Treasury Terminology

ARBITRAGE
In its simplest form, involves buying and
selling the same security, more or less
simultaneously, to profit from a price
disparity.
In the forex market, arbitrage trades
capitalize on forward exchange rates being
out of line with the interest differential.
PUT/CALL OPTIONS
In the context of bonds, a call option gives the issuer the
right to redeem the bonds before maturity.
This will happen if interest rates have fallen since the
issue was made.
A put option enables investors to redeem the bond
before maturity and will happen if interest rates rise
after the issue. Capital Adequacy Ratio
The minimum unencumbered, undiluted capital,
consisting of paid-up equity, free reserves and
long-term subordinated debt that a bank must
maintain as a percentage of its risk assets.
CAPITAL FUND
Comprises Tier I and Tier II capital of the Bank.
CASH MARKET
The market in a financial instrument like bonds,
equities, foreign exchange.
CASH RESERVE RATIO (CRR)
CRR is the percentage of Net Demand and Time
Liabilities (NDTL) that scheduled commercial
banks must maintain with the RBI as cash.
CLEARING
The process of exchanging securities and funds through
a Clearing House after a trade/deal is concluded.

CLEARING HOUSE
An Indian example of a Clearing House is CCIL, which
clears trades in G-Secs. Some Clearing Houses (abroad)
combine the functions of clearing and custody.
CLEAN PRICE/DIRTY PRICE
The price of a debt instrument excluding interest for the period
elapsed since the last coupon was paid is called the clean price.
Market prices are clean prices. Dirty price includes interest from
the last coupon date to the settlement date.

CONSTITUENT SGL ACCOUNTS (CSGL)

Distinct SGL accounts held by the main SGL account holder on
behalf of its clients. Usually belongs to cooperative banks, PFs,
etc. If credits and debits are to CGSL accounts, the RBI is
suitably advised before settlement. See Deal Approval Screen
asking whether deal is for constituent and name of constituent.
COUNTRY RISK
The possibility that a country will default on its Governments
obligations to foreigners and / or on the foreign liabilities of its
banking system/private sector for lack of foreign exchange
reserves.

CURRENT / CAPITAL ACCOUNT TRANSACTIONS

1. Transactions involving imports and exports of goods and services
and interest/dividends on financial investments are current
account transactions.
2. Transactions involving deposits and financial investments in India
or abroad by foreigners/foreign entities and Indian
individuals/entities respectively are capital account transactions.
 Current Yield
Annual coupon on a bond divided by the purchase price or market
price of the security
Depository Participant(s) (DPs)
Satellites of apex depositories - NSDL or CDSL. They maintain records
of ownership of securities.
FIMMDA
Acronym for Fixed Income Money Market and Derivatives Association
of India, a body comprising representatives of the treasury
departments of banks and entrusted with the responsibility of self-
regulation of money markets and fixed income and derivative
markets.
 INFINET
Short for Indian Financial Network. A secure closed-user
group (CUG) hybrid network consisting of VSATs and
closed lines. Membership is restricted to entities having
SGL and current accounts with the RBI. All banks and
PDs are obliged to become members of INFINET, as only
INFINET members can participate in the NDS and CCIL
settlements.
 Marketmakers
Entities (brokers, banks, institutions) which maintain a market
(liquidity) in a security or a currency by always quoting buy (bid)
and sell (offer) prices for the security or currency.

Marked-to-Market
The valuation of a security at its market price on a continuous
basis. Applied generally on trading positions in the securities and
forex markets to determine the profit (or loss) on these
exposures.

 Nostro Accounts
Nostro Accounts are foreign currency accounts maintained with
correspondent banks to facilitate clearing forex transactions of the Bank.

Non-SLR Bonds/Securities
Debt instruments that do not qualify for inclusion in the SLR of a bank.
Usually corporate bonds.

NSDL
Short for National Securities Depository Ltd, the apex depository for
electronic custody, ownership and transfer of securities, of which DPs are
members.
 Primary Dealers (PDs)
These are the intermediaries between the RBI and the
market. They are under an obligation to take a
minimum percentage of the primary issues of securities
by the RBI through the central banks auctions as and
when they take place. For this commitment, they are
paid a commission by the RBI, based on the value of
securities absorbed by them.
 Repo is short for repurchase agreement.

A repurchase agreement, as the name suggests, is a contract to buy securities

today and sell them back on a future date at a price fixed today. The securities are
nominally transferred to the buyer but the seller has full entitlement to
interest/dividends and all other benefits accruing as if he is the owner of the
securities between the time of sale and buyback.

The difference between the repurchase price (future) and sale price (today) is
normally based on the inter-bank rate of interest for the tenor of the repo.

The buyer of securities in a repo in effect borrows securities and gives cash while
the seller in the repo lends securities and receives cash. The transaction is termed
repo for the seller of securities and reverse repo for the buyer of securities.
 Risk Weight
The full capital ratio for risky assets is 9%. Risk weight
is the proportion of the full capital ratio applicable to
individual assets/asset categories. For example, G-Secs
carry a risk weight of 2.5%. This means the capital
provision for the G-Secs asset category should be 2.5%
of 9%, i.e., 0.225% of the investment in G-Secs.
Similarly, if the risk weight is 50%, the capital provision
required for the asset is 4.5%.
 Short(s)
A sale position in the cash or futures markets without
the investor actually owning the underlying shares. The
trade anticipates the price will decline, enabling
squaring up the (short) sale at a lower price.

Shortselling
Selling securities without actually owning the securities,
in the expectation of buying them back at a lower price
later.
 Subsidiary General Ledger (SGL)
An electronic record of ownership of G-Secs / T-bills / State Government securities
maintained by the RBI.

SGL Depository and SGL

The SGL (short for Subsidiary General Ledger) Depository is a computerised system of
records of ownership of SLR securities issued by the Government of India and State
Governments.
The RBI pays the coupons and redeems the SGL securities on the interest due and
redemption dates.

SLR Bonds / Securities

Securities notified by the RBI the ownership of which by a bank qualifies for inclusion
in computation of the SLR of the bank.
 Statutory Liquidity Ratio (SLR)
The Statutory Liquidity Ratio is the mandatory minimum
percentage of Net Demand and Time Liabilities (NDTL),
which scheduled commercial banks must invest in
notified securities (also called SLR Securities). This is
monitored by the RBI with reference to the NDTL
position in each bank at the close of every reporting
fortnight (alternate Fridays). Currently the SLR is 25%.

SWIFT
Society for Worldwide Interbank Financial Telecommunication
is a co-operative society created under Belgian law and having
its Corporate Office at Brussels. The Society, which has been
in operation since May 1977 and covers most of Western
Europe and North America, operates a computer-guided
communication system to rationalize international payment
transfers. It comprises a computer network system between
participating banks with two operating centers, in Amsterdam
and Brussels, where messages can be stored temporarily
before being transmitted to the relevant banks terminal.
 Tier I Capital
Consists of paid-up equity and free reserves and constitutes the
core capital of the Bank.

Tier II Capital
Consists of revaluation reserves, general provisions and loss
reserves and subordinated debt in the form of long-term bonds
and Investment Fluctuation Reserve.

Subordinated debt issued by banks/FIs/NBFCs to meet Tier II

capital requirements are called Tier II bonds.
 Yield Curve
A plot of YTM against time for various maturities for a
specific class of bonds. Usually done for G-Secs (or
Treasuries), in which case it is described as the Treasury
benchmark (risk-free) yield curve.

YTM (Yield to Maturity)

The rate of interest which equates the present value of
future interest payments and principal redemption with
todays price of the bond.