Basics of Debt Markets

What s the Debt Market?

What s the Money Market?
Why shoud one nvest n xed ncome securtes?
What are the advantages of nvestng n Government Securtes (G-Secs)?
Who can ssue xed ncome securtes?
What are the dherent types of nstruments, whch are normay traded n ths market?
What s the mportance of the Debt Market to the economy?
What are the benets of an emcent Debt Market to the nanca system and the economy?
What are the dherent types of rsks wth regard to debt securtes?
Market Structure
What s the tradng structure n the Whoesae Debt Market?
Who are the man nvestors of Govt. Securtes n Inda?
Who reguates the xed ncome markets?
What are the man features of G-Secs and T-Bs n Inda?
What are the segments n the secondary debt market?
What s the structure of the Whoesae Debt Market?
Who are the most promnent nvestors n the Whoesae Debt Market n Inda?
What s the ssuance process of G-secs?
What are the types of trades n the Whoesae Debt Market?
What s a Repo trade and how s t dherent from a norma buy or se transacton?
What s Yed?
How s the Yed to Maturty computed?
How s the prce determned n the debt markets?
How s Yed reated to the prce?
Market Structure and Trading Methodology in WDS
What s the concept of the broken perod nterest as regards the Debt Market?
What are the conventons foowed for the cacuaton of Accrued Interest?
What s the Cean Prce and the Drty Prce n reference to tradng n G-Secs?
How are the Face Vaue, Trade Vaue and the settement vaue dherent from each other?
How can nvestors n Inda hod G-Secs?
What are the type of transactons whch take pace n the market?
What s the roe of the Exchanges n the WDS?
BSE Wholesale Debt Structure(WDS)
When was the BSE accorded reguatory permsson for the WDS?
How s the settement carred out n the Whoesae Debt Market?
What are the three modues n the GILT system?
What s the membershp crtera and charges for the membershp of the BSE Whoesae Debt Segment?
What s the settement mode aowed n GILT?
What are the aspects for settement of trades n G-secs n GILT?
Corporate Debt Market
What s the structure of the Corporate Debt Market n Inda?
What are the varous knds of debt nstruments avaabe n the Corporate Debt Market?
How s the tradng, cearng and settement n Corporate Debt carred out at BSE?
BSE Retail Debt Market(REDS)
What are the securtes/nstruments traded n the Reta Debt Segment (REDS) at the Exchange?
Who are the partcpants n the Reta Debt Market?
What s the membershp crtera and procedure for the membershp of the BSE Reta Debt Segment (REDS)?
How are the Reta Transactons n G-Secs. executed at the Exchange?
What s the stng procedure for G-Secs. n respect of the Reta Debt Market?
What s the tradng methodoogy n case of the Reta tradng n G-Secs.?
How does the Cearng & Settement of the Reta G-Sec. transactons take pace n REDS?
How are the securty devery shortages treated n the Reta Debt Segment?
How s the margnng structure at the Exchange for the Reta Debt Market?
n!estor Safegaurds
What are the man ponts to be kept n mnd by the nvestor whe nvestng n the Debt Markets?
What s the future scenaro for the Reta Debt Market n Inda?
Basics Of Debt Markets
What s the Debt Market?
The Debt Market s the market where xed ncome securtes of varous types and features are ssued
and traded. Debt Markets are therefore, markets for xed ncome securtes ssued by Centra and
State Governments, Muncpa Corporatons, Govt. bodes and commerca enttes ke Fnanca
Insttutons, Banks, Pubc Sector Unts, Pubc Ltd. companes and aso structured nance nstruments.
What s the Money Market?
The Money Market s bascay concerned wth the ssue and tradng of securtes wth short term
maturtes or quas-money nstruments. The Instruments traded n the money-market are Treasury
Bs, Certcates of Deposts (CDs), Commerca Paper (CPs), Bs of Exchange and other such
nstruments of short-term maturtes (.e. not exceedng 1 year wth regard to the orgna maturty)
Why shoud one nvest n xed ncome securtes?
Fxed Income securtes oher a predctabe stream of payments by way of nterest and repayment of
prncpa at the maturty of the nstrument. The debt securtes are ssued by the egbe enttes
aganst the moneys borrowed by them from the nvestors n these nstruments. Therefore, most debt
securtes carry a xed charge on the assets of the entty and generay en|oy a reasonabe degree of
safety by way of the securty of the xed and/or movabe assets of the company
The nvestors benet by nvestng n xed ncome securtes as they preserve and ncrease
ther nvested capta and aso ensure the recept of reguar nterest ncome.
The nvestors can even neutraze the defaut rsk on ther nvestments by nvestng n Govt.
securtes, whch are normay referred to as rsk-free nvestments due to the soveregn guarantee
on these nstruments
The prces of Debt securtes dspay a ower average voatty as compared to the prces of
other nanca securtes and ensure the greater safety of accompanyng nvestments.
Debt securtes enabe wde-based and emcent portfoo dverscaton and thus assst n
portfoo rsk-mtgaton.
What are the advantages of nvestng n Government Securtes (G-Secs)?
The Zero Defaut Rsk of the G-Secs. oher one of the best reasons for nvestments n G-secs so that t
en|oys the greatest amount of securty possbe. The other advantages of nvestng n G- Secs are:
Greater safety and ower voatty as compared to other nanca nstruments.
Varatons possbe n the structure of nstruments ke Index nked Bonds, STRIPS
Hgher everage avaabe n case of borrowngs aganst G-Secs.
No TDS on nterest payments
Tax exempton for nterest earned on G-Secs. up to Rs.3000/- over and above the mt of
Rs.12000/- under Secton 80L (as amended n the atest Budget).
Greater dverscaton opportuntes
Adequate tradng opportuntes wth contnung voatty expected n nterest rates the word
over
Who can ssue xed ncome securtes?
Fxed ncome securtes can be ssued by amost any ega entty ke Centra and State Govts., Pubc
Bodes, Banks and Insttutons, statutory corporatons and other corporate bodes. There may be ega
and reguatory restrctons on each of these bodes on the type of securtes that can be ssued by each
of them TOP
What are the dherent types of nstruments, whch are normay traded n ths
market?
The nstruments traded can be cassed nto the foowng segments based on the
characterstcs of the dentty of the ssuer of these securtes:
Market
Segment
Issuer Instruments
Government
Securtes
Zero Coupon Bonds, Coupon Bearng Bonds, Treasury Bs,
STRIPS
State Governments Coupon Bearng Bonds.
Pubc Sector
Bonds
Government Agences /
Statutory Bodes
Govt. Guaranteed Bonds, Debentures
Pubc Sector Unts PSU Bonds, Debentures, Commerca Paper
Prvate Sector
Bonds
Corporates
Debentures, Bonds, Commerca Paper, Foatng Rate
Bonds, Zero Coupon Bonds, Inter-Corporate Deposts
Banks Certcates of Deposts, Debentures, Bonds
Fnanca Insttutons Certcates of Deposts, Bonds
The G-secs are referred to as SLR securtes n the Indan markets as they are egbe securtes for the
mantenance of the SLR rato by the Banks. The other non-Govt securtes are caed Non-SLR
securtes.ss
What s the mportance of the Debt Market to the economy?
The key roe of the debt markets n the Indan Economy stems from the foowng reasons:
Emcent mobzaton and aocaton of resources n the economy
Fnancng the deveopment actvtes of the Government
Transmttng sgnas for mpementaton of the monetary pocy
Factatng qudty management n tune wth overa short term and ong term ob|ectves.
Snce the Government Securtes are ssued to meet the short term and ong term nanca needs of
the government, they are not ony used as nstruments for rasng debt, but have emerged as key
nstruments for nterna debt management, monetary management and short term qudty
management.
The returns earned on the government securtes are normay taken as the benchmark rates of returns
and are referred to as the rsk free return n nanca theory. The Rsk Free rate obtaned from the G-sec
rates are often used to prce the other non-govt. securtes n the nanca markets.
What are the benets of an emcent Debt Market to the nanca system and the economy?
Reducton n the borrowng cost of the Government and enabe mobzaton of resources at a
reasonabe cost.
Provde greater fundng avenues to pubc-sector and prvate sector pro|ects and reduce the
pressure on nsttutona nancng.
Enhanced mobzaton of resources by unockng qud reta nvestments ke god.
Deveopment of heterogenety of market partcpants
Assst n deveopment of a reabe yed curve and the term structure of nterest rates.
What are the dherent types of rsks wth regard to debt securtes?
The foowng are the rsks assocated wth debt securtes:
Defaut Rsk: Ths can be dened as the rsk that an ssuer of a bond may be unabe to make
tmey payment of nterest or prncpa on a debt securty or to otherwse compy wth the
provsons of a bond ndenture and s aso referred to as credt rsk.
Interest Rate Rsk: can be dened as the rsk emergng from an adverse change n the nterest
rate prevaent n the market so as to ahect the yed on the exstng nstruments. A good case
woud be an upswng n the prevang nterest rate scenaro eadng to a stuaton where the
nvestors' money s ocked at ower rates whereas f he had wated and nvested n the changed
nterest rate scenaro, he woud have earned more.
Renvestment Rate Rsk: can be dened as the probabty of a fa n the nterest rate resutng
n a ack of optons to nvest the nterest receved at reguar ntervas at hgher rates at
comparabe rates n the market.
The foowng are the rsks assocated wth tradng n debt securtes:
Counter Party Rsk: s the norma rsk assocated wth any transacton and refers to the faure
or nabty of the opposte party to the contract to dever ether the promsed securty or the sae-
vaue at the tme of settement.
Prce Rsk: refers to the possbty of not beng abe to receve the expected prce on any order
due to a adverse movement n the prces.
Market Structure
What s the tradng structure n the Whoesae Debt Market?
The Debt Markets n Inda and a around the word are domnated by Government securtes, whch
account for between 50 - 75% of the tradng voumes and the market captazaton n a markets.
Government securtes (G-Secs) account for 70 - 75% of the outstandng vaue of ssued securtes and
90-95% of the tradng voumes n the Indan Debt Markets. State Government securtes & Treasury
Bs account for around 3-4 % of the day tradng voumes. The tradng actvty n the G-Sec. Market s
aso very concentrated currenty (n terms of qudty of the outstandng G-Secs.) wth the top 10 qud
securtes accountng for around 70% of the day voumes.
Who are the man nvestors of Govt. Securtes n Inda?
Tradtonay, the Banks have been the argest category of nvestors n G-secs accountng for more than
60% of the transactons n the Whoesae Debt Market.
The Banks are a prme and captve nvestor base for G-secs as they are normay requred to mantan
25% of ther net tme and demand abtes as SLR but t has been observed that the banks normay
nvest 10% to 15% more than the norma requrement n Government Securtes because of the
foowng requrements:-
Rsk Free nature of the Government Securtes
Greater returns n G-Secs as compared to other nvestments of comparabe nature
Who reguates the xed ncome markets?
The ssue and tradng of xed ncome securtes by each of these enttes are reguated by dherent
bodes n Inda. For eg: Government securtes and ssues by Banks, Insttutons are reguated by the
RBI. The ssue of non-government securtes comprsng bascay ssues of Corporate Debt s reguated
by SEBI.
What are the man features of G-Secs and T-Bs n Inda?
A G-Secs n Inda currenty have a face vaue of Rs.100/- and are ssued by the RBI on behaf of the
Government of Inda. A G-Secs are normay coupon (Interest rate) bearng and have sem-annua
coupon or nterest payments wth a tenor of between 5 to 30 years. Ths may change accordng to the
structure of the Instrument.
Eg: a 11.50% GOI 2005 securty w carry a coupon rate(Interest Rate) of 11.50% p.a. on a face vaue
per unt of Rs.100/- payabe sem-annuay and maturng n the year 2005.
Treasury Bs are for short-term nstruments ssued by the RBI for the Govt. for nancng the temporary
fundng requrements and are ssued for maturtes of 91 Days and 364 Days. T-Bs have a face vaue
of Rs.100 but have no coupon (no nterest payment). T-Bs are nstead ssued at a dscount to the face
vaue (say @ Rs.95) and redeemed at par (Rs.100). The dherence of Rs. 5 (100 - 95) represents the
return to the nvestor obtaned at the end of the maturty perod.
State Government securtes are aso ssued by RBI on behaf of each of the state governments and are
coupon-bearng bonds wth a face vaue of Rs.100 and a xed tenor. They account for 3-4 % of the
day tradng voumes.
What are the segments n the secondary debt market?
The segments n the secondary debt market based on the characterstcs of the nvestors and the
structure of the market are:
Whoesae Debt Market - where the nvestors are mosty Banks, Fnanca Insttutons, the RBI,
Prmary Deaers, Insurance companes, MFs, Corporates and FIIs.
Reta Debt Market nvovng partcpaton by ndvdua nvestors, provdent funds, penson
funds, prvate trusts, NBFCs and other ega enttes n addton to the whoesae nvestor casses.
What s the structure of the Whoesae Debt Market?
The Debt Market s today n the nature of a negotated dea market where most of the deas take pace
through teephones and are reported to the Exchange for conrmaton. It s therefore n the nature of a
whoesae market.
Who are the most promnent nvestors n the Whoesae Debt Market n Inda?
The Commerca Banks and the Fnanca Insttutons are the most promnent partcpants n the
Whoesae Debt Market n Inda.
Durng the past few years, the nvestor base has been wdened to ncude Co-operatve Banks,
Investment Insttutons, cash rch corporates, Non-Bankng Fnance companes, Mutua Funds and hgh
net-worth ndvduas. FIIs have aso been permtted to nvest 100% of ther funds n the debt market,
whch s a sgncant ncrease from the earer mt of 30%. The government aso aowed n 1998-99
the FIIs to nvest n T-bs wth a vew towards broadbasng the nvestor base of the same.
What s the ssuance process of G-secs?
G-secs are ssued by RBI n ether a yed-based (partcpants bd for the coupon payabe) or prce-
based (partcpants bd a prce for a bond wth a xed coupon) aucton bass. The Aucton can be ether
a Mutpe prce (partcpants get aotments at ther quoted prces/yeds) Aucton or a Unform prce
(a partcpants get aotments at the same prce).
RBI has recenty announced a non-compettve bddng facty for reta nvestors n G-Secs through
whch non-compettve bds w be aowed up to 5 percent of the noted amount n the speced
auctons of dated securtes.
What are the types of trades n the Whoesae Debt Market?
There are normay two types of transactons, whch are executed n the Whoesae Debt Market :
An outrght sae or purchase and
A Repo trade
What is a Repo trade and ho" is it di#erent fro$ a nor$al buy or sell transaction%
An outrght Buy or se transacton s a one where there s no ntended reversa of the trade at the pont
of executon of the trade. The Buy or se transacton s an ndependent trade and s n no way
connected wth any other trade at the same or a ater pont of tme.
A Ready Forward Trade (whch s normay referred to as a Repo trade or a Repurchase Agreement ) s a
transacton where the sad trade s ntended to be reversed at a ater pont of tme at a rate whch w
ncude the nterest component for the perod between the two opposte egs of the transactons.
So n such a transacton, one partcpant ses securtes to other wth an agreement to purchase them
back at a ater date. The trade s caed a Repo transacton from the pont of vew of the seer and t s
caed a Reverse Repo transacton from pont of vew of the buyer.
Repos therefore factate creaton of qudty by permttng the seer to ava of a specc sum of
money (the vaue of the repo trade) for a certan perod n eu of payment of nterest by way of the
dherence between the two prces of the two trades.
Repos and reverse repos are commony used n the money markets as nstruments of short-term
qudty management and can aso be termed as a coaterased endng and borrowng mechansm.
Banks and Fnanca Insttutons usuay enter nto reverse repo transactons to manage ther reserve
requrements or to manage qudty.
What is &ield%
Yed refers to the percentage rate of return pad on a stock n the form of dvdends, or the ehectve
rate of nterest pad on a bond or note. There are many dherent knds of yeds dependng on the
nvestment scenaro and the characterstcs of the nvestment.
Yed To Maturty (YTM) s the most popuar measure of yed n the Debt Markets and s the percentage
rate of return pad on a bond, note or other xed ncome securty f you buy and hod the securty t
ts maturty date.
Current Yed s the coupon dvded by the Market Prce and gves a far approxmaton of the present
yed.Therefore, Current Yed = Coupon of the Securty(n %) x Face Vaue of the Securty (vz. 100 n
case of G-Secs.)/Market Prce of the Securty
Eg: Suppose the market prce for a 10.18% G-Sec 2012 s Rs.120. The current yed on the securty w
be (0.1018 x 100)/120 = 8.48%
The yed on the government securtes s nuenced by varous factors such as eve of money suppy
n the economy, naton, future nterest rate expectatons, borrowng program of the government &
the monetary pocy foowed by the government.
How s the Yed to Maturty computed?
The cacuaton for YTM s based on the coupon rate, ength of tme to maturty and market prce. It s
the Interna Rate of Return on the bond and can be determned by equatng the sum of the cash-ows
throughout the fe of the bond to zero. A crtca assumpton underyng the YTM s that the coupon
nterest pad over the fe of the bond s assumed to be renvested at the same rate.
The YTM s bascay obtaned through a tra and error method by determnng the vaue of the entre
range of cash-ows for the possbe range of YTMs so as to nd the one rate at whch the cash-ows
sum up to zero.
So, say, a G-Sec - 8.00% GOI Loan 2004 wth ony 2 cash ows remanng to maturty as under:
Maturty Date: 30th |anuary 2004
Interest Payment Dates: 30th |anuary, 30th |uy
and tradng currenty at Rs. 115 for 1 Unt, w have a YTM as foows:
Settement Date: 17th March 2003 (Date at whch ownershp s transferred to the Buyer)
Frequency of Interest Payments: 2
Day Count Conventon: 30/360 (whch n MS-EXCEL s taken as Bass 4)
Yed To Maturty: 4.8626%
The same can be computed from MS-EXCEL through the YIELD Formua by nput of the parameters
gven above. It can be checked by dscountng the sad cash-ows, .e., the two coupons of Rs. 8.00
each and the prncpa repayment of Rs.100/- from the nterest payment dates and maturty dates to
the date of settement.
How s the prce determned n the debt markets?
The prce of a bond n the markets s determned by the forces of demand and suppy, as s the case n
any market. The prce of a bond n the marketpace aso depends on a number of other factors and w
uctuate accordng to changes n
Economc condtons
Genera money market condtons ncudng the state of money suppy n the economy
Interest rates prevaent n the market and the rates of new ssues
Future Interest Rate Expectatons
Credt quaty of the ssuer
There s however, a theoretca underpnnng to the determnaton of the prce of the bond n the
market based on the measure of the yed of the securty.
How s Yed reated to the prce?
Yeds and Bond Prces are nversey reated. So a rse n prce w decrease the yed and a fa n the
bond prce w ncrease the yed.
There w be an mmedate and mosty predctabe ehect on the prces of bonds wth every change n
the eve of nterest rates.(The predctabty here however refers to the drecton of the prce change
rather than the quantum of the change)
When the prevang nterest rates n the market rse, the prces of outstandng bonds w fa to equate
the yed of oder bonds nto ne wth hgher-nterest new ssues. Ths w happen as there w be very
few takers for the ower coupon bonds resutng n a fa n ther prces. The prces woud fa to an
extent where the same yed s obtaned on the oder bonds as s avaabe for the newer bonds.
When the prevang nterest rates n the market fa, there s an opposte ehect. The prces of
outstandng bonds w rse, unt the yed of oder bonds s ow enough to match the ower nterest
rate on the new bond ssues.
These uctuatons ensure that the vaue of a bond w never be the same throughout the fe of the
bond and s key to be hgher or ower than ts orgna face vaue dependng on the market nterest
rate, the tme to maturty (or ca as the case may be) and the coupon rate on the bond.
Market Structure and Trading methodology in WDS
What s the concept of the broken perod nterest as regards the Debt Market?
The concept of the Broken perod nterest or the accrued nterest arses as nterest on bonds are
receved after certan xed ntervas of tme to the hoder who en|oys the ownershp of the securty at
that pont of tme. Therefore an nvestor who has sod a bond whch makes haf-yeary nterest
payments three months after the prevous nterest payment date woud not receve the nterest due to
hm for these three months from the ssuer. The nterest on these prevous three months woud be
receved by the buyer who has hed t for ony the next three months but receve nterest for the entre
sx month perods as he happens to be hodng the securty at the nterest payment date.
Therefore, n case of a transacton n bonds occurrng between two nterest payment dates, the buyer
woud pay nterest to the seer for the perod from the ast nterest payment date up to the date of the
transacton. The nterest thus cacuated woud ncude the prevous date of nterest payment but
woud not ncude the trade date.
What are the conventons foowed for the cacuaton of Accrued Interest?
The Day Count Conventon to be foowed for the cacuaton of Accrued Intetest n case of transactons
n G-Secs s 30/360. I.e. each month s to be taken as havng 30 days and each year s to be taken as
havng 360 days, rrespectve of the actua number of days n the month. So, months ke February,
March, |anuary, May, |uy, August, October and December are to be taken as havng 30 days.
What s the Cean Prce and the Drty Prce n reference to tradng n G-Secs?
G-Secs are traded on a cean prce (Trade prce) but setted on the drty prce (Trade prce + Accrued
Interest). Ths happens, as the coupon payments are not dscounted n the prce, as s the case n the
other non-govt. debt nstruments.
'o" are the (ace )alue* Trade )alue and the settle$ent !alue di#erent fro$ each other%
The Cumuatve face Vaue of the securtes n a transacton s the face Vaue of the Transacton and s
normay the dentabe feature of each transacton.Say, a transacton of Rs.5,00,000 worth of G-Secs
w comprse a trade of 5000 G-Secs of Rs.100 each.The Trade vaue s the cumuatve prce of the
traded G-Secs (.e. no. of securtes mutped by the prce)
Say, the G-Secs referred to above may be traded at Rs.102 each so that the Trade Vaue s Rs.5,10,000
(102 x 5000).
The Settement vaue w be the trade vaue pus the Accrued Interest.
The Accrued Interest per unt of the Bond s cacuated as
= Coupon of Bond x Face Vaue of the G-Sec. (100) x (No. of Days from Interest Payment Date to
Settement Date)/360
In computng the no. of days between the Interest Payment Date and the Settement Date of the trade,
ony one of the two days s to be ncuded.
'o" can in!estors in ndia hold +,Secs%
G-Secs can be hed n ether of the foowng forms:
Physca Securty (whch s mosty outdated & not used much)
SGL (Subsdary Genera Ledger) A/c wth the Pubc Debt Omce of the RBI. The SGL A/cs are
however restrcted ony to few enttes ke the Banks & Insttutons.
Consttuent SGL A/c wth Banks or PDs who hod the G-secs on behaf of the nvestors n ther
SGL-II A/cs of RBI, meant ony for cent hodngs.
Same Demat A/c as s used for equtes at the Depostores. NSDL & CDSL w hod them n
ther SGL-II A/cs of RBI, meant ony for cent hodngs.
What are the type of transactions "hich take place in the $arket%
The foowng two types of transactons take pace n the Indan markets:
Drect transactons between banks and other whoesae market partcpants whch account for
around 25% of the Whoesae Market voumes: Here the Banks and the Insttutons trade drecty
between themseves ether through the teephone or the NDS system of the RBI.
Broker ntermedated transactons, whch account for around 70-75% of the trades n the
market. These brokers need to be members of a Recognzed Stock Exchange for RBI to aow the
Banks, Prmary Deaers and Insttutons to undertake deangs through them.
What s the roe of the Exchanges n the WDS?
BSE and other Exchanges oher order-drven screen based tradng factes for Govt. securtes. The
tradng actvty on the systems s however restrcted wth most trades today beng put through n the
broker omces and reported to the Exchange through ther eectronc systems whch provde for
reportng of "Negotated Deas" and "Cross Deas".
BSE Wholesale Debt Structure(WDS)
When "as the BSE accorded regulatory per$ission for the WDS%
The Reserve Bank of Inda, vde t's crcuar DBOD.FSC.BC.No. 39 /24.76.002/2000 dated October 25,
2000 permtted the Banks and the Fnanca Insttutons n Inda to undertake transactons n debt
nstruments among themseves or wth non-bank cents through the members of Bombay Stock
Exchange Lmted (BSE). Ths notcaton paved the way for the Exchange to commence tradng n
Government Securtes and other xed ncome nstruments.
How s the settement carred out n the Whoesae Debt Market?
The settement for the varous trades s nay carred out through the SGL of the RBI except for
transfers between the hoders of Consttuent SGL A/cs n a partcuar Bank or Insttuton ke ntra-a/c
transfers of securtes hed at the Banks and CCIL.
As far as the Broker Intermedated transactons are concerned, the settement responsbty for the
trades n the Whoesae market s prmary on the cents .e. the market partcpants and the broker
has no roe to pay n the same. The member ony has to report the settement detas to the Exchange
for montorng purposes. The Exchange reports the trades to RBI reguary and montors the settement
of these trades.
What are the trading and reporting facilities o#ered by the BSE Wholesale Debt Seg$ent%
The BSE Whoesae Debt Segment ohers tradng and reportng factes through the GILT System, an
automatc on-ne tradng system, whch w over a perod of tme provde an emcent and reabe
tradng system for a the debt nstruments of dherent types and maturtes ncudng Centra and
State Govt. securtes, T-Bs, Insttutona bonds, PSU bonds, Commerca Paper, Certcates of
Depost, Corporate debt nstruments and the new nnovatve nstruments ke muncpa securtes,
securtzed debt, mortgage oans and STRIPs.
What are the three modues n the GILT system?
GILT permts tradng n the Whoesae Debt Market through the three foowng avenues:
Order Grabbng System - whch provdes for actve nteracton between the market partcpants
n keepng wth the negotated dea structure of the market.
Negotated Dea Modue - whch permts the reportng of trades undertaken by the market
partcpants through the members of the Exchange.
Cross Dea Modue - permttng reportng of trades undertaken by two dherent market
partcpants through a snge member of the Exchange.
What is the $e$bership criteria and charges for the $e$bership of the BSE Wholesale
Debt Seg$ent%
The membershp of the debt market segment s beng granted ony to the Exstng Members of the
Exchange. The members need to have a mnmum net worth of Rs.1.5 crores for admsson to
undertakng deangs on the debt segment. No securty depost s appcabe for the membershp of the
Debt Segment as n other Exchanges. The annua approva/renewa charges at present s Rs.25,000/-
What s the settement mode aowed n GILT?
The settements for a the trades executed on the GILT system are on a rong bass. Each order has a
unque settement date speced upfront at the tme of order entry and used as a matchng parameter.
The Exchange w aow settement perods rangng from T+0 to T+5
What are the aspects for settement of trades n G-secs n GILT?
The Settement for the securtes traded n the Debt Segment woud be on a Trade by Trade DVP bass.
The prmary responsbty of settng trades concuded n the whoesae segment rests drecty wth the
partcpants who woud sette the trades executed n the GILT system on ther behaf through the
Subsdary Ledger Account of the RBI. Each transacton s setted ndvduay and nettng of transacton
s not aowed. The Exchange woud montor the Cearng and Settement process for a the trades
executed or reported through the 'GILT' system. The Members need to report the settement detas to
the Exchange for a the trades undertaken by them on the GILT system.
Cororate Debt Market
What s the structure of the Corporate Debt Market n Inda?
The Indan Prmary market n Corporate Debt s bascay a prvate pacement market wth most of the
corporate bond ssues beng prvatey paced among the whoesae nvestors .e. the Banks, Fnanca
Insttutons, Mutua Funds, Large Corporates & other arge nvestors. The proporton of pubc ssues n
the tota quantum of debt capta ssued annuay has decreased n the ast few years. Around 92% of
the tota funds mobzed through corporate debt securtes n the Fnanca Year 2002 was through the
prvate pacement route.
The Secondary Market for Corporate Debt can be accessed through the eectronc order-matchng
patform ohered by the Exchanges. BSE ohers tradng n Corporate Debt Securtes through the
automatc BOLT system of the Exchange. The Debt Instruments ssued by Deveopment Fnanca
Insttutons, Pubc Sector Unts and the debentures and other debt securtes ssued by pubc mted
companes are sted n the 'F Group' at BSE.
What are the !arious kinds of debt instru$ents a!ailable in the Corporate Debt Market%
The foowng are some of the dherent types of corporate debt securtes ssued:
Non-Convertbe Debentures
Party-Convertbe Debentures/Fuy-Convertbe Debentures (convertbe n to Equty Shares)
Secured Premum Notes
Debentures wth Warrants
Deep Dscount Bonds
PSU Bonds/Tax-Free Bonds
'o" is the trading* clearing and settle$ent in Corporate Debt carried out at BSE%
The tradng n corporate debt securtes n the F Group are traded on the BOLT order-matchng system
based on prce-tme prorty. The trades n the 'F Group' at BSE are to be setted on a rong settement
bass wth a T+2 Cyce wth ehect from 1st Apr 2003. Tradng contnues from Monday to Frday durng
the week.
The Trade Guarantee Fund (TGF) of the Exchange covers a the trades n the 'F' Group undertaken on
the eectronc BOLT system of the Exchange.
BSE !etail Debt Segement (!EDS)
What are the securtes/nstruments traded n the Reta Debt Segment (REDS) at the Exchange?
The Reta tradng n Centra Government Securtes commenced on |anuary 16, 2003 through the BOLT
System of the Exchange. Centra Government Securtes (G-Secs.) are currenty sted at the Exchange
under the G Group. The Exchange may ntroduce, n due course of tme, reta tradng n other debt
securtes ke the foowng, sub|ect to the recept of reguatory approva for the same:
State Government Securtes
Treasury Bs
STRIPS
Interest Rate Dervatve products
Who are the participants in the Retail Debt Market%
The foowng are the man nvestor segments who coud partcpate n the Reta Debt Market:
Mutua Funds
Provdent Funds
Indvdua Investors
Penson Funds
Prvate Trusts
Regous Trusts and chartabe organzatons havng arge nvestbe corpus
State Leve and Dstrct Leve Co-operatve Banks
Housng Fnance Companes
NBFCs and RNBCs
Corporate Treasures
Hndu-Undvded Fames (HUFs)
What is the $e$bership criteria and procedure for the $e$bership of the BSE Retail Debt
Seg$ent (REDS)%
Eligibility Criteria for Me$bers- The Members of the Segment possessng a net-worth of Rs. 1 crore
and above are egbe to trade n the Reta Debt segment. The members are requred to submt
addtona contrbuton of Rs. 5 akhs as refundabe contrbuton towards the separate Trade Guarantee
Fund for ths Segment. Ths contrbuton of Rs.5 akhs towards the Trade Guarantee Fund coud be
submtted n terms of cash or FDR or Bank Guarantee. However, the Exchange has permtted the
Members to earmark Rs.5 akhs from ther addtona capta for a perod of one month or t such tme
separate contrbuton for TGF s provded by them, whchever s earer
'o" are the Retail Transactions in +,Secs. e/ecuted at the E/change%
Reta Tradng n Government Securtes takes pace by eectronc order matchng based on prce-tme
prorty through the BOLT (BSE OnLne Tradng) System of the Exchange wth the contnuous tradng
sessons from 9.55 a.m. to 3.30 p.m as s operatona n the Equtes Segment. The Reta Tradng n G-
secs s to be setted on a rong settement bass wth a T+2 Devery Cyce wth ehect from 1st Apr
2003.
What is the listing procedure for +,Secs. in respect of the Retail Debt Market%
Egbe Securtes: A outstandng and newy ssued centra government securtes are egbe
to be traded on the automated, anonymous , order drven system of the egbe stock exchange.
The Rues, Bye-Laws and Reguatons of the Exchange provde for tradng n Government
securtes as a G-secs are deemed to be admtted to deangs on the Exchange from the date on
whch they are ssued as per Bye-Law 22(a) and 22(b) of the Exchange.
Group: The Government securtes have been ntroduced as a new group of securtes - "G"
Group n the BOLT system. The G-secs are aotted a 6-dgt scrp code (n the 800000 seres) and
a 11 characters apha-numerc scrp ID.
The nterpretaton for the Scrp IDs of G-Secs. n BOLT s as under:
Frst 2 characters sgnfy Centra Government Securty - CG
Next 4 Dgts sgnfy the coupon or nterest rate of the G-Sec
Next 1 character s a dherentator whch woud be 'S' n case of a norma securty and 'A'
ncase there exsts another securty wth the same coupon and maturty year
Next 2 Dgts sgnfy the Issue Year and the ast 2 dgts sgnfy the Maturty Year
The date n the Scrp Name stands for the Maturty Date of the Securty.
The Exchange w mpement and montor the suspenson of tradng durng the shut down perod so
that no settements fa due n the no-devery perod whch s on the T-3, T-2 and T-1 days for
Government Securtes (where T s the nterest payment date for the securty).
What is the trading $ethodology in case of the Retail trading in +,Secs.%
Tradng Methodoogy: The G-Secs sha be traded on the system and setted at the same prce,
whch w be ncusve of the accrued nterest .e. the Drty Prce as per the market parance n the
Whoesae Debt Market. Ths s smar to the tradng on the cum-nterest prce as s wtnessed n
the case of corporate debentures. The mnmum order sze sha be 10 unts of G-Secs wth a face
vaue Rs.100/- each equvaent to an order vaue of Rs. 1000/- and the subsequent orders w be
n ots of 10 securtes each.
Tradng & Exposure Lmts: The members of the Reta Debt Segment are permtted gross
exposure n government securtes aong ther gross exposure n equty segment upto 15 tmes of
ther addtona capta deposted by them wth the Exchange. However, no gross exposure s
permtted to the members aganst ther Base Mnmum Capta + contrbuton of Rs.10 akhs
towards TGF n the cash segment. Transactons done by the members n ths segment aong wth
ther transactons n the equty segment woud form part of ther Intra-day Tradng Lmts and are
sub|ect to a mt of 33.33 tmes of the capta deposted wth the Exchange. However, nsttutona
busness woud not form part of these Intra-Day & Gross Exposure mts.
'o" does the Clearing 0 Settle$ent of the Retail +,Sec. transactions take place in REDS%
The Cearng and Settement mechansm for the Reta tradng n G-Secs s based on the exstng
nsttutona mechansm avaabe at the Stock Exchanges for the Equty Markets. The trades executed
throughout the contnuous tradng sessons w be netted out at the end of the tradng hours through a
process of mutatera nettng. The transactons w be netted out member-wse and then scrp-wse so
as to determne the net settement and payment obgatons of the members.
The Devery obgatons and the payment orders n respect of these members are generated by the
Cearng and Settement system of the Exchange. These statements ndcate the pay-n and pay-out
postons of the members for securtes and funds who woud then gve the necessary nstructons to
ther Cearng Banks and depostores.
Custoda conrmaton of the reta trades n G-Secs. by usng 6A-7A mechansm as avaabe n the
Equty segment s aso avaabe. The schedue of varous settement reated actvtes ke obgaton
downoad, custoda conrmaton, pay-n/pay-out of funds and securtes s smar to what s at present
appcabe n the equtes segment. As per an RBI Crcuar, the RBI reguated enttes are to sette ther
transactons n the Reta Debt Segment at the Exchange through a Custodan.
'o" are the security deli!ery shortages treated in the Retail Debt Seg$ent%
In the event of faure/shortage n devery of securtes, the Exchange woud cose-out such shortages
at the ZCYC vauaton for prces pus a 5% penaty factor whch woud be debted to the account of the
member who has faed to dever the securtes aganst hs sae obgaton. The buyer n the event of
non-devery of securtes by the seer woud be egbe to receve the compensaton/consderaton
whch woud be computed at the hgher of ether the hghest trade prce from the trade date to the
date of cose out or cosng prce of the securty n the norma market on the cose-out date pus
nterest cacuated at the rate of overnght FIMMDA-NSE MIBOR for the cose-out date. The dherence
between the amount debted to the seer and amount payabe to the buyer on the bass dscussed
above woud be credted to the Investor Protecton Fund of the Exchange.
The Exchange has aso set up a separate Trade Guarantee Fund (Settement Guarantee Fund ) for the
Reta Tradng n G-Secs. as was mandated by SEBI through ts crcuar.
'o" is the $argining structure at the E/change for the Retail Debt Market%
Margnng - Mark to Market : The postons n the Reta Debt segment are marked to market
unt settement and mark to market margn on net outstandng poston of the members s
coected on a open net postons. The mark to market margn s cacuated based on the prces
derved from the Zero Coupon Yed Curve (ZCYC). Ths margn s to be coected on the T+1 day
aong wth the margn on the outstandng postons n cash segment.
Margn exempton to Insttutona busness: Insttutona busness (.e., busness done by
members on behaf of Indan Fnanca Insttutons, Foregn Insttutona Investors, Schedued
Commerca Banks, Mutua Funds regstered wth SEBI) woud be exempted from margn, as s
appcabe n the case of transactons n the equty segment, as the nsttutons are requred under
the reevant reguatons to transact ony on the bass of gvng and takng devery. The members
woud, however, be requred to mark cent type 'FI' at the tme of order entry for avang of
exempton from payment of margns and aso excuson of such trades from Intra-day Tradng and
Gross Exposure Lmts. Custoda trades on behaf of Provdent Funds transactng through a SGL-II
account (Consttuent SGL a/c) woud aso be egbe for margn exempton.
Margn Exempton aganst devery: Margn exempton for eary pay-n of securtes n case of
sae transactons as appcabe for the equtes segment woud aso be avaabe for ths segment.
Investor Safeguards
What are the man ponts to be kept n mnd by the nvestor whe nvestng n the Debt Markets?
The man features whch you need to check for any debt securty s:
Coupon (or the dscount mped by the prce as n the case of zero coupon bonds) and the
frequency of nterest payments. The securtes can aso be chosen n such a manner so that the
nterest payments concde wth any requrements of funds at that pont of tme.
Tmng of Cash Fows - In case the nterest and redempton proceeds, at one snge pont or at
dherent ponts of tme, are panned to be used for meetng certan panned expenses n the
future.
Informaton about the Issuer and the Credt Ratng - It s essenta to obtan enough nformaton
about the background, the busness operatons, the nanca poston, the use of the funds beng
coected and the future pro|ectons to satsfy onesef of the sutabty of the nvestment. As per
the reguatons n force n the capta markets, t s essenta for any corporate debt securty to
obtan a credt ratng from any of the ma|or credt ratng agences. A proper anayss of the
background and the nancas of the ssuer of any non-govt. debt nstrument and especay the
credt ratng woud end greater safety to your nvestments
Other Terms of partcuar Issue - It s aso advsabe to check on certan terms of the ssue ke
the use of the ssue proceeds, the montorng agency, the formaton of trustees, the secured or
unsecured nature of the bonds, the assets underyng the securty and the credt-worthness of the
organzaton
Most of the sad nformaton can be avaabe from the prospectus of the sad ssue (In case of and
any requred and reevant detas can aso be obtaned on demand from the ead manager of the
ssue
Obtan a the reevant knowedge on the debt securty ke the coupon, maturty, nterest
payments, put and ca optons (f any), Yed To Maturty (at the partcuar prce at whch the trade
s ntended to be carred out) and the Duraton of the Instrument.
Check the Yed To Maturty (YTM) of the debt securty wth the YTMs of other comparabe debt
securtes of the same cass and features.
Remember that the Yed and the Prce are nversey reated. So, you w be abe to obtan a
hgher yed at a ower prce.
It s desrabe to check on the qudty of any corporate debt nstrument before nvestng n t
so as to ensure the avaabty of satsfactory ext optons.
The Debt Markets are suted for nvestors who seek decent returns over a onger tme horzon
wth perodc cash ows. There s aso a tax exempton for nterest earned on G-Secs. up to
Rs.3000/- under Secton 80L of the Income Tax Act.
The nvestor shoud be we aware of the set of rsks assocated wth the Debt Markets ke the defaut
rsk (non-recept or deay n recept of nterest or prncpa), prce rsk, nterest rate rsk (rsk of rates
movng adversey after nvestment), settement rsk (or rsk of non-devery of securtes and funds n
the secondary market) and the re-nvestment rsk (nterest payments fetchng a ower return when re-
nvested) .
Investors n the Debt Markets shoud foow a process of |udcous nvestng after a carefu study of the
economc and money market condton, varous nstruments avaabe for nvestment, the desred
returns and ts compatbty wth exstng nvestment opportuntes, aternatve modes avaabe for
nvestments and the reevant transacton costs.
What is the future scenario for the Retail Debt Market in ndia%
The Reta Debt Market s set to grow tremendousy n Inda wth the broadenng of the market
partcpaton and the avaabty of a wde range of debt securtes for reta tradng through the
Exchanges.
The foowng are the trends, whch w mpact the Reta Debt Market n Inda n the near future:
Expanson of the Reta Tradng patform to enabe tradng n a wde range of government and
non-government debt securtes.
Introducton of new nstruments ke STRIPS, G-Secs. wth ca and put optons, securtsed
paper etc.
Deveopment of the secondary market n Corporate Debt
Introducton of Interest Rate Dervatves based on a wde range of underyng n the Indan
Debt and Money Markets.
Deveopment of the Secondary Repo Markets.
The BSE vson for the Indan Debt Market foresees the markets growng n eaps and bounds n the
near future, soon attanng goba standards of safety, emcency and transparency. Ths w truy hep
the Indan capta markets to attan a pace of prde among the eadng capta markets of the word.