INSIDE:A Peek into

Student Life at NISM

Related Party Transactions - Cautionary Tales for Investors & Analysts

NISMNOVEMBER 2010

UPDATE

Training for CBI Officers on‘Investigation of Capital Markets Fraud’

Volume 3 / Issue 4

An Introduction to Financial Engineering and Risk Management

NISM UPDATE Team

2 November 2010

Foreword

P

editor@nism.ac.in

rogress made in finance theory, applied mathematics and computer

science are acting as drivers for financial engineering - a multidisciplinary

field that fosters financial product innovation. However, if regulation lags

behind financial innovation, which may be possible, there could be risk. We can

neither stifle innovation nor let unbridled innovation hurt the markets. Hence

the policy makers and regulators have a tough job finding the fine balance

between innovation and market safety.

In this Issue of NISM we touch upon this subject starting from the very basic

concept of financial engineering and also draw attention to a specialized

program on financial engineering and risk management offered by NISM.

We also cover two post-event updates:

Related Party Transactions - Cautionary Tales for Investors & Analysts.

An event organized by NISM in association with the CFA Institute, USA and

Indian Association of Investment Professionals (IAIP) on Thursday, October 28,

2010.

Training for CBI Officers on ‘Investigation of Capital Markets Fraud’. This was

a two-day training programme (18-19 October, 2010) conducted by NISM for

the officers of CBI.

We have lined up a distinguished set of speakers for the India Investment

Management Conference that will be organized in association with the CFA

Institute-USA and IAIP. The event is scheduled for January 7, 2011 and early

bird registration discount of 20% is available till November 30, 2010.

The first batch of NISM’s one-year, residential, full-time, post-graduate

programme – Certified Securities Markets Professional (CSMP 2010-2011) is

progressing well. We share a short note written by one of the students on life in

and around the NISM Campus at Vashi, Navi Mumbai.

We hope that you find the NISM Update useful and informative. Please send

your feedback and suggestions to

NATIONAL INSTITUTE OF SECURITIES MARKETS

NISM Bhavan, Plot No. 82, Sector - 17,

Vashi, Navi Mumbai - 400 705

Phone: +91- 022-66735100-106 | Fax: 022-66735110www.nism.ac.inNiSM

NiSM

Related Party Transactions -

Cautionary Tales for Investors & Analysts

An event titled “Related Party Transactions” was

conducted by the CFA Institute, USA, Indian Association of

Investment Professionals (IAIP) and NISM in Mumbai. The

event on Thursday, October 28, 2010 was hosted by the

National Stock Exchange in its auditorium at Bandra Kurla

Complex.

Mr Vidhu Shekhar of NSE, set the ball rolling, followed by

two excellent presentations from Mr. Lee Kah Lun (Head,

Asia Pacific: Standards and Financial Market Integrity, CFA

Institute) and Mr David Smith (Co-Head, Asia Corporate

Governance Research, Institutional Shareholder Services).

Mr Lee provided glimpses of his vast experience on the

subject with illustrations from China, Hong Kong,

Malaysia, Indonesia, India and other parts of Asia. Mr

Smith explained the technicalities of RPT and how some of

the transactions are abusive while others are not. Abusive

RPTs are the bane of free market enterprise. Mechanisms

for empowering small retail investors were also discussed.

This was followed by a panel discussion in which the

speakers were joined by Ms Fianna Jesover (Corporate

Affairs Division, OECD Directorate for Financial and

Enterprise Affairs). Ms Jessover provided the OECD

context, and also added to the experience-sharing

discussion. The panel was ably moderated by Mr Navneet

Munot of SBI Mutual Fund. This was followed by a lively

question & answer session, where the questions were of

consistently high quality.

The key takeaway from the event was that fair disclosure in

the true spirit of corporate governance and vigilance

exercised by independent directors are the key to

protecting shareholders’ interest. In the long run, well

governed corporations gain the trust of shareholders and

enjoy access to capital markets to realize their business

goals consistently.

Training for CBI Officers on

‘Investigation of Capital Markets Fraud’

NISM conducted a two-day training programme for CBI

officers on ‘Investigation of Capital Markets Fraud’ at CBI

Academy, Ghaziabad during 18-19 October, 2010. The

programme was inaugurated by Shri Sujeet Pandey, IPS,

DIG (Training) and Prof. G. Sethu, OSD In-Charge of NISM.

Shri Sujeet Pandey, during the inaugural address,

emphasized the importance of understanding the

magnitude and complexity of economic crimes and its

cascading effect on various intermediaries associated with

the securities markets.

Based on a series of discussions with senior officials at SEBI

and enforcement agencies, the programme was structured

to sensitize the participants to various capital markets

operations and issues related to investigation of capital

market crimes. During the first day of the programme,

sessions were arranged to provide an overview of the

financial and regulatory system in the capital markets,

primary and secondary market activities and

understanding of the various intermediaries in the

securities markets. The second day sessions emphasized

on the regulatory role of SEBI and the surveillance and risk

management practices adopted by SEBI. The sessions

further highlighted operations by the Stock Exchanges as

first line regulators in the securities markets. Technical

sessions on derivatives and the role of FIIs, the activities

and crimes in securities markets were also held.

The valedictory session was addressed by Dr. Pradnya

Sarvade, ED, SEBI, who highlighted the role of enforcement

agencies in preventing securities market crimes and the

road ahead. The programme was well received by 25 CBI

Officers in the rank of Addl. SP, Dy. SP, Inspectors and Bank

Officers on deputation to CBI.

3November 2010 NiSM

financial product is a package of cash flows. ASmall pieces of cash flow streams are

assembled together to make a product. Different

ways of packaging creates different financial

products. The art and science of this task is called

financial engineering.

Consider the earliest form of financial engineering. A

promoter wanted to raise money to finance a

business enterprise. He approached people asking

them to contribute to the firm’s capital. He came

across two types of people: one kind who were

prepared to take risk, commit funds forever and

sought dividends; the other kind who did not want to

take risk, were willing to commit funds for a limited

time and sought regular assured cash flows by way of

interest payments and principal repayment. The

promoter divided the claims on the future cash flows

expected to be generated by the firm into two parts:

one, a fixed assured cash flow stream; the other a

residual cash flow stream that could be high if the

firm did well and low or nil if the firm did not do well.

He sold the first as firm’s debt and the residual cash

flow stream as firm’s equity. The firm’s cash flows

were parceled out as two financial products, debt

and equity. In terms of seniority of claim on the firm’s

cash flows, debt came first and equity came next.

This is financial engineering. It was a win-win

situation for the firm, debt holders and equity

holders. Thus financial engineering created choices

Financial Engineering and Risk Management Prof. G Sethu – Officer on Special Duty, NISM

4 November 2010NiSM

5November 2010 NiSM

that met a wider range of customer choice. When large amounts are

required to be raised, no one segment of investors is adequate. Through

financial engineering, we create layers of claims on the firm’s cash flows,

some senior and some subordinate claims. The game can get quite complex

and some of the subordinate layers can get very risky.

As we are only repackaging a given cash flow stream, the risk of the package

cannot be different from the risk of the underlying cash flow. It is a zero sum

game.

Unless we are able to assess the value of cash flow streams, we would be

unable to create the equivalence between the cash flow streams that are

being exchanged. As finance theory improves, the asset pricing models

(including option pricing models) become better. In certain cases, complex

mathematics and computer programming are required to work out asset

prices. Progress made in finance theory, applied mathematics and computer

science act as drivers for financial engineering. That is why financial

engineering is a multidisciplinary field. Needless to say, financial engineering

fosters financial product innovation.

Modern world offers more choices to people. Awareness and education

equips people to make the right choices from the ever increasing choices.

Would we say that the modern world is risky? We could look at financial

engineering the same way. Is financial engineering adding to the risk of the

financial system? Financial engineering only redistributes the risk while

offering a wider menu of financial choices to investors. Some buyers prefer

more risk and some prefer less risk. The problem arises when the high risk

layer is sold to uninformed persons who aren’t able to evaluate or

understand the high risk they are taking.

It could also be a case that different financial products need to be regulated

differently. If regulation lags behind financial innovation, which may be

possible, there could be risk. The solution is neither to stifle innovation nor

let unbridled innovation hurt the markets. Policy makers and regulators have

a tough job finding the fine balance between innovation and market safety.

NISM, through its School for Securities Education (SSE), offers a certificate

programme in the field of Financial Engineering and Risk Management. It is a

specialized programme that combines the teaching of high-level

quantitative financial economics, advanced mathematics, complex

modelling and computer science. NISM's "Certificate in Financial

Engineering and Risk Management (CFERM)" programme provides the right

blend of theory and applications, addressing context as well as content. The

objective of this Programme is to match the right talent with the experienced

theoreticians and practitioners and serve the financial markets with a batch

of well-trained financial engineers.

6 November 2010NiSM

CFERM programme is an executive certificate programme in financial

engineering and risk management. It has been designed for working

professionals in treasury and risk management functions who cannot attend

full-time programmes.

After successful completion of the programme, the participants would have

acquired requisite knowledge to:

�Design and understand new financial products and financial solutions

�Manage the treasury more effectively

�Implement financial solutions for banks, corporate and other entities in

the financial sector

�Assess and evaluate the various financial engineering and risk

management solutions offered in the market

�Address the risk management issues at strategic and operational levels

Design and Understand New Financial Products and Solutions

Manage Treasury more Effectively

Implement Financial Solutions

for BFSI Sector

Address Risk Management issues at Strategic and Operational Levels

CFERM

For for information on CFERM programme, write to cferm@nism.ac.in

7November 2010 NiSM

Student Life in and around the NISM Campus at VashiTapabrata Neogi – Student of CSMP 2010-2011

ome to new age Securities Markets HProfessionals, NISM’s Certified Securities

Markets Professional programme focuses on all

round development of students with focus on

surprise quizzes, assignments, and final exams. Life,

therefore, is focused on meeting assignment

deadlines and being ready for surprise quizzes. The

element of surprise being quite high, there are many

sleep-deprived days that develops capability to

develop financial solutions and understand financial

markets in a holistic manner.

In fact, holidays turn out to be fun-filled days with

movies, cricket, badminton, discussions in the

canteen and trips to places like Pune, Lonavala, or

Khandala. We at NISM manage to get hold of our

own share of fun celebrating events like

Independence Day, Ganesh Chaturthi, Navratri,

Diwali and all other festivals. Rigor of the course

brings out the best in us as we run around trying to

complete tasks given by faculty members and doing

our best in the time available.

Birthday parties of batch-mates turn out to be huge

celebrations with entire batch participating in the

event to make it memorable as always. Perhaps this

is what life should be all about with professionalism

mixed with equal share of fun. Study trips to places

like BSE, NSE and MCX provide great exposure that

focuses on strong applications of theories learnt in

the classrooms of the institute. The mundane

necessities that any academic life can bring about is

replaced by no nonsense approach towards

professional learning through guidance that is of

high standards.

NISM and its hostel are located at a great location in

Vashi with malls, parks, fitness centers, and host of

other facilities around that offer students enough

avenues for recreation. Definitely, there is no time to

slack-off because the approach of the programme is

nothing less than avant-garde allowing students to

focus on their career aspirations in a much bigger

way than might have been possible otherwise.

After so much hard work, the fun simply doubles up

during holidays, birthday parties, or festivals as

students bring out their distinctive characteristics

and talent to make time more enjoyable for

everyone in the batch. The whole programme is

enriching with huge amount of opportunity for

personal growth and career focused initiative.

In a sense, life at National Institute of Securities

Markets is a journey of a lifetime, sure to bring out

well-rounded and competent professionals to face

challenges of Securities Markets in the future.

Learning to innovate and living with fun is intimately

intertwined at NISM.

India Investment Management Conference What's Next after the Recovery?

2011

7 January 2011 Grand Hyatt Mumbai

Mumbai, India 7DATE

FEES

VENUE

For Registration, Visit: www.nism.ac.in/cfa

Contact: apevents@cfainstitute.org |+91 22 66735100-06

CFA Institute Members, IAIP Members, NISM

Graduates (CFERM/CSMP program)

Rate: INR 8,400

CFA Institute Candidates /NISM Students

Rate: INR 9,450

Non-member Rate: INR 10,500 Save20%

Register by

th

30 November

2010