Meaning – MiFID II is a legislative framework instituted by the European Union to regulate financial markets in the bloc and improve protections for investors with the aim of restoring confidence in the industry after the financial crisis exposed weaknesses in the system. It is a revised version of the Markets in Financial Instruments Directive (MiFID) and was rolled out on January 3, 2018.
While the original MiFID only covered multi-lateral trading facilities, the previously unregulated organized trading facilities (OTFs) have also been added in the new framework. There are new safeguards for algorithmic and high-frequency trading activity. Stricter requirements for portfolio management, investment advice, and other investor protections are also included. Additional and reinforced powers of supervision of derivatives markets, coordinated with the European Securities and Markets Authority (ESMA) is also a part of the new regulations.
By TJEF Editor Kriti Kanchan Sinha
Citizens of Venezuela, both the rich and the poor alike, are increasingly turning to the world of cryptocurrency, specifically bitcoins, to salvage the value of their savings with the Bolivar, their national currency, becoming worthless as a result of massive currency inflation. Similar is the case with Zimbabwe where citizens are exchanging money in form of bitcoins as trust in their own institutions fall and hyperinflation has wiped out the Zimbabwean dollar completely. Reading these, you would probably not be wrong in feeling that cryptocurrency seems to be the go-to currency for countries in political or economic distress.
An Introduction to Cryptocurrency
So, what exactly is a cryptocurrency? Investopedia defines it as a digital or virtual currency that uses cryptography for security. This feature of cryptography makes it extremely difficult to counterfeit as it is pure mathematics and logic and the human factor is negligible. The most important aspect of cryptocurrency that makes it so alluring to many is the fact it is independent of central banks and governments. Cryptocurrency in itself has no intrinsic value which is why it has been denounced by some including Axel Weber, Chairman of the Swiss bank UBS AG, as nothing but a speculative bubble. Further, its supply is not determined by any central bank and is limited in quantity – it is one of the reasons for the price volatility of cryptocurrencies. Bitcoin is the most famous of all but there are multiple others including Ethereum, Litecoin, Tron etc. The below figure provides us with the list of top five cryptocurrencies in terms of their market capitalization.
In this article, let us take a look at the usage of cryptocurrency and its legality in different countries around the world.
Financial institutions have come a long way since the aftermath of Global Financial Crisis in 2008. As asset management companies and fund houses battle to grab a larger share of corpus from increasingly knowledgeable investor cohort, more and more emphasis has been laid on building customer confidence and trust, financial transparency and ethics. In a recent survey by CFA, ‘From Trust to Loyalty: A Global Survey of What Investors Want’, majority (~38%) of the retail customers chose ‘Trust on asset managers/firm’ as their primary reason while picking an asset management firm.
More recently, one such step in achieving financial transparency is a decision by DSP Blackrock Mutual Fund & Edelweiss Mutual Fund to opt for Total Returns Index (TRI) as the benchmark to measure the performance of their funds. Prior to DSP Blackrock & Edelweiss Mutual Fund, Quantum mutual fund adopted the TRI benchmarks to compare the returns of their funds. Such a move by fund houses is in the right direction towards global convergence on usage of fair and transparent benchmarks – to gauge performances of assets under management.
What is Total Returns Index (TRI)?
There are two sources of returns on equity investments: capital gains and cash dividends. The cash dividends received are typically reinvested by mutual funds to generate further returns on net assets. For instance, The PRI (Price Returns Index) version of NIFTY 50 for the year 2016 delivered a return of 3.01% and the 50 underlying stocks paid an aggregate dividend of 1.47%, thus the TRI version of the index delivered 4.48% return during the year. Historically, most of the domestic funds have used PRI, to compare their funds’ performances, which considers only capital gains (price appreciation) thus ignoring dividend returns. Total Returns Index (TRI) captures both – price appreciation and cash dividends to reflect all sources of returns in equity portfolio. The Net Asset Value (NAV) calculated by mutual funds also reflects both these sources of returns. Using TRI for fund performance comparison is thus a more appropriate, fair and prudent benchmarking practice.
Global emphasis on usage of total return index benchmarks for performance comparison
Globally, the emphasis on transparency has been on a rise as indicated by the guidelines issued by various capital market regulators. In the United States, Securities and Exchange Commission (SEC) regulations published in 1998 mandates that all funds report performances using appropriate benchmarks which consider reinvestment of dividends for index computation (read TRI). Most of the asset managers in the United States claiming a large part of the industry AUM use Total Returns (TR) indices as benchmarks to measure the performances of their funds. Below is the summary of 5 such asset managers and few of their top funds and corresponding benchmarks.
December 2017 Issue, Volume II, Issue No. 2
As the year 2017 comes to an end, we look back and realize that this year has witnessed some very important events which had the potential to transform many economies around the world.
This issue of TAPMI Journal of Economics and Finance (TJEF) focuses on some of the prominent topics in the field of Finance and Economics. The journal contains papers on below topics:
- SHOULD YOU RIDE THE BITCOIN WAVE? – By Vidhi Jain & Vignesh V
- BASEL III NORMS: JOURNEY SO FAR & THE ROAD AHEAD – By Mohit Jain & Barnava Chatterjee
- BANK RECAPITALISATION: NECESSITY AND IMPACT – By Anandhan P.T. & Lakshmi Ramakrishnan Nair
We hope that the readers of the journal benefit from the insights of the papers published.
Please read the PDF version of the Journal on – TJEF Volume 2 Issue 2
By Ishan Kekre & Girish C
A weather derivative is a tool for managing weather risk. It is a financial contract that allows a firm to hedge itself against unexpected and adverse weather. A weather derivative contract or WD derives its value from future weather conditions. Contrary to stereotypical weather insurance, the payout of this kind of derivative is based on a parametric weather index. For instance, the index could be centimeters or millimeters of rainfall. The index could also be a cumulative frequency distribution of temperatures across many locations. The underlying of WD could also be related to snowfall or hurricanes.
Origin of Weather Derivatives
The weather derivative market as compared to other financial instruments is relatively young. The first transaction in the WD market dates back to 1997. The sector developed due to the severe repercussions of El Niño. These events were forecasted correctly by the meteorological community. Firms that had their revenues linked to weather realized the importance of protecting themselves against seasonal weather risks. Many companies who were in the business of dealing with financial futures and options saw WDs as attractive tools to hedge weather risks.
The insurance sector achieved substantial financial consolidation. As a result, there was significant capital to hedge weather risks. Insurance firms started writing options with payoffs linked to weather events. This, in turn, elevated the liquidity for the development of a WD market. Thus, the WD market evolved over the years into a strong over-the-counter market.