Decoding Global Financial

Markets

Participants in Financial Markets

 1 Overview of financial markets
2 Participants in financial markets
3 Financial Institutions

Sections 4

5
Investment alternatives

FX &Commodity

6 Factors affecting financialmarkets

7 Nuances of financial markets

2 Participants of financial markets

A. Banks

B. Exchanges

C. Insurance companies

D. Credit rating agencies

E. Pension funds

F. Corporate and retail participants

Bank as a participant in the financial market
What role do banks play in a financial market
Banks and NBFCs facilitate large financial movements as well as provide ancillary financial services; and therefore, are at the centre of working of
financial markets. Following are the major banking and NBFC categories:
Commercial Banks NBFC Micro finance institutions Payments bank
▪ Banking institutions that ▪ An NBFC does not have a ▪ A type of NBFC, MFIs provide ▪ Payments bank came into existence in
facilitate fund movement and banking licence issued by RBI, loans & other financing 2017. They are permitted to accept
management via accepting & therefore can perform only alternatives including financial demand deposits from customers upto
savings deposits and limited banking functions. Like services to the portion of a limit of ₹10,000 per customer, issue
providing loans, such as term commercial banks, NBFCs can population not having enough ATM/ debit cards(not credit cards) and
loans, mortgages and short- provide loans to customersbut accessibility to it. provide payments/ remittance services
term loans, to customers. due to the lack of banking ▪ Typically, MFIs provide small ▪ These banks were instituted with the
license, they cannot accept unsecured loans to individuals intention of widening financial
▪ In addition to these core
demand deposits from public from lower income groups and inclusion of the Indian population by
services, commercial banks
also perform other services ▪ Over the years, NBFCs have unorganised sector who do not facilitating smaller & easily accessible
such as issuance of also started performing have any accessto the banking savings accounts and improving the
investment vehicles likeFDs functions such as financial system of the country payments/ remittance services
and CDs. consulting & brokerage

State Bank of India Bajaj Finance Limited Annapurna Microfinance Pvt. Ltd Airtel Payments Bank
HDFC Bank Limited
Mahindra & MahindraFinancial Arohan Financial Services Pvt.
India Post Payments Bank
ICICI Bank Services Limited Ltd
Shriram TransportFinance
Citi Bank Disha Microfin Pvt. Ltd Paytm Payments Bank
Company Limited
Punjab National Bank
Muthoot Finance Limited Equitas Microfinance Pvt. Ltd Fino Payments Bank
Standard Chartered
Tata Capital Financial Services ESAF Microfinance &
Axis Bank Jio Payments Bank
Limited Investments Pvt.Ltd.
 Traditional earning model of abank

Overview of a traditional bank earning model

Banks earn income from two sources – interest earned on extended credit and income earned on investments. The excess of deposits over the loans
provided is invested by the bank to earn investment income, and they are one of the largest liquidity providers in the financial market

Interest on loans
Net Interest Margin

Interest to
depositors

BANK

Loans to
borrowers

Liquidity surplus/
deficit
Public deposits

Inflows for bank Outflows for bank

2 Participants of financial markets

A. Banks

B. Stock exchanges

C. Insurance companies

D. Credit rating agencies

E. Pension funds

F. Corporate and retail participants

Page 3 16 March 2021 Draft- For discussion purposes only

Table of contents

Sr.No. Area
B Background and overview
B.1 Landscape of Indian Stock Exchanges
B.2 Understanding Stock Exchanges
B.3 India’s role in Global Financial Markets
B.4 Indian Stock Exchange Trading Mechanism

Page 4 16 March 2021 Draft- For discussion purposes only

Landscape of Indian Stock Exchanges

Indian Exchanges and the Role of SEBI Primary Vs. Secondary Market
➢ An exchange can be defined as an institution facilitating the listing ➢ The primary market for stock exchanges refers to the market wherein
and trading of different asset classes, such as stocks, bonds, corporations' issue new securities through the Initial Public Offerings (IPOs)
derivatives and/or commodities. to general public for raising funds.

➢ In India, NSE and BSE are the two national exchanges along with 21
regional exchanges.
➢ The Securities and Exchange Board of India (SEBI) is theprimary
regulator of stock exchanges in India that is responsible for
promoting the growth and development of the securities markets
while protecting the rights of the investors.
➢ The secondary market is responsible for the listing and trading of all existing
securities that have already been bought and sold on the primary market.
NSE/BSE are responsible for a major proportion of the trading done in the
secondary market.
➢ The secondary market can also be in form of an Over The Counter (OTC)
market in which non-listed securities are traded without a centralized
platform regulating it.

Stock exchange Products traded Stock exchange Products traded

BombayStock Exchange (BSE)
National Stock Exchange(NSE)
Calcutta Stock Exchange
Metropolitan Stock Exchange of
India (MSEI)
Equity: Cash, IPO’s, Derivatives: Equity,
Commodity, Currency, Interest Rate, ETF’s,
mutual Funds.
Equity: Cash, IPO’s, Derivatives: Stock,
Commodity, Currency, ETF’s, mutual Funds,
Fixed Income: Bonds.
Currently under trading suspension from SEBI
Equity: Cash, IPO’s, Derivatives:Equity,
Currency
*Discontinued Debt Securitiessince 2018
India International Exchange(India
INX)
NSE International Exchange (NSE
IFSC)
National Commodity and
Derivatives Exchange
Multi Commodity Exchange of India
(MCX)
Index Derivatives: Sensex and India 50,
Commodity Derivatives: Preciousmetals,
Energy; Equity Derivatives and Debt
Equity index derivatives, commodity
derivatives, interest rate derivatives and
currency derivatives.
Cereals and Pulses, Oil and seeds, Fibres,
Spices, Index Products and metals
Bullion (Gold, Silver mini), Base metals
(Aluminium, Copper), Energy (Crude oil) and
Agri Commodities (Black pepper, cardamon
etc)
Understanding how Stock Exchanges Work
India’s role in Global Financial Markets

India’s Stock Exchanges in a Global Context Growth of F&O Segment in India

40,00,00 ,00 0

35,00,00,000
• India’s stock market capitalization is $ 2.52
30,00,00,000
trillion

Trading Volume (in Rs. Cr)

25,00,00 ,00 0
• India’s NSE represents the world’s largest
derivatives market on the trading volume and 20,00,00,000

the number of contracts traded. Trading 15,00,00,000

volume saw a growth of 58 in 2018 and
10,00,00 ,00 0
the derivatives contract grew to 6 billion.
5,00,00,000
• BSE has the highest number of listed
companies in the world compared to any other -
20 13-14 20 14-15 20 15-16 20 16-17 20 17-18 20 18-19 20 19-20
exchange with 5689 listings. It is also the
oldest stock exchange inAsia.
• India’s stock market turnover ratio has
experienced an average of 69.85 from
2003-2019
 India’s Stock Exchange Trading Mechanism

1. Finding a Broker:
• All trades are executed through trading members or brokerage firms
• Broker is the intermediary for performing all their buying/selling activities Investor Trading Mechanism in India
2. Account Creation and Registration:
• Creating an online trading account with the broker is the next step. For retail
investors, a Demat account needs to be created through which the broker will execute Investor Broker
all trades from
Retail,
Institution, NRI,
3. Placing an Order
Government Account Creation
• The investor can place bids on the securities they wish to purchase
• Securities such as Stocks, Derivatives, Bonds, Papers are available
• After specifying the quantity and type of security to buy/sell, an investor can place
that order directly through their broker Placing a Bid

4. Execution of Orders:
• The Broker executes orders given by their client Execution of
Stock Exchange
• This process is done directly through the order-matching platform Order
• NSE uses a screen-based technology system which matches the bids according to All ordersneed to be
their price and time executed through
electronic platforms
Preparation of
5. Preparation of Contracts: provided by Contract
• A contract note is sent to the investor through an automated message exchanges + PriceDiscovery
(NSE/BSE)
6. Contract settlement
• Refers to the backend process that differs for each stock exchange, the clearing Investor Contract Settlement
agency is responsible for settling all executed trades of the day and provides the final
share certificates.
2 Participants of financial markets

A. Banks

B. Exchanges

C. Insurance companies

D. Credit rating agencies

E. Pension funds

F. Corporate and retail participants

Participants in Financial markets: Insurancecompanies

Let’s get familiar with certain terms

Insurer/ Insured/
Underwriter Policy Policy period Risk Premium Claim
Policyholder

Understanding the Insurance business

Life Insurance Companies General Insurance Companies

Risk covered: Death Risk covered: Fire, Health, Travel, Motor

Policy period:?? Policy period: ??
Different types of products :

So how do Insurance companies participate in Financial markets?

 Participants in Financial markets: Insurancecompanies
Investment Assets Under Management (AUM)
Investment AUM Amount
Ason March 31, 2020 (INRcrore)
Life Fund 26,19,157
Details regarding debt securities
Pension, General Annuity and Grp Fund 8,98,045

ULIP 38,90,274

General, Health andReinsurance 3,62,656

Total 77,70,132

Investment distribution – Life Insurance Business

Type of investment Amount

Central Govt Sec. => 25%

Central Govt Sec., State Govt Sec, Other >= 50%
Approved Sec [incl. (i) above]
Investment in Housing/ Infrastructure >=15% Subject to
exposure
Other investments <=35% norms
Total LifeFund 100%

Besides debt securities, insurers investment in equity, mutual funds,

fixed deposits, property, ABS/MBS etc.
2 Participants of financial markets

A. Banks

B. Stock exchanges

C. Insurance companies

D. Credit rating agencies

E. Pension funds

F. Corporate and retail participants

Page 3 16 March 2021 Draft- For discussion purposes only

Credit rating agencies:

What are credit rating agencies?

Agencies or institutions conducting the exercise of analyzing stocks or other investment products and issuing a credit rating
which highlight the credit worthiness of the company / investment product are called Credit Rating Agencies (“CRA”)

Globally, some of the largest credit rating agencies CRA in India are regulated by the Securities and Exchanges
are as follows: Board of India (SEBI). Leading CRA in India are as listed below:

1. Credit Rating Information Services of India Limited (CRISIL)

1. Moody’s Investor Services, Inc. (Moody’s)

2. Fitch, Inc. (Fitch) 2. ICRA Limited(ICRA)

3. Standard & Poor’s Division of McGraw Hill Companies, Inc.

3. Credit Analysis & Research Limited (CARE)
(S&P)

4. India Ratings & Research Pvt.Ltd.

5. Small & Medium Enterprises Rating Agency of India (SMERA)

6. Brickwork Ratings (BWR)

Rating scales

S&P: ICRA
Long-term Long-term
Issuer Rating Description Issue Rating Rating Description
AAA Extremely Strong AAA
[ICRA]AAA Highest degree of safety, lowest credit risk
AA Very Strong AA
A Strong A [ICRA]AA (+/-) High degree of safety, very low credit risk
BBB Adequate BBB [ICRA]A (+/-) Adequate degree of safety, low credit risk
BB Less Vulnerable BB
[ICRA]BBB (+/-) Moderate degree of safety, moderate credit risk
B More Vulnerable B
CCC Currently Vulnerable CCC [ICRA]BB (+/-) Moderate risk of default
CC Currently Highly Vulnerable CC [ICRA]B (+/-) High risk of default
- Bankruptcy Filing C
[ICRA]C (+/-) Very high risk of default
SD Selective Default -
D Default D [ICRA]D In/Very near to default

Short-term Short-term
Rating Description Rating Description
A-1+ Borrower’s capacity is very strong [ICRA]A1 Very strong degree of safety, lowest credit risk
A-1 Borrower’s capacity is strong
[ICRA]A2 Strong degree of safety, low credit risk
A-2 Borrower’s capacity is obligatory
A-3 Borrower’s capacity is adequate but could be vulnerable to
[ICRA]A3 Moderate degree of safety, higher credit risk than A1, A 2
adverse circumstances
B Borrower’s capacity is subject to major ongoing uncertainties [ICRA]A4 Minimal degree of safety, very high credit risk, susceptible
C Borrower’s capacity is vulnerable to non-payment to default
SD Selective Default [ICRA]D In/Near default
D Default
Rating scales

Credit rating on ILFS issued by ICRA on 01st May 2017 Credit rating on ILFS issued by ICRA on 08th September 2018

Credit rating on ILFS issued by ICRA on 17th September 2018

Rating methodologies

Industry specific credit rating

methodologies
Rating methodologies

Characteristics of a rating:

Two types of rating

Objectivity methods:
Model driven ratings
• Structural model
• Merton
• Black cox
• Reduced form model
Analyst driven ratings
• Business risk profile and financial
Verifiability Homogeneity
risk profile
Rating methodologies
Feedback loop

Continuous Live data Weight allocation Optimized weights Publish top performing
feed/processing using Correlation schemes as per the
Analysis Dynamic recalibration Performance Index (PI) on
leading to better results iNVESTWISE

Trends in
returns AUM
Scheme Re-Calibration/Fine tuning
Yield to
Maturity
Manager
experience Policy
Expense constraint
Ratio
► Release a list of top 10 schemes
based on dynamically constructed
► Step 1: Rank the variables to PI.
► Monthly data extraction, standardize them. ► Analyze model performance by
prepping for processing. ► Step 2: Calibrate the weights back testing the PI with Actual
► Ranking of the selected variables using correlation analysis on outcome.
for standardization and model STATA and run the ► Display output using iNVESTWISE
input. evolutionary optimization (user friendly dashboard)
algorithm.
► Imputation of missing values ► Deploy the model for monthly
► Step 3: Feed it back with error investments.
► Removal of noise.
correction and recalibrate the
weights.
2 Participants of financial markets

A. Banks

B. Stock Exchanges

C. Insurance companies

D. Credit rating agencies

E. Pension funds

F. Corporate and retail participants

Pension fund Investment framework

Factors affecting choice of investment

Return Risk Liquidity Time Internal External

Objective tolerance needs horizon policies regulation

Investment philosophy and regulations

Key decision
Return objective Risk Tolerance Liquidity needs Time Horizon Regulation
makers

Low.
Generate return
Treasurer prescribed by EPFO Low It will be high when Long term Ministry of Finance
net attrition is higher
Global Market Vs Indian market comparison

Pension fund assets to GDP ( )

USA Largest provident and pension funds in
140
1 3 5 .7 1 3 6 .8 1 3 5 .8
India
120 1 3 1 .9
1 1 9 .8 1 2 3 .4
1 1 6 .7
100
80
60
40
20
0
2010 2011 2012 2013 2014 2015 2016

India
2.0

1.5

1.0
1.1
0.8
0.5
0.6
0 .2 0 .2 0.3 0.4
0.0
2010 2011 2012 2013 2014 2015 2016
Global Market Vs Indian market comparison

Asset Allocation among Pension Funds globally (2016)

➢ Equity investment is used as a

tool to enhance fund returns,
globally

➢ On an average, pension funds in

Australia, USA and UK have
higher allocation towardsequity
and equity-related instruments

➢ India currently permits

investment in equity instruments
in the range of 5 - 1 5 for
pension funds
Leading Privately held PF Trust Working philosophy

Illustrative components of investment management policy for pension fund

 Challenges faced by PF Trusts in India

Use Case
Investment asset class Portfolio weight Yield

G-Sec and related investments 45 5.80

Pensions funds: A ticking time bomb
Debt instruments and related
35 6.00
investments • Statutory pay out rate of 8.50 in falling yield
scenario.
Not
Short term debt instruments Nil
Applicable • Higher yielding papers maturing and replaced
by lower yielding paper
Equities and relatedinstruments 15 11.00
• How to manage Credit risk in portfolio- Punjab
Asset backed, miscellaneous state paper defaulting, 476 defaults by CRISIL
5 10
investments in H2FY20,AT 1 bonds concern

1. What is the rate of interest which EPFO has declared ?

2. What is the W.Avg Yield ?
3. How to ensure active management of the portfolio ?
4. Managing ALM mismatch in current scenario where credit risk ,liquidity risk and market risk are substantial
5. Liquidity challenge during restructuring
6. Managing market driven rates and statutory payout rate differential
7. Many PF trust surrendered their portfolio to EPFO due to IL&FS,DHFL exposures in last 2 years
2 Participants of financial markets

A. Banks

B. Exchanges

C. Insurance companies

D. Credit rating agencies

E. Pension funds

F. Corporate and retail participants

 Corporate and retail participants in the financial market
What roles do corporate/ retail participant play in the financial market
Corporates represent the entire business community that has access to the financial markets to service different needs. They are one of the largest
participants in the financial markets primarily as a borrower of capital or as an investor of surplus funds. Individuals who participate in the financial
markets are called retail participants. Compared with corporates, retail participants access the financial market for a smaller amount.
Corporate participants Retail participants
Corporate as a borrower A retail participant enters the financial market either as a borrower when
Corporates participate in the financial market as borrowers because they need capital she wants to take loan for various purposes, such as home loan, consumer
for business operations and for business expansions. They can raise money from the loan (to purchase an electronic equipment) and auto loan or as investors to
financial market in form of either equity or debt. invest excess earnings saved from their current incomes.
Cost of loans are a combination of a base rate plus premium charged by the
financial institution basis the credit quality of the retail borrower. In India,
credit quality of a retail borrower can be basis the retailer’s CIBIL score.
Growth in retail credit is a very important indicator to gage the growth in
the economy

Corporate as an investor
Corporates invest their surplus cash, which they would not use towards capital
expansion, in various investment products. Corporates invest such surplus cash into
different investment products, such as FDs, MFs, CDs, CPs, G-Sec and tax-free bond
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