derivatives in india

Using Derivatives in India - A SnapshotFebruary 7, 2000 : 

Using Derivatives in India - A SnapshotFebruary 7, 2000

Salient Features : 

Salient Features Purpose To be used to hedge underlying loans or trade transactions Participants Professional- Foreign & new Private sector banks and Financial Institutions Corporate- large to medium companies with FX loan exposures Products FX, Structured and Vanilla Cross-Currency and FCY interest rate Options, Interest Rate Swaps, FRAs, Currency/ Coupon swaps, Gold and Commodity derivative

Down memory lane : 

Down memory lane Globalization  greater long term exposures Deregulation  greater market risks Demand for hedging through derivatives. Foreign Bank facilitators Transactions against specific regulatory approvals

Regulatory Response : 

Regulatory Response Progressive relaxation on curbs Introduction of new derivative products Initiatives to strengthen and develop the market

Regulatory response- Landmark developments : 

Regulatory response- Landmark developments Jan’94- Cross Currency Options Mid’95- 3rd Currency Hedging Mid’96- Structured Cross Currency Options Aug’96- FCY Interest rate Derivatives Apr’97- Rupee Swaps Sep’98- Commodity hedging May’99- Gold hedges and Commodity derivatives July’99- Interest Rate Derivatives in INR

At the same time.. : 

At the same time.. Simultaneous efforts to develop a yield curve - removal of CRR on interbank liabilities. Increased freedom to banks to set and manage their Asset-liability, FX positions. Focus on risk monitoring and risk management- Capital adequacy norms, Value at Risk Steps to deepen the market- increase market participants Transparent and market friendly profile …while fostering a low interest rate, stable rupee environment

Market response : 

Market response Leap in transaction volumes. More participants - Public and Private Sector Banks, Financial Institutions Steps to self-regulate: FEDAI, FIMMDA Some way to go: Understanding of products, risks and control still inadequate Documentation and Accounting standards not fully developed No retail interest until Equity derivatives scheduled for next month Market not yet integrated, nascent yield curve

The Market- Turnover * : 

The Market- Turnover * Interest Rate Swaps (3 mo to 5 years) FCY - USD 1 Billion INR - USD 1-2 Billion (nascent) Currency Options (up to 2 years) Only FCY/FCY- USD 500 Million Currency Swaps (1 - 5 years) USD/INR - USD 500- 750 Million FCY/FCY - USD 250- 500 Million Commodity Derivatives - USD 50 Million BIS Stastics Outstanding OTC contracts of $81.5 trillion at end-June 1999 IRS (66%), FX (18%), Equities (2%) and commodities (0.5%) Slowdown in growth- hit by Euro introduction * Turnover includes cancellation of deals

The Participants : 

The Participants

RBI Guidelines : 

RBI Guidelines Derivatives as hedges - Suitable documentary evidence Non-rupee derivatives through Authorized Dealers only. Appropriate Authorizations - Board Resolutions Back office infrastructure and risk management capability (e.g. for Commodity risk) Option writing - Principle of Limited risk - No receipt of premiums by any market participant including banks. Rupee stability paramount - No linkage between interest rate and rupee forward premia.

Documentation Issues : 

Documentation Issues ISDA/Rupee ISDA/ICOM is the standard documentation to be signed between various counterparts Confirmation can handle most of the basic requirements ISDA required for events of default set-off, etc. ISDAs signed with corporate counterparts Hardly any between banks None at all with Public Sector Banks Both FEDAI/ FIMMDA looking at the issue closely

Legal issues : 

Legal issues SCRA FEMA Wagering act Tax implications No legal derivative disputes so far.

New products on the horizon : 

New products on the horizon Issuance and investment in foreign currency denominated bonds with rupee settlement USD/INR options- awaiting RBI approval Structured deposits linked to the Rupee Credit-default Swaps Derivatives with payoffs linked to commodities Equity derivatives- Exchange & OTC Hybrids

Other Emerging Markets : 

Other Emerging Markets Large capital inflows after exchange controls and local markets were significantly de-regulated Deregulation has enabled local companies and offshore investors to hedge away exchange risks Benchmark interest rates have developed from the foreign exchange swap market Unbundling of price, credit and liquidity risks made possible by the development of : Liquid markets for underlying instruments Unsegmented markets to allow free access to underlying hedge instruments Derivative instruments to hedge individual elements of risk

Disclaimer : 

Disclaimer Although the information contained herein is believed to be reliable, Citibank makes no representation as to the accuracy or completeness of any information contained herein or otherwise provided by Citibank. The ultimate decision to proceed with any transaction rests solely with the customer. Citibank N.A. is not acting as your advisor. Therefore, prior to entering into any proposed transaction, you should determine the economic risks and merits, as well as the legal, tax and accounting characterizations and consequences of the transaction, and that you are able to assume these RISKS. The contents of this presentation are proprietary in nature, and may not disseminated in whole or in part without Citibank's written consent.