Fism Notes

1. Auctions of Government Securities - contd.
Auction Calendar
Auction Notification (for G-Sec) => Comes every six months
AUCTION Notification for TB comes every quarter
95% under Comp bidding (both amount and price has to be quoted)
5% under non-comp bidding (only amount to be quoted and allocated at Cut-
off) => if it is not fully applied, the balance portion would be added to the
Competitive portion value.
Yield based Auction is conducted for New securities to find out the cut-off
Coupon / Yield at which the security would be issued - The security is always
issued with a Face Value of 100 (in US it is 1000 and quotes in 32nd)
IN US, the price is quoted like 1015-18 for a Bond => the trader will settle
this bond at = 1015 + 18/32 = 1015.5625
If the Bond is Quoted as 1015-18+, the trader will settle the bond at = 1015
+ 18/32 + 1/64 = 1015.5781
Price based Auction is conducted for all existing securities (reopen the
securities) => as Coupon is already announced in the first Auction, the
security's current price has to be found out for the cut-off
Uniform Price - Every bidder under competitive bidding will pay the same
price or yield for the security if successful
Multiple Price Auction is done where each competitive bidder pays the price
or yield it quotes
In Auction Notification, the announcement about the its SLR status has to be
mentioned (the security should be eligible for Ready Forward deal)
Non-SLR Government bonds are typically issued for subsidy (Oil marketing
Companies)
Every Auction has to be Underwritten fully. The Primary Dealers are entities
which have been given license for Underwriting and giving 2-way Quotes for
G-Secs.
Underwriting => (a) Minimum Underwriting Commitment (MUC) and (b)
Additional Commitment for Underwriting (ACU)
Any issue has to be underwritten under MUC with = 21*2.5 = 52.5
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2. Any issue has to be underwritten under MUC with = 21*2.5 = 52.5
Underwriting fees charged by Primary Dealers vary substantially depending
on Liquidity condition in the market => when liquidity is poor, the chance of
devolvement is very high (as buyers will not be there) and the fees charged
for underwriting would be very high. Liquidity is the major driving force when
looking at Underwriting.
Example of Underwriting (2000CR 2023 security of 22nd Oct) => 1008CR is
Minimum and 992 is additional => RBI will pay to successful bidders under
Underwriting Auctions for only ACU and not for MUC.
HDFCBK 0.54 400CR
Citi 0.59 500CR
HSBC 0.62 400CR
CANBK 0.58 600CR
BOB 0.58 400CR
All underwriting Auctions are Multiple Price Auction. Each one will pay as per
its Quote.
HDFCBK 400 (full on 0.54) = (0.54/100) * 4000000000 = 21600000 = 216000
BOB + CANBANK 1000 =Cut-off will be 0.58
BOB = (592/1000) * 400 = 236.8
CANBANK = (592/1000) * 600 = 355.2
Each primary Dealer has to achieve a Success Ratio (each one fixes its own
strategy) = Foreign Banks and large private banks will be very active and
highly competitive in shorter duration securities for achieving success ratio.
When Issued Market = A MARKET where banks, institutions and Primary
Dealers are allowed to trade the security before its issuance. This helps PDs
to (a) discover the price/yield likely to be realised for the security and (b) to
redistribute the security before its issuance (sell it in advance before issuance
=> short selling or selling it on forward basis which will be settled only on
Auction date (Tuesday to Friday, when issued market will function but the
aggregation (Plus and minus) will take place only on Friday (date of Auction).
Final settlement and allocation happens on T+1 basis. The security would be
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3. Final settlement and allocation happens on T+1 basis. The security would be
credited to the SGL (Subsidiary General Ledger) A/c of the successful bidders
on payment.
Introduction to Repo Market - Funding through Borrowing
Repo stands for Repurchase Agreement or Ready Forward deal
Repo is used for Short sale cover.
RBI allows entities to short a security (selling the security before
owning it) and carry this short position (Roll over) till 3 months (90
days)
A trader sells 6.10% GS 2031 (12-Jul-2031) on 28-Oct-2021 at 6.35%
yield but it does not own the security.
Trader approaches a Security holding entity (for example LIC, SBI, etc.)
and requests to borrow the security.
Repo is legally shown as a Purchase and Sell Transaction. Trader can
borrow the security but it will be seen as if he / she is buying the
security because as per the regulations (across world) all Repo
borrowings have to be fully funded => Trader has to give full money
against the borrowed security.
That means we have to find the price of the security under Repo and
the Trader has to fully pay (lending money and borrowing security) to
the Security holding entity (LIC / SBI)
How this money comes => Because our trader did short sell, he / she
will receive money against delivery of the security. It is a multi-lateral
netting and combined settlement of all positions of the traders. For our
trader short sell => recieve cash value => pay cash value to the security
holding entity => take security and deliver the same to the Buyer.
Repo is a financing arrangement used primarily in the government
securities markets whereby a dealer or other holder of government
securities sells the securities to a lender and agrees to repurchase them
at an agreed future date at an agreed price which will provide the
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4. at an agreed future date at an agreed price which will provide the
lender with an extremely low risk return.
Such a transaction is called a repo when viewed from the perspective of
the supplier of the securities (the party acquiring funds) and a reverse
repo or matched sale-purchase agreement when described from the
point of view of the supplier of funds.
Repos are hybrid transactions that combine features of both secured
loans and outright purchase and sale transactions but do not fit cleanly
into either classification. The use of margin or haircuts in valuing repo
securities, the right of repo borrowers to substitute collateral in term
agreements, and the use of mark-to-market provisions are examples of
repo features that typically are characteristics of secured lending
arrangements but are rarely found in outright purchase and sale
transactions.
The repo buyer's right to trade the securities during the term of the
agreement, by contrast, represents a transfer of ownership that
typically does not occur in collateralized lending arrangements.
Repos are popular because they can virtually eliminate credit problems.
Traced back to the birth of Federal Reserve System and to the inception
of the Bankers’ Acceptances market at the close of World war I (in 1918).
In 1923, the Fed began to use short term repos against Governments as a
tool for altering bank reserves.
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Worldwide Central Bankers use Repos to moderate Money Supply in the
economy.
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Characteristics of RP Agreement
Maturities
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Principal Amounts
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Yields
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Determinants of RP Rates
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Valuation of Collateral
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Taking Margin and Marking to Market
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5. Treatment of Accrued Interest
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Credit Risk
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Right of Substitution
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Repo Transaction
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