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Module II: Global Financial Ecosystem

Worlds major Financial Markets for Equity

World-Stock-Exchanges.net features a list of world stock exchanges, securities commissions and other regulatoryagencies, as well as stock market resources.

Top 5 Stock ExchangesNew York Stock Exchange (NYSE) - Headquartered in New York City. Market Capitalization (2011, USD Billions)14,242; Trade Value (2011, USD Billions)20,161.

The largest stock exchange in the world by both market capitalization and trade value. NYSE is the premier listingvenue for the worlds leading large- and medium-sized companies. Operated by NYSE Euronext, the holdingcompany created by the combination of NYSE Group, Inc. and Euronext N.V., NYSE offers a broad and growinarray of financial products and services in cash equities, futures, options, exchange-traded products (ETPs), bonds,market data, and commercial technology solutions. Featuring more than 8000 listed issues it includes 90% of theDow Jones Industrial Average and 82% of the S&P 500 stock market indexes volume.

NASDAQ OMX - Headquartered in New York City. Market Capitalization (2011, USD Billions) - 4,687; TradeValue (2011, USD Billions)13,552.

Second largest stock exchange in the world by market capitalization and trade value. The exchange is owned byNASDAQ OMX Group which also owns and operates 24 markets, 3 clearinghouses and 5 central securitiesdepositories supporting equities, options, fixed invome, derivatives, commodities, futures and structured products. Itis a home to approximately 3,400 listed companies and its main index is the NASDAQ Composite, which has been

published since its inception. Stock market is also followed by S&P 500 index.

Tokyo Stock Exchange - Headquartered in Tokyo. Market Capitalization (2011, USD Billions)3,325; Trade Value(2011, USD Billions)3,972.

Third largest stock exchange market in the world by aggregate market capitalization of its listed companies. It had2,292 companies which are separated into the First Section for large companies, the Second Section for mid-sizedcompanies, and the Mothers section for high growth startup companies. The main indices tracking Tokyo StockExchange are the Nikkei 225 index of companies selected by the Nihon Keizai Shimbun, the TOPIX index based onthe share prices of First Section companies, and the J30 index of large industrial companies. 94 domestic and 10foreign securities companies participate in TSE trading. The London Stock Exchange and the Tokyo StockExchange are developing jointly traded products and share technology.

London Stock Exchange - Headquartered in London. Market Capitalization (2011, USD Billions)3,266; TradeValue (2011, USD Billions)2,871.

Located in London City, it is the oldest and fourth-largest stock exchange in the world. The Exchange was foundedin 1801 and its current premises are situated in Paternoster Square close to St Pauls Cathedral. It is the most

international of all the worlds stock exchanges, with around 3,000 companies from over 70 countries admitted totrading on its markets. The London Stock Exchange runs several markets for listing, giving an opportunity fordifferent sized companies to list. For the biggest companies exists the Premium Listed Main Market, while in termsof smaller SMEs the Stock Exchange operates the Alternative Investment Market and for international companies

that fall outside the EU, it operates the Depository Receipt scheme as a way of listing and raising capital.

Shanghai Stock Exchange - Headquartered in Shanghai. Market Capitalization (2011, USD Billions)2,357; Trade

Value (2011, USD Billions)3,658.

It is the worlds 5th largest stock market by market capitalization and one of the two stock exchanges operating

independently in the Peoples Republic of China. Unlike the Hong Kong Stock Exchange, the SSE is not entirelyopen to foreign investors. The main reason is tight capital account controls by Chinese authorities. The securitieslisted at the SSE include the three main categories of stocks, bonds, and funds. Bonds traded on SSE includetreasury bonds, corporate bonds, and convertible corporate bonds. The largest company in SSE is PetroChina(market value3,656.20 billion).

Worlds major Financial Markets for Debt

http://en.wikipedia.org/wiki/Bond_market

Foreign Exchange

http://en.wikipedia.org/wiki/Foreign_exchange_market

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Commodities

Definition of 'Commodity Market'

A physical or virtual marketplace for buying, selling and trading raw or primary products. For investors' purposesthere are currently about 50 major commodity markets worldwide that facilitate investment trade in nearly 100primary commodities.

Commodities are split into two types: hard and soft commodities. Hard commodities are typically natural resourcesthat must be mined or extracted (gold, rubber, oil, etc.), whereas soft commodities are agricultural products or

livestock (corn, wheat, coffee, sugar, soybeans, pork, etc.)

There are numerous ways to invest in commodities. An investor can purchase stock in corporations whose businessrelies on commodities prices, or purchase mutual funds, index funds or exchange-traded funds (ETFs) that have afocus on commodities-related companies. The most direct way of investing in commodities is by buying into afutures contract.

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International lending institutions World Bank

Introduction World Bank: The World Bank Group is one of the worlds largest sources of funding and knowledge

for developing countries.

The World Bank is a lending institution that funds essential infrastructural requirement,globally. World Bank as an institution that was designed for investment as well as providing

loans.

Functions: Provide funds for development projects Provide policy advice and technical assistance Promote investment in developing countries Extend grants for project preparation and institutional building Assistance to developing and transition countries Promote the economic development of

the world's poorer countries Finance the poorest developing countries whose per capitaGNP is less than $865 a year special financial assistance through the InternationalDevelopment Association (IDA)

The Bank Group uses financial resources and extensive experience to help poor nationsreduce poverty, increase economic growth, and improve the quality of life.

World Bank provides technical and financial assistance to underdeveloped nations fordevelopment schemes like building roads, schools, hospitals, etc. The main aim is toeliminate poverty from the world.

The World Bank collaborates with numerous other partners and multilateralorganizations, including the World Health Organization (WHO) and the Food andAgriculture Organization (FAO), to realize the most far-reaching results possible.

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Sources: Official Sources

Other Development Banks Governments

Export Credit Institutions Investment Banks Private Sector Investors Financial resources are acquired by borrowing on the international bond market. It issues bonds to raise money and then passes on the low interest rates to its borrowers. It is made up of 185 member countries. These countries are jointly responsible for how

the institution is financed and how its money is spent.

Groups Of World Bank: International Bank for Reconstruction and Development (IBRD) International Development Association (IDA) International Finance Corporation (IFC) Multilateral Investment Guarantee Agency (MIGA) International Centre for Settlement of Investment Disputes (ICSID)

IMF

The International Monetary Fund (IMF) is an organization of 188 countries, working to foster global monetarycooperation, secure financial stability, facilitate international trade, promote high employment and sustainableeconomic growth, and reduce poverty around the world.

With its near-global membership of 188 countries, the IMF is uniquely placed to help member governments takeadvantage of the opportunitiesand manage the challengesposed by globalization and economic developmentmore generally. The IMF tracks global economic trends and performance, alerts its member countries when it seesproblems on the horizon, provides a forum for policy dialogue, and passes on know-how to governments on how to

tackle economic difficulties.

The IMF provides policy advice and financing to members in economic difficulties and also works with developingnations to help them achieve macroeconomic stability and reduce poverty.

Marked by massive movements of capital and abrupt shifts in comparative advantage, globalization affectscountries' policy choices in many areas, including labor, trade, and tax policies. Helping a country benefit fromglobalization while avoiding potential downsides is an important task for the IMF. The global economic crisis hashighlighted just how interconnected countries have become in todays world economy.

Key IMF activities

The IMF supports its membership by providingpolicy advice to governments and central banks based on analysis of

economic trends and cross-country experiences; research, statistics, forecasts, and analysis based on tracking ofglobal, regional, and individual economies and markets; loans to help countries overcome economic difficulties;concessional loans to help fight poverty in developing countries; andtechnical assistance and training to helpcountries improve the management of their economies.

Original aims

The IMF was founded more than 60 years ago toward the end of World War II (see History). The founders aimed tobuild a framework for economic cooperation that would avoid a repetition of the disastrous economic policies thathad contributed to the Great Depression of the 1930s and the global conflict that followed.

Since then the world has changed dramatically, bringing extensive prosperity and lifting millions out of poverty,especially in Asia. In many ways the IMF's main purposeto provide the global public good of financial stabilityis the same today as it was when the organization was established. More specifically, the IMF continues toprovide a forum for cooperation on international monetary problems

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facilitate the growth of international trade, thus promoting job creation, economic growth, and poverty reduction;promote exchange rate stability and an open system of international payments; andlend countries foreign exchange when needed, on a temporary basis and under adequate safeguards, to help themaddress balance of payments problems.

An adapting IMF

The IMF has evolved along with the global economy throughout its 65-year history, allowing the organization toretain its central role within the international financial architecture

As the world economy struggles to restore growth and jobs after the worst crisis since the Great Depression, the IMFhas emerged as a very different institution. During the crisis, it mobilized on many fronts to support its membercountries. It increased its lending, used its cross-country experience to advise on policy solutions, supported globalpolicy coordination, and reformed the way it makes decisions. The result is an institution that is more in tune withthe needs of its 188 member countries.Stepping up crisis lending. The IMF responded quickly to the global economic crisis, with lending commitmentsreaching a record level of more than US$250 billion in 2010. This figure includes a sharp increase in concessionallending (thats to say, subsidized lending at rates below those being charged by the market) to the worlds poorest

nations.Greater lending flexibility. The IMF has overhauled its lending framework to make it better suited to countriesindividual needs. It is also working with other regional institutions to create a broader financial safety net, whichcould help prevent new crises.Providing analysis and advice. The IMFs monitoring, forecasts, and policy advice, informed by a global perspectiveand by experience from previous crises, have been in high demand and have been used by the G-20.

Drawing lessons from the crisis. The IMF is contributing to the ongoing effort to draw lessons from the crisis forpolicy, regulation, and reform of the global financial architecture.Historic reform of governance.The IMFs member countries also agreed to a significant increase in the voice of

dynamic emerging and developing economies in the decision making of the institution, while preserving the voice ofthe low-income members.For brief History of IMF:http://www.imf.org/external/about/history.htmALSO PPT

ADB

The Asian Development Bank (ADB) is a regional development bank established on 22 August 1966 to facilitateeconomic development of countries in Asia. The bank admits the members of the United Nations Economic andSocial Commission for Asia and the Pacific (UNESCAP, formerly known as the United Nations EconomicCommission for Asia and the Far East) and non-regional developed countries. From 31 members at itsestablishment, ADB now has 67 members - of which 48 are from within Asia and the Pacific and 19 outside. ADB

was modeled closely on the World Bank, and has a similar weighted voting system where votes are distributed inproportion with member's capital subscriptions. At present, both the United States and Japan hold 552,210 shares,the largest proportion of shares at 12.756% each. China holds 228,000 shares (6.429%), India holds 224,010 shares(6.317%), the 2nd and 3rd largest proportion of shares respectively.http://en.wikipedia.org/wiki/Asian_Development_Bank

EBRD

Founded in 1991, the European Bank for Reconstruction and Development (EBRD) uses the tools of investment tohelp build market economies and democracies in 30 countries from central Europe to central Asia. Its mission was tosupport the formerly communist countries in the process of establishing their private sectors. By the seventhmeeting, representatives of 40 nations and two European institutions had reached agreement on the bank's charter,its initial size,and the distribution of power among shareholders.[2]

Headquartered in London, the EBRD is now owned by 63 countries and two intergovernmental institutions. Despiteits public sector shareholders, it invests mainly in private enterprises, usually together with commercial partners.

EBRD provides project financing for banks, industries and businesses, both new ventures and investments inexisting companies. It also works with publicly owned companies to support privatization, restructuring state-ownedfirms and improvement of municipal services.

European Bank for Reconstruction and Development member statesMembers, only financingMembers, recipients of investments

The EBRDs mandate stipulates that it must only work in countries that are committed to democratic principles. TheEBRD is directed by its founding agreement to promote, in the full range of its activities, environmentally sound andsustainable development.

http://www.imf.org/external/about/history.htmhttp://www.imf.org/external/about/history.htmhttp://www.imf.org/external/about/history.htmhttp://www.imf.org/external/about/history.htm

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The following countries are members and recipients of investments:[3] Albania, Armenia, Azerbaijan, Belarus,Bosnia and Herzegovina, Bulgaria, Croatia, Estonia, Georgia, Hungary, Jordan, Kazakhstan, Kyrgyzstan, Latvia,Liechtenstein, Lithuania, Macedonia, Moldova, Mongolia, Montenegro, Poland, Romania, Russia, Serbia, Slovakia,Slovenia, Tajikistan, Tunisia, Turkmenistan, Ukraine and Uzbekistan. The Republic of Kosovo is set to join as arecipient member on 17 December 2012.[4]

The following countries are financing members only: Australia, Austria, Belgium, Canada, Cyprus, Czech Republic(receiving member until 2007-12-31[5]), Denmark, Egypt, Finland, France, Germany, Greece, Iceland, Ireland,Israel, Italy, Japan, Luxembourg, Malta, Mexico, Morocco, Netherlands, New Zealand, Norway, Portugal, SouthKorea, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States of America.

Two European Union institutions are also financing members: the European Community and the EuropeanInvestment Bank.

In 2006 the organization stated that it would cease spending in the Baltic and central European nations by 2010, andfunding would be shifted to Russia, Ukraine, Armenia, Kazakhstan and Uzbekistan.[6] Due to the financial crisisthis graduation process was postponed till 2015.[7] Among the former communist countries only the CzechRepublic has graduated within EBRD so far (this happened in 2007) and gained the status of the only ex-communistcountry that is a shareholder within EBRD and not a borrower any more.[8]

The EBRD is not to be confused with the European Investment Bank (EIB) which is owned by the EU memberstates and supports EU policyhttp://en.wikipedia.org/wiki/European_Bank_for_Reconstruction_and_Development

Financing global trade

Trade finance is related to international trade.

While a seller (the exporter) can require the purchaser (an importer) to prepay for goods shipped, the purchaser(importer) may wish to reduce risk by requiring the seller to document the goods that have been shipped. Banks mayassist by providing various forms of support. For example, the importer's bank may provide a letter of credit to theexporter (or the exporter's bank) providing for payment upon presentation of certain documents, such as a bill oflading. The exporter's bank may make a loan (by advancing funds) to the exporter on the basis of the exportcontract.

Other forms of trade finance can include Documentary collection, trade credit insurance, export factoring, and

forfaiting. Some forms are specifically designed to supplement traditional financing. [1] In many countries, tradefinance is often supported by quasi-government entities known as export credit agencies that work with commercialbanks and other financial institutions.

Since secure trade finance depends on verifiable and secure tracking of physical risks and events in the chainbetween exporter and importer,the advent of new methodologies in the information systems world has allowed thedevelopment of risk mitigation models which have developed into new advanced finance models.[citation needed]This allows very low risk payment advances to exporters to be made,while preserving the importers normal paymentcredit terms and without burdening the importers balance sheet.[citation needed] As the world progresses towardsmore flexible, growth oriented funding sources post the global banking crisis,the demand for these newmethodologies has increased dramatically amongst exporters,importers and banks.[citation needed]

Trade finance refers to financing international trading transactions. In this financing arrangement, the bank or other

institution of the importer provides for paying for goods imported on behalf of the importer.

Buyers credit

A financial arrangement in which a bank or financial institution, or an export credit agency in the exporting country,extends a loan directly to a foreign buyer or to a bank in the importing country to pay for the purchase of goods andservices from the exporting country. Also known as financial credit. This term does not refer to credit extendeddirectly from the buyer to the seller (for example, through advance payment for goods and services).

The Practicla example is that foreign Bank makes payment to exporter based on either Letter of Undertaking fromthe Importer bank or based on their risk on Importer. Letter of Undertaking is simply confirmation by a bank here inimporter country to pay to exporter bank thus exporter bank risk get reduced. The Letter of undertaking is issued byImporter bank on the basis of risk on Importer.

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Simply, Importer Bank takes risk on Importer , This bank sends LOU to exporter bank which in turn takes risk onImporter bank and makes payment. On fimal day Importer bank recover money from importer and makes paymentto exporter bank.

This all exercise is done to exploit existance of interest rate arbitrage

Buyer's credit is the credit availed by an importer (buyer) from overseas lenders, i.e. banks and financial institutionsfor payment of his imports on due date. The overseas banks usually lend the importer (buyer) based on the letter ofcomfort (a bank guarantee) issued by the importers bank. Importer's bank or Buyers Credit Consultant or importerarranges buyer's credit from international branches of a domestic bank or international banks in foreign countries.For this service, importer's bank or buyer's credit consultant charges a fee called an arrangement fee.

Buyer's credit helps local importers gain access to cheaper foreign funds close to LIBOR rates as against localsources of funding which are costly compared to LIBOR rates.

The duration of buyer's credit may vary from country to country, as per the local regulations. For example in India,buyer's credit can be availed for one year in case the import is for trade-able goods and for three years if the importis for capital goods. Every six months, the interest on buyer's credit may get reset.Contents [hide]

Benefits to importer

The exporter gets paid on due date; whereas importer gets extended date for making an import payment as per thecash flowsThe importer can deal with exporter on sight basis, negotiate a better discount and use the buyers credit route toavail financing.The funding currency can be in any FCY (USD, GBP, EURO, JPY etc.) depending on the choice of the customer.The importer can use this financing for any form of trade viz. open account, collections, or LCs.The currency of imports can be different from the funding currency, which enables importers to take a favourableview of a particular currency.

Steps involved

The customer will import the goods either under LC, collections or open accountThe customer requests the Buyer's Credit Arranger before the due date of the bill to avail buyers credit financingArrange to request overseas bank branches to provide a buyer's credit offer letter in the name of the importer. Bestrate of interest is quoted to the importerOverseas bank to fund Importer's bank Nostro account for the required amountImporter's bank to make import bill payment by utilizing the amount credited (if the borrowing currency is differentfrom the currency of Imports then a cross currency contract is utilized to effect the import payment)Importer's bank will recover the required amount from the importer and remit the same to overseas bank on due

date. It helps importer in working capital management.

Cost involved

Interest cost: is charged by overseas bank as a financing costLetter of Comfort / Undertaking: Your existing bank would charge this cost for issuing letter of comfort /UndertakingForward Booking Cost / Hedging costArrangement fee: Charged by person who is arranging buyer's credit for buyer.Risk premium: Depending on the risk perceived on the transaction.Other charges: A2 payment on maturity, For 15CA and 15CB on maturity, Intermediary bank charges.WHT (Withholding tax): The customer may have to pay WHT on the interest amount remitted overseas to the localtax authorities depending on local tax regulations. In case of India, the WHT is not applicable where Indian banksarrange for buyer's credit through their offshore offices.

Supplier credit

A financing arrangement under which an exporter extends credit to a foreign importer to finance his purchase.Usually the importer pays a portion of the contract value in cash and issues a Promissory note or accepts a draft asevidence of his obligation to pay the balance over a period of time. The exporter thus accepts a deferred paymentfrom the importer, and may be able to obtain cash payment by discounting or selling the draft or promissory notescreated with his bank. Compare with Buyers credit.

Role of credit-rating agencies

I. The Role Of Credit RatingsA. Reducing information asymmetry

2.One way to describe the role of credit ratings is in terms of how information, or the lack of it, affects the actions of

participants in financial markets. In short, credit ratings can help reduce the knowledge gap, or "informationasymmetry," between borrowers (issuers) and lenders (investors). The essential subject matter of this information

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asymmetry is a borrower's creditworthiness. A borrower knows its own creditworthiness better than a lender does.And because creditworthiness is not a directly observable attribute, a lender generally has to estimate it fromattributes that are observable, using various approaches. One is to perform its own analysis; another is to use creditratings from independent rating agencies; and another is to use information and analysis provided by third parties orother analysts. Using multiple approaches will likely permit a lender to be more confident about its conclusions,especially if the approaches lead to the same result.

3.1. Creampuffs and lemons. The concept of asymmetric information is well established in economic theory. Profs.George Akerlof,Michael Spence, and Joseph Stiglitz shared the 2001 Nobel Prize in Economics for their work on markets with

asymmetric information. Akerlof explained the concept using the highly illustrative example of the used-car market(Akerlof, 1970), which we paraphrase here.

4. Posit that every car is either good (a "creampuff") or bad (a "lemon"). The buyer of a new car doesn't know beforehis purchase whether the car is a creampuff or a lemon. Rather, he gains that knowledge after owning the car for asufficient period of time (say, a year).

5. Now suppose that the owner of a creampuff wants to sell his car, and that a used creampuff is really worth$10,000, while a used lemon is worth only $2,000. The owner knows that his car is a creampuff, but potential buyersdo not. As such, potential buyers, concerned that the car could be a lemon, will be unwilling to pay $10,000 for it. Ifthere is a chance that the car could be either a creampuff or a lemon, buyers might be willing to pay some pricebetween $2,000 and $10,000. However, buyers will also figure out that sellers will be reluctant to sell creampuffs ifthey can't realize what the cars are worth, which means that most or all of the used cars offered for sale will belemons. Accordingly, buyers will likely refuse to pay more than $2,000 for a used car. Thus, the seller of a used

creampuff would likely be unable to get a buyer to pay the fair price. The whole problem boils down to informationasymmetry between the seller and the buyer: The seller knows whether the car is a lemon or a creampuff, while thebuyer lacks that knowledge.

6. One commentator (Tuch, 2010) concisely summarized the "lemons" problem, as follows:

7. "Unable to distinguish between high-quality products and low-quality products ('lemons'), buyers will offer thesame (discounted) price for both. High-quality products will not be offered for sale, effectively being driven out ofthe market by lemons. The market may even collapse."

8. A simple theoretical application of the lemons principle in credit markets might go as follows: Lenders, in the roleof potential used-car buyers, would be unable to distinguish high-risk borrowers (lemons) from low-risk borrowers(creampuffs). Therefore, a lender would charge all borrowers the same rate of interest: the one necessary to cover

the risk of lending to a high-risk borrower. Just like the seller of a creampuff could expect to sell his car only for theprice of a lemon, a low-risk borrower would have to pay the same interest rate as a high-risk one. In such a situation,the volume of borrowing by low-risk borrowers would suffer, and lenders would misallocate productive resourcesaway from low-risk borrowers. This suggests that economic output would be suboptimal.

9.2. Credit ratings help close the information gap. In the real world, of course, this problem is one of gradations,rather thanabsolutes. A real-world lender has some ability to distinguish between high-risk and low-risk borrowers, but thatability is imperfect. Although the lender may be able to correctly characterize potential borrowers most of the time,it will inevitably mischaracterize some. In addition, borrowers' riskiness spans a continuum; there are not merelytwo categories. Although a lender can adjust the interest rates it charges based on its assessments of borrowers'riskiness, these adjustments may be suboptimal because the assessments may be imprecise or inaccurate.

10. Enter credit ratings. By combining credit ratings with its own analysis, a lender can potentially better distinguishamong borrowers of different creditworthiness. By using ratings as an independent, unbiased "second opinion," thelender may be able to more accurately map the interest rates it charges to the true riskiness of the borrowers. Theoverall result should be a superior allocation of limited capital to productive uses.

11. Interestingly, in his 1970 article, Akerlof used credit markets as an example of the lemon principle in operation,with a focus on credit markets in less-developed countries. Akerlof concluded the article by noting that marketsdevelop responses to "counteract the effects of uncertainty." He identifies four types of responses: guarantees,brand-name goods, chains (such as restaurant and hotel chains), and licensing of service providers, such as doctors,lawyers, and barbers.

12. More recently, other scholars have highlighted the role of credit ratings in reducing information asymmetry. Forexample, researchers at the Bank of England recently stated:

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13. "Rating agencies originally emerged to assist dispersed investors in monitoring issuers in the debt capitalmarkets. By assigning an objective measure of credit quality to debt issues, based on independent analysis of issuer-supplied financial information, CRAs can help to reduce information asymmetries between investors and borrowers.This can widen market participation and contribute to deeper, more liquid markets." (Deb et al., 2011, p. 3)

14. Likewise, a noted legal scholar described the credit rating agencies' activities in terms of informationasymmetry, as follows:

15. "The debt-rating agency is in this sense a solution to the classic 'market for lemons' problem. In principle, giventhe prospect of fraud and default, an issuer will be forced to pay the interest rate applicable to the average quality

issuer unless it can credibly signal its superior credit to the market. Such a market and inefficient average costpricing typically arise when the individual competitor cannot credibly distinguish its product from the herd ofsimilar products." (Coffee, 2006, p. 309, n. 20)

16. Over the years, various other commentatorsmostly from academic or policy orientationshave observed thatthe role of credit ratings is to address information asymmetry in credit markets. Examples include Partnoy (1999),White (2001), Schwarcz (2002), Carron et al. (2003), Bank for International Settlements (2005), Fulghieri et al.(2010), Opp et al. (2011), Rousseau (2011), and Kiff et al. (2012). However, most of them simply make the point inpassing and do not pursue it to any depth, and some reach conclusions or policy recommendations that appear toimply a different type of role entirely. For the most part, they focus greater at tention on the mechanics of how creditrating agencies operate day-to-day than on the actual role of credit ratings in the decision-making processes ofinvestors and issuers.B. Improving market function and efficiency

17. Another way to describe the role of credit ratings is in terms of "market efficiency." This description focuses onhow credit ratings contribute to the operation of markets, rather than on how they affect specific market participantsin specific transactions. Essentially, credit ratings reduce the ability of one investor to outperform another by makingbetter judgments about creditworthiness. In this view, ratings act as an equalizer in the fixed-income capital markets,helping to put investors on more equal footing. Various commentators, including Schwarcz (2002), Carron et al.(2003), Opp (2011), Deb et al. (2011), and Rousseau (2011), have recognized credit ratings' efficiency-enhancingrole. Ultimately, though, the "market efficiency" description and the "asymmetric information" description amountto the same thing. The mechanism through which credit ratings improve market efficiency is by reducinginformation asymmetries.C. How credit ratings fulfill their role

18. Credit ratings fulfill their role in the markets in several ways. The most obvious is by serving as an unbiased,independent "second opinion" that an investor can use to confirm or refute his or her own analysis. Beyond that

ideal case, however, credit ratings may also mitigate information asymmetry in some less obvious ways.

19. For example, some institutional investors include credit ratings in their investment policies for fixed-incomeinvestments. Such an investment policy does not delve into the nuances of different kinds of bonds, but rather usescredit ratings as screens to disqualify securities that exceed a maximum threshold of credit risk. In such cases, thecredit rating is a necessarybut not, in itself, sufficientcondition for investing in a given security. The investor isusing credit ratings to screen securities before conducting its own analysis and before examining research andanalysis from other outside sources. In such a case, credit ratings mitigate information asymmetry in two ways. First,by providing the screen that helps the institution to apply its analytical resources most effectively, and second, bysupplying an unbiased, independent "second opinion" of the security's creditworthiness.

20. In many cases, when an issuer obtains a credit rating on its own securities, it is trying to send investors a signalabout its creditworthiness. In the context of the used-car example, the issuer wants to signal that it is not a "lemon."

By reducing uncertainty about its creditworthiness, an issuer may achieve lower costs of borrowing than it wouldotherwise have.D. Implications of the role, and how regulatory use of credit ratings can distort it

21. Rating agencies' role in the market is significant, but it is also specialized and somewhat limited. The main flowof information in the capital markets is from issuers to investors. A secondary flow of information comes fromexchanges, data vendors, and trading desks in the form of prices and trading flows. Rating agencies provide a thirdsource of additional information consisting of independent credit opinions. Credit ratings can contribute to aninvestor's decision-making process, but they are not a substitute for the investor's own analysis or for informationfrom other sources.

22. Some market participants, however, perceive a larger role for credit ratings, in the form of promoting financialstability or preventing asset bubbles and financial crises. They assert that credit ratings can cause or exacerbate abubble or a crisis. Examples include Arezki et al. (2011), Coffee (2010), Deb et al. (2011), He et al. (2011), and Kiffet al. (2012). White (2009) and others have argued that decades of regulatory use elevated credit ratings to a point of

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amplified significance, giving them the "force of law." That point, however, ignores or misconstrues the true role ofcredit ratings, focusing rather on distortions of their role that regulatory or other unintended uses have caused.

23. The regulatory use of credit ratings (and certain practices described in Part IV) can produce unintended effects.These can include distorting the decision-making processes of market participants and causing them to deemphasizeor misunderstand the information that ratings actually provide. Such distortions, in turn, can contribute to orexacerbate an asset bubble or a financial crisis.

24. The regulatory use of private-sector gatekeepersincluding rating agenciesrests on the notion that usinggatekeepers helps to reduce improper behavior among the market's primary participants (issuers and investors). This

assumption, in turn, relies on the premise that a gatekeeper actually can influence the behavior of an issuer'smanagement (Tuch, 2010). Only when regulatory use distorts and amplifies a gatekeeper's role does its influencestart to overshadow the other motivations and considerations of the primary market participants.

25. Policymakers around the globe have come to understand this mechanism and to respond appropriately. Forexample, Section 939A of the Dodd-Frank Act directs U.S. regulatory agencies to eliminate or minimize their use ofcredit ratings. The European Union has also proposed legislation that includes a similar provision.

26. When used as intendedas independent "second opinions" to help investors make investment decisionscreditratings have no special ability to prevent or to cause asset bubbles or financial crises. Indeed, rating agencies are nomore able than other participants in the capital markets to predict (much less prevent) financial bubbles or adversemacroeconomic trends.III. What Credit Ratings Are

27. Credit rating symbols convey information. More specifically, they convey forward-looking, summary opinionsabout a borrower's or a security's creditworthiness. They summarize the conclusions of a rating agency's creditanalysis, which its analysts explain more fully in a published report. Credit rating symbols are valuable because theyprovide summary opinions about creditworthinessa complex, multidimensional phenomenonusing simple, one-dimensional rating scales. The challenge for a rating agency is to ensure that i ts methodology properly weights thediverse factors that contribute to a security's creditworthiness in a way that is useful to investors.(2)

28. A look at the origins of credit ratings reveals much about their fundamental nature. Rating agencies developed asinformation businesses. There was a knowledge gap between borrowers and investors, and rating agencies seized theopportunity to create and publish information about the creditworthiness of major borrowers. Investors used thisinformationin the form of credit opinionsto help make decisions. So essentially, rating agencies developed as aresponse to asymmetric information.

29. From a slightly different perspective, credit ratings are a specialized type of securities research, similar to whatindependent securities analysts and analysts at sell-side firms produce. Like such research, credit ratings embodyforward-looking opinions designed to contribute to an investor's decision-making process. However, instead ofproviding opinions about the overall investment merit of specific securities or types of securities (which embodiesmany different dimensions, including creditworthiness), a credit rating addresses creditworthiness only.Accordingly, credit rating agencies operate only in the fixed-income arena, while securities analysts cover the entirelandscape of the capital markets.

30. Another similarity between credit ratings and research by securities analysts is that both rating agencies andsecurities research departments establish their own analytic methodologies. Although different securities analystsuse many of the same financial ratios when they analyze companies, there is no standardization in how they weightthe various ratios and qualitative factors that inform a final recommendation. Likewise, rating agencies as a group donot follow a single set of methodologies when they analyze credits. There are, in fact, many reasonable approaches

to analyzing credit. Each rating agency chooses the methodology it thinks is best, drawing on its own credit researchand decades of observations.

31. Another similarity between credit ratings and other third-party research is that rating agencies and researchdepartments each have distinct definitions for their nomenclature for recommendations. For example, some sell-sideresearch departments use simple three-step systems (e.g., buy, hold, sell), while others choose systems with moregradations (Fuchita & Litan, 2006, p. 144). Likewise, each rating agency defines the meanings of its rating symbols,which are the vocabulary through which it communicates a summary of its analysis on a given credit. Indeed, thereis some evidence that different rating agencies calibrate their rating scales somewhat differently (Cantor & Packer,1994).

32. The market can gain enormous value from the range of approaches and methodologies in use among securitiesanalysts and rating agencies. This diversity offers investors multiple points of view to consider when makinginvestment decisions. A single point of view would be less helpful.

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33. Credit ratings can be compared to a host of other types of opinion products as well (see the table below, whichcompares key attributes of some selected rating systems). Some rating systems are forward-looking and aim to helpusers make decisions. Others are purely "historical" and don't offer any practical use. Some use a pass/fail system,while others offer graduated scales. Some reflect measures in absolute terms, while others give relative rankings.Some are multidimensional, with a conclusion that draws from a variety of factors, while others measure a singlefactor only. Finally, some have narrow, specialized applications, while others have broader uses. Against thisbackdrop, credit ratings from the major rating agencies (i) are forward-looking, with an aim to support decision-making, (ii) use graduated scales, (iii) provide relative rankings, (iv) reflect multiple factors that may influencecreditworthiness, and (v) are designed specifically to address creditworthiness and no other investmentconsiderations.

ECGC

What is ECGC?

Export Credit Guarantee Corporation of India Ltd. ( ECGC ) is a Government of India Enterprise which providesexport credit insurance facilities to exporters and banks in India. It functions under the administrative control ofMinistry of Commerce & Industry, and is managed by a Board of Directors comprising representatives of theGovernment, Reserve Bank of India, banking , insurance and exporting community. Over the years, it has evolvedvarious export credit risk insurance products to suit the requirements of Indian exporters and commercial banks.ECGC is the seventh largest credit insurer of the world in terms of coverage of national exports. The present paid upcapital of the Company is Rs. 1000 Crores and the authorized capital is Rs. 1000 Crores.ECGC is essentially an export promotion organization, seeking to improve the competitive capacity of Indianexporters by giving them credit insurance covers comparable to those available to their competitors from most o thercountries. It keeps it's premium rates at the lowest level possible.

Vision

The vision of Export Credit Guarantee Corporation of India Ltd. Is to excel in providing export credit insurance andtrade related services.Mission

The mission of ECGC is to support the Indian Export Industry by providing cost effective insurance and traderelated services to meet the growing needs of Indian export market by optimal utilization of available resources.

What does ECGC do?

Provides a range of credit risk insurance covers to exporters against loss in export of goods and servicesOffers Export Credit Insurance covers to banks and financial institutions to enable exporters to obtain betterfacilities from them

Provides Overseas Investment Insurance to Indian companies investing in joint ventures abroad in the form of equityor loan

How does ECGC help exporters?

ECGCOffers insurance protection to exporters against payment risksProvides guidance in export-related activitiesMakes available information on different countries with it's own credit ratingsMakes it easy to obtain export finance from banks/financial institutionsAssists exporters in recovering bad debtsProvides information on credit-worthiness of overseas buyers

Need for export credit insurance

Payments for exports are open to risks even at the best of times. The risks have assumed large proportions today dueto the far-reaching political and economic changes that are sweeping the world. An outbreak of war or civil war mayblock or delay payment for goods exported. A coup or an insurrection may also bring about the same result.Economic difficulties or balance of payment problems may lead a country to impose restrictions on either import ofcertain goods or on transfer of payments for goods imported. In addition, the exporters have to face commercialrisks of insolvency or protracted default of buyers. The commercial risks of a foreign buyer going bankrupt or losinghis capacity to pay are aggravated due to the political and economic uncertainties. Export credit insurance isdesigned to protect exporters from the consequences of the payment risks, both political and commercial, and toenable them to expand their overseas business without fear of loss.

Objectives of ECGC

The Corporation has set before itself the following objectives:1. To encourage and facilitate globalization of Indias trade.

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2. To assist Indian exporters in managing their credit risks by providing timely information on worthiness of thebuyers, bankers and the countries.3. To protect the Indian exporters against unforeseen losses, which may arise due to failure of the buyer, bank orproblems faced by the country of the buyer by providing cost effective credit insurance covers in the form of Policy,Factoring and Investment Insurance Services comparable to similar covers available to exporters in other countries.4. To facilitate availability of adequate bank finance to the Indian exporters by providing surety insurance covers forbankers at competitive rates.5. To achieve improved performance in terms of profitability, financial and operational efficiency indicators andachieve optimum return on investment.6. To develop world class expertise in credit insurance among employees and ensure continuous innovation and

achieve the highest customer satisfaction by delivering top quality service.7. To educate the customers by continuous publicity and effective marketing.

History of ECGC

The need for export promotion had started immediately after Independence in 1947.In 1953, a proposal for initiation of an export credit guarantee scheme was put forward at a meeting of the ExportAdvisory Council . Ministry of Commerce & Industry analyzed in depth the pros and cons of the Export CreditInsurance Scheme and a revised draft proposal on the scheme was presented to the Export Advisory Council in1955.Shri T T Krishnamachari, Finance Minister in Pandit Nehrus cabinet appointed a special committee under the

Chairmanship of Shri T.C.Kapur to examine the feasibility of setting up an effective organization to provideinsurance against export credit risks. The Government accepted the recommendations of Kapur Committee and thusthe Export Risk Insurance Corporation (ERIC) was registered on 30th July 1957 in Mumbai as a Private Ltd.

Company, entirely state owned, under the Companies Act with an authorized capital of Rs.5 crores and paid upcapital of Rs.25 lakhs. Shri Ratilal M Gandhi was the First Chairman and Shri T C Kapur was the First ManagingDirector of the Corporation. Shri Morarji Desai, Union Commerce Minister inaugurated ERIC and the first Policywas issued on 14th October 1957.After introduction of insurance covers to banks during the period 1962-64, ERICs name was changed to ExportCredit & Guarantee Corporation Ltd in 1964.To bring Indian identify in the name, ECGC was renamed as Export Credit Guarantee Corporation of India Ltd inthe year 1983.

EXIM Banks.

Export-Import Bank of India is the premier export finance institution of the country, set up in 1982

under the Export-Import Bank of India Act 1981. Government of India launched the institution with a

mandate, not just to enhance exports from India, but to integrate the countrys foreign trade and

investment with the overall economic growth. Since its inception, Exim Bank of India has been both a

catalyst and a key player in the promotion of cross border trade and investment. Commencing

operations as a purveyor of export credit, like other Export Credit Agencies in the world, Exim Bank of

India has, over the period, evolved into an institution that plays a major role in partnering Indian

industries, particularly the Small and Medium Enterprises, in their globalisation efforts, through a wide

range of products and services offered at all stages of the business cycle, starting from import of

technology and export product development to export production, export marketing, pre-shipment and

post-shipment and overseas investment.

THE INITIATIVES

Exim Bank of India has been the prime mover in encouraging project exports from India. The Bankprovides Indian project exporters with a comprehensive range of services to enhance the prospect of

their securing export contracts, particularly those funded by Multilateral Funding Agencies like the

World Bank, Asian Development Bank, African Development Bank and European Bank for

Reconstruction and Development.

The Bank extends lines of credit to overseas financial institutions, foreign governments and their

agencies, enabling them to finance imports of goods and services from India on deferred credit terms.

Exim Banks lines of Credit obviate credit risks for Indian exporters and are of particular relevance to

SME exporters.

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The Banks Overseas Investment Finance programme offers a variety of facilities for Indian investments

and acquisitions overseas. The facilities include loan to Indian companies for equity participation in

overseas ventures, direct equity participation by Exim Bank in the overseas venture and non-funded

facilities such as letters of credit and guarantees to facilitate local borrowings by the overseas venture.

The Bank provides financial assistance by way of term loans in Indian rupees/foreign currencies for

setting up new production facility, expansion/modernization/upgradation of existing facilities and for

acquisition of production equipment/technology. Such facilities particularly help export oriented Small

and Medium Enterprises for creation of export capabilities and enhancement of international

competitiveness.

Under its Export Marketing Finance programme, Exim Bank supports Small and Medium Enterprises in

their export marketing efforts including financing the soft expenditure relating to implementation of

strategic and systematic export market development plans.

The Bank has launched the Rural Initiatives Programme with the objective of linking Indian rural

industry to the global market. The programme is intended to benefit rural poor through creation of

export capability in rural enterprises.

In order to assist the Small and Medium Enterprises, the Bank has put in place the Export Marketing

Services (EMS) Programme. Through EMS, the Bank seeks to establish, on best efforts basis, SME sectorproducts in overseas markets, starting from identification of prospective business partners to facilitating

placement of final orders. The service is provided on success fee basis.

Exim Bank supplements its financing programmes with a wide range of value-added information,

advisory and support services, which enable exporters to evaluate international risks, exploit export

opportunities and improve competitiveness, thereby helping them in their globalisation efforts.

THE LEADERSHIP

Since inception, Exim Bank has had, at the helm of its affairs, leading banking professionals as Chief

Executive Officers. Shri R.C. Shah, a seasoned banker, with vast commercial and international banking

experience, was the first Chairman and Managing Director of Exim Bank during January 1982-January

1985. His vision helped the setting up of the institution as a unique organizational model, with a flat,

non-hierarchical culture, multi-disciplinary approach to problem solving, access to the latest technology

and a climate for innovation. He was succeeded by Shri Kalyan Banerji, who was the Chairman and

Managing Director during February 1985-April 1993. Shri Banerji had long years of commercial banking

experience, with exposure to international banking. Ms. Tarjani Vakil took over as the Chairperson and

Managing Director of the Bank in August 1993 and guided the institution in its endeavours for export

capability creation, till October 1996. Ms. Vakil had long years of development banking experience and

was associated with Exim Bank since its inception. She was succeeded by Shri Y.B. Desai, who was the

Managing Director of the Bank during August 1997-April 2001. Shri Desai had vast commercial banking

experience and joined Exim Bank in the initial years of the institution. Shri T.C. Venkat Subramanian took

over as Chairman and Managing Director of Exim Bank from May 1, 2001. Shri Subramanian has bothcommercial banking and development banking experience and has been associated with Exim Bank

since its inception. Under the stewardship of Shri Subramanian, Exim Bank has crossed significant

milestones in business promotion as well as other initiatives as the premier export finance institution of

the country.

OBJECTIVES

for providing financial assistance to exporters and importers, and for functioning as the principal

financial institution for coordinating the working of institutions engaged in financing export and import

of goods and services with a view to promoting the countrys international trade

shall act on business principles with due regard to public interest

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The Export-Import Bank of India Act, 1981

Refer pdf