LIBOR days are numbered

Libor alternatives it would be either OBFR, Overnight Bank Fund Rate, or GCRR,General Collateral Repo rate.

Orderly liquidation of bankcrupt Banks

FED is proposing new measures  to prevent the chaotic crash of banks and  orderly liquidation of financial institution can be done.

The case for more capital

Good read on how banks focused only one half of the ratio by de leveraging their balance sheet instead of raising more capital as well.  
It’s a capital ratio of two halves..

The case for more capital

Why bank capital matters for monetary policy

This week's reading

How To Think, And Act, Like A Software Executive....

With distributive technology any business can be impacted or even can be wiped out hence I agree wit what has been written by Vijay Gurbaxani in the latest issue of Harvard Business Review.

“The current business environment requires all leaders to view their companies as software businesses — and think like software executives,”

Intel CEO Banking Company's Future On 5G, Moore's Law, The Cloud, and IoT...

Jayadev Galla Takes Indian Battery Company Amara Raja To New Heights...

Key Mechanics ofThe U.S. Tri-PartyRepo Market


The Strange Relationship Between Power and Loneliness

What is trading revenue for wall street firms...

Good article to understand what gets counted as trading revenues:  Making Sense of Wall Street’s Trading Revenue

Good series to read on Market Liquidity

Introduction to a Series on Market Liquidity.

Full circle of money flow to emerging countries in one year from Aug 2013 to Sep 2014

In August 2013, India faced the worst currency crisis in the wake of US taper tantrum. Indian currency had lost 20.1 percent from beginning 2013 and rupee slumped 3.9 percent to an unprecedented 68.8 per dollar the biggest drop since 1993. The market was in panic mood and RBI and Indian government were trying every thing to stop this mayhem. Some measure like capital control taken by Indian authorities fired back as foreign funds sens that India can freeze their funds or investments. Indian Bond yields was raising and and benchmark government 5Y bond touched the highest yields since 2001.

India has come to long way from August 2013 to August 2014. Rupee is stable and everyone is talking about the Indian growth story in next 5 to 10 years. Mood has completely changed and with corrective measures RBI governor Rajan is well prepared for the further tapering of Fed. Recently ICICI has raised $500m through 5.5 yead bonds, pricing tighter than at it's own funding curve. Money has started flowing back into India and this is the case with almost all emerging countries.

Credit spreads on U.S. dollar-denominated emerging market bonds are back to pre-tantrum levels from early 2013.Bond yields of emerging countries has been tighten and prices are touching all time high. Money is flowing to emerging countries at alarming rate and this is  because of easy monetary policies across the world. There will be a reversal of this money sooner or later but looks like investors are not thinking about that and if this happen suddenly than there could be knee jerk situation again. Indian central bank chief has mentioned his worry on this and he said that we can not reliance on foreign capital, this  money will exit for better use in home countries. Most of the market participants think that this reversal could happen when US do the first rate increase. 

However it is expected that India will be less impacted due to reasons like crude oil is cheaper, high foreign exchange reserve and most importantly India currently has pro business and stable government. 

CCIL (India's clearing house) zero curve construction

CCIL (India's clearing house) zero curve construction

Bilateral and tri-party repo haircut differences duering the Financial Crisis

The Odd Behavior of Repo Haircuts during the Financial Crisis & Blog on bilateral and tri-party repo haircut differences: they can’t explain it.

Tri-Party Repo Market

Good reads on Tri party repo market,
Crisis Chronicles: The Commercial Credit Crisis of 1763 and Today’s Tri-Party Repo Market.

Fire sales are one of the three systemic risk concerns highlighted in a May 2010 whitepaper by the Federal Reserve Bank of New York on tri-party repo infrastructure reform These three risks are 1) the market’s excessive reliance on clearing-bank provision of intraday credit to complete settlement, 2) poor liquidity and credit risk management practices on the part of various classes of tri-party repo market participants, and 3) the absence of any mechanism to mitigate the risk of fire sales of collateral in the aftermath of a large-dealer default.

The first two these are being addressed or have been addressed but management of fire sale of collateral of defaulted dealer is still challenge, The Risk of Fire Sales in the Tri-Party Repo Market.

IRDA relax interest rate derivative limits for insurers

Indian insurers can now use interest rate derivatives of over one year to hedge exposures but CSAs will be required to transact, according to updated guidelines from the regulator. 

IRDA informs to insurers that after careful examinations of the comments received, the Authority now withdraws the earlier guidelines and issues fresh guidelines. Insurers are allowed to deal as user with following types of Rupee Interest Rate Derivatives to the extent permitted, and in accordance with these guidelines.

i)                    Forward Rate Agreements (FRAs);

ii)                  Interest Rate Swaps (IRS); and

iii)                Exchange Traded Interest Rate Futures (IRF).

Participants can undertake different types of plain vanilla FRAs/IRS. IRS having explicit/implicit option features are prohibited. It is to be noted that FRAs and IRS are Over-the-counter (OTC) contracts.

CSA will be required to transact these interest rate derivatives so it will require time to be operationally ready to transact CSA. "It takes time to set up a CSA programme and it is not just about negotiating a document. From an operational standpoint you also need to be able to manage the collateral process, including the posting and the reconciliation of collateral. these guidelines are a significant step forward but it will take some time before activity picks up as the players will take time to set up processes,"

"It may take two to three years for insurers to fully utilise interest rate derivatives but we do expect the industry to respond positively to the guidelines and we expect the bigger players in the market, especially those who have joint ventures with international insurers, to be the first to the market,"

Repo and how it related to sub prime crisis

The financial crisis was not caused by homeowners borrowing too much money. It was caused by giant financial institutions borrowing too much money, much of it from each other on the repurchase (repo) market. This matters, because we can't prevent the next crisis by fixing mortgages. We have to fix repos. 
Citi Group's analyst  Matt got this correct in his research report, are the brokers Broken.

"Much of the focus on financials during the credit crunch has been upon writedowns. First on subprime and CDOs of ABS, then on ABCP, ARS and a string of other products, and now on more normal loan portfolios. Investors have been almost obsessive about finding the next ‘shoe to drop’.  Yet from a credit perspective, the major question facing all financials going forward is not one of writedowns but one of funding and leverage. After all, it was the catastrophic loss of funding caused by a sudden evaporation of confidence which led to the demise of both Bear Stearns and Northern Rock, not anything to do with writedowns. The common strand linking those two institutions was their dependence on wholesale markets for funding. And yet their models were not so different from those of many other financial institutions today. The other US broker-dealers, in particular, are funded heavily through short-term repo and secured lending markets, and do not have the diversification implied by a large deposit base. Does this mean that they too are similarly vulnerable?" 

Repos are still not fixed and this market still connects banks , shadow banking entities and still have the power to convert entity or product specific crisis into systematic crisis. some of the latest comments in the news

"Regulators and policymakers currently have no reliable, ongoing information on bilateral repo market activity." -- Financial Stability Oversight Council, May 7, 2014.

"The banks remain dangerously interconnected and vulnerable to sudden runs because of their dependence on short-term, often overnight borrowing through the multitrillion-dollar repurchase agreement, or repo, market. -- Jennifer Taub, associate professor, Vermont Law School, April 4, 2014.
****

A detailed explanation about repo and how it was main driver behind the 2008 crisis, About Repo.

Size of the Fed balance sheet

A good read on Fed balance sheet size and asset buying program. 

Fed balance sheet size. 

Indian Money market instruments - Repo & Call

Repurchase Agreement (Repo) is an instrument for borrowing funds by selling securities with an agreement to repurchase the said securities on a mutually agreed future date at an agreed price which includes interest for the funds borrowed.
The reverse of the repo transaction is called ‘reverse repo’ which is lending of funds against buying of securities with an agreement to resell the said securities on a mutually agreed future date at an agreed price which includes interest for the funds lent.

It can be seen from the definition above that there are two legs to the same transaction in a repo/ reverse repo. The duration between the two legs is called the ‘repo period’. Predominantly, repos are undertaken on overnight basis. Settlement of repo transactions happens along with the outright trades in government securities. Repo that are not overnight termed as Term Repo.

Earlier repo securities in corporate debt allowed except CPs, CDs and NCDs maturing in less than one year. But from Jan 2013 RBI also permitted repo these securities. Only listed corporate debt securities that AA or above rated are eligible to be used for repo.

However volume in "Repo in corporate debt" is very less. This can be due to sharp haircut ,10% -12%-15%, while in CBLO haircuts are 5%. Also in  "Repo in corporate debt" market pricing is not based on online platform but lender needs to find out the borrower while in CBLO market pricing is determined through online ask - bid spreads.

RBI has permitted select entities (scheduled commercial banks excluding RRBs and LABs, PDs, all-India FIs, NBFCs, mutual funds, housing finance companies, insurance companies) to undertake repo in both the repo market.

Call/Notice/Term  Money - 

The call/notice/term money market is a market for trading very short term liquid financial assets that are readily convertible into cash at low cost. The money market primarily facilitates lending and borrowing of funds between banks and entities like Primary Dealers. An institution which has surplus funds may lend them on an uncollateralized basis to an institution which is short of funds. 

The period of lending may be for a period of 1 day which is known as call money and between 2 days and 14 days which is known as notice money. Term money refers to borrowing/lending of funds for a period exceeding 14 days. The interest rates on such funds depends on the surplus funds available with lenders and the demand for the same which remains volatile.

This market is governed by the Reserve Bank of India which issues guidelines for the various participants in the call/notice money market. The entities permitted to participate both as lender and borrower in the call/notice money market are Scheduled Commercial Banks (excluding RRBs), Co-operative Banks other than Land Development Banks and Primary Dealers.

Scheduled commercial banks are permitted to borrow to the extent of 125% of their capital funds in the call/notice money market, however their fortnightly average borrowing outstanding should not exceed more than 100% of their capital funds (Tier I and Tier II capital). At the same time SCBs can lend to the extent of 50% of their capital funds on any day, during a fortnight but average fortnightly outstanding lending should not exceed 25 per cent of their capital funds.

Co-operative Banks are permitted to borrow upto 2% of their aggregate deposits as end of March of the previous financial year in the call/notice money market.

Primary Dealers can borrow on average in a reporting fortnight up to 225% of the total net owned funds (NOF) as at end-March of the previous financial year and lend on average in a reporting fortnight up to 25% of their NOF.

The trades are conducted both on telephone as well as on the NDS Call system, which is an electronic screen based system set up by the RBI for negotiating money market deals between entities permitted to operate in the money market. The settlement of money market deals is by electronic funds transfer on the Real Time Gross Settlement (RTGS) system operated by the RBI. The repayment of the borrowed money also takes place through the RTGS system on the due date of repayment.

Arbitrage b/w CBLO and repo market  

There can be arbitrage opportunity for market participants who have access of both the markets. If repo rate is less than CBLO rate than banks or PDs can borrow in repo market and lend that money in CBLO market for almost risk free return. 

If CBLO rate is less than reverse repo rate than banks can borrow in CBLO market and park that money with RBI at reverse repo rate for risk free return.

So for no arbitrage CBLO rate should be in between of repo and reverse repo rate. Now reverse repo rate is always 100 basis point less than repo rate.