MARIEL BAUTISTA

STRIPS - Primary and secondary market volumes

STRIPS is the acronym for Separate Trading of Registered Interest and Principal
Securities. Stripping is the process of separating a standard coupon-bearing bond into
its individual coupon and principal components. For example, a 5 year coupon bearing
bond can be stripped into 10 coupon and one principal instruments, all of which
thenceforth would become zero coupon bonds.
In an official STRIPS market for the Government securities, these stripped securities
i.e., the newly created zero coupon bonds remain the direct obligations of the
Government and are registered in the books of the agent meant for this purpose

Market practices & FIMMDA guidelines:

The Fixed Income Money Market and Derivatives Association of India (FIMMDA) was
established in May 1998 and formally inaugurated by Dr. Y.V. Reddy, Deputy Governor,
Reserve Bank of India (RBI). One of the main objectives of establishing FIMMDA was to
recommend and implement healthy business practices, ethical code of conduct,
standard principles and practices to be followed by the members in their dealing of
securities. To provide a clear understanding of market conventions, practices and high
levels of integrity by the individuals concerned in the market, FIMMDA has formulated
and prescribed certain set of regulations which are discussed below.
General Principals:
It is expected that all the Principals and Brokers should maintain the highest
standards of conduct so as to enhance the reputation of these markets.
All participants must ensure that any individual who commits on behalf of the
institution is acting within approved authorities.
All institutions must stand by the commitment made by an individual acting on their
behalf, the principle being ‗My Word is my Bond‘.
Institutions must ensure that the individuals acting on their behalf are fully trained
and completely aware of the rules and regulations, conventions, practices and the
markets in which they deal.
All individuals must comply with the rules and regulations governing the market and
keep up-to-date with changes that may happen from time to time.
Trades done outside the NDS, between institutions who are members of the NDS
should be entered in the NDS within a period of 15 minutes from the time of conclusion
of the trade.

The role of a broker is to bring together the counterparties for a fee. When brokers
act as intermediaries, they are not expected to act as principals or in a discretionary
capacity, even momentarily. Where the broking company is acting on its own account, it
is expected to declare that it is dealing as a principal before negotiating the trade.
Brokers and principals are expected to maintain confidentiality of the parties involved
in the transactions.
Settlement of the deals in Fixed Income, Money Market and Rupee Derivatives will
be subject to market conventions laid down by FIMMDA, irrespective of the counterparty
being a member of FIMMDA

KIT APOLONIO
Internal Controls:
The fundamental principle of maintenance of internal controls is the functional
segregation of the front office and back office and settlement functions. Since there may
be an overlap of the mid-office and back office functions, the managements of individual
institutions may lay down any other level of segregation that it thinks fit. Personnel in
back office functions and mid-office functions should be functionally segregated from
those in the front office.

Knowing the counterparty: It is good practice to carry out basic due diligence and
‗Know your counterparty‘ checks before dealing with the party. This basic check is to
find out who the dealing party is and why the counterparty is dealing with the involved
products.

 Recording of the conversations: It is a general experience that recourse to

recorded tapes provides speedy resolution of disputes and differences. System of
recording should be implemented in all the member front offices as soon as possible.
However, while installing a recording system or signing up a new client, counterparties
should beduly informed regarding the recording of the conversations.

Off-Premise Dealings: As a practice, participants should deal only from their normal
place of dealing i.e. from their respective dealing rooms/office as the case may be.
However, there may be occasions when the dealer may have to deal from other than his
normal place of dealing. Management may lay down the guidelines, including the staffs
that are authorized to deal from outside the normal place of dealing. The dealer / official
should, prior to dealing, inform the counterparty about dealing off-premises. The fact
that the deal has been done off the premises should also be recorded in the deal
confirmation and/or other relevant records.

VIRON BALTAZAR
Dealing Hours: FIMMDA has prescribed dealing hours from 9:00 a.m. to 5:30 p.m.
from Monday to Friday and from 9:00 a.m. to 1:00 p.m. on Saturday. However any
provisions and regulations made by RBI would supersede and timings prescribed by
RBI would prevail. Deals done outside these hours should be reported to the
management

Personal Investments: Personal investments of dealers in the products, which the

institution is dealing in should confirm to the ―Personal Investment Policy‖ formulated
by the management. While framing the Personal Investment Policy the management
should take into consideration the rules and regulations laid down by any statutory
authority in respect of insider trading.

Rotation of Dealers: It has been suggested that dealers should not be kept too long
on the same desk. Management should formulate suitable policy for rotation of dealers.
Further a system of an annual compulsory leave of 15 days or longer may be introduced
so that no dealer remains on the job continuously.

Confirmation of Deals: Firms should ensure that they have a process in place to
ensure that deals recorded by the trader are confirmed independently by the back-
office. All confirmations should include the date of the deal, the name of the
counterparty and all other details of the deal .

CAROL BALTAZAR
Regulations governing Unscheduled Holiday
An Unscheduled Holiday may be declared on account of:
Systemic Problems: Events that could lead to total settlement transactions coming to
a halt like general bandh / RBI strike / political disturbances / disruption of public utility
services due to heavy rains, etc. These events would have an impact on the overall
system and would be common to all players at a particular place.
Specific Problems: Events that could have an impact on transactions entered into
between few or a group of market participants like a strike in one bank / few banks /
organizations participating in money market. This would pose settlement problem to the
counter party to the transactions entered with such market participant(s).

Declaration of unscheduled holiday due to systemic problems:

FIMMDA, after taking into consideration the status of clearing transactions and in
consultation with select market players and/or RBI, may decide to postpone settlement
of transactions in money, securities, and derivatives markets. The decision of FIMMDA
will be formally communicated through information service providers / wire agencies like
Reuters, Bloomberg, Money Line Telerate, etc. It would be also published on FIMMDA‘s
website.
Call Money: Settlement of second leg would be done at the contracted rate for the
extended period of settlement. In other words, additional interest for one / more day/s
would be payable at contracted rate on amount borrowed. Call Money transactions due
for settlement on 1st leg would get automatically cancelled as, the transaction is by
nature, overnight money.
Notice Money / Term Money (Inter-Bank): Where 1st leg of the transaction could not
be performed because of the above event, the contract would be deemed to have been
done for settlement on the following working day for the same original period (number of
days) and at same rate. The other terms of the contract would remain unaltered. Banks
and PDs do enter into long-term inter-bank transactions with payment terms like
payment of interest on quarterly / half yearly basis. If such quarterly / half yearly interest
is payable on such day it would be effected on the next working day without any other
levy. Where the 2nd leg of the transaction cannot be performed, the repayment date will
be extended by the number of days of the unscheduled holiday at the contracted rate.
Certificate of Deposit and Commercial Paper-Primary Market Issuance: Where the
1st leg of the transaction in the primary market could not be performed because of the
above event, the contract would be deemed to have been done for settlement on the
following working day for the same period / original duration and at the same rate. All
the other terms of the contract would remain unaltered. Thus, the due date would get
extended.

Secondary Market Trade: In case of secondary market deals contract would be

performed on the following working day at ‗contracted rate of yield‘.
Redemption: CDs and CPs due for redemption would be redeemed by the respective
issuers by paying day/s interest at contracted interest / discount rate, if the holder is the
first investor. If CD/CP is held by transferee (for secondary market trades) the issuer
would pay the investor/holder in due course interest on the face value of the CD /CP at
previous day‘s FIMMDA-NSE rate. The basis in all the above cases would be
Actual/365 day basis