Ifs Sem Iv Notes

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SYLLABUS IFS SEM IV

Serial Modules/Units
No.
1 MONEY MARKET

Components of organized money market – Call and Notice Market, Treasury Bills
Market, Commercial Bills Market, Market for Certificate of Deposits, Market for
Commercial Papers, Discount Market and Market for Collateralized Borrowing and
Lending Obligations - Features of Indian Money Market-
Reforms in Indian money market.
2 CAPITAL MARKET & FOREIGN EXCHANGE MARKET

Capital Market: Structure of the Indian Capital Market –Recent Developments in the
Primary Market and the Secondary Market - Overview of Debt Market in India – Role
of SEBI - Foreign Exchange Market: components and functions.

3 DERIVATIVES MARKET IN INDIA

Meaning of derivatives – Participants in the derivative markets (Hedgers, Arbitragers


and Speculators)
–– Significance of derivative markets – types and functioning of financial derivatives:
Forwards, Futures, Options and Swaps - Derivatives trading in India.

4 FINANCIAL SERVICES

Merchant Banking-Functions & Role, Credit Rating-Concept & Types, Functions &
Limitations, Leasing Companies, Venture Capital Funds, Micro Finance.
QUESTION PAPER PATTERN Semester IV

Maximum Marks: 80 Marks

Time: 2 .5 Hours

Note: 1) Attempt all Questions

2) All Questions carry equal marks

3) Attempt any two questions out of three in each of question 2, 3, 4 & 5

Q-1 Objective Questions: (20 marks)

A) Explain the following Concepts (Any Five from Eight) (Two from each module) (10 Marks)

B) Multiple Choice question (Ten questions at least Two from each Module) (10 Marks)

Q-2 (from Module I) (15 Marks)

A) Full Length Question

B) Full Length Question

C) Full Length Question

Q-3 (from Module II) (15Marks)

A) Full Length Question

B) Full Length Question

C) Full Length Question

Q-4 (from Module III) (15 Marks)

A) Full Length Question

B) Full Length Question

C) Full Length Question

Q-5 (from Module IV) (15 Marks)

A) Full Length Question

B) Full Length Question

C) Full Length Question


Indian Financial System-II
Semester IV
Module: I – Money Market

1. Meaning of Money Market:


Money market is the “collective name given to the various firms and institutions that deal in
the various grades of near money.”

It is a market for short-term loans in the sense that it provides money for working capital or
circulatory capital.

Most important short-term instruments with different degrees of maturity that are used in the
money market often are: inter-bank call money, short-notice deposits, Treasury Bills of 91 days
and 364 days, commercial bills, certificate of deposits and commercial paper.

A well-developed money market is essential for the efficient functioning of a central bank.
Money market is an institution through which surplus funds move to the deficit areas so that
temporary liquidity crisis can be tackled. Money market enables inter-bank transactions of
short-term funds. A well-knit money market acts as a ‘barometer’ for central banking
operations. It enables the central bank to implement its monetary policy efficiently.

In the absence of a well-coordinated banking system and other constituents of money market,
the central bank may not be able to achieve its desired goals. Above all, government deficits
are financed in a non-inflationary way through the money market institutions. Thus, the
existence of a well-developed money market is essential for an economy.

2. India’s Money Market:


A country’s financial market deals in financial assets and instruments of various types such as
currency, bank deposits, bills, bonds, etc. Such financial market consists of both the money
market and the capital market.

A money market is one where money is bought and sold. Technically, a money market is one
where money is borrowed and lent. It deals in borrowing and lending of short- term funds. In
the money market, the short- term funds of banking institutions and individuals are bid by
borrowers and the Government.
The main building blocks of money market are:
(i) Central bank,

(ii) Commercial banks, and

(iii) Indigenous banks and village moneylenders.

India’s short-term credit market or money market has, invariably, a dichotomy. It consists of
two sectors: (i) organised sector comprising the Reserve Bank of India and commercial banks,
and (ii) unorganised sector having an indigenous stint. The organised market comprises the
RBI, the State Bank of India, commercial banks, the Life Insurance Corporation of India, the
General Insurance Corporation of India, and the Unit Trust of India.

These are the organised components of money market since the functions and activities of these
institutions are systematically coordinated by the RBI and the Government. Also, cooperative
banks fall in this category. In India, we have three-tier cooperative credit structure: State
cooperative banks, District or Central cooperative banks, and primary credit societies. Except
the last one, the other two types of cooperative banks lie in the organised compartment of the
money market.

The organised sector of the Indian money market can be divided into sub-markets:
(i) Call Money Market:
The call money market—an important sub-market of India’s money market is the market for
very short- term funds such as overnight call money and notice money (14 days’) known as
‘money at call’. The rate at which the funds are borrowed in this market are called ‘call money
rate’. Such rate is market-determined—influenced by demand for and supply of short-term
funds.

(ii) Treasury Bill Market:


By treasury bill we mean short-term liability of the Union Government. The treasury bill
market deals in treasury bills to meet the short-term financial needs of the Central Government.
But by issuing treasury bills, the Central Government raises funds almost uninterruptedly.
Treasury bills are of two types: ad hoc, and regular. Ad hoc treasury bills are sold to the state
governments and foreign central banks and, therefore, these are not marketable. Regular treas-
ury bills are sold to the banks and to the public and, therefore, are freely marketable.

At present the following types of treasury bill are in use:


(i) 14-day intermediate treasury bills,

(ii) 91-day treasury bills,


(iii) 182-day treasury bills,

(iv) 364-day treasury bills.

(iii) Repo Market:


Repo—a money market instrument—helps in collateralised short-term borrowing and lending
through purchase-sale operations in debt instruments.

(iv) Commercial Bill Market:


Trade bills or commercial bills are traded in this market. It is a bill drawn by one trader on
another. Traders get money by discounting such bills in a commercial bank so as to avail
financial accommodation.

(v) Certificate of Deposits:


It is a certificate issued by a bank of depositors of funds that remain deposited at the bank for
a specified period. These are tradeable and negotiable in the short-term money markets.

(vi) Commercial Paper:


It is a short-term instrument of raising funds by corporate houses at cheaper cost. It was
introduced in January 1990. Its maturity period ranges from 3 months to 6 months.

(vii) Money Market Mutual Funds:


This instrument was introduced in April 1992 to provide additional short-term revenue to the
individual investors.

The unorganised market is largely made up of indigenous bankers and non-bank financial
intermediaries like chit funds, nidhis, etc. It is unorganised since these institutions are not
systematically coordinated by the RBI. Like commercial banks, these financial institutions are
not subject to reserve requirements. Nor do these institutions strictly depend on the RBI or
banks for financial accommodation. Different components of money market have been shown
in a treelike diagram (Fig. 8.1).
3. Characteristics of India’s Money Market:
The Indian money market is peculiar. It has several important features:
1. Dichotomised:
In the first place, the Indian money market has invariably a dichotomy—commercial banking
developed on Western or European lines, and an unorganised sector doing business on
traditional lines. However, these two sectors are loosely connected to each other.

Every sector conducts its business independently having different style of functioning. Over
the years, the importance of the unorganised sector of the Indian money market has been
shrinking. Even then its share in providing rural finance is still not unimportant.

2. Scattered:
Secondly, India’s money market is scattered. The two important money market centres in India
are in Kolkata and Mumbai. These two markets are dubbed National Money Market. However,
Delhi and Ahmedabad are coming to the ambit of the National Money Market. The National
Money Markets are related to the local money markets.

3. Unorganised Sector Virtually Free from the RBI’s Control:


Thirdly, the unorganised sector of the money market is practically insulated from the central
banking control mechanism. Monetary flexibility and monetary control of the RBI gets
somehow choked because of the existence of the unorganised money market which is
practically outside the purview of the RBI’s control.
This is because these institutions do not rely on financial accommodation from the RBI in times
of liquidity crisis. Nor are they subject to reserve requirements. Obviously, in such a set-up,
RBI’s credit control instruments cannot be applied on them even if they deserve punishment
on the ground of national interest.

4. Before 1969, Commercial Banks Lacked Discipline:


Fourthly, we also notice the absence of a well-organised banking system in India. Commercial
banks habitually maintain an excess cash reserve. Their lending policies are often harsh if we
compare it with the lending policies of unorganised component of the market. Banks are
hesitant in opening branches in unbanked or underbanked areas.

However, this canard against commercial banks in the present situation is not justified.
Particularly after nationalisation, banking system in India has gained enough strength. It is now
one of the disciplined sectors of the money market. One has enough reason to be sceptic regard-
ing the RBI’s control and monitoring over the organised commercial banking sector. Because
of the absence of an effective control of the

RBI, the country experienced the two infamous banking scams one was Harshad Mehta Scam
of 1992 and the other was the Ketan Parekh Scam in 2002.

5. Absence of a Bill Market before 1971:


Fifthly, to integrate the organised and unorganised sectors of the money market, establishment
of a bill market is a necessary condition. It is said that a steady supply of trade bills freely
negotiable in both sectors would ensure link or integration between them. But such was
consciously absent in India before 1971 when ‘real’ bill market scheme was introduced by the
RBI.

6. Problems Associated with Seasonal Fluctuations in Money Supply:


Finally, Indian money market is characterised by the seasonal stringency of money supply
during the busy season when demand for money shoots high. With high demand for liquid
money and its consequent shortage, interest rates rise in the busy season from November to
June. But in the slack season, an opposite situation arises when interest rates go down.

These seasonal fluctuations in the rates of interest create uncertainty in the money market.
However, the RBI being the watchdog of the country’s monetary situation controls such
fluctuations in the market rate of interest successfully.

7. RBI and Unorganised Component of the Money Market:


Being the leader of the money market, the central bank must have a final say on a country’s
financial system. To make its monetary policy an effective instrument, the character of the
money market is important. Usually, money market of LDCs is underdeveloped. India is, of
course, not the exception. Unorganised components of India’s money market like the banking
system do not depend on the RBI for any sort of financial accommodation since these
institutions deal with their own funds and do not accept deposits from the public.

Obviously, these sectors of the money market are not within the ambit of the RBI’s direction
and control. On the other hand, the organised components of the money market can never
remain isolated from the RBI’s control and guidance. But the RBI has no control over the
quality and composition of credit allocated by the unorganised components of the money
market.

As a result, the RBI’s monetary policy or the weapons of credit control—tend to become less
effective. For instance, the RBI occasionally employs its credit control instruments to check
inflation (or deflation). Truly speaking, commercial banks are in the shackles of regulatory
processes of the RBI.

On the other hand, indigenous bankers are free from these control instruments. As a result, the
objective of controlling inflation or deflation gets frustrated. Above all, these institutions are
important providers of black money in the economy. But their behaviour virtually remains
unchecked.

However, with the passage of time, the organised sector of the money market has been
developed by the RBI. It has developed a bill market in India. Consequently, we notice the
contraction of businesses of unorganised sector of the money market. Still then, this sector
occupies an important place. Hence the necessity of integration.

The eventual integration of the organised and unorganised sectors will make the money market
sensitive and responsive to the monetary policy. Once integration is made, the RBI’s control,
regulation, directive and guidance will touch every facet of the money market. Let us hope for
the advent of a developed money market in India under the able guidance of
4. Constituents of the Indian Money Market:
It has been said that the Indian money market is dichotomised. There exists both organised and
unorganised components of money market. As far as the money market is concerned, the
Reserve Bank of India lies at the top. In addition, we have Indian joint stock banks— scheduled
and non-scheduled banks. Commercial banks not included in the Second Schedule of the RBI
Act, 1934, are called non- scheduled banks.

Some cooperative banks are scheduled commercial banks but not all cooperative banks enjoy
the ‘scheduled’ status. At present (January 2009) the number of non- scheduled banks is 30.
The two most important scheduled commercial banks are commercial banks (both public and
private) and cooperative banks.

 The “Committee to Review the Working of Monetary System” chaired


by Chakravarty made several recommendations in 1985 to develop Indian
money market.
 As a follow-up, the RBI set up a Working Group on money market under the
chairmanship of Vaghul, in 1987. Based on the recommendations of Vaghul
Committee, RBI initiated a number of measures to widen and deepen the money
market; the main ones of which are as follows:

Deregulation of Interest Rates


Interest rates are now subject to market conditions as the ceiling limit on them have been
removed by RBI after 1989.The important interest rates in India are-Bank rate, Medium-term
lending rate, Prime Lending rate, Bank Deposit rate, Call rate, Certificate of Deposit rate,
Commercial paper rate etc. This deregulation got a major push after the economic liberalisation
of 1991. Chakravarty Committee was a strong proponent of free and flexible interest rates to
promote savings, investments, government financial system and stability. RBI removed the
upper ceiling of 16.5% and instead fixed a minimum of 16% per annum. The rates were further
relaxed after the Narasimhan Committee report in 1991.
Reforms in Call and Term money market
The reforms in call and term money market were done to infuse more liquidity into the system
and enable price discovery. RBI undertook several important steps to check the constraints and
remove them systematically. It was in October 1998, RBI announced that non-banking
financial institutions should not participate in call/term money market operations and it should
purely be an interbank operating segment and encouraged other participants to migrate to
collateralised segments to improve stability. Also, reporting of all call/notice money market
transactions through negotiated dealing system within 15 minutes of conclusion of transaction
was made mandatory. The volume of operations in this segment was not increased much even
after the reforms.
Introduction of new money market instruments
RBI introduced many new market instruments to diversify the market. These were certificates
of deposit in 1989, commercial papers in 1990 and interbank participation certificates
with/without risk in 1988.
Setting up Discount and Finance House of India
Discount and Finance House of India was set up in 1988 to impart more liquidity and also
further develop the secondary market instruments. However, maturities of existing instruments
like CDs and CPs were gradually shortened to encourage wider participation. Likewise ad
hoc treasury bills were abolished in 1997 to stop automatic monetisation of fiscal deficit.
Introducing Liquidity Adjustment Facility
RBI introduced a Liquidity Adjustment Facility in June 2000 which was operated through
fixed repo and reverse repo rates. This helped establishment of interest rate as an important
monetary instrument and granted greater flexibility to RBI to respond to market needs and
suitably adjust liquidity in the market. Repo and Reverse Repo rates were introduced in 1992
and 1996 respectively.
Refinance by RBI
This is a potent tool by RBI to meet the any liquidity shortages and for credit control to select
sectors. The export credit refinance facility to banks is provided under Section 17(3) of RBI
Act 1934. It is available to all scheduled commercial banks who are authorised to deal in
foreign exchange and have extended export credit. The SCBs are prvided export credit to the
tune of 50% of the outstanding export credit. The concept of directed credit was also changed
as the Narasimhan Committee recommended reduction of directed credit from 40 to 10%. It
also suggested narrowing of priority sector and realigning focus to small farmers and low
income target groups. The refinance rate is linked to bank rate.
Regulation of Non-Banking Financial Companies
RBI Act was amended in 1997 to bring the NBFCs under its regulatory framework. A NBFC
is a company registered under Companies Act, 1956 and is involved in making loans and
advances, acquisition of shares, stocks, bonds, securities issued by government etc. They are
similar to banks but are different from the latter as they cannot accept demand deposits and
cannot issue cheques. They have to be registered with RBI to operate within India. There are a
host of regulations which NBFCs have to follow to smoothly operate within India like accept
deposit for a minimum period, cannot accept interest rate beyond the prescribed rate given by
RBI.
Debt Recovery
RBI has set up special Recovery Tribunals which provide legal assistance to banks for recovery
of dues.
Certificate of Deposit
India introduced Certificates of Deposit (CDs) in 1989 to increase the range of money market
instruments in the country and thereby give investors greater flexibility in terms of utilization
of their short-term funds.

What is a Certificate of Deposit?


A Certificate of Deposit (CD) is a money market instrument which is issued in a dematerialised
form against funds deposited in a bank for a specific period. The Reserve Bank of India (RBI)
issues guidelines for Certificate of Deposit from time to time.

Eligibility for Certificate of Deposit:


Certificates of Deposit are issued by scheduled commercial banks and select financial
institutions in India as allowed by RBI within a limit. Certificates of Deposits are issued to
individuals, companies, corporations and funds among others. Certificates of Deposits can also
be issued to Non-Resident Indians but on a non-repatriable basis only. It is important to note
that banks and financial institutions cannot provide loans against Certificates of Deposits. Also,
banks cannot buy their own Certificates of Deposits prior to the latter's maturity. However, the
aforementioned norms may be relaxed by the RBI for a specific period of time. It is important
to note that banks have to maintain the statutory liquidity ratio (SLR) and cash reserve ratio
(CRR) on the price of a Certificate of Deposit.
Format of Certificates of Deposit
Banks and financial institutions should issue a Certificate of Deposit in a dematerialised form
only. However, investors can seek a certificate in physical form as well as per Depositories
Act, 1996. In case an investor seeks a certificate in a physical form, a bank informs the
Financial Markets Department, Reserve Bank of India, Mumbai. Also, a Certificate of Deposit
entails stamp duty charges as well. Given that Certificates of Deposits are transferable in a
physical form, banks should ensure that they are issued on good quality paper. A Certificate of
Deposit has to be signed by two or more signatories (authorized).

Minimum size and maturity of a Certificate of Deposit


A certificate of deposit can only be issued for a minimum of Rs.1 lakh by a single issuer and
in multiples of Rs.1 lakh. The maturity of a certificate of deposit depends on the investor. For
instance, for a certificate of deposit issued by banks, the maturity period is not less than seven
days and not above one year while for financial institutions, a certificate of deposit should not
be issued for less than one year and not above three years.

Transferability

A certificate of deposit which is not held in an electronic form can be transferred by


endorsement and delivery. However, a certificate of deposit held in a demat form is transferred
according to guidelines followed by demat securities.

Discount

A certificate of deposit can be issued at a discount on its face value. Furthermore, banks and
financial institutions can issue certificates of deposits on a floating rate basis. However, the
method of calculating the floating rate should be market-based.

Reporting

Banks' fortnightly return should include certificates of deposits as per Section 42 of the RBI
Act, 1934. Furthermore, banks and financial institutions should also report about certificates
of deposits under the Online Returns Filing System (ORFS).

Commercial Paper
Commercial paper is an unsecured, short period debt tool issued by a company, usually for
the finance and inventories and temporary liabilities. The maturities in this paper do not last
longer than 270 days. These papers are like a promissory note allotted at a huge cost and
exchangeable between the All-India Financial Institutions (FIs) and Primary Dealers (PDs).
Most of the commercial paper investors are from the banking sector, individuals, corporate
and incorporated companies, Non-Resident Indians (NRIs) and Foreign Institutional Investors
(FIIs), etc. However, FII can only invest according to the limit outlined by the Securities and
Exchange Board of India (SEBI)
In India, commercial paper is a short-term unsecured promissory note issued by the Primary
Dealers (PDs) and the All-India Financial Institutions (FIs) for a short period of 90 days to
364 days.

Commercial Paper in India


On 27th March 1989, commercial paper in India was introduced by RBI in the Indian money
market. It was initially recommended by Vaghul working Group on the basis of the following
points.

 The registration of commercial papers should only be granted to companies having Rs.
5 cores and above net worth with excellent dividend payment record.
 The market should follow the CAS discipline. The RBI should manage the paper
amount, entry of the market, and total quantum which can be upgraded in a year.
 No limitation on the commercial paper market apart from the least size of the note.
However, the size of one issue and each lot should not be less than Rs. 1 crore and Rs.
5 lakhs respectively.
 It should be eliminated from the provision of insecure advances in the state of banks.
 The company using commercial paper should have minimum 5 cores as net worth, a
debt ratio maximum of 105, a debt servicing ratio closer to 2, current ratio minimum
1033, and should be recorded on the stock exchange.
 The paper can be made in terms of interest or at a discount rate to face value.
 It should not be compelled to stamp duty while issuing and transferring.

Features of Commercial Paper


Few distinct features are:

 It is a short-term money market tool, including a promissory note and a set maturity.
 It acts as an evidence certificate of unsecured debt.
 It is subscribed at a discount rate and can be issued in an interest-bearing application.
 The issuer guarantees the buyer to pay a fixed amount in future in terms of liquid cash
and no assets.
 A company can directly issue the paper to investors, or it can be done through
banks/dealer banks.

Types of Commercial Paper


According to the Uniform Commercial Code (UCC), commercial papers are divided into four
different types.

 Draft – It is written guidance by an individual to another and to pay a stipulated sum


to a third party.
 Check – It is a unique draft where the drawee is a bank.
 Note – Here, an individual is promised to pay another individual or bank a particular
amount.
 Certificates of Deposit – In this type, a bank confirms the receipt of deposit.
According to security, there are two types of commercial papers

 Unsecured Commercial Papers – These are traditional papers and allotted without
any security.
 Secured Commercial Papers – It is also known as Asset-Backed Commercial Papers
(ABCP) and assured by other financial assets.

Advantages of Commercial Paper


 Contributes Funds – It contributes extra funds as the cost of the paper to the issuing
company is cheaper than the loans of the commercial bank.
 Flexible – It has a high liquidity value and flexible maturity range giving it extra
flexibility.
 Reliable – It is highly reliable and does not have any limiting condition.
 Save Money – On commercial paper, companies can save extra cash and earn a good
return.
 Lasting Source of Funds– Maturity range can be customised according to the firm’s
requirement, and matured papers can be paid by selling the new commercial paper.

Commercial Paper Formula


The formula for estimation discounted price of a commercial paper.
Price = Face Value/ [1 + yield x (no. of days to maturity/365)]
Yield = (Face value – Price)/ (price x no of days to maturity) X 365 X 100

Commercial Paper Example


Calculate the interest yield of the following commercial paper:

Particular Amount

Face Value ₹ 5,00,000

Sale Price ₹ 4,90,000

Maturity Period 100

Brokerage and other charges 3%

Solution:
Brokerage = 3% of ₹500,000 = ₹15,000
Net Sale Price = ₹490,000 – ₹15,000 = ₹475,000
Particular Amount

Face Value ₹ 5,00,000

Sale Price ₹ 4,90,000

Maturity Period 100

Brokerage and other Charges 3%

Brokerage Value 15000

Net Sale Price ₹4,75,000

Yield 18.95%

Yield = [(Face Value – Sale Price)/Sale Price] * (360/Maturity Period) * 100


= (5,00,000 – 4,75,000)/4,75,000 * (360/100) * 100
= 18.95%

Collateralized Borrowing and Lending Obligations

Financial institutions often need liquidity or ready cash to meet their transactions.
Usually, the repo facilit y of the RBI gives one day loans to scheduled commercial
banks. Another mechanism is the Call Money Market where financial institutions
can avail loans from one day to fourteen days.

In the same way, quick money or short -term money can be obtained by financial
inst itutions from the Collateralized Borrowing and Lending Obligations Market.

What is CBLO Market?

The Collateralized Borrowing and Lending Obligation (CBLO) market is a money


market segment operated by the Clearing Corporation of India Ltd (CCIL). In the
CBLO market, financial entities can avail short term loans by providing prescribed
securities as collateral. In terms of functioning and objectives, the CBLO market is
almost similar to the call money market.
The uniqueness of CBLO is that lenders and borrowers use collateral for their
activities. For example, borrowers of fund have to provide collateral in the form of
government securities and lenders will get it while giving loans. There is no such
need of a collateral under the call money market.

Who are the participants in the CBLO market?

Institutions participating in CBLO are entities who have either no access or restricted
access to the inter -bank call money market. Still, institutions active in the call money
market can participate in the CBLO market. Nationalized Banks, Private Banks,
Foreign Banks, Co-operative Banks, Insurance Companies, Mutual Funds, Primary
Dealers, Bank cum Primary Dealers, NBFC, Corporate, Provident/ Pension Funds
etc., are eligible for CBLO membership. These institutions have to avail a CBLO
membership to do activit ies in the market.

Instrument under the CBLO market

Collateralized Borrowing and Lending Obligation (CBLO) is the instrument in the


CBLO market. It is a discounted instrument available in electronic book entry form
for the maturity period ranging from one day to one year.

The CCIL provides the Dealing System through Indian Financial Network
(INFINET) and Negotiated Dealing System for participating in the market.

In the CBLO market, members can borrow or lend funds against the collateral of
eligible securities. Eligible securities are Central Government securities including
Treasury Bills, and such other securities as specified by the CCIL. Borrowers in
CBLO have to deposit the required amount of eligible securit ies with the CCIL. For
trading, the CCIL matches the borrowing and lending orders (order matching)
submitted by the members. Borrowers have to pay interest to the lenders in
accordance with the bid.

The Clearing Corporation of India Ltd. (CCIL) (CIN: U65990MH2001PLC131804) was set up
in April, 2001 to provide guaranteed clearing and settlement functions for transactions in
Money, G-Secs, Foreign Exchange and Derivative markets. The introduction of guaranteed
clearing and settlement led to significant improvement in the market efficiency, transparency,
liquidity and risk management/measurement practices in these market along with added
benefits like reduced settlement and operational risk, savings on settlement costs, etc. CCIL
also provides non-guaranteed settlement for Rupee interest rate derivatives and cross currency
transactions through the CLS Bank.

How a CBLO Works


CBLOs are operated by the Clearing Corporation of India Ltd. (CCIL) and the Reserve Bank
of India (RBI). CBLOs allow short-term loans to be secured by financial institutions, helping
to cover their transactions. To access these funds, the institution must provide
eligible securities as collateral—such as Treasury Bills that are at least six months from
maturity.

The CBLO works like a bond—the lender buys the CBLO and a borrower sells the money
market instrument with interest. The CBLO facilitates borrowing and lending for various
maturities, from overnight to a maximum of one year, in a fully collateralized environment.
The details of the CBLO include an obligation for the borrower to repay the debt at a specified
future date and an authority to the lender to receive the money on that future date. The lender
also has the option to transfer his authority to another person for value received.

Since the repayment of loans is guaranteed by the CCIL, all borrowings are fully
collateralized. The collateral provides a safeguard against default risk by the borrower or
lender’s failure to make funds available to the borrower. The required value of the collateral
must be deposited and held in the custody of the CCIL. After the deposit has been received,
the CCIL facilitates trades by matching borrowing and lending orders submitted by its
members.

Special Considerations
Types of financial institutions eligible for CBLO membership include insurance firms, mutual
funds, nationalized banks, private banks, pension funds, and private dealers. To borrow,
members must open a Constituent SGL (CSGL) account with the CCIL, which is used to
deposit the collateral.

Questions for Review

1.

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