The Hindu Business Line : ‘Providing calculator for structured products a difficult task’

Mumbai, Sept. 30 Bankers and primary dealers are of the view that the Reserve Bank of India’s suggestion to provide a mechanism for corporates to calculate the variation in the prices of derivative products, would not be practical.

Providing a calculator for derivative products, as suggested by the RBI, would be difficult to implement, due to the different models and existence of multiple systems across banks for valuations, said Mr V. Srikanth, Chairman, Fixed Income Money Market Derivatives Association of India.Speaking at the 9th Annual General Meeting of FIMMDA, Mr Srikanth, said: “We are in discussions with the RBI regarding the difficulties in the implementation of providing a calculator for structured products.”

In the guidelines, the RBI had said, “While selling structured products, the selling banks should make available a calculator or at least access to a calculator (say on the market maker’s Web site) which will enable the users to mark to market these structured products on an ongoing basis.”

The calculator would help clients get an idea of the price of the structured product in different scenarios of interest rate or currency fluctuation and the underlying risk. However, according to FIMMDA, banks would have to invest a lot of money in developing the software and making the same available to their clients or users. Even making the calculator available on the Web site would be difficult, because each derivative product is structured differently and is unique to that particular transaction. So, it would not be possible for clients to evaluate or compare the product with a similar product from another market maker (bank or primary dealer), said an official from FIMMDA.

As an alternative, FIMMDA has suggested that once the customer buys the product, banks can inform the customers on a daily basis of the price of the product and at what price the customer wishes to unwind.

About the new reporting platform for Interest Rate Swaps and Forward Rate Agreements set up by RBI through CCIL, Mr Srikanth said that banks should be given time to set up necessary infrastructure required for processing and reporting the IRS trades, as the volumes are huge and are executed at good speed. “However, we request members to make all efforts to comply with the RBI’ s time limits for reporting, while developing necessary internal systems for doing this activity error-free,” he said.

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‘Providing calculator for structured products a difficult task’