NISM/Certification/Series-IV: IRD/2010/1 dated May 18, 2010
NISM/Certification/Series-IV: IRD/2010/1 dated May 18, 2010
National Institute of Securities MarketsCommuniqué/Press ReleaseNISM-Series-IV: Interest Rate Derivatives Certification ExaminationNISM/Certification/Series-IV: IRD/2010/1 dated May 18, 2010
In exercise of the powers conferred by sub-regulation (3) of regulation (7) of Securities and Exchange Board of India (Certification of Associated Persons in Securities Markets) Regulations 2007, National Institute of Securities Markets (NISM) in consultation with the Securities and Exchange Board of India hereby specifies the NISM-Series-IV: Interest Rate Derivatives Certification Examination as the requisite standard for the approved users and sales personnel of the ‘Trading Members’ who are registered as such in the Currency Derivatives Segment of a recognized stock exchange and trading in Interest Rate Derivatives.
The NISM-Series-IV: Interest Rate Derivatives Certification Examination, offered by NISM, will be available to the candidates from May 20, 2010.
Details of NISM-Series-IV: Interest Rate Derivatives Certification Examination are given in Annexure-I and Annexure-II attached to this communique.
The text of these Annexures and the registration details are available at www.nism.ac.in
-sd-
G.Sethu OSD
Incharge
National Institute of Securities Markets
Copy to:
- Executive Director, MIRSD, SEBI
- Executive Director, LAD, SEBI
- Executive Director, DNPD, SEBI
- CEO, BSE
- CEO, MCX-SX
- CEO, NSE
Enclosures: Annexure I and II.
Annexure I – Syllabus OutlineNISM-Series-IVInterest Rate Derivatives Certification Examination
Objective of the Examination
The examination seeks to create a common minimum knowledge benchmark for the approved users and sales personnel of the ‘Trading Members’ who are registered as such in the Currency Derivatives Segment of a recognized stock exchange and trading in Interest Rate Derivatives.
On successful completion of the examination the candidate should:
- Know the basics of fixed income securities markets and specifically interest rate derivative markets in Indian and developed world.
- Understand the analytical framework required for Bond Futures market in India along with trading and hedging strategies involved
- Understand the clearing, settlement and risk management as well as the operational mechanism related to interest rate derivatives markets
- Know the regulatory environment in which the interest rate derivatives markets operate in India.
Examination Specifications
- This is a computer-based examination with multiple choice questions.
- The Examination will consist of 100 questions of 1 mark each adding to 100 marks.
- The examination should be completed in 2 hours.
- There shall be negative marking of 25% of the marks assigned to a question.
- The passing score for the examination will be 60 marks.
Syllabus Outline with Weightages
| Unit 1 | Introduction to FIS and Interest Rate Market | 5% |
| Unit 2 | Interest Rate Derivatives | 10% |
| Unit 3 | Analytical Framework for Interest-sensitive Products | 10% |
| Unit 4 | Bond Futures Market in India | 15% |
| Unit 5 | Hedging and Speculation | 15% |
| Unit 6 | Operational Mechanism | 15% |
| Unit 7 | Clearing, Settlement and Risk Management | 20% |
| Unit 8 | Regulatory Framework and Compliance | 10% |
Annexure II – Test Objectives
NISM-Series-IV
Interest Rate Derivatives Certification Examination
Unit 1: Introduction to Fixed-Income Securities (FIS) and Interest Rate Market
1.1 Understand role and place of FIS among financial markets; why FIS is the mother of all markets
1.2 Explain size of FIS market in relation to the stage of economic development; India and the global scene
1.3 Explain the importance of risk-free interest rate as the basis and benchmark for all valuation
1.4 List factors affecting interest rate in general and India in particular
1.5 Understand term structure (yield curve); its shape, shifts and interpretation
1.6 Know rationale for introducing interest rate derivatives in India
1.7 List regulators and understand the areas of regulations
Unit 2: Interest Rate Derivatives (IRD)
2.1 Explain economic role of derivatives
2.2 Describe scope of risk management in trading/speculation, hedging, insurance and diversification
2.3 Understand uses, misuses and abuses of Risk Management
2.4 Describe derivatives markets and products in India and other developed markets
2.5 Differentiate between features of Over-The-Counter (OTC) and Exchange-traded products/ markets
2.6 Distinguish between bond futures and interest rate futures with specific reference to features and risks addressed by them
Unit 3: Analytical Framework for Interest-sensitive Products
3.1 Define and calculate :
- compounding frequency
- payment frequency
- day count basis
- business day adjustment
3.2 Define and calculate various measures of return:
- coupon,
- current yield,
- yield-to-maturity (“yield”)
- holding period return (HPR)
3.3 Define and calculate various measures of risk:
- Macaulay Duration
- Modified Duration
- Rupee Duration
- Price value of a basis point (PVBP)
- Convexity
- Yield volatility
3.4 Understand benchmark 10Y yield in India, its past movements and factors affecting it
Unit 4: Bond Futures Market in India
4.1 Understand the peculiarities of bond futures like multiple eligible underlying bonds
4.2 List eligibility criteria and the selection of “cheapest to deliver” (CTD) bond; normalization of eligible bonds through “conversion factor”
4.3 Describe the procedure for determining the CTD bond
4.4 Understand the pricing of bond futures for futures bid price and futures offer price
4.5 Understanding the concepts related to repo and reverse repo
Unit 5: Hedging and Speculation
5.1 Explain speculative/trading strategies:
- directional bet on interest rate
- yield curve spread bet on interest rate
- barbell and butterfly strategies
5.2 Explain Hedging strategies for managing interest rate risk in loans and bond investments like by adjusting the Duration with futures
5.3 List and describe risks associated with futures:
- basis risk,
- liquidity risk
- margin funding risk
5.4 Discuss RBI guidelines on hedging for different market participants; hedge effectiveness and de-recognition
5.5 Explain RBI’s restrictions on market players
5.6 Know SEBI’s guidelines and understand the scope of jurisdiction of RBI and SEBI
Unit 6: Operational Mechanism
6.1 List various players involved in the execution of trade and their role
6.2 Understand operational guidelines by the Exchanges
6.3 List the minimum input requirements for specification of order
6.4 Understand features, functionality and navigation of menu of Trader workstation:
- Order types
- Order status
- MIS
- Information flow
6.5 Describe controls by Exchanges for smooth execution of orders
Unit 7: Clearing, Settlement and Risk Management
7.1 Describe in brief the process flow for clearing and settlement
7.2 Understand margining and mark-to-market under SPAN
7.3 Understand the risk management measures like SPAN, value-at-risk, scenario analysis and incorporation of under-margining risk
7.4 Illustrate margining and mark-to-market process with given SPAN parameters for two consecutive trading days
7.5 Describe and differentiate the process of cash settlement and physical settlement
7.6 Understand the peculiarities of physical settlement in bond futures like the settlement period versus the trading period, notice of settlement, physical delivery through electronic book entry system of SGL A/c with RBI and timeline for various actions in the physical settlement process
Unit 8: Regulatory Framework and Compliance
8.1 Know the SEBI regulation that apply to all members
8.2 Know RBI regulations that additionally apply to banks, primary dealers, financial institutions, non-bank financial institutions, urban cooperative banks and foreign financial institutions
8.3 Know Exchange regulations on trading, clearing and settlement
8.4 Know ICAI’s regulations on hedge accounting for bodies corporate
8.5 Describe in detail compliance reporting
