Introduction
• The international financial system exists to
facilitate the design, sale, and exchange of a
broad set of contracts with a very specific set
of characteristics.
• We obtain financial resources through this
system:
– Directly from markets, and
– Indirectly through institutions.
Introduction
•
Indirect Finance: An institution stands between lender and
borrower.
–
•
Direct Finance: Borrowers sell securities directly to lenders
in the financial markets.
–
•
•
We get a loan from a bank or finance company to buy a car.
Direct finance provides financing for governments and corporations.
Asset: Something of value that you own.
Liability: Something you owe.
Funds Flowing through the Financial System
Introduction
• Financial development is linked to economic
growth.
• The role of the financial system is to facilitate
production, employment, and consumption.
• Resources are funneled through the system so
resources flow to their most efficient uses.
Meaning of Indian financial system
• The financial system enables lenders and
borrowers to exchange funds.
• India has a financial system that is controlled by
independent regulators in the sectors of
insurance, banking, capital markets and various
services sectors.
• Thus, a financial system can be said to play a
significant role in the economic growth of a
country by mobilizing the surplus funds and
utilizing them effectively for productive purposes.
FEATURES OF INDIAN FINANCIAL SYSTEM:
• It plays a vital role in economic development
of a country.
• It encourages both savings and investment.
• It links savers and investors.
• It helps in capital formation.
• It helps in allocation of risk.
• It facilitates expansion of financial markets.
Definition of Financial System:
• The various type of services that are provided by financial institutions like
banks, insurance companies, pensions, fund etc. to the people of the
country makes a financial system.
1. The Financial Institutions in India are broadly divided into two categories
viz. Banks and Non-Banking Financial Institutions (NBFI). A bank accepts
demand deposits while NBFIs do not accept them. The banks have been
authorised to issue checks but NBFIs cannot issue them.
2. Banks are classified into commercial and cooperative. Commercial banks
operate their business for profit purposes while the basis of operation for
cooperative banks is on cooperative lines i.e. service to its members and the
society. In comparison to a commercial bank, Cooperative banks provide a
higher rate of interest.
Commercial banks are of two categories viz.
• a) Scheduled commercial banks
b) Non-scheduled commercial banks.
• A scheduled bank is a bank that has been included in the 2nd schedule of
the RBI Act 1934. A scheduled bank also had to be a corporation and the
Paid-up capital for it should be at least Rs. 500 crores.
• The Non-Scheduled banks have to put some reserve requirements like
SLR, and CRR according to the banking regulation act 1949. Scheduled
Banks are required to maintain reserve requirements with RBI as per the
RBI Act 1934.
3. Co-operative Banks: These are of two types• a) Urban Co-operative banks (UCB)
b) Rural Co-operative banks.
The Urban Co-operative banks (UCB) are also known as Primary Cooperative Banks. They help the communities, and localities workplace
groups and are set up mostly in urban and semi-urban areas. Their
main customers are mainly small borrowers and businesses.
These UCBs are also classified into Scheduled and Non-scheduled
categories, which are then further classified into a single state and
multi-state.
4. Public Sector Banks:
• Banks are controlled by the federal or state governments, with a
combined ownership of more than 51 percent. SBI and its affiliates,
Punjab National Bank, Bank of India, and others are examples. Those
Nationalized Banks (private banks taken over by the government)
which were nationalized in 1969 and 1980s are also public sector
banks as the government owns more than 51% of these banks.
5. Private Sector Banks:
• These are those Indian Banks that are owned by private individuals
for example ICICI bank, HDFC bank, Axis Bank etc.
6. Foreign Banks:
• Those Banks that are established and provided services of banking in India but are
owned by foreign entities are called foreign banks. for example, Citi Bank, HSBC Banks,
Standard chartered banks etc.
7. Regional Rural Banks (RRBs):
• The Regional Rural Banks Act of 1976 established RRBs in 1975 with the goal of
developing the rural economy by providing credit and other facilities, particularly to
small and marginal farmers, agricultural labourers, artisans, and small entrepreneurs, for
the purpose of developing agriculture, trade, commerce, industry, and other productive
activities in rural areas. The national government, the concerned state government, and
the sponsor bank each own 50:15:35 of RRBs (each RRB is sponsored by a particular
bank). RRBs are required to distribute 75% of their funding to priority industries.
NABARD also supervised RRBs.
8. Local Area Banks (LAB):
• They were established in 1996 as part of a Government of India scheme. The
government intended to establish new private local banks with control over two or three
adjacent areas. The goal of establishing local area banks was to allow local institutions to
mobilise rural savings and make them available for investments in local areas. There are
just four Non-Scheduled Local Area Banks in India, one of which is Coastal Local Area
Bank in Vijayawada, Andhra Pradesh.
• The RBI regulates and supervises three main areas of the Non-Banking Financial
Institutions (NBFIs) sector in India: All India Financial Institutions (AIFIs), Non-Banking
Financial Companies (NBFCs), and Primary Dealers (PDs). Credit Information Companies
(CIC) are a type of non-banking financial organisation regulated by the Reserve Bank of
India.
9. AIFIs are institutional mechanisms tasked with delivering long-term
finance to specific sectors. The RBI currently regulates and supervises four
AIFIs, also known as Development Financial Institutions (DFIs).
10. NABARD:
• NABARD was established in 1982 under the provisions of the National
Bank for Agriculture and Rural Development Act 1981. NABARD gives
credit to promote agriculture, small scale industries, cottage and village
industries, handicrafts and other rural crafts and other allied economic
activities in rural areas. NABARD extends assistance to the government,
RBI and other organizations in matters relating to rural development. It
offers training and research facilities for banks, cooperatives and
organizations in matters relating to rural development
11. Small Industries Development Bank of India (SIDBI):
• SIDBI was established in 1990 under the provisions of the Small
Industries Development of India Act 1989 SIDBI serves as the primary
financial institution for promoting, funding, and developing the Micro,
Small, and Medium Enterprise (MSME) sector, as well as for
coordinating the functions of other organisations involved in similar
activities. SIDBI primarily provides banking institutions with indirect
financial support (in the form of refinancing) in order for them to lend
to MSMEs.
12. MUDRA Bank:
• MUDRA (Micro Units Growth and Refinance Agency Ltd.) is a
government-owned financial agency dedicated to the development
and refinancing of micro-enterprises. MUDRA Ltd, a non-banking
finance company, has been set up as a subsidiary of SIDBI pending the
passing of an act creating MUDRA Bank. MUDRA’s goal is to provide
funding to non-corporate (informal sector) small businesses in rural
and urban areas with financing needs of up to Rs 10 lakhs, such as
small manufacturing units, shopkeepers, etc. MUDRA would be in
charge of refinancing all Last Mile Financiers, including Micro Financial
Institutions, Non-Banking Finance Companies, Societies, Trusts,
Companies, Co-operative Societies, Small Banks, Scheduled
Commercial Banks, and Regional Rural Banks, who lend to micro/small
business entities engaged in manufacturing, trading, and services.
13. Non-Banking Financial Companies (NBFCs):
• The NBFC is a company governed by the Companies Act, 1956/2013,
that deals with loans and advances, the acquisition of
shares/bonds/debentures issued by the government or a local
authority, or other marketable securities of a similar nature, leasing,
hire-purchase, insurance, and chit business, but not with agriculture,
industrial activity, or the purchase or sale of any goods. Private sector
institutions make up the majority of NBFCs.
14. Primary dealers (PDs):
• Primary dealers are RBI-registered companies with the authority to buy
and sell government securities. In the primary market, PDs purchase
government securities directly from the government (RBI issues these
assets on behalf of the government), with the intention of reselling them
to other buyers in the secondary market. As a result, they play an
important role in the primary and secondary government securities
markets.
15. Credit Information Companies (CIC):
• A CIC is a non-profit organisation that accepts banks, NBFCs, and financial
institutions as members and collects data and identity information for
individual customers and enterprises. CICs tell banks whether or not a
potential borrower is creditworthy based on his payment history. The
ability of lenders to assess risk and of consumers to receive credit at
competitive rates is determined by the quality of information available.
The RBI regulates and licenses credit information companies (CICs) under
the Credit Information Companies (Regulation) Act 2005. TransUnion
Credit Information Bureau of India Limited (CIBIL), Equifax, Experian, and
High Mark Credit Information Services are the four CICs currently
operating in India.
16. Payment Banks:
• In August 2015, the Reserve Bank of India (RBI) approved 11 applications
for Payment Bank licenses. The Reserve Bank of India has capped the
amount of deposits that payment banks can receive from individuals at Rs.
1 lakh. Only those companies that are truly engaged in targeting the poor
will be able to apply for payment bank licenses as a result of this
restriction. As a result, migrant workers, self-employed individuals, lowincome households, and others will be the primary beneficiaries of
payment banks’ low-cost savings accounts and remittance services,
allowing those who currently transact only in cash to make their first foray
into the formal banking system (payment banks will not be permitted to
lend or issue credit cards). Only demand deposits will be accepted by
payment banks.
17. Small Finance Banks:
• In September 2015, RBI granted licenses to 10 applicants for Small Finance
Banks which is a step in the direction of furthering financial inclusion.
• The small finance banks shall primarily undertake basic banking activities
of acceptance of deposits and lending to unserved and underserved
sections including small business units, small and marginal farmers, micro
and small industries and unorganized sector entities.
• COMPONENTS/ CONSTITUENTS OF INDIAN
FINANCIAL SYSTEM
The following are the four major components
that comprise the Indian
Financial System:
1. Financial Institutions
2. Financial Markets
3. Financial Instruments/ Assets/ Securities
4. Financial Services.
Components of the Financial System:
• Financial institutions
The term financial institution defines those
institutions which provide a wide variety of
deposit, lending, and investment products to
individuals, businesses, or both. Some other
financial institutions provide services and
account for the general public, others are
more likely to serve only certain consumers
with more specialized offerings.
1. Central Banks
• These are the financial institutions that regulate, oversight and look
after the management of all other banks. RBI is known as the
central bank of India. An individual does not have direct contact
with a central bank instead, large financial institutions work directly
with the RBI to provide products and services to the general public.
2. Retail and Commercial Banks
• These Banks provide products to consumers and commercial banks
worked directly with businesses. At present, most banks offer
deposit accounts, lending and financial advice. These banks cater
for services like checking and savings accounts, certificates of
deposit (CDs), personal and mortgage loans, credit cards, and
business banking accounts.
3. Internet Banks
• These types of banks work the same as retail banks. Internet bank is
of two type• Digital banks- These are online-only platforms affiliated with
traditional banks.
• Neo banks- These banks are not affiliated with any bank but
themselves. These are pure digital native banks.
4. Credit Unions
• These are the financial institution that was
founded and administered by its member and
provide standard banking services.
These unions help a specific population based on
their field of membership, such as military
personnel or teachers.
5. Insurance Companies
• These companies help individuals in transferring
the risk of loss. These companies take care of
individuals and businesses from financial loss
caused due to disability, death, accidents,
property damage and other catastrophes.
Financial Markets
• Financial markets are places where financial
instruments are bought and sold.
• These markets are the economy’s central
nervous system.
• These markets enable both firms and
individuals to find financing for their activities.
• These markets promote economic efficiency:
– They ensure resources are available to those who
put them to their best use.
– They keep transactions costs low.
The Role of Financial Markets
1. Liquidity:
– Ensure owners can buy and sell financial
instruments cheaply.
– Keeps transactions costs low.
2. Information:
– Pool and communication information about
issuers of financial instruments.
3. Risk sharing:
– Provide individuals a place to buy and sell risk.
The Structure of Financial Markets
1. Distinguish between markets where new
financial instruments are sold and where
they are resold or traded: primary or
secondary markets.
2. Categorize by the way they trade:
centralized exchange or not.
3. Group based on the type of instrument they
trade: as a store of value or to transfer risk.
Types of financial market
1. Stock market
• The stock market trades shares of ownership of public companies.
•
Each share comes with a price, and investors make money with the stocks when they perform well
in the market.
•
It is easy to buy stocks.
•
The real challenge is in choosing the right stocks that will earn money for the investor.
• There are various indices that investors can use to monitor how the stock market is doing.
•
When stocks are bought at a cheaper price and are sold at a higher price, the investor earns from
the sale.
2. Bond market
• The bond market offers opportunities for companies and the government to secure money to
finance a project or investment.
• In a bond market, investors buy bonds from a company, and the company returns the amount of
the bonds within an agreed period, plus interest.
3. Commodities market
• The commodities market is where traders and investors buy and sell natural resources or
commodities such as corn, oil, meat, and gold.
• A specific market is created for such resources because their price is unpredictable.
• There is a commodities futures market wherein the price of items that are to be delivered at a
given future time is already identified and sealed today.
4. Derivatives market
• Such a market involves derivatives or contracts whose value is based on the market value of the
asset being traded.
• The futures mentioned above in the commodities market is an example of a derivative.
Participants of financial market
•
•
•
•
•
•
•
•
•
Banks
Primary dealers
Financial Institutions (FIs)
Stock Exchanges
Brokers
Investment Bankers (Merchant Bankers)
Foreign Institutional Investors (FIIs)
Custodians
Depositories
Financial Markets
• The marketplace where buyers and sellers
participate in the trade of assets such as
equities, bonds, currencies, and derivatives.
• Consists of 2 types:
1. Money Market – deals in short-term credit (<
1 yr).
2. Capital Market –handles medium-term &
long-term credit. (> 1 yr).
Money Market:
It is characterized by two sectors:
1. Organized sector — this sector comes within the direct
purview of RBI. It includes banking & sub-markets.
• a. Banking sector – Commercial banks [under Banking
regulation act 1949 & consist of both private & public],
RRBs, Cooperative Banks.
b. Sub Markets – Meet the need of govt and industries.
It includes call money, Bill market [Commercial bill, TBill], Certificate of Deposit [CD] & Commercial Paper
[CP].
2. Unorganized sector– consists of indigenous bankers,
money lenders, non-banking financial institutions, etc.
Capital Market:
• This market comprises buyers & sellers, who trade in
equity (ownership of asset) &debt (loan). It is regulated
by SEBI (established in 1992).
The institutions in the capital market are called NBFCs
(Non-banking financial companies). But it’s not
necessary that all NBFCs are capital market institutions.
• RBI defines NBFC as – ‘A NBFC is a company registered
under the Companies Act, 1956 and is engaged in the
buss of loans & advances, acquisition of share/ stock
issued by Government. It doesn’t include any
institution whose principal buss is agriculture activity,
industrial activity, or sale/purchase of the immovable
property.
Financial instrument
• A financial instrument is defined as a contract
between individuals/parties that holds a
monetary value.
• They can either be created, traded, settled, or
modified as per the involved parties'
requirement.
• In simple words, any asset which holds capital
and can be traded in the market is referred to as
a financial instrument.
• Some examples of financial instruments are
cheques, shares, stocks, bonds, futures, and
options contracts.
• Financial instruments can be primarily classified into
two types – derivative instruments and cash
instruments.
• Derivative instruments can be defined as instruments
whose characteristics and value can be derived from its
underlying entities such as interest rates, indices or
assets, among others. The value of such instruments
can be obtained from the performance of the
underlying component. Also, they can be linked to
other securities such as bonds and shares/stocks.
• Cash instruments, on the other hand, are defined as
instruments which can be transferred and valued
readily in the market. Some of the most common
examples of cash instruments are deposits and loans
where the lenders and borrowers are required to be
agreed upon.
Other Classifications
• Financial instruments can also be classified based on the asset class,
i.e. equity-based and debt-based financial instruments.
• Equity-based financial instruments include securities, such as
stocks/shares. Also, exchange-traded derivatives, such as equity
futures and stock options, fall under the same category.
• Debt-based financial instruments, on the other hand, consist of
short-term securities, such as commercial paper (CP) and treasury
bills (T-bills) which have a maturity period of one year or less.
• Cash instruments such as certificates of deposits (CDs) also fall
under this category. On the same lines, exchange-traded
derivatives, such as short-term interest rate futures fall under this
category.
• Since the maturity period on long-term debt-based financial
instruments exceeds a year, securities such as bonds fall under the
category. Exchange-traded derivates include bond futures, and
options are the other examples.
Financial Instruments
Financial Instruments: The written legal
obligation of one party to transfer
something of value, usually money, to
another party at some future date, under
certain conditions.
– The enforceability of the obligation is
important.
– Financial instruments obligate one party
(person, company, or government) to transfer
something to another party.
– Financial instruments specify payment will be
made at some future date.
– Financial instruments specify certain conditions
under which a payment will be made.
Uses of Financial Instruments
• Three functions:
– Financial instruments act as a means of payment (like money).
• Employees take stock options as payment for working.
– Financial instruments act as stores of value (like money).
• Financial instruments generate increases in wealth that are
larger than from holding money.
• Financial instruments can be used to transfer purchasing power
into the future.
– Financial instruments allow for the transfer of risk (unlike money).
• Futures and insurance contracts allows one person to transfer
risk to another.
• The use of borrowing to finance part of an
investment is called leverage.
• How did this happen?
– The more leverage, the greater the risk that an
adverse surprise will lead to bankruptcy.
• The more highly leveraged, the less net worth.
• How did this happen?
– Some important financial institutions, during the
crisis, were leveraged at more than 30 times their
net worth.
– When losses are experienced, firms try to
deleverage to raise net worth.
• When too many institutions deleverage, prices fall,
losses increase, net worth falls more.
– This is called the “paradox of leverage”.
Characteristics of Financial Instruments
• These contracts are very complex.
• This complexity is costly, and people do not
want to bear these costs.
• Standardization of financial instruments
overcomes potential costs of complexity.
– Most mortgages feature a standard application
with standardized terms.
Characteristics of Financial Instruments
• Financial instruments also communicate
information, summarizing certain details
about the issuer.
– Continuous monitoring of an issuer is costly and
difficult.
• Mechanisms exist to reduce the cost of
monitoring the behavior of counterparties.
– A counterparty is the person or institution on the
other side of the contract.
Characteristics of Financial Instruments
• The solution to high cost of obtaining
information is to standardize both the
instrument and the information about the
issuer.
• Financial instruments are designed to handle
the problem of asymmetric information.
Underlying Versus Derivative Instruments
• Two fundamental classes of financial
instruments.
– Underlying instruments are used by
savers/lenders to transfer resources directly to
investors/borrowers.
• This improves the efficient allocation of resources.
• Examples: stocks and bonds.
Underlying Versus Derivative Instruments
• Derivative instruments are those where their
value and payoffs are “derived” from the
behavior of the underlying instruments.
– Examples are futures and options.
– The primary use is to shift risk among investors.
A Primer for Valuing Financial
Instruments
Four fundamental characteristics influence the value of a
financial instrument:
1. Size of the payment:
– Larger payment - more valuable.
2. Timing of payment:
– Payment is sooner - more valuable.
3. Likelihood payment is made:
– More likely to be made - more valuable.
4. Conditions under with payment is made:
– Made when we need them - more valuable.
A Primer for Valuing Financial Instruments
We organize financial instruments by how
they are used:
• Primarily used as stores of value
1. Bank loans
•
Borrower obtains resources from a lender to
be repaid in the future.
2. Bonds
•
•
A form of a loan issued by a corporation or
government.
Can be bought and sold in financial markets.
A Primer for Valuing Financial Instruments
3. Home mortgages
•
Home buyers usually need to borrow using the home
as collateral for the loan.
– A specific asset the borrower pledges to protect the lender’s
interests.
4. Stocks
•
•
•
The holder owns a small piece of the firm and
entitled to part of its profits.
Firms sell stocks to raise money.
Primarily used as a stores of wealth.
A Primer for Valuing Financial Instruments
5. Asset-backed securities
•
•
Shares in the returns or payments arising from
specific assets, such as home mortgages and student
loans.
Mortgage backed securities bundle a large number of
mortgages together into a pool in which shares are
sold.
– Securities backed by sub-prime mortgages played an
important role in the financial crisis of 2007-2009.
A Primer for Valuing Financial Instruments
Primarily used to Transfer Risk
1. Insurance contracts.
•
Primary purpose is to assure that payments
will be made under particular, and often rare,
circumstances.
2. Futures contracts.
•
•
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An agreement between two parties to
exchange a fixed quantity of a commodity or
an asset at a fixed price on a set future date.
A price is always specified.
This is a type of derivative instrument.
A Primer for Valuing Financial Instruments
3. Options
•
•
•
Derivative instruments whose prices are based on the
value of an underlying asset.
Give the holder the right, not obligation, to buy or sell
a fixed quantity of the asset at a pre-determined price
on either a specific date or at any time during a
specified period.
These offer an opportunity to store value
and trade risk in almost any way one would
like.
• The biggest risk we all face is becoming
disabled and losing our earning capacity.
– Insuring against this should be one of our highest
priorities.
– More likely than our house burning down.
• It is important to assess to make sure you
have enough insurance.
• One risk better transferred to someone else.
Flow of Funds through Financial
Institutions
The Role of Financial Markets
1. Liquidity:
– Ensure owners can buy and sell financial
instruments cheaply.
– Keeps transactions costs low.
2. Information:
– Pool and communication information about
issuers of financial instruments.
3. Risk sharing:
– Provide individuals a place to buy and sell risk.
The Structure of Financial Markets
1. Distinguish between markets where new
financial instruments are sold and where
they are resold or traded: primary or
secondary markets.
2. Categorize by the way they trade:
centralized exchange or not.
3. Group based on the type of instrument they
trade: as a store of value or to transfer risk.
Financial Security Market:
This market is known asa) Government Securities [gilt edge] security
market and
b) Industrial Security Market [New Issue Market
is the primary market & Old Issue Market is the
secondary market].
Development Financial Institutions: They
provide long-term loans to industries engaged in
infrastructure where projects have long
gestation periods & require long term loans.
Financial services:
• The purpose of Financial Services is to cater for a person
with borrowing, selling or purchasing securities, allowing
payments and settlement, lending and borrowing.
• These services help in the management of funds as the
money is invested efficiently and also help to get the
required funds.
• These services are provided by the assets management and
liability management companies.
These services are• Banking services- like cash deposit, issuing debit and
credit cards, opening accounts, Fixed deposit, loan facility
etc.
• Insurance services- like issuing of insurance, selling
policies, insurance undertaking and brokerages, etc.
• Foreign exchange services- currency exchange, foreign
exchange, etc.
• Investment services- like asset management etc.
Regulatory Environment
• Regulations of financial institutions basically focus
on providing stability to the financial system, fair
competition, consumer protection, and the
prevention and reduction of financial crimes.
• The banking related functions, such as issue of
license to start new banks / branches, matters
relating to interest rates, loan policies, investments,
prudential exposure norms etc. are regulated and
supervised by the Reserve Bank of India under the
provisions of the Banking Regulation Act, 1949
RBI
• Reserve Bank regulates commercial and urban cooperative banks, development finance institutions (DFIs)
and non-banking financial companies (NBFCs).
• There are 293 commercial banks (289 scheduled and 4
non-scheduled), 1,926 urban co-operative banks (UCBs), 9
DFIs and 13,671 NBFCs (of which 584 NBFCs are permitted
to accept/hold public deposits).
• In addition, the Reserve Bank is also the regulator in
respect of State and district central co-operative banks
[(the supervision is vested with the National Bank for
Agriculture and Rural Development (NABARD)].
• Life insurance companies and mutual funds are regulated
by the Insurance Regulatory and Development Authority
(IRDA) and the Securities and Exchange Board of India
(SEBI), respectively.
• The Reserve Bank has a legislative mandate to regulate the interest rate
and foreign exchange markets which are critical for the resilient
functioning of the financial system and the broader economy, and for
ensuring financial stability.
• As part of this mandate, the Reserve Bank is tasked with the regulation,
development and oversight of the interest rate markets, including the
Government Securities market; money markets including the market for
repo in Government securities and corporate bonds; foreign exchange
markets; derivatives on interest rates/prices, foreign exchange rates and
credit.
• The Reserve Bank is also responsible for the regulation of financial
market infrastructure, including financial market benchmarks, for these
markets.
• The Reserve Bank regulates financial markets within the overarching
statutory framework of the Reserve Bank of India Act, 1934.
• The Government Securities Act, 2006, Foreign Exchange Management
Act, 1999, the Bilateral Netting of Qualified Financial Contracts Act, 2020
and the Payment and Settlement Systems Act, 2007.
• The Reserve Bank authorises Electronic Trading Platforms
(ETPs) under the Electronic Trading Platforms (Reserve Bank)
Directions, 2018.
• ETPs are any electronic system, other than a recognised stock
exchange, on which transactions in eligible instruments like
securities, money market instruments, foreign exchange
instruments, derivatives, etc. are contracted.
• No entity shall operate an ETP without obtaining prior
authorisation of RBI.
• The prudential guidelines / directions issued by the Reserve
Bank under its statutory powers to eligible market
participants form the broad regulatory framework .
• For the interest rate markets, including the Government
Securities market; money markets, including the market for
repo in Government securities and corporate bonds; foreign
exchange markets; derivatives on interest rates/prices, foreign
exchange rates and credit.
Clearing Corporation of India Ltd (CCIL):
• CCIL is a Central Counterparty (CCP) which was set up in April 2001 to
provide clearing and settlement for transactions in Government securities,
foreign exchange and money markets in the country.
• CCIL acts as a central counterparty in various segments of the financial
markets regulated by the RBI .
• The government securities segment, i.e. outright, market repo and triparty
repo, USD-INR and forex forward segments.
• Moreover, CCIL provides non-guaranteed settlement in the rupee
denominated interest rate derivatives like Interest Rate Swaps/Forward
Rate Agreement market.
• It also provides non-guaranteed settlement of cross currency trades to
banks in India through Continuous Linked Settlement (CLS) bank by acting
as a third-party member of a CLS Bank settlement member.
• CCIL also acts as a trade repository for OTC interest rate and forex derivative
transactions.
• The Board is empowered to organize, maintain, control, manage, regulate and
facilitate the operations of Clearing Corporation and all activities of the
Members of Clearing Corporation.
•
MANAGEMENT COMMITTEE
1. CONSTITUTION
• The Board may appoint one or more Management Committee(s) for the
purposes of managing the day-to-day affairs of the different segment(s) of
Clearing Corporation.
• The Board may decide on the constitution, duration and powers of the
Management Committee(s).
• Nomination and withdrawal of the nominees from the Management
Committee(s) and appointment of office bearers including the terms and
conditions governing such appointment, and rules and procedures for the
functioning of the Management Committee(s).
2. POWERS OF MANAGEMENT COMMITTEE
• The Management Committee(s) shall carryout and implement all
directives issued by the Board from time to time and shall be bound to
comply with all the conditions of delegation and perform within the
limitations of the powers of the Management Committee(s) as may be
prescribed.
Governmet Philosophy
• Governments can create subsidies, taxing the public and giving the
money to an industry, or tariffs, adding taxes to foreign products to
lift prices and make domestic products or Financial Markets
• A role for the government in the financial markets consists of:
regulation (passive rules), intervention (active discretion), and their
personal financing needs.
• Three of the most important regulatory rules for maintaining a
stable economy are: a clear understanding of the fundamental role
of the financial intermediary (saving, lending, and risk hedging), the
use of interest rate caps, and implementation of an effective profit
allocation scheme.
• To measure the personal use of the financial markets by
governments, their presence on foreign exchanges is examined to
note discrepancies from the theoretical norm.
• A government listing guide is provided that details the listing
preferences of foreign governments onto stock exchanges. The
preferred foreign exchanges for governments are: Frankfurt,
Luxembourg, London, and Switzerland.
1. Metaphysics
1.1 What is Money?
• Money is so ever-present in modern life that we tend to take its existence and
nature for granted. But do we know what money actually is? Two competing
theories present fundamentally different ontologies of money.
• The commodity theory of money: A classic theory, holds that money is a kind of
commodity that fulfills three functions: it serves as
(i) a medium of exchange,
(ii) a unit of account, and
(iii) a store of value.
• The credit theory of money: According to the main rival theory, coins and notes
are merely tokens of something more abstract: money is a social construction
rather than a physical commodity. The abstract entity in question is a credit
relationship; that is, a promise from someone to grant (or repay) a favor (product
or service) to the holder of the token. In order to function as money, two further
features are crucial: that
(i) the promise is sufficiently credible, that is, the issuer is “creditworthy”; and
(ii) the credit is transferable, that is, also others will accept it as payment for
trade.
1.2 What is Finance?
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One may view “finance” more generally that is, the financial sector or system as an extension
of the monetary system.
It is typically said that the financial sector has two main functions: (1) to maintain an effective
payments system; and (2) to facilitate an efficient use of money.
The latter function can be broken down further into two parts. First, to bring together those
with excess money (savers, investors) and those without it (borrowers, enterprises), which is
typically done through financial intermediation (the inner workings of banks) or financial
markets (such as stock or bond markets). Second, to create opportunities for market
participants to buy and sell money, which is typically done through the invention of financial
products, or “assets”, with features distinguished by different levels of risk, return, and
maturation.
The modern financial system can thus be seen as an infrastructure built to facilitate
transactions of money and other financial assets, as noted at the outset.
It is important to note that it contains both private elements (such as commercial banks,
insurance companies, and investment funds) and public elements (such as central banks and
regulatory authorities).
Financial assets: the modern finance consists of several other “asset types” besides money;
The typical distinction here is between financial and “real” assets, such as buildings and
machines, because financial assets are less tangible or concrete.
Intrinsic value: Perhaps the most important characteristic of financial assets is that
their price can vary enormously with the attitudes of investors. Put simply, there are two
main factors that determine the price of a financial asset: (i) the credibility or strength of the
underlying promise (which will depend on the future cash flows generated by the asset); and
(ii) its transferability or popularity within the market, that is, how many other investors are
interested in buying the asset.
2. Epistemology
• A central concept here is that of risk.
• Since financial assets are essentially promises of future
money payments, a main challenge for financial agents
is to develop rational expectations or hypotheses about
relevant future outcomes.
• The two main factors in this regard are (1) expected
return on the asset, which is typically calculated as the
value of all possible outcomes weighted by their
probability of occurrence, and (2) financial risk, which
is typically calculated as the level of variation in these
returns.
• The concept of financial risk is especially interesting
from a philosophical viewpoint since it represents the
financial industry’s response to epistemic uncertainty.
3. Philosophy of Science
• A third aspect of financial models concerns the way they incorporate
uncertainty .
• Some of the problems of contemporary financial (and
macroeconomic models are due to the way they model uncertainty
as risk.
• Both neo-classical models and behavioral economics capture
uncertainty as probabilistic uncertainty.
• The philosophy of science literature that pertains to financial
economics is, however, still fairly small.
4. Ethics
• Having considered the epistemic and scientific challenges of finance,
we now turn to the broad range of compelling ethical challenges
related to money and finance.
• The present part is divided into three sections, discussing 1) the claim
that financial activities are always morally suspect, 2) various issues of
fairness that can arise in financial markets, and 3) discussions about
the social responsibilities of financial agents.
5. Political Philosophy
• The financial system and the provision of money
indeed raise a number of questions that connect
it to the “big questions” of political philosophy.
• Including questions of democracy, justice, and
legitimacy, at both the national and global levels.
• The discussions around finance in political
philosophy can be grouped under three broad
areas: financialization and democracy; finance,
money and domestic justice; and finance and
global justice.