Arbitrage
In its simplest form, involves buying and selling the same security, more or less
simultaneously, to profit from a price disparity. In the forex market, arbitrage trades capitalize
on forward exchange rates being out of line with the interest differential.
Call Option
A financial (DERIVATIVE) instrument giving the right but no obligation to the holder to buy a
security (or currency) at a predetermined price (or exchange rate) from the option seller. The
option holder (buyer) pays the option seller a premium for this privilege. If the option can be
exercised at any time before its maturity, it is called an American option. European options,
in contrast, can be exercised only on maturity.
Call and PUT options in cross-currencies (i.e., USD/JPY, Euro/USD, GBP/USD, etc.) are
allowed to be bought and sold by banks in India on a fully hedged basis. The option seller
should be a bank abroad. USD/INR options are on the anvil.
In the context of bonds, a call option gives the issuer the right to redeem the bonds before
maturity. This will happen if interest rates have fallen since the issue was made. A put option
enables investors to redeem the bond before maturity and will happen if interest rates rise
after the issue.
Capital Adequacy
The minimum unencumbered, undiluted capital, consisting of paid-up equity, free reserves and
long-term subordinated debt that a bank must maintain as a percentage of its risk assets.
Currently 9%.
Capital Fund
Comprises Tier I and Tier II capital of the Bank.
Cash Market
The market in a financial instrument like bonds, equities, foreign exchange.
Cash Reserve Ratio (CRR)
CRR is the percentage of Net Demand and Time Liabilities (NDTL) that scheduled commercial
banks must maintain with the RBI as cash.
Clearing
The process of exchanging securities and funds through a Clearing House after a trade/deal is
concluded.
Clearing House
An Indian example of a Clearing House is CCIL, which clears trades in G-Secs. Some
Clearing Houses (abroad) combine the functions of clearing and custody.
Clean Price/Dirty Price
The price of a debt instrument excluding interest for the period elapsed since the last coupon
was paid is called the clean price. Market prices are clean prices. Dirty price includes interest
from the last coupon date to the settlement date.
Country Risk
The possibility that a country will default on its Government’s obligations to foreigners and / or
on the foreign liabilities of its banking system/private sector for lack of foreign exchange
reserves.
Current / Capital Account Transactions
1. Transactions involving imports and exports of goods and services and interest/dividends
on financial investments are current account transactions.
2. Transactions involving deposits and financial investments in India or abroad by
foreigners/foreign entities and Indian individuals/entities respectively are capital account
transactions.
Current Yield
Annual coupon on a bond divided by the purchase price or market price of the security
CRISIL
Short for Credit Rating Information Services of India Ltd, which rates debt issues and other
financial obligations in the Indian market.
Demat
The existence of securities in electronic form in depositories and depository participants
Dematted / Dematting
The process of converting physical securities to electronic (demat) form.
Depository Participant(s) (DPs)
Satellites of apex depositories - NSDL or CDSL. They maintain records of ownership of
securities.
Derivatives
Financial instruments or contracts based on an underlying cash instrument. An example is a
forward contract in foreign exchange in which the purchase/sale of a currency for a future date
is fixed today. The forward contract is “derived” and exists because of spot transactions
between the two currencies, that is, the existence of a spot (cash) market, which is a
fundamental condition. The price of a derivative is a function of the price of the underlying
instrument or product in the cash market and other variables such as interest rates, time to
maturity of the derivative and volatility of prices in the cash market.
FEDAI
Short for Foreign Exchange Dealers’ Association of India, a body comprising representatives
of the foreign exchange departments of banks and entrusted with the formulation of norms for
inter- bank and merchant forex transactions and self-regulation of forex markets.
Forward Premium
A currency is at a premium in the forward market when fewer can be bought for a forward
maturity than spot.
Forward Discount
Refers to the value of a currency in the forward market, i.e., for future delivery. When a
currency is at a discount compared to the spot rate, it is worth less or, in other words, is
cheaper to buy in the forward market than for spot settlement.
FIMMDA
Acronym for Fixed Income Money Market and Derivatives Association of India, a body
comprising representatives of the treasury departments of banks and entrusted with the
responsibility of self-regulation of money markets and fixed income and derivative markets.
Floors
An interest rate option product which protects lenders/investors from falling interest rates.
FRAs
Short for Forward Rate Agreements. Enables FRA buyer or seller to lock-in a rate of interest
for a future period. An example of how it is structured is a bank selling a 6-6 FRA @7%. This
means the FRA buyer will pay 7% interest for the 6-month period commencing 6 months
hence (nomenclature, therefore, as 6-6), irrespective of the actual market rate for 6 months at
that time.
Forward Contracts (Forex)
Forex deals between two currencies to be settled on a future date specified at the time of the
deal.
Hedging
Insulating (for example) interest rate exposures from market fluctuations, mostly using
derivative instruments like swaps and futures. (See Interest Rate Swap below).
Interest Rate Swap (IRS)
A derivative transaction in which one party pays a fixed rate of interest and the counterparty
pays a floating rate of interest (reset at predetermined intervals) on an agreed principal.
For example, Bank A might pay 9% fixed (semi-annually) to Bank B and Bank B pays MIBOR
+ 0.25%, (half-yearly) to Bank A on ` 100cr. No exchange of principal takes place at the
beginning or end. Only interest payments or the net flow from Bank A to Bank B or vice-versa
at six- monthly intervals takes place.
This swap protects Bank A’ s investments from a rise in interest rates as it receives and pays
offsetting fixed rates through the swap.
INFINET
Short for Indian Financial Network. A secure closed-user group (CUG) hybrid network
consisting of VSATs and closed lines. Membership is restricted to entities having SGL and
current accounts with the RBI. All banks and PDs are obliged to become members of
INFINET, as only INFINET members can participate in the NDS and CCIL Settlements.
Issuing and Paying Agent (IPA)
The bank responsible for due diligence, issue and redemption in the issue of Commercial
Paper (CP) by a corporate.
Liquidity Adjustment Facility (LAF)
A facility designed by the RBI to mop up excess liquidity or supply liquidity to the banking
system on a daily basis through repo/ reverse repo auctions.
Thus, if the market is surplus in funds, the RBI will attract more reverse repos. When the
market is liquidity – short, LAFs will attract more repos. (Repos and reverse repo are used
here from the perspective of the RBI-it borrows cash in a repo and borrows securities in a
reverse repo).
LIBOR
London Interbank Offer Rate, the rate at which banks in London lend and borrow U.S. dollars
from one another.
Market Participants and Players
Product Participants/Players
1. Call Money, Notice/Term Money Banks, Primary Dealers, Financial institutions,
mutual funds, insurance companies – the last three
only as lenders.
2. Repos Banks, PDs and mutual funds
3. Certificates of Deposit (CDs) Can be issued only by banks and financial
institutions. For issues by financial institutions, the
maturity should be at least one year. No restrictions
on the buy side.
4. Commercial Paper (CP) Can be issued only by credit-rated corporates. No
restrictions on the buy side.
5. Government of India securities
State Government securities
T-bills/Issued by Government of India/State
Governments through the RBI. No restrictions on
buy side.
6. Government of India-Securities No restrictions Government – guaranteed
securities on buying.
7. Non-SLR Bonds Issued by corporates – no buy/sell restrictions.
8. Spot Foreign Exchange Only forex authorised branches of banks and termlending
institutions (IDBI, IFCI) on both buy and sell
sides. Corporates and individuals must have
underlying physical and approved current/capital
account transactions and must route their deals
through authorised dealers.
9. Forward Contracts in Foreign As for spot foreign exchange
10. Derivatives Entirely inter-bank, inter-institutional product on
originating side.
11. Equities and Mutual Funds Primary issues by corporates/mutual funds. No
restrictions on buy and sell sides.
Market makers
Entities (brokers, banks, institutions) which maintain a market (liquidity) in a security
or a
currency by always quoting buy (bid) and sell (offer) prices for the security or currency.
Marked-to-Market
The valuation of a security at its market price on a continuous basis. Applied generally on
trading positions in the securities and forex markets to determine the profit (or loss) on these
exposures.
MIBOR
Mumbai Inter-bank Offer Rate (MIBOR) is the interest rate at which a bank can borrow in the
money market.
MIFOR
Mumbai Inter-bank Forward Offered Rate indicates the sum of LIBOR and the forward
premium on USD/INR.
NDTL
Short for Net Demand and Time Liabilities.
The liability base of a bank, as defined by the RBI, on which the bank must maintain minimum
CRR and SLR as prescribed by the RBI.
Net Owned Funds (NOF)
Paid-up equity plus free unencumbered reserves – also called net worth – of a bank.
NSE
Acronym for National Stock Exchange.
Nostro Accounts
Nostro Accounts are foreign currency accounts maintained with correspondent banks to
facilitate clearing forex transactions of the Bank.
Non-SLR Bonds/Securities
Debt instruments that do not qualify for inclusion in the SLR of a bank. Usually corporate
bonds.
NSDL
Short for National Securities Depository Ltd, the apex depository for electronic custody,
ownership and transfer of securities, of which DPs are members.
Offer(s)
The price(s) at which market makers / sellers want to sell securities or foreign exchange to the
market.
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Open Market Operations (OMOs)
When the RBI itself buys securities from or sells securities to the market, they are called open
market operations or OMOs. The RBI’s actions have the effect of decreasing the money
supply when selling securities to the market and increasing the money supply when buying
securities from the market.
On-the-run
Recently – issued or latest issues of G-Secs. which are generally most active in the secondary
market.
On balance sheet
Items of assets and liabilities which figure in the balance sheet. Examples are paid-up capital,
reserves, borrowings, investments, fixed assets, etc.
Off balance sheet
Items which do not appear in the main balance sheet. Examples are contingent liabilities such
as guarantees and LCs. Swaps are also treated as such.
PDO (Public Debt Office)
RBI’s department maintaining SGL accounts and handling SGL transfers.
Put Option
A financial instrument giving the holder the right but no obligation to sell a security at a
predetermined price and during or at a predetermined time to the option seller.
Primary Dealers (PDs)
These are the intermediaries between the RBI and the market. They are under an obligation to
take a minimum percentage of the primary issues of securities by the RBI through the central
bank’s auctions as and when they take place. For this commitment, they are paid a
commission by the RBI, based on the value of securities absorbed by them.
Reporting Fortnight/Friday
This is the day of the week, every alternate week, for which banks must report their closing
Net Demand and Time Liabilities (NDTL) to the RBI. The RBI checks their compliance with the
Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) obligations based on the NDTL
data provided by the banks on reporting Fridays. Reporting fortnight refers to the gap between
two reporting Fridays.
Repo/Reverse Repo
Repo is short for repurchase agreement.
A repurchase agreement, as the name suggests, is a contract to buy securities today and sell
them back on a future date at a price fixed today. The securities are nominally transferred to
the buyer but the seller has full entitlement to interest/dividends and all other benefits accruing
as if he is the owner of the securities between the time of sale and buyback.
The difference between the repurchase price (future) and sale price (today) is normally based
on the inter-bank rate of interest for the tenor of the repo.
The buyer of securities in a repo in effect borrows securities and gives cash while the seller in
the repo lends securities and receives cash. The transaction is termed repo for the seller of
securities and reverse repo for the buyer of securities.
Risk Weight
The full capital ratio for ‘risky’ assets is 9%. Risk weight is the proportion of the full capital
ratio applicable to individual assets/asset categories. For example, G-Secs carry a risk weight
of 2.5%. This means the capital provision for the G-Secs asset category should be 2.5% of
9%, i.e., 0.225% of the investment in G-Secs. Similarly, if the risk weight is 50%, the capital
provision required for the asset is 4.5%.
RTGS (Real Time Gross Settlement)
System of clearing trades in securities immediately on completion of a deal. Is possible on
STP platform. RBI/NDS/CCIL plan to move to RTGS mode in the near future in the G-Secs
market.
Securitization
The conversion of loans into tradable securities based on the underlying cash flows from the
loans for interest payments and principal amortization.
Settlement
The process of exchanging securities and funds after a trade/deal is concluded. If done
through a clearing house, called clearing. The custodian is responsible for accepting or
delivering securities bought or sold by its clients. Depository participants are examples of
custodians. In Western countries, major banks also perform the role of custodians. They may
even settle and guarantee trades on behalf of their clients.
Settlement of foreign exchange deals involve crediting and debiting nostro accounts for crosscurrency
deals (i.e., deals entirely in foreign currencies) and nostro account and rupee
account for USD/INR deals.
Sensex
The BSE index of its 30 most actively traded shares.
Short(s)
A sale position in the cash or futures markets without the investor actually owning the
underlying shares. The trade anticipates the price will decline, enabling squaring up the (short)
sale at a lower price.
Short selling
Selling securities without actually owning the securities, in the expectation of buying them
back at a lower price later.
SGL Depository and SGL
The SGL (short for Subsidiary General Ledger) Depository is a computerized system of
records of ownership of SLR securities issued by the Government of India and State
Governments.
The RBI pays the coupons and redeems the SGL securities on the interest due and
redemption dates.
SLR Bonds / Securities
Securities notified by the RBI the ownership of which by a bank qualifies for inclusion in
computation of the SLR of the bank.
Statutory Liquidity Ratio (SLR)
The Statutory Liquidity Ratio is the mandatory minimum percentage of Net Demand and
Time Liabilities (NDTL), which scheduled commercial banks must invest in notified securities
(also called SLR Securities). This is monitored by the RBI with reference to the NDTL position
in each bank at the close of every reporting fortnight (alternate Fridays). Currently the SLR is
25%.
Subsidiary General Ledger (SGL)
An electronic record of ownership of G-Secs / T-bills / State Government Securities
maintained by the RBI.
STRIPS
Separation of interest from principal in a fixed – income instrument. Each interest payment till
maturity is converted into a security, which is priced on prevailing market interest rates for that
maturity. The principal becomes a separate security representing a one-off payment on
maturity and is similarly priced. A stripped security becomes, in essence, a series of zero
coupon securities representing interest and principal cash flows from the security.
Spot
Foreign exchange deals between two currencies to be settled two working days after the deal.
SWIFT
‘Society for Worldwide Interbank Financial Telecommunication’ is a co-operative society
created under Belgian law and having its Corporate Office at Brussels. The Society, which has
been in operation since May 1977 and covers most of Western Europe and North America,
operates a computer-guided communication system to rationalize international payment
transfers. It comprises a computer network system between participating banks with two
operating centers, in Amsterdam and Brussels, where messages can be stored temporarily
before being transmitted to the relevant bank’s terminal.
Standard Assets
Loans/investments which are not in arrears or default with regard to interest and principal.
Trading Portfolio
As defined by the RBI, the trading portfolio of a bank consists of securities bought with a view
to profit from short-term upward movements in their prices. They must be compulsorily
marked-to- market.
T-bills
Short for Treasury Bills. Sovereign debt of the Government of India. Qualifies for inclusion in
the SLR. Issued through auctions by the RBI. Maximum maturity: one year. A discount
instrument.
Tail
The lower among the bid prices is an auction, if bids are arranged in descending order.
Tier I Capital
Consists of paid-up equity and free reserves and constitutes the core capital of the Bank.
Tier II Capital
Consists of revaluation reserves, general provisions and loss reserves and subordinated debt
in the form of long-term bonds and Investment Fluctuation Reserve.
Subordinated debt issued by banks/FIs/NBFCs to meet Tier II capital requirements are called
Tier II bonds.
TT Buying/Selling Rates
Rates quoted by a bank for immediate purchases/sales of foreign exchange. Usually the interbank
rate ± bank’s spread. TT buying/selling rates are converted to TT forward rates by
applying the applicable forward premiums on the foreign currency.
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Vostro Accounts
Vostro Accounts are rupee accounts maintained by banks outside India with Bank of Baroda to
clear their rupee transactions.
Value Date
Payment date to settle a transaction, that is, the date on which funds will actually be credited
or debited.
Volatility
The standard deviation (average deviation of individual prices from the mean) of a series of
prices of a financial instrument. Measures the fluctuation over time in the market price of an
instrument and is extensively used in the valuation of financial instruments.
Yield Curve
A plot of YTM against time for various maturities for a specific class of bonds. Usually done for
G-Secs (or Treasuries), in which case it is described as the Treasury benchmark (risk-free)
yield curve.
YTM (Yield to Maturity)
The rate of interest which equates the present value of future interest payments and principal
redemption with today’s price of the bond.
Zero Coupon Yield
The yield on bonds paying no coupons and cumulating interest till maturity.
In its simplest form, involves buying and selling the same security, more or less
simultaneously, to profit from a price disparity. In the forex market, arbitrage trades capitalize
on forward exchange rates being out of line with the interest differential.
Call Option
A financial (DERIVATIVE) instrument giving the right but no obligation to the holder to buy a
security (or currency) at a predetermined price (or exchange rate) from the option seller. The
option holder (buyer) pays the option seller a premium for this privilege. If the option can be
exercised at any time before its maturity, it is called an American option. European options,
in contrast, can be exercised only on maturity.
Call and PUT options in cross-currencies (i.e., USD/JPY, Euro/USD, GBP/USD, etc.) are
allowed to be bought and sold by banks in India on a fully hedged basis. The option seller
should be a bank abroad. USD/INR options are on the anvil.
In the context of bonds, a call option gives the issuer the right to redeem the bonds before
maturity. This will happen if interest rates have fallen since the issue was made. A put option
enables investors to redeem the bond before maturity and will happen if interest rates rise
after the issue.
Capital Adequacy
The minimum unencumbered, undiluted capital, consisting of paid-up equity, free reserves and
long-term subordinated debt that a bank must maintain as a percentage of its risk assets.
Currently 9%.
Capital Fund
Comprises Tier I and Tier II capital of the Bank.
Cash Market
The market in a financial instrument like bonds, equities, foreign exchange.
Cash Reserve Ratio (CRR)
CRR is the percentage of Net Demand and Time Liabilities (NDTL) that scheduled commercial
banks must maintain with the RBI as cash.
Clearing
The process of exchanging securities and funds through a Clearing House after a trade/deal is
concluded.
Clearing House
An Indian example of a Clearing House is CCIL, which clears trades in G-Secs. Some
Clearing Houses (abroad) combine the functions of clearing and custody.
Clean Price/Dirty Price
The price of a debt instrument excluding interest for the period elapsed since the last coupon
was paid is called the clean price. Market prices are clean prices. Dirty price includes interest
from the last coupon date to the settlement date.
Country Risk
The possibility that a country will default on its Government’s obligations to foreigners and / or
on the foreign liabilities of its banking system/private sector for lack of foreign exchange
reserves.
Current / Capital Account Transactions
1. Transactions involving imports and exports of goods and services and interest/dividends
on financial investments are current account transactions.
2. Transactions involving deposits and financial investments in India or abroad by
foreigners/foreign entities and Indian individuals/entities respectively are capital account
transactions.
Current Yield
Annual coupon on a bond divided by the purchase price or market price of the security
CRISIL
Short for Credit Rating Information Services of India Ltd, which rates debt issues and other
financial obligations in the Indian market.
Demat
The existence of securities in electronic form in depositories and depository participants
Dematted / Dematting
The process of converting physical securities to electronic (demat) form.
Depository Participant(s) (DPs)
Satellites of apex depositories - NSDL or CDSL. They maintain records of ownership of
securities.
Derivatives
Financial instruments or contracts based on an underlying cash instrument. An example is a
forward contract in foreign exchange in which the purchase/sale of a currency for a future date
is fixed today. The forward contract is “derived” and exists because of spot transactions
between the two currencies, that is, the existence of a spot (cash) market, which is a
fundamental condition. The price of a derivative is a function of the price of the underlying
instrument or product in the cash market and other variables such as interest rates, time to
maturity of the derivative and volatility of prices in the cash market.
FEDAI
Short for Foreign Exchange Dealers’ Association of India, a body comprising representatives
of the foreign exchange departments of banks and entrusted with the formulation of norms for
inter- bank and merchant forex transactions and self-regulation of forex markets.
Forward Premium
A currency is at a premium in the forward market when fewer can be bought for a forward
maturity than spot.
Forward Discount
Refers to the value of a currency in the forward market, i.e., for future delivery. When a
currency is at a discount compared to the spot rate, it is worth less or, in other words, is
cheaper to buy in the forward market than for spot settlement.
FIMMDA
Acronym for Fixed Income Money Market and Derivatives Association of India, a body
comprising representatives of the treasury departments of banks and entrusted with the
responsibility of self-regulation of money markets and fixed income and derivative markets.
Floors
An interest rate option product which protects lenders/investors from falling interest rates.
FRAs
Short for Forward Rate Agreements. Enables FRA buyer or seller to lock-in a rate of interest
for a future period. An example of how it is structured is a bank selling a 6-6 FRA @7%. This
means the FRA buyer will pay 7% interest for the 6-month period commencing 6 months
hence (nomenclature, therefore, as 6-6), irrespective of the actual market rate for 6 months at
that time.
Forward Contracts (Forex)
Forex deals between two currencies to be settled on a future date specified at the time of the
deal.
Hedging
Insulating (for example) interest rate exposures from market fluctuations, mostly using
derivative instruments like swaps and futures. (See Interest Rate Swap below).
Interest Rate Swap (IRS)
A derivative transaction in which one party pays a fixed rate of interest and the counterparty
pays a floating rate of interest (reset at predetermined intervals) on an agreed principal.
For example, Bank A might pay 9% fixed (semi-annually) to Bank B and Bank B pays MIBOR
+ 0.25%, (half-yearly) to Bank A on ` 100cr. No exchange of principal takes place at the
beginning or end. Only interest payments or the net flow from Bank A to Bank B or vice-versa
at six- monthly intervals takes place.
This swap protects Bank A’ s investments from a rise in interest rates as it receives and pays
offsetting fixed rates through the swap.
INFINET
Short for Indian Financial Network. A secure closed-user group (CUG) hybrid network
consisting of VSATs and closed lines. Membership is restricted to entities having SGL and
current accounts with the RBI. All banks and PDs are obliged to become members of
INFINET, as only INFINET members can participate in the NDS and CCIL Settlements.
Issuing and Paying Agent (IPA)
The bank responsible for due diligence, issue and redemption in the issue of Commercial
Paper (CP) by a corporate.
Liquidity Adjustment Facility (LAF)
A facility designed by the RBI to mop up excess liquidity or supply liquidity to the banking
system on a daily basis through repo/ reverse repo auctions.
Thus, if the market is surplus in funds, the RBI will attract more reverse repos. When the
market is liquidity – short, LAFs will attract more repos. (Repos and reverse repo are used
here from the perspective of the RBI-it borrows cash in a repo and borrows securities in a
reverse repo).
LIBOR
London Interbank Offer Rate, the rate at which banks in London lend and borrow U.S. dollars
from one another.
Market Participants and Players
Product Participants/Players
1. Call Money, Notice/Term Money Banks, Primary Dealers, Financial institutions,
mutual funds, insurance companies – the last three
only as lenders.
2. Repos Banks, PDs and mutual funds
3. Certificates of Deposit (CDs) Can be issued only by banks and financial
institutions. For issues by financial institutions, the
maturity should be at least one year. No restrictions
on the buy side.
4. Commercial Paper (CP) Can be issued only by credit-rated corporates. No
restrictions on the buy side.
5. Government of India securities
State Government securities
T-bills/Issued by Government of India/State
Governments through the RBI. No restrictions on
buy side.
6. Government of India-Securities No restrictions Government – guaranteed
securities on buying.
7. Non-SLR Bonds Issued by corporates – no buy/sell restrictions.
8. Spot Foreign Exchange Only forex authorised branches of banks and termlending
institutions (IDBI, IFCI) on both buy and sell
sides. Corporates and individuals must have
underlying physical and approved current/capital
account transactions and must route their deals
through authorised dealers.
9. Forward Contracts in Foreign As for spot foreign exchange
10. Derivatives Entirely inter-bank, inter-institutional product on
originating side.
11. Equities and Mutual Funds Primary issues by corporates/mutual funds. No
restrictions on buy and sell sides.
Market makers
Entities (brokers, banks, institutions) which maintain a market (liquidity) in a security
or a
currency by always quoting buy (bid) and sell (offer) prices for the security or currency.
Marked-to-Market
The valuation of a security at its market price on a continuous basis. Applied generally on
trading positions in the securities and forex markets to determine the profit (or loss) on these
exposures.
MIBOR
Mumbai Inter-bank Offer Rate (MIBOR) is the interest rate at which a bank can borrow in the
money market.
MIFOR
Mumbai Inter-bank Forward Offered Rate indicates the sum of LIBOR and the forward
premium on USD/INR.
NDTL
Short for Net Demand and Time Liabilities.
The liability base of a bank, as defined by the RBI, on which the bank must maintain minimum
CRR and SLR as prescribed by the RBI.
Net Owned Funds (NOF)
Paid-up equity plus free unencumbered reserves – also called net worth – of a bank.
NSE
Acronym for National Stock Exchange.
Nostro Accounts
Nostro Accounts are foreign currency accounts maintained with correspondent banks to
facilitate clearing forex transactions of the Bank.
Non-SLR Bonds/Securities
Debt instruments that do not qualify for inclusion in the SLR of a bank. Usually corporate
bonds.
NSDL
Short for National Securities Depository Ltd, the apex depository for electronic custody,
ownership and transfer of securities, of which DPs are members.
Offer(s)
The price(s) at which market makers / sellers want to sell securities or foreign exchange to the
market.
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Open Market Operations (OMOs)
When the RBI itself buys securities from or sells securities to the market, they are called open
market operations or OMOs. The RBI’s actions have the effect of decreasing the money
supply when selling securities to the market and increasing the money supply when buying
securities from the market.
On-the-run
Recently – issued or latest issues of G-Secs. which are generally most active in the secondary
market.
On balance sheet
Items of assets and liabilities which figure in the balance sheet. Examples are paid-up capital,
reserves, borrowings, investments, fixed assets, etc.
Off balance sheet
Items which do not appear in the main balance sheet. Examples are contingent liabilities such
as guarantees and LCs. Swaps are also treated as such.
PDO (Public Debt Office)
RBI’s department maintaining SGL accounts and handling SGL transfers.
Put Option
A financial instrument giving the holder the right but no obligation to sell a security at a
predetermined price and during or at a predetermined time to the option seller.
Primary Dealers (PDs)
These are the intermediaries between the RBI and the market. They are under an obligation to
take a minimum percentage of the primary issues of securities by the RBI through the central
bank’s auctions as and when they take place. For this commitment, they are paid a
commission by the RBI, based on the value of securities absorbed by them.
Reporting Fortnight/Friday
This is the day of the week, every alternate week, for which banks must report their closing
Net Demand and Time Liabilities (NDTL) to the RBI. The RBI checks their compliance with the
Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) obligations based on the NDTL
data provided by the banks on reporting Fridays. Reporting fortnight refers to the gap between
two reporting Fridays.
Repo/Reverse Repo
Repo is short for repurchase agreement.
A repurchase agreement, as the name suggests, is a contract to buy securities today and sell
them back on a future date at a price fixed today. The securities are nominally transferred to
the buyer but the seller has full entitlement to interest/dividends and all other benefits accruing
as if he is the owner of the securities between the time of sale and buyback.
The difference between the repurchase price (future) and sale price (today) is normally based
on the inter-bank rate of interest for the tenor of the repo.
The buyer of securities in a repo in effect borrows securities and gives cash while the seller in
the repo lends securities and receives cash. The transaction is termed repo for the seller of
securities and reverse repo for the buyer of securities.
Risk Weight
The full capital ratio for ‘risky’ assets is 9%. Risk weight is the proportion of the full capital
ratio applicable to individual assets/asset categories. For example, G-Secs carry a risk weight
of 2.5%. This means the capital provision for the G-Secs asset category should be 2.5% of
9%, i.e., 0.225% of the investment in G-Secs. Similarly, if the risk weight is 50%, the capital
provision required for the asset is 4.5%.
RTGS (Real Time Gross Settlement)
System of clearing trades in securities immediately on completion of a deal. Is possible on
STP platform. RBI/NDS/CCIL plan to move to RTGS mode in the near future in the G-Secs
market.
Securitization
The conversion of loans into tradable securities based on the underlying cash flows from the
loans for interest payments and principal amortization.
Settlement
The process of exchanging securities and funds after a trade/deal is concluded. If done
through a clearing house, called clearing. The custodian is responsible for accepting or
delivering securities bought or sold by its clients. Depository participants are examples of
custodians. In Western countries, major banks also perform the role of custodians. They may
even settle and guarantee trades on behalf of their clients.
Settlement of foreign exchange deals involve crediting and debiting nostro accounts for crosscurrency
deals (i.e., deals entirely in foreign currencies) and nostro account and rupee
account for USD/INR deals.
Sensex
The BSE index of its 30 most actively traded shares.
Short(s)
A sale position in the cash or futures markets without the investor actually owning the
underlying shares. The trade anticipates the price will decline, enabling squaring up the (short)
sale at a lower price.
Short selling
Selling securities without actually owning the securities, in the expectation of buying them
back at a lower price later.
SGL Depository and SGL
The SGL (short for Subsidiary General Ledger) Depository is a computerized system of
records of ownership of SLR securities issued by the Government of India and State
Governments.
The RBI pays the coupons and redeems the SGL securities on the interest due and
redemption dates.
SLR Bonds / Securities
Securities notified by the RBI the ownership of which by a bank qualifies for inclusion in
computation of the SLR of the bank.
Statutory Liquidity Ratio (SLR)
The Statutory Liquidity Ratio is the mandatory minimum percentage of Net Demand and
Time Liabilities (NDTL), which scheduled commercial banks must invest in notified securities
(also called SLR Securities). This is monitored by the RBI with reference to the NDTL position
in each bank at the close of every reporting fortnight (alternate Fridays). Currently the SLR is
25%.
Subsidiary General Ledger (SGL)
An electronic record of ownership of G-Secs / T-bills / State Government Securities
maintained by the RBI.
STRIPS
Separation of interest from principal in a fixed – income instrument. Each interest payment till
maturity is converted into a security, which is priced on prevailing market interest rates for that
maturity. The principal becomes a separate security representing a one-off payment on
maturity and is similarly priced. A stripped security becomes, in essence, a series of zero
coupon securities representing interest and principal cash flows from the security.
Spot
Foreign exchange deals between two currencies to be settled two working days after the deal.
SWIFT
‘Society for Worldwide Interbank Financial Telecommunication’ is a co-operative society
created under Belgian law and having its Corporate Office at Brussels. The Society, which has
been in operation since May 1977 and covers most of Western Europe and North America,
operates a computer-guided communication system to rationalize international payment
transfers. It comprises a computer network system between participating banks with two
operating centers, in Amsterdam and Brussels, where messages can be stored temporarily
before being transmitted to the relevant bank’s terminal.
Standard Assets
Loans/investments which are not in arrears or default with regard to interest and principal.
Trading Portfolio
As defined by the RBI, the trading portfolio of a bank consists of securities bought with a view
to profit from short-term upward movements in their prices. They must be compulsorily
marked-to- market.
T-bills
Short for Treasury Bills. Sovereign debt of the Government of India. Qualifies for inclusion in
the SLR. Issued through auctions by the RBI. Maximum maturity: one year. A discount
instrument.
Tail
The lower among the bid prices is an auction, if bids are arranged in descending order.
Tier I Capital
Consists of paid-up equity and free reserves and constitutes the core capital of the Bank.
Tier II Capital
Consists of revaluation reserves, general provisions and loss reserves and subordinated debt
in the form of long-term bonds and Investment Fluctuation Reserve.
Subordinated debt issued by banks/FIs/NBFCs to meet Tier II capital requirements are called
Tier II bonds.
TT Buying/Selling Rates
Rates quoted by a bank for immediate purchases/sales of foreign exchange. Usually the interbank
rate ± bank’s spread. TT buying/selling rates are converted to TT forward rates by
applying the applicable forward premiums on the foreign currency.
Module-III : Theory and Practice of Forex and Treasury Management
108
Vostro Accounts
Vostro Accounts are rupee accounts maintained by banks outside India with Bank of Baroda to
clear their rupee transactions.
Value Date
Payment date to settle a transaction, that is, the date on which funds will actually be credited
or debited.
Volatility
The standard deviation (average deviation of individual prices from the mean) of a series of
prices of a financial instrument. Measures the fluctuation over time in the market price of an
instrument and is extensively used in the valuation of financial instruments.
Yield Curve
A plot of YTM against time for various maturities for a specific class of bonds. Usually done for
G-Secs (or Treasuries), in which case it is described as the Treasury benchmark (risk-free)
yield curve.
YTM (Yield to Maturity)
The rate of interest which equates the present value of future interest payments and principal
redemption with today’s price of the bond.
Zero Coupon Yield
The yield on bonds paying no coupons and cumulating interest till maturity.
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