Financial Daily from THE HINDU group of publications
Friday, Mar 31, 2006
Financial Daily from THE HINDU group of publications Friday, Mar 31, 2006 |
|
|
|
|
|
|
|
Money & Banking
-
Financial Markets Markets - Derivatives Markets Conduct code for banks selling OTC derivatives Priya Nair
What banks have to do Alert clients about market changes. Should know about the customer's business well. Must play an advisory role
Mumbai , March 30 A code of conduct is being worked out for banks offering over-the-counter derivative instruments to corporates. The objective of this is to ensure that buyers of OTC products are convinced of the suitability, advantages and the risks of such products. Unlike exchange traded derivatives products, OTC derivatives are normally custom-made to suite the requirements of the customers. According to Mr C.E.S. Azariah, CEO, Fixed Income Money Market and Derivatives Association of India (FIMMDA), as the OTC derivative market in India is not regulated, many corporates buy derivative products from banks without fully understanding their implications. There is, therefore, a need to introduce some standardisation in the derivatives market in India, along the lines of international guidelines. FIMMDA is working on the code of conduct. It has prepared a paper on this and circulated it among its members for their views, said Mr Azariah. The code of conduct will address issues such as standards and procedures for ascertaining the suitability and appropriateness of clients wishing to buy OTC derivatives, standards for reasonable rates, guidelines to avoid transactions that could result in delay of gains or losses and guidelines for introduction of products.
Role of banks
"Banks should alert their clients about any market change. For instance, a corporate that has taken a rupee loan, may go in for a swap in Japanese yen, as interest rates are low in Japan. There could be immediate gains in such a case. But if the yen appreciates against the rupee, as the Japanese economy is improving, then the corporate could end paying more interest on the loan." There have been cases where corporates have lost up to Rs 4-5 crore due to currency fluctuations. Ideally, the same level of knowledge about a customer's business and needs as required for traditional lending is also required in case of a derivative transaction. But often, banks that do not give credit try to lure customers to buy derivative products, said an officer from a public sector bank. Banks only look at the commission they earn from these products, which is directly related to the product's complex nature. When it comes to derivative products, scrutiny of the customer is purely on the basis of a questionnaire. "Banks sell products by merely trying to match the level of sophistication of the product with that of their clients. They don't really look at whether their clients needs the particular derivative product or not," the official said. Usually, derivatives are bought only for hedging. Therefore, the bank should be in a fiduciary capacity. This implies an advisory role for the bank. "But it needs to be examined if banks are performing this advisory role," the official said.
More Stories on : Financial Markets | Derivatives Markets
Article E-Mail :: Comment :: Syndication :: Printer Friendly Page
|
Stories in this Section |
|
The Hindu Group: Home | About Us | Copyright | Archives | Contacts | Subscription Group Sites: The Hindu | Business Line | Sportstar | Frontline | The Hindu eBooks | The Hindu Images | Home |
Copyright © 2006, The
Hindu Business Line. Republication or redissemination of the contents of
this screen are expressly prohibited without the written consent of
The Hindu Business Line
|