TRMB Assignment

8/13/2019 TRMB Assignment

1/5

TRMB AssignmentI

1. Repo and Reverse Repo. Need for LAF

Arepurchase agreement, also known as arepo,RP, orsale and repurchase agreement, is the

sale ofsecurities together with an agreement for the seller to buy back the securities at a later

date. The repurchase price should be greater than the original sale price, the difference

effectively representing interest, sometimes called therepo rate. The party that originally

buys the securities effectively acts as alender. The original seller is effectively acting as a

borrower, using their security ascollateral for a secured cashloan at a fixed rate ofinterest.

A repo is economically similar to a secured loan, with the buyer (effectively the lender or

investor) receiving securities as collateral to protect him against default by the seller. The

party who initially sells the securities is effectively the borrower. Almost any security may be

employed in a repo, though highly liquid securities are preferred as they are more easily

disposed of in the event of a default and, more importantly, they can be easily obtained in the

open market where the buyer has created a short position in the repo security by a reverse

repo and market sale; by the same token, non-liquid securities are discouraged. Treasury or

Government bills, corporate and Treasury/Government bonds, and stocks may all be used as

"collateral" in a repo transaction. Unlike a secured loan, however, legal title to the securities

passes from the seller to the buyer. Coupons (interest payable to the owner of the securities)falling due while the repo buyer owns the securities are, in fact, usually passed directly onto

the repo seller. This might seem counterintuitive, as the legal ownership of the collateral rests

with the buyer during the repo agreement. The agreement might instead provide that the

buyer receives the coupon, with the cash payable on repurchase being adjusted to

compensate, though this is more typical of sell/buybacks.

Although the transaction is similar to a loan, and its economic effect is similar to a loan, the

terminology differs from that applying to loans: the seller legally repurchases the securities

from the buyer at the end of the loan term. However, a key aspect of repos is that they are

legally recognised as a single transaction (important in the event of counterparty insolvency)

and not as a disposal and a repurchase for tax purposes.

Reverse repo

A reverse repo is simply the same repurchase agreement from the buyer's viewpoint, not the

seller's. Hence, the seller executing the transaction would describe it as a "repo", while the

buyer in the same transaction would describe it a "reverse repo". So "repo" and "reverse repo"

are exactly the same kind of transaction, just being described from opposite viewpoints. The

term "reverse repo and sale" is commonly used to describe the creation of a short position in

a debt instrument where the buyer in the repo transaction immediately sells the security

provided by the seller on the open market. On the settlement date of the repo, the buyeracquires the relevant security on the open market and delivers it to the seller. In such a short


2/5

transaction the buyer is wagering that the relevant security will decline in value between the

date of the repo and the settlement date.

Need for Liquidity adjustment facility(LAF): LAF is a monetary policy tool which allows

banks to borrow money through repurchase agreements

LAF is used to aid banks in adjusting the day to day mismatches in liquidity. LAF consists of

repo and reverse repo operations. Repo or repurchase option is a collateralized lending i.e.

banks borrow money from Reserve bank of India to meet short term needs by selling

securities to RBI with an agreement to repurchase the same at predetermined rate and date.

The rate charged by RBI for this transaction is called the repo rate. Repo operations therefore

inject liquidity into the system. Reverse repo operation is when RBI borrows money from

banks by lending securities. The interest rate paid by RBI is in this case is called the reverse

repo rate. Reverse repo operation therefore absorbs the liquidity in the system. The collateral

used for repo and reverse repo operations are Government of India securities. Oil bonds have

been also suggested to be included as collateral for Liquidity adjustment facility.

Liquidity adjustment facility has emerged as the principal operating instrument for

modulating short term liquidity in the economy. Repo rate has become the key policy rate

which signals the monetary policy stance of the economy.

Repo and reverse repo rates were announced separately till the monetary policy statement in

3.5.2011. In this monetary policy statement, it has been decided that the reverse repo rate

would not be announced separately but will be linked to repo rate. The reverse repo rate will

be 100 basis points below repo rate. The liquidity adjustment facility corridor, that is the

excess of repo rate over reverse repo, has varied between 100 & 300 basis points. The periodbetween April 2001 to March 2004 and June 2008 to early November 2008 saw a broader

corridor ranging from 150-250 and 200-300 basis points respectively. During March 2004 to

June 2008 the corridor was narrow with the rates ranging from 100-175 basis points. A

narrow LAF corridor is reflected from November 2008 onwards. At present the width of the

corridor is 100 basis points. This corridor is used to contain any volatility in short term

interest rates.

Credit default swaps(CDS):

A credit default swap(CDS) is a financial swap agreement that the seller of the CDS willcompensate the buyer in the event of a loan default or other credit event. The buyer of the

CDS makes a series of payments (the CDS "fee" or "spread") to the seller and, in exchange,

receives a payoff if the loan defaults. It was invented by Blythe Masters from JP Morgan in

1994.

In the event of default the buyer of the CDS receives compensation (usually the face value of

the loan), and the seller of the CDS takes possession of the defaulted loan. However, anyone

can purchase a CDS, even buyers who do not hold the loan instrument and who have no

direct insurable interest in the loan (these are called "naked" CDSs). If there are more CDS

contracts outstanding than bonds in existence, a protocol exists to hold a credit event auction;

the payment received is usually substantially less than the face value of the loan.


3/5

Credit Risk in CDS:

When entering into a CDS, both the buyer and seller of credit protection take on counterparty

risk.

The buyer takes the risk that the seller may default. If AAA-Bank and Risky Corp.

default simultaneously ("double default"), the buyer loses its protection against default by

the reference entity. If AAA-Bank defaults but Risky Corp. does not, the buyer might

need to replace the defaulted CDS at a higher cost.

The seller takes the risk that the buyer may default on the contract, depriving the seller of

the expected revenue stream. More important, a seller normally limits its risk by buying

offsetting protection from another party that is, it hedges its exposure. If the original

buyer drops out, the seller squares its position by either unwinding the hedge transaction

or by selling a new CDS to a third party. Depending on market conditions, that may be at

a lower price than the original CDS and may therefore involve a loss to the seller.In the future, in the event that regulatory reforms require that CDS be traded and settled via a

central exchange/clearing house, such as ICE TCC, there will no longer be 'counterparty risk',

as the risk of the counterparty will be held with the central exchange/clearing house.

As is true with other forms of over-the-counter derivative, CDS might involve liquidity risk.

If one or both parties to a CDS contract must post collateral (which is common), there can be

margin calls requiring the posting of additional collateral. The required collateral is agreed on

by the parties when the CDS is first issued. This margin amount may vary over the life of the

CDS contract, if the market price of the CDS contracts changes, or the credit rating of one of

the parties changes. Many CDS contracts even require payment of an upfront fee (composed

of "reset to par" and an "initial coupon.").

Another kind of risk for the seller of credit default swaps is jump risk or jump-to-default

risk.A seller of a CDS could be collecting monthly premiums with little expectation that the

reference entity may default. A default creates a sudden obligation on the protection sellers to

pay millions, if not billions, of dollars to protection buyers.This risk is not present in other

over-the-counter derivatives.

External Commercial Borrowing(ECB):

An external commercial borrowing (ECB) is an instrument used in India to facilitate the

access to foreign money by Indian corporations and PSUs (public sector undertakings). ECBs

include commercial bank loans, buyers' credit, and suppliers credit, securitised instruments

such as floating rate notes and fixed rate bonds etc., credit from official export credit

agencies and commercial borrowings from the private sector window of multilateral financial

Institutions such as International Finance Corporation (Washington), ADB, AFIC, CDC, etc.

ECBs cannot be used for investment in stock market or speculation in real estate. The DEA

(Department of Economic Affairs), Ministry of Finance, Government of India along

with Reserve Bank of India, monitors and regulates ECB guidelines and policies. For

infrastructure and greenfield projects, funding up to 50% (through ECB) is allowed. In

telecom sector too, up to 50% funding through ECBs is allowed. Recently Government of

India has increased limits on RBI to up to $40 billion and allowed borrowings in Chinesecurrency yuan.


4/5

Borrowers can use 25 per cent of the ECB to repay rupee debt and the remaining 75 per cent

should be used for new projects. A borrower cannot refinance its existing rupee loan through

ECB. The money raised through ECB is cheaper given near-zero interest rates in the US and

Europe, Indian companies can repay their existing expensive loans from that.

The ministry has not put any ceiling on individual companies for using renminbi as currency

for ECB. Even though the overall limit for permitting it under ECB is only $1 billion, the

officials denied possibilities of a single company using the entire amount as it would come

under approval route.

The cost of borrowing in Renminbi is far less, said a finance ministry official. Companies

go for it as it is on easier terms. We are getting their (Chinas) money cheap.

EEFC Account:

Exchange earners foreign currency account (EEFC) is an account maintained in foreigncurrency with an authorised dealer i.e. a bank dealing in foreign exchange. It is a facility

provided to the foreign exchange earners, including exporters, to credit 100% of their foreign

exchange earnings to the account, so that the account holders do not have to convert foreign

exchange into rupees and vice versa, thereby minimising the transaction costs.

All categories of foreign exchange earners, such as individuals, companies, etc. who are

resident in India, can open EEFC accounts. Special economic zone (SEZ) units cannot open

EEFC accounts. But, a unit located in an SEZ can open a foreign currency account with an

authorised dealer in India subject to certain conditions. SEZ developers can open EEFC

Accounts.

An EEFC account can be held only in the form of a current account. Cheque facility is

available for operation of the EEFC account. No interest is payable on EEFC accounts.

Up to 100% foreign exchange earnings can be credited to the EEFC account. However, the

sum total of the accruals in the account during a calendar month should be converted into

rupees before the last day of the succeeding calendar month after adjusting for utilization of

the balances for approved purposes or forward commitments.

Some of the permissible credits into EEFC account

i) Inward remittance through normal banking channels, other than remittances received on

account of foreign currency loan or investment received from abroad or received for meeting

specific obligations by the account holder;

ii) Payments received in foreign exchange by a 100% export oriented unit;

iii) Payments received in foreign exchange by a unit in the domestic tariff area for supply of

goods to a unit in the SEZ;

iv) Payment received by an exporter from an account maintained with an authorised dealerfor the purpose of counter trade. (Counter trade is an arrangement involving adjustment of


5/5

value of goods imported into India against value of goods exported from India);

v) Advance remittance received by an exporter towards export of goods or services;

vii) Professional earnings including directors fees, consultancy fees, lecture fees, honorarium

and similar other earnings received by a professional by rendering services in his individualcapacity;

viii) Re-credit of unused foreign currency earlier withdrawn from the account;

ix) Amount representing repayment by the account holder's importer customer, of

loan/advances granted, to the exporter holding such account; and

x) The disinvestment proceeds received by the resident account holder on conversion of

shares held by him to ADRs/GDRs under the Sponsored ADR/GDR Scheme approved by the

Foreign Investment Promotion Board of the government of India.

Foreign exchange earnings received through an international credit card for which

reimbursement has been made in foreign exchange may be regarded as a remittance through

normal banking channel and the same can be credited to the EEFC account. There is no

restriction on withdrawal in rupees of funds held in an EEFC account. However, the amount

withdrawn in rupees will not be eligible for conversion into foreign currency and for re-credit

to the account.

FCL:

FCL means Full Container Load and LCL means Less Container Load. If an exporter has

goods to accommodate in one full container load, he books an FCL (Full Container Load) to

stuff his cargo. In an FCL cargo, the complete goods in the said container owns by one

shipper. In an FCL owned by one shipper, the cargo in the container need not have fully

loaded cargo in the container. Let the cargo be half loaded or quarter loaded container, if

booked by one shipper under one shipment, the said shipment is called FCL shipment.

TRMB Assignment

Documents

Transcript of TRMB Assignment