleornon-conv
ert
ibl
e.
Conver
ti
bledebent
uresmaybeconv ert
edint
o
equi
tyasperter
msofi ssue.
Ther
eisnopract
icaldif
fer
encebet
weennon-
conv
ert
ibl
edebentures(NCD)andbonds.
 Joi
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Asamat terofconveni
ence,weusebondas
commonnomencl at
urefornon-
conver
ti
ble
corpor
atedebtpaper,wit
horigi
nalmat
uri
tyof1
yearandabove.
Wher
ethedebentur
esandbondsareconvert
ibl
ein
t
oequit
y,t
heyaresomenti
onedspeci
fical
ly
.
Bondsmaybei ssuedwit
hdifferi
ngstr
ucturesin
ordert
oenhancet hemarket
abili
tyoft
he
i
nstrument
sasal sotor
educet hecostofissue.
Thevariat
ionsi
ncludeput
/cal
lorconvert
ibi
li
ty
opti
ons,zerocouponbonds,f
loat
ingrat
ebonds,
deepdiscountbondsandinst
rumentswithstepup
coupons.
Bondswhicharenotsecuredbymor t
gages,but
secur
edbystocksorothercoll
ater
al,ar
ealso
ref
err
edtoascoll
ateral
isedobl
igati
ons.
Fi
nally,t
herearealsobondswit
hput/callopti
on
andst epupcoupons,withthei
ncent
iveofhigher
i
nt er
estfornon-
redemptionoft
hebondsi nearl
y
stages.
 Joi
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Conv
ert
ibl
eBonds:
Thesear eami xofdebtandequity
,wherethebond-
holdersaregivenanoptiontoconvertt
hedebtint
o
equityonafixeddate,orduri
ngaf i
xedper
iod,and
theconversi
onpr i
ceispredeter
mined.
I
ft heissuercompany '
sstockpriceishi
ghert
han
theprefixedconversi
onprice,t
heinvest
orswoul
d
prefertoconvertthedebtintoequit
y.
Thebenefitt
othecompanyi
sthatther
eisnodebt
repaymentandatt
hesametimeitsequit
ybasei
s
strengt
hened.
Thecoupononconvert
iblebondisgeneral
lyl
ower
thanthecoupononnon-conver
ti
blebondofsimi
lar
credi
tstandi
ng.
Incasethebondisconv
ert
edi nt
oequi
ty,
theequity
holdi
ngsoftheexi
sti
ngsharehol
der
sgetdil
uted.
 Joi
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Equi
ti
es:
Banksarepermitt
edt oinvesti
nequit
ies(
shar
esof
l
ist
edcompani es)subjecttoali
mitoncapi
tal
marketexposure,setbyRBI.
Equit
iesaretr
adedonst ockexchangeandthe
stockpri
cesareinfl
uencedbyf undamental
s
(f
inanci
alposi
tion)ofthecompanyasal sovari
ous
macro-economicfactors.
Inv i
ewoft her
isksinv
olvedi
nequityt
radi
ng,bank
treasuri
esaregeneral
lycaut
iousi
ninvest
ing
surplusfundsi
nt hestockmarket
.
However,wemustment ionthatI
ndianstock
marketisoneoftheoldesti
nAsiaandt he
i
nsti
tuti
onalst
ructur
eiswelldevel
oped,withSEBI
ast
heRegul at
or.
BombaySt ockExchangeandNat i
onalStock
Exchangearethetwol eadi
ngstockexchanges,
wherethetradi
ngisdoneonanel ectr
onicplat
for
m
(al
socall
edscreen-basedtradi
ng).
 Joi
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Theder i
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