Although cost of funds remains high in the money market, THISDAY investigations revealed that some banks have actually cut their lending rates significantly to make it easy for big corporations to access funds, hitherto starched in their coffers.The big corporates, mainly the prime customers of the banks with thriving businesses in the food sector, manufacturing and processing, telecommunications and services among others, are accessing credit from banks at rates in the region of 11 per cent per annum, which is quite low compared to average maximum lending rate in the market at over 20 per cent.

A treasury with one of the banks explained: “There is no high risk premium on the transactions, unlike when lending to other customers of the bank.” He added: “These are people and organisations that the banks have been dealing with, have come to understand their businesses and can predict the future. Remember that the operating business environment in Nigeria is difficult and so when a customer comes to the bank to borrow money, he doesn’t just have to contend with the cost of the funds to the bank but the risks associated with his business, since a bank puts all that into consideration before arriving at the interest rate” he said.

The Central Bank of Nigeria (CBN) noted at the end of its monetary policy committee meeting last week that developments in interest rates structure indicated that the retail lending rates were still relatively high even though they were declining.According to the Committee, average maximum lending rate dropped to 22.56 per cent in May 2010, from 23.45 per cent in December, 2009. Also, average prime lending rate fell to 18.77 per cent in May 2010, from 19.03 per cent in December 2009.The result of trading activities at the inter-bank money market showed Nigerian Inter-bank Offer Rates (NIBOR), which had remained at about 1 to 2 per cent increasing last week.

The inter-bank lending rates rose to 8.25 per cent on average from 2 per cent the previous week after NNPC caused a major outflow, by withdrawing about N100 billion from the system. There was outflow to foreign exchange and fixed income securities purchases. There was also a dry up of the fiscal inflow in the system, both factors causing the rates to rise, one of the traders said.The NNPC reportedly sold about $600 million to some banks in the last two weeks and recalled part of the naira proceeds to its CBN account last week in compliance with CBN’s monetary control measures.

At the foreign exchange market, the naira, which gained 5 kobo at the first bi-weekly auction last Monday lost the 5 kobo at the second auction (last Wednesday) to exchange N148.50/$1. At the inter-bank market, the naira eased to N150.22 to the dollar from 149.70, which ended its two-week rally against the dollar.

Interest, Lending, Inter-bank, Securities Trading

As stated earlier, the big corporates majorly – the prime customers of banks with thriving businesses in the food sector, manufacturing and processing, telecommunications and services among others are accessing credit from banks at rates in the region of 11 per cent per annum, which is quite low compared to average maximum lending rate in the market at over 20 per cent. But lending rate to the private sector remains high, with the flow of credit falling to the very low levels.

The CBN in its market and economy review last week noted that as at May, 2010 aggregate domestic credit (net) grew by 12.38 per cent over the December 2009 level, and by 29.72 per cent when annualised, which was still below the 2010 indicative target of 55.54 per cent. Credit to government (net), which grew substantially by 50.87 per cent over end-December 2009 (or 122.1 per cent on annualised basis), was the major contributor. Credit to the private sector declined by 1.88 per cent (or 4.51 per cent on annualided basis), in contrast to the growth benchmark of 31.54 per cent for 2010.

The CBN further disclosed that the substantial growth of credit to government (net) against the backdrop of declining private sector credit reflected the risk aversion of banks to lending to non-government borrowers, adding that the “Committee believes that in order to provide the private sector with the necessary credit to grow the economy, further efforts are needed to unlock the credit market in order to enhance the flow of credit to the real economy.

The CBN noted that average savings rate dropped marginally to 2.92 per cent in May 2010 from 3.36 per cent in December 2009. The consolidated deposit rates declined to 3.30 per cent in May 2010 from 6.13 per cent in December 2009. Thus, the spread between the average maximum lending rate and the consolidated deposit rate widened to 19.27 per cent in May 2010 from 17.34 per cent in December, 2009.

CBN noted that the key policy challenges remained the negative growth in money supply and private sector credit as well as the subsisting high lending rates in the face of declining inter-bank rates.On inter-bank lending, cost of borrowing among banks increased last week, across low and high tenored papers, with the low instruments increasing by much higher percentage points.NIBOR increased to 8.25 per cent on average last week from 2 per cent the previous week, attributed to outflow especially that created by the NNPC that withdrew about N100 billion from the system.

The secured Open Buy Back (OBB) climbed to about 7.50 per cent on the average from 1.50 per cent. Overnight and call rates both rose to 8.5 per cent from 2 per cent and 2.50 per cent respectively.One of the dealers said the rates will most likely go up this week because of the extremely tight liquidity in the system.It was gathered that the opening balance in the accounts of banks with the CBN dropped to N54 billion last Friday from about N230 billion a week ago due to huge outflows.

Forex Transactions

The market indicated last week the gradual resurgence in demand for dollars at the market while dollar supply from the oil majors was drying up. The development triggered low performance of the local currency.Traders said some oil majors sold about $29 million by midweek last week but that the sales were not significant enough to support the naira.

As already indicated, the local currency, which gained by 5 kobo at the first in the bi-weekly auction last Monday when it traded N148.45/$1 as against N148.50/$1 previously, lost the 5 kobo at the second auction (last Wednesday) to exchange N148.50/$1. At the inter-bank market, the naira eased to N150.22 to the dollar from N149.70, which ended its two-week rally against the dollar. At the parallel market, traders exchanged N154/$1 as against N153/$1 at the beginning of last week.
The monetary authority sold only $150 million at the second of the bi-weekly auction last Wednesday, short of the $214 million demanded.

The CBN was reported to have made the lowest dollar sales in three months, at its auction last Monday. Banks bought the smallest amount of dollars in more than three months as demand from companies declined. CBN reportedly sold $117.1 million at the auction, the least since March 24, after putting $200 million on offer, the smallest available amount since the auction on March 29.

The foreign exchange market, according to the CBN remained relatively stable in the first half this year. During the period – January 1 to June 16, 2010, according to CBN data, total sales at 45 bi-weekly WDAS auctions amounted to $11,155.10 million, equivalent to an average of $247.89 million per auction. In the corresponding period of 2009, the sum of $12,995.48 million was sold at 70 daily and bi-weekly RDAS auctions, equivalent to an average of $185.65 million per auction.

The market regulator further stated that in May 2010, the average foreign exchange demand of $459.26 million per auction was recorded against the average sales of $394.45 million. As at June 23, 2010 average demand for the month dropped to $315.73 million and correspondingly, the average sales also declined, to $297.69 million, representing sales as a percentage of demand of 94.29.The CBN Governor, Sanusi Lamido Sanusi, told reporters last week that Nigeria is “comfortable” with current naira levels and believes the currency is unlikely to come under pressure, with foreign reserves capable of funding 16 months of imports.

Other Devts: Intervention fund

The CBN announced last week that N150billion out of the N500 billion intervention fund is ready for drawdown and will be accessed by 150 manufacturers before the end of this month.According to the Governor, the fund is targeted at deficit and strategic sectors of the economy. He however, noted that even though the power sector remains a key target, there have been no requests from that sector to access the fund, owing to the non conclusion of the power sector reforms.”So far, we’ve had about 150 companies that are going to borrow under the manufacturing tranche and that is about N150 billion” Sanusi said.

Microfinance

The apex bank also disclosed last week it was considering the Bangladesh model of microfinance for Nigeria. The CBN, said the Governor, will be sending a team to study the microfinance model in Bangladesh as it looks into the smooth operations of the lower segments of the financial sector.The Governor of the central bank of Bangladesh, Atiur Rahman, said Bangladesh authorities are willing to share their experiences in that sector with Nigeria, stressing that the microfinance sector has helped Bangladesh improve its economy and cope with the global financial crisis.

Rahman disclosed that a different body from the central bank regulates microfinance in that country, adding that commercial banks in Bangladesh extend 40 per cent of their credit to the microfinance banks, who in turn channel the fund for on lending to the small and medium enterprises sector as well as agriculture.

D-8 Central Banks
The D-8 central banks from Nigeria, Bangladesh, Egypt, Indonesia, Iran, Malaysia, Pakistan and Turkey met in Abuja last week and expressed their commitments to collaborate on monetary and fiscal issues in the interest of the economies of member countries.

Sanusi said the meeting was necessitated by the role central banks play in national economies, stressing that it has become crucial to review and adopt common regulatory regimes to safeguard financial systems stability and prevent a repeat of recent experience of the global meltdown.

The Minister of Finance, Dr. Olusegun Aganga, said areas of co-operation by D-8 central banks as drawn up by the secretariat was important especially for trade facilitation, adding that as developing countries : “We owe ourselves the duty to promote trade among ourselves in order to grow our economy at a faster rate than North-South trade will ordinarily afford us.”

The currency declined for a second day, touching the lowest level in more than two weeks, as stocks fell and the U.S. dollar rose against all of its major counterparts. Canadian government bonds climbed.

“The numbers are suggesting people are getting nervous,” said David Watt, senior currency strategist in Toronto at Royal Bank of Canada, the nation’s biggest lender. “The Bank of Canada is heading to a tightening campaign in the third quarter now the debate is will they go in July or September.”

The Canadian currency, nicknamed the loonie, depreciated 1.6 percent to C$1.0479 per U.S. dollar at 12:10 p.m. in Toronto, from C$1.0314 yesterday. It dropped as much as 1.7 percent, the most on an intraday basis since Oct. 30, to touch C$1.0489, the weakest level since Jan. 4. One Canadian dollar buys 95.43 U.S. cents.

The consumer price index rose 1.3 percent in December from a year earlier after gaining 1 percent in the previous month, Statistics Canada said today in Ottawa. The median forecast of 26 economists in a Bloomberg News survey was for a 1.6 percent gain. Core inflation, which excludes energy and food, was unchanged at an annualized 1.5 percent, less than forecast. The Bank of Canada’s inflation target is 2 percent.

U.S. Dollar Strength
The greenback gained against all 16 of its most-traded counterparts tracked by Bloomberg. The Canadian currency fell against 12.

“The soft CPI numbers were somewhat of a catalyst for the price action, but the U.S. dollar has been strong across the board, which means weakness for Canada, the other commodity currencies and the euro,” said Jack Spitz, managing director of foreign exchange at National Bank of Canada in Toronto.

Crude oil for February delivery dropped 2.4 percent to $77.12 a barrel on the New York Mercantile Exchange. Raw materials generate half of Canada’s export revenue, and crude is the nation’s biggest export. Stocks fell, with the Standard & Poor’s 500 Index plunging 1.6 percent.

The yield on Canada’s two-year note tumbled as much as eight basis points, or 0.08 percentage point, to touch 1.19 percent, the lowest level since Dec. 8, before trading at 1.2 percent. The price of the 1.25 percent security maturing in December 2011 rose 11 cents to C$100.10. The benchmark 10-year note’s yield fell as much as seven basis points to 3.41 percent, the lowest since Dec. 18.

Validates Rate Decision
The lack of change in the core consumer-price data today “validates the central bank’s decision to keep interest rates at rock-bottom levels,” Erin Weir, an economist for the United Steelworkers union in Toronto, wrote in a note. “The prospect of having to raise rates to quell inflation is far away.”

Canada’s central bank held the benchmark overnight lending rate at a record low 0.25 percent yesterday. Policy makers reiterated they will keep the rate there through June, barring a change in the inflation outlook, and repeated that the Canadian currency’s “persistent strength” hampers economic recovery.

The benchmark lending rate was 4.5 percent when the bank began cutting it in December 2007.

Currency traders are betting which countries will raise interest rates as the global economy shows signs of emerging from the worst recession in more than half a century. Investors tend to favor the currencies of nations whose borrowing costs are rising because yields are higher.

Russian Investment
Russia’s central bank has started buying Canadian dollars and securities, its first deputy chairman, Alexei Ulyukayev, told reporters today in the central Russian city of Tula. He didn’t specify how much the bank had invested. Russia aims to diversify its reserves, the world’s third-largest stockpile, to reduce risks posed by the dominance of the U.S. dollar.

“The proportion of the Russian reserves that will flow into the Canadian dollar will be quite small,” said Shaun Osborne, Toronto-based chief currency strategist at Toronto- Dominion Bank, the nation’s second-largest lender. “It may put a break on depreciation in the short term but nothing long term. It’s all about the U.S. dollar today.”

Canadian factory sales rose less than expected in November, gaining 0.1 percent to C$42.6 billion ($40.8 billion), a Statistics Canada report today showed. Economists in a Bloomberg survey forecast a 0.7 percent gain.

Electronic trading in the FX market continues to grow at a staggering pace. According to Greenwich Associates report “Electronic Foreign Exchange: Booming in Crisis,” published in March 2009, the 37 percent rate at which electronic FX trading increased last year was almost triple the 13 percent year-over-year increase in total FX trading volume. Over the same time period, the proportion of global FX trading conducted on electronic platforms jumped from 44 percent to 53 percent.

So what is wrong with this picture In short, the market has reached an inflection point where the very technology that helped fuel this growth is becoming outdated. Traditional FX trading solutions single-dealer platforms and multi-bank (electronic communication networks) ECNs can no longer meet the needs of sophisticated institutional traders. Unfortunately, the challenges that firms face extend well beyond the front office.

Companies are under tremendous pressure to minimize trading costs and increase operational efficiencies firm-wide. As such, the challenges facing firms today is twofold: deploy advanced technology that will allow FX traders to navigate – and exploit – today’s complex marketplace, but do so with an eye towards long-term value and scalability.

The question, then, is what constitutes “advanced trading technology” in the world of FX. To answer that, first consider the limitation of traditional FX platforms.

Single-Dealer Execution Platforms. All leading FX dealers maintain such platforms, based on a fairly standardized ASP or software as a service (SaaS) model. Yet leading institutions and hedge funds can have relationships with as many as seven or eight different FX dealers, which introduces numerous trading and workflow challenges.

First and foremost, single-dealer platforms provide liquidity from only one source, limiting price discovery. Using multiple-dealer platforms to try solving this problem leads to troubles in both the front and back offices (e.g. desktop issues and a tangle of independent workflow connections). In addition, the SaaS model these platforms are based on means they cannot be customized to meet client-specific trading or integration requests.

ECNs. What about anonymous electronic communication networks (ECNs)” Don’t they address the shortcomings of single-dealer platforms by aggregating liquidity from numerous sources” To a certain extent, they do. However, ECNs also rely on a model that does not address the importance of dealer-client relationships.

FX remains a highly fragmented over-the-counter (OTC) market. Dealers are still the primary source of FX liquidity, and the pricing and size they offer is counterparty-specific (based on a client’s credit, trading history, etc.).?? In an anonymous ECN model, banks and other liquidity providers do not know who the potential counterparty is. To mitigate their risk, they offer limited size and “one size fits all” pricing that might be markedly different from what a client would receive under a disclosed trading model.

For the buy-side, the challenge is how to combine the benefits of single-dealer platforms and ECNs in a single trading system.?? In response, firms are increasingly turning to advanced, broker-neutral platforms that can give clients the best of both worlds?? consolidated liquidity and optimal pricing.?? In this model, traders can view and act on direct, streaming liquidity from every provider with whom they have a relationship?? banks, dealers and ECNs in a single, highly customizable trading interface.

From the dealers perspective, this is essentially the same as delivering streaming quotes directly via their single-bank system?? the counterparty is known, the quote is adjusted according to the client’s credit and sales profile and it is delivered to that client alone.

From the client’s perspective, they can trade against a consolidated book of streaming quotes from multiple dealers, yet maintain and leverage the relationships they have with their liquidity providers so that they receive optimal pricing and size. Ultimately, this model gives FX market participants the greatest control of their order flow, while driving efficiencies throughout the trade lifecycle.

However, this gets us only halfway there. Today’s trading systems have to be flexible and easy to integrate into a firms’ existing workflow infrastructure. Given the increased focus on straight through processing and operational efficiencies, tight integration with legacy and third-party workflow applications is a must. Fortunately, there are broker-neutral FX aggregation systems that offer the kind of workflow integration that clients require. The same technology that allows these systems to easily add new liquidity providers and adapt to market structure changes also allows them to be easily deployed in complex enterprise environments.

Traditional FX platforms have moved things in the right direction the days of clients blithely relying on custodian banks to cover their FX needs are certainly drawing to a close but the market has a long way to go before it realizes true benefits of electronic trading technology. Ultimately, the future of electronic FX lies with technology that can address firms most complex trading requirements while providing the kind of long-term value that companies need more than ever.

The first time the five-year deposit interest rate increases 0.54
banks face earnings pressure
It is worth noting that this at the central bank announced that financial institutions in the five-year benchmark deposit interest rates 0.54 percentage points, and contrast, the five-year benchmark lending rate 0.09 percentage point hike alone. Personal housing accumulation fund the five-year loan rate was only 0.09 percentage points adjusted upwards accordingly.

In this regard, the Central Plains Analysis Securities researcher said, “This is the profitability of the mainland banking sector will constitute the new pressures. Prior to China’s deposit and lending rates increase in the basic, as adjusted and the bank to pay interest on deposits has improved significantly, while the lending interest rate to accelerate the decline in access. This has always been dependent on income spreads most commercial banks, will have a negative impact. “It is understood that this adjustment, the long-term deposit, loan spreads at 2.25, while the original rate of 2.7, reduced 0.45 points to reach 17% decline.

At the same time, Lyon, a researcher at that “interest rate increase the profitability of insurance companies for the mainland to form good, because the current structure of insurance assets ratio of more than 20% for bank deposits. Research data indicate that rising interest rates 0.27 basis points each, life insurance companies and other large stock price is expected to be up 5 percent support. ”

Short-term lending rates higher than long-term
curb excessive speculation
At the same time, the adjustment of short-term Loan interest rates range, significantly higher than long-term. Galaxy Securities analyst Gao Xiaofeng analysis, “the original short-term lending rates relatively low, since the first quarter of this year, subject to hot pursuit, this part of the funds into the stock market. The encounter marked increase, which would lead banks to tighten short-term loans due in order to market liquidity will gradually shrink, but it also requires a process will have obvious market reaction. ”

Foreign exchange transactions to expand the fluctuation range of
to accelerate the appreciation of the yuan will steadily the same day, the central bank also announced that, since 5 21 from the date of the inter-bank spot foreign exchange market, the yuan to float against the U.S. dollar trading price ranged from 3/1000 expanded to 5/1000. The industry that this will push to accelerate the appreciation of the yuan steady.

economists that the “slightly accelerated appreciation of the RMB to the Mainland’s imports and exports in some sectors, such as the negative impact will be increased, but the long term, beneficial to the economy as a whole rose. ”

Long-term loans to small increase in interest rates
mortgage burden of the public do not public concern for real estate loans , high Xiaofeng believes the long-term lending rates had only about one-third of previous rate increases, showing the central bank reluctant to increase the repayment burden on home buyers. Mr. Sun public rough calculations on this account, told reporters that “The interest rate increase after the increase in the monthly mortgage repayment amount to about tens of dollars a year for several hundred dollars more than the calendar year after the rate hike repayment increase significantly less, so the pressure is not, you can afford.”

The foreign exchange market has had an evergrowing influence on the equity, bond, commodity and real estate markets, having changed dramatically since the advent of free-floating currencies in 1971. This change was brought on by the explosive growth of globalization and technology, impacting every individual worldwide. Goods are now manufactured across the globe. Is this a positive or negative development? Unfortunately, it is not that clear-cut. It is most likely a mix of both, since as with many opportunities in life, there is usually a trade-off. Consumers may receive lower prices for their goods, but displaced workers in higher cost countries/regions may feel the adverse impact. The foreign exchange market is responsible for pricing the currencies involved in these international business transactions. This market is ultimately determined by supply and demand. The FX market is just a formal mechanism for finding price equilibrium, each day, for buyers and sellers of the respective currency pairs. Technological advances have extended the transparency of the market as well as the reach of the market to many new participants. This transparency has increased the integrity of the market by giving participants confidence in the foreign currency market. The FX market price has an enormous impact on the international business community.

To gain additional perspective on today’s foreign exchange market; let’s look at the past. Back in the early 1970′s, the Nixon Administration was faced with some very tough decisions. The Vietnam War and an economic slowdown in the U.S economy created a difficult monetary and fiscal situation. Inflation started to heat up creating a highly precarious position for the United States. The U.S. was forced to abandon the gold standard, whereby U.S. dollars were readily transferable into a fixed amount of gold. Up until 1944, the U.S. dollar was fixed at a price of $20.00 to one ounce of gold. That price was subsequently increased to $35.00 per ounce after 1944. By the end of the 1960′s, the U.S. was under pressure to devalue the USD once again due the decreasing demand for U.S currency.

The U.S. was forced to abandon the gold standard in 1971, ending the dollar-gold convertibility. The official gold price was raised to $38 in 1972. By 1974, gold soared from the previously fixed price of $38.00 to $195.00. By releasing the fixed price of dollars to gold this inevitably led to the floating of the world’s currencies relative to each other. This was the very beginning of the currency market as we know today.

As the US dollar floated, investors began to consider other alternatives than just keeping all of their savings in US dollar investments. For additional perspective, let’s take a look at the US dollar over the last 36 years from 1944 and to today. In 1972, $1 could be converted to gold at $38 per ounce. Today (August 2008), 1 ounce of gold costs approximately $800. Using a compound growth rate calculator, gold has increased at an annual compounded growth rate during the period of 1972-2008 of 8.83%. Conversely, the US dollar has fallen by 8.83% per annum during that period relative to the price of an ounce of gold. We, should be concerned with this dollar devaluation and consider the implications for our own portfolios.

So, the dollar devaluation relative to gold is important. What about the foreign exchange market, isn’t that important too? If you live, work and invest in a certain country, why should the price of the currency matter to you? Investors must realize that their own currency is priced not only relative to commodities, but against other currencies. Being apprised of not only the inflationary view of the market (as measured by gold) but the relative value of your currency compared to others is also important. Currencies are a means of payment and create a relative price of equal goods in two economies. The exchange rate is, therefore, an enormous factor in global competition. The expansion of economic activity in countries such as Brazil, Russia, India and China have greatly affected the United States, Europe, Canada, Japan, United Kingdom and Australia. This has created currency pricing shifts that influence an individual’s real estate values, employment wages, their retirement assets, even energy and food costs.

A deeper understanding of the relationships between the different economies and their currencies gives investors an opportunity to hedge their overall financial position relative to another currency, or, for the more aggressive investor, to exploit opportunities in the foreign currency market when they arise. The economy is truly global with information traveling around the world in milliseconds. Ironically, an increase in value for a country’s currency translates into a manufacturing cost disadvantage in the global market, for which an economy has to make up with efficiency gains. The offsetting balance is that as your currency strengthens certain goods, such as energy and food, and may become less expensive in relation to other nations with weaker currencies With technological advances and cost savings, corporations now find it much easier to shift their production facilities to the most cost effective country or region very swiftly. Recent trends indicate that the global workplace encourages lower prices worldwide. Each trading day, the foreign exchange market factors in multiple dimensions from business into one currency pair.

Investors have a good understanding and a long term trading plan can take advantage of sudden FX pricing shifts by trading the foreign currency market. Traditionally, investors would measure their portfolio’s performance relative to a locally calculated index. Some of the most popular equity indexes in the world are as follows: Nikkei 225 (Tokyo), FTSE 100 (London), DAX (Frankfurt), TSX (Toronto), S&P/ASX 200 (Sydney) and the SP-500 (New York). Normally the returns are calculated in the local currency. What if the index is moving up but the local currency is actually declining? This would cause non-local (international) investors a currency drag on those local index returns. An example would be a Canadian investor with their assets invested in the U.S. SP-500 index in 2007. The U.S. dollar dropped approximately 14% against the Canadian dollar that year. The SP-500, in USD terms was up about 4% in 2007. But in the context of the Canadian investor, considering the USD dollar devalued 14% against the Canadian dollar, the loss for the SP-500 portfolio in Canadian investor would be negative 10% net of the currency translation. Using ISE FX Options?? (please refer to the table below) there are many strategies that could have been used to mitigate most of that currency risk. Just remember that options are about risk and reward. If an investor wants to hedge out some currency risk, an additional debit must be paid for the option.

As investors, we wonder what trading strategies are the larger financial institutions implementing? More recently, large institutions have been known to employ several different strategies in relation to foreign exchange trading. Similar to retail investors, the institutional goal is to find profitable strategies that will lead to greater trading profits. Following are just some of the most popular strategies: trend following, relative-value, carry-trade and volatility trading. As a result of the explosive growth in the foreign exchange market over the past few decades and the corresponding liquidity, many institutions can enter and exit trades with just a subtle price impact in the foreign exchange market. Now that ISE FX Options are available, larger institutions and individual investors are taking advantages of its unique market structure. Most of the familiar strategies that have been used in the spot-foreign exchange market can be adapted to the options market in various shapes and forms.

Trading the technical trend by using technical analysis is a strategy that is familiar to most investors. Relative value trading uses the concept of fundamental value between a certain price good in country or region relative to another country or region. Carry trading is based on the concept that foreign currencies offer differing risk-free interest rates and the strategy attempts to forecast the future changes (or lack thereof) in the respective countries interest rates of the various risk-free interest rate spreads for profit. Volatility trading uses the option volatilities to predict either greater underlying pair movement or a reduction in pair movement. Investors might actually have an edge in many of these categories relative to larger institutions.

Since retail investors normally trade in smaller trading unit sizes, they have a slight edge when entering and exiting their trades. Retail investors must also have a well organized trading strategy based on sound trading principles. Determining if the FX market is appropriate for you is based on your financial goals and your own risk tolerances. The use of options allows for many different strategies, including hedging, increasing portfolio returns by the use of selling options and various spread strategies that allow the investor to actually select their own risk and reward tradeoffs. There are many sub-classifications of these three broad categories. Just as a reminder, ISE FX Options allow investors to implement their specific forecasts on the US dollar relative to another currency. The ISE FX Options are US dollar based. The trading convention is intuitive, if you are bullish on the USD, you can implement that forecast by purchasing calls. If you are bearish on the USD, you can implement that forecast by purchasing puts. There are, literally, thousands of options strategies, and, most important, there is no one supreme options strategy.

The options market offers tremendous opportunities each trading session, the key question for investors is what are they looking for? The essence of trading is determining what you are good at forecasting and then trading within your risk tolerance.

According to the Bank for International Settlements the traditional turnover for the foreign exchange market has compounded at 17.67% increase from the years 2004-2007. What is fueling this explosive growth? Globalization is one factor, but another driver has been the growth of electronic FX trading. Larger institutions can now set up algorithmic trading systems that have all of the pre-defined rules of trading.

Retail investors now have the ability to use algorithms based on their very own set of trading rules. Interestingly, spot FX trading is losing market share (although it did increase in aggregate turnover) to other categories such as swaps, forwards and options. The ISE FX Options market is fully electronic with complete transparency for all market participants. Options give the self-directed investor a wide range of alternatives. With the impact of the foreign exchange market on equity, bond, commodity and real estate markets, options provide investors with financial versatility. The flexibility in the market structure, with a wide range of currency pairs available for trading (calls/puts, strike prices and expiration months), can help meet every investor’s needs. The most important consideration is your trading plan.

Not only has there been more coverage on the FX market lately, but due to recent technology advancements, the market is much more accessible and transparent these days. Decades ago, foreign exchange trading was done primarily by large banks and other financial institutions. Today, retail investors easily and openly participate in the foreign exchange market. One relatively new development is the introduction of exchange-listed foreign exchange options. The International Securities Exchange (ISE) now offers options trading in six currencies relative to the United States dollar, providing investment opportunities for any market condition. What are the differences between spot FX trading and trading listed ISE FX Options? I will examine these differences and provide some deeper insight into the benefits of ISE FX Options.

In order to decide whether this is the right investment class, you probably want to answer a few questions first: What are options? With options you have more choices and increased flexibility when selecting your foreign exchange trading strategy. Options allow you to trade in view of your own unique risk/reward tradeoffs. How can I understand all of the terminology required? There are rights, obligations, premiums, strike price, intrinsic value, expiration, calls and puts and settlement process, to name just a few. These terms may seem a little intimidating, but it is worth spending even just a small amount of time learning some of the options jargon.

The US listed equity options market has existed for over 35 years. ISE is the world’s largest equity options exchange and the first fully electronic options exchange (launched in 2000). Experienced equity options investors have learned that the options market offers another dimension of choices. ISE currently trades equity, Exchange Traded Fund (ETF), index and foreign currency options. The exchange is regulated by the Securities and Exchange Commission, which means the FX Options can be traded from an options-enabled brokerage account. One major difference between the spot FX market and ISE FX Options is that the ISE does not hold your trading account. ISE’s markets were built with a market maker mode; market makers are assigned different trading instruments where they are responsible for providing ample liquidity each and every trading day; thus increasing the integrity of the market. ISE has created very liquid markets with complete transparency for all market participants.

If the ISE does not hold your trading account, who does? ISE FX Options can be easily traded through all options-enabled online brokerage accounts. Some of these brokers have both spot trading and ISE FX Options capabilities. While each broker provides its own unique benefits, you need to pick the one that’s right for you, based on your investment goals. To learn more about ISE FX Options, sign up for trade alerts and ISE’s weekly webinar and podcast series.

If you have been trading the spot foreign exchange market, you already know that the base currency varies dependent on the specific pair. According to the Bank of International Settlements in 2007, approximately 86% of all foreign currency transactions involve the US dollar. With that in mind, ISE decided that its FX Options would originate with the USD as the base currency for all the pairs. Another important consideration was to ease options trading. Since the USD is the base currency for the all of the ISE pair values, if you are bullish on USD you could simply buy call options or, conversely, if you are bearish on the USD, you buy put options. The dollar relative convention allows ISE FX Options to be consistent for all the currency pairs. While this diverges from the spot FX market, it allows for ease of use in implementing call and put strategies. ISE FX Options are currently available in six currency pairs, as illustrated above.

To help explain options, I will provide a more practical example. Years ago, I used to visit a local pizza restaurant with my family and order a pizza each time we visited. As an incentive, the restaurant gave us a coupon every time we came for a pizza, where, after obtaining five coupons, we had the option to purchase a pizza at a 50 percent discount. In effect, we were given a call option to purchase pizza at a 50% discount. Of course, we were under no obligation to exercise that option. In our case, we always exercised the option since we liked the pizza, especially at the discount. We were holders of the option (though, in the listed options market, options are not available for free). Listed options have rights and obligations. There are two types of options, calls (the right to purchase the exchange rate) and puts (the right to sell the exchange rate). Another way to consider options is in relation to your car or home insurance. Owning insurance is a form of a put option.

The concepts of rights and obligations are extremely important to understanding the options market. For example, investors that purchase rights pay premiums to the option sellers. The option sellers earn the premiums but are obligated to sell the underlying exchange at a certain price (the strike price ofor calls) or obligated to buy the underlying exchange rate at a certain price (the strike price for puts). What is the benefit to options then? Limited risk for the buyer of the options. The most you can lose if you purchase an option is the amount you paid for the option (options must be paid for next day in cash). Two simple strategies are buying calls if you are bullish on the USD or, buying puts if you are bearish on the USD.

The buyer’s pay premiums to the seller’s based on the supply and demand factors of the options market. The option premiums are disseminated each day. For example, if an investor was bullish USD/JPY, he might look at the calls to implement that bullish view on ISE symbol YUK. Based on this forecast, an options buyer is expecting their premium to expand so that they can sell the options at higher prices to their initial trade. Options sellers have the reverse view; they hope that the premiums contract so that they can buy the options back at lower prices to their initial trade. The ISE FX Options market is open each trading day from 9:30 ET to 4:15, nearly concurrent with the equities market. The option premiums that are quoted on the ISE are multiplied by $100 giving the investor the aggregate funds that will be either be debited or credited. For example, a premium of $1.00 would be $100 per contract paid by the option buyer to the option seller. The brokerage commission varies from broker to broker.

The rights and obligations do not exist in perpetuity; options have a limited life span. An investor must decide the length of time they would like to purchase. In most cases the more time, the higher the premium. If an investor wanted to own the right to buy the exchange rate for three months at a certain price, the strike price, it would normally cost more than an option to buy the exchange rate for one month at the identical strike price. Of course, investors that wanted to own the right to sell the USD exchange rate for three months would normally pay more than an investor that wanted to own the right to sell the USD exchange rate for one month at the identical price. One disadvantage of owning an option is that the time value of the option depreciates as time passes, while all other factors remain constant.

Options can be used for a variety of reasons. Options were created to transfer risk from those parties that want to reduce their financial risk to those that are willing to expose themselves to more risk in return for the option premium. Again, think of it in terms of an insurance policy, non-US investors that are call buyers are hedging their currency risk relative to the US dollar (i.e. yen). For those investors that wanted to insure their USD exposure, ISE FX puts are available. There are many different time periods, called expirations, and strike prices, the price at which the contract exists. Hedging is not the only use for options. For limited risk, options also allow investors to make forecasts on the USD relative to another currency. There are many other available strategies, but investors should also understand the risks and rewards inherent in any options transaction.

Since options have a limited life, what happens to them at expiration? Do you have to hold them until expiration? No, you do not have to hold them until expiration. Each day, there is a market for all the different options, although, some options may expire worthless as time goes on. At expiration, ISE FX Options are cash-settled, meaning that if the option has value at expiration that amount is paid to the buyer from the seller. For example, an investor decides to buy a two month YUK 110 call (a right to buy the exchange rate) when YUK is 108 for $1.25. Assuming the buyer does not, subsequently, sell the option back to the options marketplace, but holds the options until expiration two months later, what is its worth at expiration? That value is called intrinsic value, (the difference between the strike price and the ISE pair value). The intrinsic value is the ultimate value at expiration. Prior to expiration, an option premium consists of intrinsic value and time premium. At expiration, all options are worth zero or their intrinsic value. An alternative way to look at the intrinsic value is the value of an option if it were exercised immediately. If the YUK value expired at 112, the 110 call would be worth $2 or $200 per contract. If YUK closed at 109 at expiration, that corresponding call would be worth 0. The options seller would be able keep the entire premium they originally received.

Premiums drive the options market as pips drive the spot FX market. The FX options market has many different strike prices to select from. There are three main strike price categories. The categories are determined by how far the given exchange rate pair is from the strike price. The three categories are: in-the-money, at-the-money and out-of-the-money. In-the-money (ITM) options have intrinsic value and cost the most in nominal terms. They will act in price most like the spot market. The benefit of ITM (in-the-money) options is a higher correlation of option price movement with the underlying spot. One of the main disadvantages of the ITM options relative to at-the-money and out-of-the-money is the cost is higher. This cost translates into greater option price risk for the option buyer.

At-the-money options tend to be the most popular for options investors. An at-the-money (ATM) strike is defined as the given exchange rate pair value having an almost equal value with the strike price. They have no intrinsic value, but the potential to gain intrinsic value relatively quickly. For example if YUK is trading at 108, the 108 calls and puts would be defined as ATM. ATM options are a balance between the in-the-money options and the out-of-the money options. Why would an investor need an ATM option, why not just buy the spot value? The answer is that the option reflects the limited risk. It’s important to remember that you cannot lose more than you paid for the option. In the spot market, many investors tend to use tight stop loss orders to reduce their catastrophic loss occurrence.

The disadvantage of using stop-loss orders is that occasionally the spot trader may be forced to exit from potentially profitable trades due to using tight stop orders. Long options have an embedded stop-loss feature. Option buyer’s maximum risk is the option premium. Options offer limited risk and are
especially helpful in volatile markets.

Out-of-the-money options tend to be the most speculative of the three strike price categories. An out-of-the-money (OTM) option would be defined as having no intrinsic value, and also with a low probability to gain intrinsic value relatively quickly. For example if YUK were trading at 108, the 111 calls or the 105 puts would be defined as OTM. Why would an investor purchase an OTM option, why not just buy the spot value? Again the answer is the option reflects limited risk. The OTM will be even less expensive than the ATM option, with a lower probability of success. OTM options tend to be used when investors are expecting a large move up in the USD exchange rate (calls) or a large move down in the USD exchange rate (puts).

How does leverage relate to options? When trading spot FX, many investors are faced with the dilemma of how much leverage should to use. Is it 10 to 1, 25 to 1, 50 to 1 or more? Leverage can be a double-edged sword. If your forecast is correct, leverage allows you to magnify the gains. If your forecast is wrong, increased leverage only magnifies your losses. What is reasonable? The spot trader needs to make that decision based on their individual goals and risk tolerances. When trading options, the leverage consideration is based on the selected strike price. ITM options have the least leverage, but you can lose the most in nominal terms. ATM options have a bit more leverage than ITM, but they cost less with a lower probability of success. OTM options have the most leverage with the lowest probability of success. Leverage is not the only consideration when trading ISE FX Options. An investor should consider how quickly they believe the pair value could move and in what time frame. You should always consider, If I am wrong, how much could I lose

Another difference between ISE FX options and the spot market is that the interest rate differential is priced into the options market each day. After an investor purchases an option, there are no subsequent debits or credits to your account. The total cost is the premium multiplied by 100 and any brokerage commissions that might apply. Options pricing models are available to aid investors in the selection of the proper strike and month for the option they select. The parameters that affect the ISE FX Options price are: ISE exchange rate value, interest rate differential between the two currencies, option volatility, time remaining until expiration and the strike price.

ISE FX options are options on the exchange rate themselves. Using the ISE FX Options trading convention, the USD is the base currency. The valuation is expressed as the number of units of the other currency per US dollar. Think of it as, What is the US dollar really worth relative to another currency There are many strike prices available and various expirations extending as far back as ten months. The options are cash settled at expiration. The settlement occurs each month, normally on the third Friday of the month at the noon buying rate of the New York Federal Reserve Bank. Cash-settlement avoids any further complications at expiration of ending up with an unwanted underlying position. The premiums are dynamically priced and they are quoted in US dollars.

ISE FX Options are available through conventional equity brokerage accounts. One of the key advantages of ISE’s market is that it is market maker-driven, removing any exchange conflicts of interest that exist in the spot FX market. ISE provides investors with the ability to trade foreign currency options, but will never take the opposing side of an investor’s trade. Another benefit is the enhanced transparency of the ISE FX Options market relative to the spot market.

The exchange-listed options market provides numerous benefits for investors. Specifically, ISE FX Options allows investors to manage their foreign currency risk more efficiently than spot trading. With the unique alternatives that options provide, each investor is able to pick the best options strategy that is most compatible with their risk/reward tradeoffs. Options give buyers the right to buy or sell the US exchange rate at a certain price, the strike price, and a certain time, the expiration date, with limited risk. If you believe the US dollar will increase in value you buy calls to implement that view. If you believe the US dollar is going to decline in value, you simply buy puts.

As you learn more about options, there are so many different FX options strategies that you can implement. Whether you choose to hedge, implement a directional FX bias or build more advanced options strategies, ISE FX Options are a great way to take advantage of the constantly fluctuating value of the US dollar.

Well, I am going to dispel those myths forex online true right now. Financial stocks, the leaders on tugged stock markets down on morning after posted a $2.36 billion loss for the fourth quarter, reminding investors that banking and investment institutions were still hurting from the country foreign exchange financial and credit crises. On the dollar fell to its lowest against the yen since August 1995. After 10 a.m., the Dow Jones industrial average was down 121 points and the broader Standard & Poor index of 500 stocks was down 1.6 percent as investors cashed forex charts online their profits from 5 percent rally.

That’s currency market almost never the jess. 2) They forex broker scalping started with more money. 1) They are a lot smarter than the rest of us.

The dollar fell to $1.1155 Swiss francs from 1.1236. I know in this day and age of thousand dollar charting platforms, its easy to think forex currency trading that. It really doesn’t matter what they use. This is by far the biggest myth.

In European morning trading, the dollar was at 88.43 yen, down from 89.06 late in New York. 3) They use the most expensive trading software. But it has absolutely no bearing as to the success online forex exchange one has in trading. In early afternoon forex trading signals trading, shares in the major European exchanges were slightly lower.

The have nots look at the haves and wonder what in the world are they doing to be this successful. Here are the top 3 myths about people that make money trading forex. The Tokyo benchmark forex signal software review Nikkei 225 stock average rose 0.5 percent, while the S&P/ASX 200 in Sydney gained 0.4 percent. Oil futures in New York fell 24 cents, to $43.36 a barrel, and are down by more than two-thirds from a July high above $145 a barrel. They usually put these myths forex brokers in their head as to how they do it. Gino Jolly contributed reporting.. The Hang Seng money market index in Hong Kong added 2.2 percent, while the Shanghai Stock Exchange composite index luise 0.1 percent.

They know that it isn’t the equipment that makes the money, its the trader. And the plummeting yield the benchmark 10-year Treasury note hit lows forex trading signals of 2.11 percent as investors bet that interest rates would remain exceptionally low, as the Fed put it on for the foreseeable future. But the fed funds rate has now fallen global forex trading review below the Bank of Japan overnight rate the first time that has happened since January 1993.

That leaves little incentive for money managers to buy short-term government assets, especially considering the currency risk that accompanies forex currency trading such purchases, Mr. Sorry, intelligence has online currency market absolutely nothing to do with this. I’ve seen people who have gotten an Ivy league education crash their accounts within a week, and I’ve seen people who never graduated from high school be able to make an incredible living trading the markets. The Fed cut more than most people expected, Tohru Sasaki, foreign exchange chief foreign exchange strategist at JPMorgan Chase in Tokyo, said. Crude oil prices fell even as the OPEC cartel planned to announce that it would cut oil production by 2 million barrels a day beginning Jan. Long-term Treasury debt continued its rally on morning as investors searched for a safe place to put their forex opportunity money on the longer end of the yield curve. But the dollar was already weakening because of the large U.S.

Current-account deficit, the fiscal deficit and the low investment yields The dollar had risen over the last few months as the credit crisis led investors to money market repatriate funds held overseas, Mr. Economists had expected alpari forex review the Fed to cut the federal funds rate to 0.5 percent from 1 percent but the central bank cut the target for overnight loans between banks to a range of zero to 0.25 percent. Top 3 Myths About People That Make Money Trading Forex I know that there is a disparity between the haves and have nots when it comes to making money trading forex. currency market But he vast majority of successful forex traders use tools online foreign exchange rates that are readily available and affordable to anybody.

Sure, its always better to start off with a large account, than having to build one. He predicted the dollar would hit record lows by the end of March. Shares of were down 6.7 percent. Some of the most successful traders of all time, started off with very humble beginnings.

The euro rose to $1.4112 from $1.4007 late in New York, while the British pound roze to $1.5599 from $1.5579. In Europe, stocks were mixed, though mostly unchanged, in afternoon trading after modest gains in Asia and the dollar fell sharply against other major currencies.

Japan’s currency also advanced against all of its 16 major counterparts on speculation the nation’s government won’t intervene to stem the currency’s gain. The Australian dollar fell to its weakest level in eight months versus the New Zealand currency on speculation the smaller South Pacific nation’s central bank will raise rates from a record low.

“Japanese firms are continuing to bring home profits,” said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. “The government’s stance on a strong yen is careless, as it doesn’t benefit the nation’s export- driven economic structure.”

The yen climbed to 88.99 per dollar as of 9:24 a.m. in Tokyo from 89.64 in New York on Sept. 25. It earlier touched 88.24, the strongest level since Jan. 23. The currency rose to 130.66 per euro from 131.70, after earlier rising to 129.83, the highest since July 14. The dollar traded at $1.4690 per euro from $1.4689.

The Australian dollar bought NZ$1.1991, the least since Jan. 13, before trading at NZ$1.2025 from NZ$1.2069 in New York on Sept. 25.

Japan’s currency gained on expectations the nation’s exporters are taking advantage of an April 1 rule change that waives taxes on repatriated profits. Under previous laws, companies had to pay a combined 40 percent tax on overseas earnings. The first half of Japan’s fiscal year ends Sept. 30.

Yen Forecasts
Large manufacturers in Japan forecast the yen would average 94.85 per dollar in the 12 months to March 2010, according to the Bank of Japan’s quarterly Tankan survey released July 1.

Japanese Finance Minister Hirohisa Fujii said last week he didn’t support a weak yen, fueling speculation Japan won’t resort to intervention to curb yen’s appreciation. Central banks intervene in foreign-exchange markets by selling and buying currencies.

In a survey released by Japan’s Cabinet Office on April 22, exporters said they can remain profitable as long as the yen trades at 97.33 per dollar or weaker. A rising currency hurts exporters by making their goods more expensive to foreign buyers and reducing the value of profits earned abroad. Exports account for 12 percent of Japan’s economy, compared with 6 percent in the U.S.

NeoTicker is one of the trading software programs that provide real-time analysis and direct order routing with flexibility and power enhancement to what data brokers and vendors offer. This forex software is supported by the following data vendors and brokerages: eSignal, RealTick, myTrack, Ninja Trader, Interactive Brokers, DTN IQFeed, QuoteSpeed, FXCM, MB Trading, QCharts , EFX Group, Open E Cry, DTN Satellite, etc.

A Forex trading software package really worth mentioning is TradeStation, which was designed to help you find forex trading strategies, and to not just place random trades. This award-winning program trading software lets you back-test your trading thoughts before you trade. Furthermore, it then harnesses your PC’s power to monitor the markets and instantly send your forex orders to the marketplace. This FX software also offers deep-discount commissions and the ability to back-test and fully-automate your own options, equities, futures, or forex trading strategies.

eSignal is another award-winning foreign exchange software package with real-time global market quotes, news and fundamentals, as well as decision support, charting and all the professional forex tools that institutions and individual investors demand, delivered directly to your PC via the Internet.

Fap Turbo robot is another favorite currency trading software that seems to tick all the boxes. This FX software is affordable, easy to install, and comes with a money back guarantee. This foreign exchange software has been tested extensively and works automatically for you, which means that it will save you a lot of time and effort.

As with any great currency trading software, the idea behind using FapTurbo isn’t just about money. It’s also about trading comfortably, in what little time you have, and being free to do the other things that you enjoy, while making another forex income stream.

Our program trading software list won’t be complete without mentioning QuoteTracker. You probably know that there’s much more to a quote than a number and a ticker symbol. This trading software will help you track up to six hundred symbols with a big range of charts and more than a hundred technical indicators. This forex software system will help you spot potential forex opportunities using streaming option chains. You will be able to research fifteen years of historical data, track all the streaming Level II quotes and then chart up to twenty days of intraday data. Furthermore, this trading software allows you to place trades and monitor forex transactions in real time, all from one simple-to-use program.

1. Floating Rate Bonds
The floating rate bonds (FRBs) issued by the Government of India till September 2004 were linked to the cut-off yields of the 364-day Treasury Bills (TBs), which led to certain issues relating to the pricing of FRBs in the secondary market. Reflecting this experience and in consultation with market participants and the Technical Advisory Committee on Money, Foreign Exchange and Government Securities Markets, the structure has been revised. The revised structure contemplates that: (1) the auction will be conducted through the “price based” process as against the “spread based” process earlier; and (2) the base yield for FRBs will be linked to the primary market cut-off yield of the 182-day TBs. The revised structure is expected to simplify the methodology for pricing of FRBs in the secondary market. The revised issuance structure for FRBs has been built into the negotiated dealing system (NDS) auction format being developed by the Clearing Corporation of India Limited (CCIL).

The indicative calendar for the issuance of Central Government securities provides for the issuance of FRBs. Accordingly:
- any new issuance of floating rate bonds would be in terms of the revised issuance structure.

2. Auction Process of Government of India Securities
As indicated in the Mid-Term Review of October 2008, the recommendations of the Internal Working Group (Chairman: H.R. Khan) involving the Reserve Bank such as reduction of the time gap between bid submission and declaration of auction results have already been implemented. The other recommendations of the Working Group such as: (1) withdrawal of the facility of bidding in physical form and submission of competitive bids only through the NDS; and (2) submission of a single consolidated bid on behalf of all its constituents by the bank/primary dealer (PD) in respect of non-competitive bids will be implemented after the amendments in the specific notification and in the scheme for non-competitive bidding facility by the Government of India.

Ways and Means Advances to the Government of India : Status
The Reserve Bank, in consultation with the Government of India, has revised the extant limits for the Ways and Means Advances (WMA) for the financial year 2009-10. As per the revised arrangements, the WMA limits will continue to be fixed on a half-yearly basis, and are placed at Rs.20,000 crore for the first half and Rs.10,000 crore for the second half of 2009-10. The applicable interest rate on WMAs and overdrafts will, as it is the practice now, continue to be linked to the repo rate. The Reserve Bank of India, however, retains the flexibility to revise the limits in consultation with the Government of India, taking into consideration the prevailing circumstances.

Debt Management for State Governments

1. Non-Competitive Bidding in the Auction of State Development Loans (SDLs): Status
In order to widen the investor base and enhance the liquidity for SDLs, a scheme for non-competitive bidding in the auction of SDLs was notified by all the State Governments on July 20, 2007. Subsequent to the announcement in the Mid-Term Review of October 2008, the necessary system changes required to handle non-competitive bidding in the auction of SDLs have been carried out in the NDS auction platform developed by the CCIL.

The scheme for non-competitive bidding in SDLs will be operationalised during the current financial year.

2. Ways and Means Advances Limits for the State Governments: Status
The State-wise limits of normal WMA for the year 2009-10 have been kept unchanged at the limits set for the year 2008-09. Accordingly, the aggregate normal WMA limit for State Governments is placed at Rs.9,925 crore, including the WMA limit of Rs.50 crore for the Government of the Union Territory of Puducherry. All other terms and conditions of the scheme remain unchanged.

Development of Market Infrastructure

1. Separate Trading for Registered Interest and Principal of Securities (STRIPS)
Stripping is the process of converting periodic coupon payments and the principal of an existing Government security into tradable zero-coupon securities, i.e., separate trading for registered interest and principal of securities (STRIPS). The availability of STRIPS across the term structure will aid the development of a sovereign zero-coupon yield curve. As indicated in the Annual Policy Statement of April 2008, all operational arrangements for the introduction of STRIPS are ready. The required software development, critical for the introduction of STRIPS, has been carried out as part of the public debt office NDS (PDO-NDS) platform maintained by the Reserve Bank. Furthermore, in order to ensure sufficient volume/liquidity in STRIPS and considering the fungibility of coupon STRIPS, securities have been identified that will be eligible for stripping/reconstitution by the market participants. Accordingly:

- draft guidelines prepared in consultation with the market participants are being placed on the Reserve Bank‘s website for comments and feedback by end-May 2009. With the finalisation of the guidelines, STRIPS will be launched during the current financial year.

2. Revision of Repo Accounting
The accounting norms on repo transactions prescribed by the Reserve Bank in 2003, treated repo as a set of two independent outright transactions. Consequent upon the amendment in 2006 to the Reserve Bank of India Act, 1934, repo has been defined as an instrument for borrowing funds by selling securities. Accordingly, it was proposed to revise the accounting guidelines to capture the economic essence of repo as a collateralised lending and borrowing instrument and not as outright sale and purchase. Accordingly, it is proposed:

- to issue revised guidelines on repo accounting, taking into account comments on the draft guidelines earlier placed on the Reserve Bank’s website, by end-June 2009 for implementation from April 1, 2010.

3. Multi-modal Settlements in Government Securities: Status
As indicated in the Annual Policy Statement of April 2008, a new settlement mechanism (Multi-modal Settlement) through commercial banks has been put in place to facilitate entities such as mutual funds (MFs), which do not hold a current account with the Reserve Bank, to directly participate in the government securities market. Under the new mechanism, while settlement of the securities leg continues to take place in the SGL account maintained with the Reserve Bank, the funds leg will settle through the “designated settlement banks” (DSBs) appointed by the CCIL. The guidelines in the matter were issued on June 2, 2008. From June 30, 2008 onwards, secondary market transactions in government securities undertaken by MFs are being settled only through this mechanism.

The facility of multi-modal settlements can also be availed of by other non-bank entities such as insurance companies, pension funds and co-operative banks which do not maintain a current account with the Reserve Bank.

4. Clearing and Settlement of OTC Rupee Interest Rate Derivatives: Status
As indicated in the Mid-Term Review of October 2008, the CCIL has operationalised a clearing and settlement arrangement for over-the-counter (OTC) rupee interest rate derivatives on a non-guaranteed basis since November 27, 2008. As at end-March 2009, 13 members have decided to participate in the non-guaranteed settlement of OTC rupee interest rate derivatives. The trade reporting platform for OTC rupee interest rate derivatives is already functional.

5. Settlement of OTC Trades in Corporate Bonds
For facilitating settlement of OTC corporate bond transactions in real-time gross settlement (RTGS) system on a DvP-I basis (i.e., on a trade-by-trade basis), it has been decided, in consultation with the SEBI, to allow the clearing houses of the exchanges to have a transitory pooling account facility with the Reserve Bank. Under the proposed settlement mechanism, the buyer of securities will transfer the funds through his bank to this transitory account through RTGS. The clearing house will thereafter transfer the securities from the seller’s account to the buyer’s account and effect the release of funds from the transitory account to the seller’s account.