Foreign Currency Convertible Bond - FCCB

FCCB's are nothing but a BOND, it's convertible means it can be converted into Stocks upon redemption or future date totally depends on investor interest if they want it to be converted into Stocks or not.

This bond is having Warrants attached to it, that means if stock price of the company reaches the one that is mentioned in the bond investors have the choice to convert this Bond into Shares getting benefits of appreciation of the stocks, if not than any how Principal will be given back to the investor by the company.

Investor also has the advantage of getting regular Coupon payments each year. 

It is foreign currency means A type of convertible bond issued in a currency different than the issuer's domestic currency. In other words, the money being raised by the issuing company is in the form of a foreign currency.

Companies issue's FCCB's to raise money in foreign currencies.

FCCB's appear on the liabilities/debt side of the issuing company's balance-sheet.

It's very risky for the company see below example :

Eg : Suzlon issued FCCB, redemption of which is going to be happen on june this year, now since Dollar is already surpasses 55 ( they have issued FCCB when dlr is below 50 ), company facing severe pressure of getting default, since they have issued in dollar and need to pay in dollar...company got the payment in USD/INR BELOW 50 and they need to pay back amount in usd/inr 56..

suppose Suzlon got 1 LAC Dollar = 50 LAC inr

now Suzlon need to pay 1 LAC Dollar = 56 LAC inr..

12 % Loss...also they have paid interest as coupon to investor..
Since Suzlon price is also not appreciated instead it got 70 % reduced..


Many companies in India is facing trouble as FCCB's date near maturity..

Tagged as:FCCB, BONDS

Credit default swap

A Credit Default Swap (CDS) is now a days one of the most widely traded form of credit derivative, it's one more example of Hedging tool. It is similar to an insurance contract, providing the buyer need to pay to buy (insurance) protection from another party for losses that may occur as a result of the ( loan, sovereign debt, company bond ) default, bankruptcy or credit rating downgrades.

The "buyer" of protection pays a fixed fee or premium for the protection, and in return, the "seller" of protection promises to make a payment equal to the losses incurred upon the occurrence of credit events

The "buyer" of protection = XXX Bank 

The "seller" of protection = YYY Insurance Company 

Suppose Bank XXX buys corporate bonds issued by a IT Company ZZZ.

In order to hedge the default risk of ZZZ, Bank XXX buys a CDS from Insurance Company ZZZ.

XXX pays a periodic fee to ZZZ, in exchange for a credit default protection

In return, ZZZ agrees to pay XXX a set amount if a credit default event occurs.

Tagged as:CDS, FINANCIAL, CREDIT

US Quantitative easing (QE)

2008 Financial crisis – SEP/OCT 2008

After Crisis, FED wanted to improve the economy, business sentiments and labour conditions in the US. Started rounds of QE :

QE1: Nov. 25, 2008 - March 31, 2010

FED purchased a total of 1.25 Trillion dollar Mortgage backed securities to lower mortgage interest rates and increase the availability of credit for homebuyers to help support the housing market and improve financial market conditions.

QE2: Nov. 3, 2010 - June 30, 2011

The Fed continued to reinvest payments on securities purchased during the QE1 program. In addition, it began the purchase of $600 billion of longer-term Treasury securities to promote a stronger pace of economic recovery.

Operation Twist: Sep 21, 2011 – June 30, 2012:

Fed announce to purchase $400 billion of bonds with maturities of 6 to 30 years and to sell bonds with maturities less than 3 years, thereby extending the average maturity of the Fed's own portfolio.

This is an attempt to do what Quantitative Easing (QE) tries to do, without printing more money and without expanding the Fed's balance sheet, therefore hopefully avoiding the inflationary pressure associated with QE

QE3 ?? Next soon..

Tagged as:QE, QE1, QE2, QE3, CRISIS, US

Volcker Rule

Proposed Rule Regarding Prohibitions and

Restrictions on Proprietary Trading (Volcker Rule)

 Section 619 of the Dodd-Frank Act, among other things, generally prohibits two activities of banking entities.

1.  · It prohibits federally insured depository institutions, bank holding companies, and their subsidiaries or affiliates (banking entities) from engaging in short-term proprietary trading of any security, derivative, and certain other financial instruments for a banking entity’s own account, subject to certain exemptions. 

2.  · It prohibits owning, sponsoring, or having certain relationships with a hedge fund or private equity fund, subject to certain exemptions. 

This provision restricts banks' ability to trade for their own profit, a practice known as proprietary trading. It is named for former Federal Reserve Chairman Paul Volcker.

Analyst say proprietary trading was not a cause of the 2008 financial crisis and the rule is a means of political revenge on an unpopular industry. Advocates of stronger regulation argue that the rule would have prevented JPMorgan's loss. They say the trades were made to boost bank profits, not to protect against market-wide risk.

JPMorgan announced this month a trading loss of at least $2 billion on a botched hedging strategy. Since that announcement, potential losses have mounted. Advocates of stronger regulation argue that the rule would have prevented JPMorgan's loss. They say the trades were made to boost bank profits, not to protect against market-wide risk.Many Question's have been raised after JPMorgan, the largest U.S. bank, revealed that a faulty hedging strategy had generated a loss 2 Billion dollar that could reach $5 billion.

The rule was slated to be finalized by July but regulators have indicated they will likely miss the deadline. Banks will have until 2014 to fully comply

Tagged as:VOLCKER, JP MORGAN

FATCA - Foreign Account Tax Compliance Act

The Foreign Account Tax Compliance Act (FATCA), enacted in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act, is an important development in U.S. efforts to combat tax evasion by U.S. persons holding investments in offshore accounts.

Under FATCA, certain U.S. taxpayers holding financial assets outside the United States must report those assets to the IRS. In addition, FATCA will require foreign financial institutions to report directly to the IRS certain information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest.
The act will require foreign financial institutions to look for and report American account holders or face a 30 per cent witholding tax on American investments from 2013.
(1) undertake certain identification and due diligence procedures with respect to its accountholders;

(2) report annually to the IRS on its accountholders who are U.S. persons or foreign entities with substantial U.S. ownership; and

(3) withhold and pay over to the IRS 30-percent of any payments of U.S. source income, as well as gross proceeds from the sale of securities that generate U.S. source income, made to (a) non-participating FFIs, (b) individual accountholders failing to provide sufficient information to determine whether or not they are a U.S. person, or (c) foreign entity accountholders failing to provide sufficient information about the identity of its substantial U.S. owners.

Tagged as:FATCA, US TAX

FATCA US FOREIGN US REGULATION World TAX TAX VOLCKER Related Link