Introduction
Rating agencies have been assessing wide range of financing instruments with varied characteristics and intricacies. During the last few years, the Indian Capital Market has witnessed a scenario of newer and innovative financial instruments/issues being floated by the issuers. These instruments include structured bonds, asset/mortgaged backed securities, security receipts, convertible/non-convertible debentures etc.
In the context of the intricacies involved in the innovative instruments, the investors may not fully understand the implications arising out of the complexity involved in such instruments. In order to inform the investor about complexity of such instruments, Acuité has categorized such instruments in three levels: Simple, Complex and Highly Complex.
It has to be understood that complexity is different from credit risk and even an instrument categorized as 'Simple' can carry high levels of risk.
Simple Instruments
These instruments carry high degree of certainty regarding their risk-return relationships and are reasonably well understood by investors and other market players.
Complex Instruments
These instruments typically have variable risk return profiles and understanding of these instruments among market participants is lower vis-à-vis Simple instruments. These are mainly instruments with variable returns over time. The number of counterparties for such instruments can be more than one.
Highly Complex Instruments
These instruments are the highest in term of complexity and the understanding of their risk profile is usually more difficult than 'Complex Instruments'. The cash-flow, return and maturity characteristics are variable in nature and often involve large number of counterparties.
Classification of Instruments Based on their Complexity
CORPORATE AND BANK-DEBT |
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BANK FACILITIES |
ALL |
- |
- |
FIXED DEPOSITS |
FIXED RATE OF INTEREST |
- |
- |
COMMERCIAL PAPER |
FIXED RATE OF INTEREST |
- |
- |
CORPORATE BONDS AND NON CONVERTIBLE DEBENTURES |
FIXED COUPON RATE |
FIXED COUPON WITH PUT/CALL OPTION. |
- |
FLOATING RATE LINKED TO CERTAIN BENCH MARK RATE(WITH OR WITHOUT PUT/CALL OPTION) |
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CONVERTIBLE DEBENTURES |
- |
COMPULSORILY OR OPTIONALLY CONVERTIBLE |
- |
STRUCTURED INSTRUMENTS |
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STRUCTURED BONDS/NCD'S |
- |
BACKED BY GUARANTEE OF GOVT/GROUP COMPANY |
PARTIALLY GUARANTEED |
ASSET BASED SECURITIES(ABS) |
- |
FIXED RATES. |
FLOATING RATES. |
BACKED BY SPECIFIED ESCROW OF CASH FLOWS OR FIXED DEPOSIT. |
BACKED BY LINKED TO CERTAIN BENCHMARK RATES. |
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MORTGAGE BASED SECURITIES(MBS) |
- |
- |
MBS WITH RESET OF RATES |
PASS THROUGH CERTIFICATES(PTC) |
- |
- |
INSTRUMENTS BACKED BY ABS/MBS. |
COLLATERISED DEBT OBLIGATIONS (CDO) |
- |
SINGLE ASSET |
MULTIPLE ASSET |
BONDS STRUCTURES FOR POOL FINANCING |
- |
- |
BONDS STRUCTURED FOR POOL FINANCING |
HYBRID INSTRUMENTS |
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LOWER TIER 2 BONDS |
FIXED COUPON |
FIXED COUPON |
FLOATING RATE |
FLOATING RATE(YIELD LINKED TO BENCHMARK) |
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HYBRID DEBT INSTRUMENTS |
- |
- |
INNOVATIVE PERPETUAL DEBT |
PERPETUAL PREFERENCE SHARES |
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UPPER TIER 2 BONDS |
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OTHER HYBRID INSTRUMENTS |
- |
SEPARATE TRADING OF REGISTERED INTEREST |
SECURITY RECEIPTS(ISSUED BY ASSET RECONSTRUCTION COMPANIES) |
|
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EQUITY LINKED DEBENTURES |
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COMMODITY LINKED DEBENTURES |
EQUITY & PREFERENCE SHARES |
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EQUITY SHARES |
EXCHANGE TRADED EQUITY SHARES |
- |
- |
PREFERENCE SHARES |
- |
PLAIN VANILLA |
- |
CONVERTIBLE PREFERENCE SHARES |
MUTUAL FUNDS |
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DEBT FUNDS |
GILT FUNDS |
FLOATING RATE FUNDS |
- |
MONTHLY INCOME PLANS |
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LIQUID FUNDS |
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DEBT FUNDS |
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FIXED MATURITY PLANS |
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INTERVAL FUNDS |
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STRUCTURED MUTUAL FUNDS |
- |
CAPITAL PROTECTED FUND-STATIC HEDGE |
CAPITAL PROTECTED FUND-LEVERAGED |
CPPI (CONSTANT PROPORTION PORTFOLIO INSURANCE) |
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ARBITRAGE FUNDS |
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DPI (DYNAMIC PORTFOLIO INSURANCE) |
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MUTUAL FUNDS-EQUITY AND OTHERS |
PLAIN EQUITY FUNDS |
DERIVATIVE FUNDS |
ART FUNDS |
FUND OF FUNDS |
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SECTOR BASED FUNDS |
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INTERNATIONAL FUNDS |
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BALANCED FUNDS |
SPECIAL SITUATION FUNDS |
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GOLD FUNDS |
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EXCHANGE TRADED FUNDS |
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INDEX LINKED MUTUAL FUNDS |
DERIVATIVES |
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EQUITY DERIVATIVES |
- |
BUYING INDEX/STOCK OPTIONS(LONG POSITION) |
SELLING INDEX/STOCK OPTIONS(SHORT POSITION) |
INDEX/STOCK/CURRENCY FUTURES(BUYING AND SELLING) |
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COMMODITY DERIVATIVES |
- |
COMMODITY FUTURES |
- |
FOREIGN EXCHANGE DERIVATIVES |
- |
SIMPLE SINGLE CURRENCY FORWARD RATE AGREEMENT WITHOUT ANY FEATURES(CAP,COLLAR,KNOCK IN,KNOCK OUT,ETC.) |
FORWARD RATE AGREEMENT WITH CUSTOMISED FEATURES |
CROSS CURRENCY FORWARD RATE AGREEMENTS |
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CURRENCY OPTIONS |
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CURRENCY SWAPS |
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INTEREST RATE DERIVATIVES |
- |
- |
INTEREST RATE SWAPS |
CROSS CURRENCY INTEREST RATE SWAPS |
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CREDIT DERIVATIVES |
- |
CREDIT DEFAULT SWAPS-PROTECTION BUYING-SINGLE ASSET |
CREDIT DEFAULT SWAPS-PROTECTION SELLING-SINGLE ASSET |
CREDIT DEFAULT SWAPS-MULTI ASSET(BOTH BUYING AND SELLING) |