Government Bond Markets
Debt Markets Shagun Thukral, CFADebt MarketsMarket where fixed
income securities of various types and features are issued and
tradedCritical component of the financial systemOTC marketUS Bond
Market is more than $35 trillion in size with daily turnover
exceeding $800 BillionTotal world bond market in excess of $80
trillionIndian debt market is approx $200 Bn
Types of InstrumentsCentral Government Zero Coupon BondsCoupon
Bearing bonds/Dated securitiesTreasury BillsFRBsSTRIPSState
GovernmentCoupon Bearing BondsFRBsPublic Sector Debentures Fixed
and FloatingTaxable/Tax-free bonds and
debenturesCPsZCBs/DDBsGuaranteed Bonds Central or State Government
GuaranteedPrivate Sector Corporate, Banks. FIs
RegulatorsGovernment Securities and Money Markets Reserve Bank
of IndiaCorporate Debt - SEBIGovernment Securities MarketImportant
source of borrowing for the governmentBenchmark for pricing
corporate papers of varying maturitiesPre-requisite for development
of corporate bond marketUsed as a tool for managing fiscal and
monetary policiesOMOsSLRFiscal Deficit
Participants in Govt Sec MarketGovernments As issuers
(suppliers)Primary Dealer Market makers/intermediariesBanks captive
investors through SLRsMutual Funds launched gilt fundsInsurance Cos
Regulatory requirement to invest in GsecPFs and Pension FundsFIIs
within permissible limitsBrokers
Primary Market Annual borrowing amount announced in the
budgetBorrowing calendar released semi-annuallyUnderwriting PDs
/Underwriting commissionAuction Process on FridaysMultiple Price
MethodUniform Price MethodYield based auction for new
securitiesCompetitive and Non-competitive bidsDevolvement
-PDsWhen-Issued MarketSale Route at predetermined rates
(discontinued)Private Placement -
Govt Borrowing PlanAnnual Borrowing for 2012-13 as announced in
the Union Budget INR 5.69 lakh crores Gross and Net INR 4.7 lakh
croresFirst Half borrowing to be INR 3.7 lakh crores (gross) and
INR 2.85 lakh crores netActual borrowing v/s budgeted
borrowingSecondary MarketWholesale segmentActive market through SGL
or CSGL with PDO-RBILot size of 5 CrsNDS-OMBroker/PDSettlement on
NDS by RBI/CCILT+1 DVP IIIReporting on NSE/CCILRetail
segmentSGL/physical form/dematLess than 1 CrSettled directlyBroker
marketNo reporting
Fiscal cliff12State Government BondsAlso known as State
Development Loans (SDLs)Issued through Auction processOnly 10 yr
issuances in primary marketQualify for SLR but not for repoTrade at
slightly higher levels than central government bonds but lower than
corporate bondsSimilar Secondary Market operations
Corporate Debt MarketDominated by the PSU bonds
segmentPFCRECPGCIRFCPrimary Market issuances through public issue
or private placementMainly comprises of bonds and debenturesMutual
funds, Insurance companies, BanksMostly issuances are up to 10 year
maturity- max 15 yearsMost securities held in demat formSecondary
Market Securities traded on the WDM segment of NSE/BSE or
OTCSettlement through custodians on T+0 or T+1 or T+2 basis through
DVP IReporting of Trades on FIMMDA F-TracSettlement on NSE/BSE
platforms NSCCL not guaranteedLetter of Allotment (LoA) issued
initially and then securities recd
Factors inhibiting the growth of Private Corporate Debt
MarketNarrow issuer and investor basePrimary issuance through
private placementLack of transparencyAbsence of a benchmark
rateAbsence of Market MakingDull secondary market Accessible only
to high rated borrowersFII investment is limitedDifferential stamp
duties levied by different states inhibiting the growth of primary
market
Innovative Debt InstrumentsFloating rate bondsZero coupon
bondsDeep discount bondsFully Convertible Debentures with Interest
(optional)Perpetual BondsSecuritised paperABSMBSPTCCDOSRs issued by
Asset Reconstruction companiesInverse Float BondsStructured
SecuritiesSecurities backed by a pool of loans or receivablesAsset
Backed Security (ABS) is a security created from a portfolio of
other underlying assets like:LoansBondsCredit card
receivablesMortgagesAuto LoansAssets are classified and clubbed
according to the credit quality of a borrower and sold to
investorsDone through creation of a SPV or trustBank receives a
servicing/origination feeCredit risk passed on to the
investorStructure of ABS/MBSCash flows of similar assets are pooled
togetherAllocated into tranches based on credit riskTranches
receive returns in order of their seniority and payment
waterfallSenior most tranches would have the lowest returns and
bear the lowest losses. Normally rated AAAMezzanine tranches rank
lower than senior tranches with the equity tranche ranked lowest
and receiving the highest returnsIn case of defaults, equity
tranche is affected first and if defaults are high,
Structure of ABSAsset 1
Asset 2
Asset 3-----Asset NTotal = $ 100 MnSPVSenior
TranchePrincipal-75%Return 6%Mezzanine TranchePrincipal -20%Return
10%Equity TranchePrincipal - 5%Return 30%Waterfall
MechanismOptions, Futures, and Other Derivatives 8th Edition,
Copyright John C. Hull 201221Equity TrancheSenior TrancheMezzanine
TrancheAsset Cash FlowsCollateralized Debt Obligation (CDO)A kind
of ABS in which the underlying are bonds with a larger number of
tranchesSimilar to ABS in terms of risk-return and rating of
tranchesThe originator acquires a portfolio of bonds and splits
into tranches passes it on to a SPV for a profitABS CDOs are
created by clubbing tranches of existing ABS
ABS- CDOsAssetsSenior Tranche (80%)AAAMezzanine Tranche
(15%)BBBEquity Tranche (5%)Not RatedSenior Tranche
(65%)AAAMezzanine Tranche (25%) BBBEquity Tranche (10%)The
mezzanine tranche is repackaged with other mezzanine tranchesLosses
to AAA rated ABS CDOsLosses on Subprime portfoliosLosses on
Mezzanine Tranche of ABSLosses on Equity Tranche of ABS CDOLosses
on Mezzanine Tranche of ABS CDOLosses on Senior Tranche of ABS
CDO10%33.3%100%93.3%0%13%53.3%100%100%28.2%17%80.0%100%100%69.2%20%100%100%100%100%
