It's not easy to grasp the workings of India's derivatives market, but talking to Chandrasekaran Ebenezer Srinivasan Azariah will probably give you a good head-start. The chief executive of the Fixed Income Money Market and Derivatives Association of India (Fimmda) - who usually goes by his initials CES Azariah - is a veteran of India's biggest public-sector bank, State Bank of India (SBI), with 33 years of experience in the foreign exchange, fixed-income and derivatives markets in India and Bahrain.
In June last year, Azariah assumed the role of chief executive of Fimmda, a champion of the local derivatives market. Fimmda, formed in June 1998, has more than 90 members, including public-sector, private-sector and foreign banks, primary dealers, as well as the Life Insurance Corporation of India.
Fimmda's mission is to represent market players and foster development of the bond, money and derivatives markets. Through its role as the principal interface with the regulators on various issues, it develops benchmark rates and new derivatives contracts, establishes best practice, puts out documentation and provides training for dealers and students.
Much of the association's work has been to push forward market reforms. For instance, it has worked with the Ministry of Finance on amendments to various pieces of legislation, including the Government Securities Bill 2004, Reserve Bank of India (Amendment) Bill 2005 and The Banking Regulations (Amendment) Bill 2005.
By acting as an interface between the regulators and members, Fimmda has made suggestions to the regulators on ways to ease the pressures from tight liquidity in the money markets. Since the end of last year, tight liquidity has resulted from rapid growth in credit and currency demand, tax-related outflows and redemptions of India Millennium Deposits.
The Reserve Bank of India (RBI) - the country's financial regulator - has traditionally tried to ease tightness by injecting liquidity directly into the system through repo operations under the liquidity adjustment facility and unwinding balances under the market-stabilisation scheme.
Yet Azariah feels the repo window could be widened to, for example, allow banks with excess foreign-currency government securities in their portfolio to pledge these to the RBI. "Liquidity at the moment is tight in the money market," he says. "So we would like to suggest to the RBI that perhaps banks with extra dollars could pledge those dollars and borrow rupees at 6.5%.
"RBI could perhaps place it in the overnight market and get some interest," he adds. "The interest rate gained on dollars would be additional profit for the RBI. Instead of doing a dollar-rupee foreign-exchange swap, why not pledge dollars with the RBI and they can draw some money?"
Fimmda will be discussing these issues with the RBI ahead of the annual policy statement for 2006-2007 due for release on April 18, says Azariah.
The association has also done a lot to help create consistent, liquid market benchmarks for interest rate and cross-currency swaps. For example, the Mumbai Interbank Forward Offer Rate (Mifor) - equivalent to the dollar/rupee forward premium over the US Libor - has been widely used as the floating-rate benchmark for valuing swaps. However, because the dollar/rupee forward rate is fixed by the RBI at noon, and Libor is fixed by the British Bankers Association at 4pm, there is no uniform Mifor rate for valuing outstanding swap positions.
Azariah says Fimmda is trying to establish a uniform exercise for valuing Mifor swaps. For example, the association could perhaps take a poll of market participants at 4.30pm or 5pm, he says. "That kind of exercise is needed."
The association also plans to propose to the RBI that banks be allowed to deal in equity derivatives, says Azariah. If that happens, Fimmda would also start interacting with the equity market regulator, the Securities and Exchange Board of India (Sebi). "Banks have positions from their investment department in equities, but they don't have hedging instruments through equity derivatives," he says. "If RBI can permit banks to get into equity derivatives, then we would interact with Sebi."