Dr Chekuri Ramarao: Eminent Linguist with a Literary Flair of Par Excellence

Shri Chekuri Ramarao, a well-known Telugu writer, literary critic and linguist, died on July 24^th, aged 80, while doing meditation at his residence in Hyderabad.

As I was reading about his peaceful and graceful passing away in the newspaper, an elegantly aged man sitting on a chair quietly with a contended smile on his face—the face of Dr. Chekuri Ramarao, whom I met for the first and last time at Dr. Bh Krishnamurti’s book, ‘Studies in Telugu Linguistics’, release ceremony at Hotel Ramada Inn on June 2009—flashed in my mind clearly and vividly.

What a wonder! Such a quiet looking thorough gentleman, who was born at Illendulapadu, a village near Madira of Khammam district on October 1^st, 1934, had indeed become a ‘problem’ for his parents. For, coming under the influence of a relative-cum-friend, he had become an adventurous child: watching the Sun rising from the other side of the stream nearby his village ... over the mango orchards ... with wide- opened eyes obviously, caught by its scenic-beauty... ... absconding from school...  perhaps!... stealing money from home...and whiling away the time in the nearby town, Madira, meaninglessly. He was therefore to be shifted to a village near Sattenapalii for schooling. Finally, it was in Narsaraopet Municipal High School that he seemed to have acquired his rooting in traditional and modern Telugu poetry, grammar and prosody under the tutelage of stalwarts like Nayani Subbarao, school Headmaster and a noted romantic poet;  Bhagavathula Subbarao and Lanka Seetaramayya, Telugu teachers. His leaning towards Marxist philosophy too appeared to have flowered here at Narsaraopet. Later on he moved to Machilipatnam for his Intermediate studies. Dr Rao once wrote: “From SSLC to BA, I have not passed any examination at the first instance.” Yet, with his brother’s clever intervention he could sail through BA and obtained MA in Telugu from Andhra University.

Finally, he secured PhD for his research on linguistics— ‘A Transformational Study of Telugu Nominals’— from Cornel University, USA. To quote him: “Although my childhood  was not all that fruitful, I could, in my later life, learn a lot from such stalwarts as Duvvuri Venkataramanasastry, Ganti Somayajulu, Bh Krishnamurti, Martin Joos, Gordon Fairbanks and Charles Hockett.” And with such sound grounding, he became a Professor in Linguistics at Osmania University and retired in the year 1980 as the Head of the Department of Linguistics.

It is no exaggeration to say that intensive research on Telugu Syntax within the framework of modern linguistic theories indeed began with Dr. Rao’s pioneering work—‘A Transformational Study of Telugu Nominals’—published in 1968. In this study, adopting transformational generative approach,  he discussed about factive, dubitative, quotative, intensive, action and relative nominalizations in Telugu.   Some of his path breaking articles are: ‘A Grammatical Sketch of Telugu’ (1965), ‘Direct and Indirect Reports’ (1968), ‘Coordination or Subordination’, ‘Causal Use of Quotative Morpheme in Dravidian’ (1972), ‘Some Aspects of Coordination in Telugu’ (1972), and ‘Time Passes’ (1975). His other stellar work on the syntax of Telugu sentence is: ‘Telugu Vakyam’. He also brought out an English-Telugu dictionary for journalists. Some of his other interesting publications in Telugu are: Sahitya vyasa rinchli, Cerapithikalu, Bhasanuvartanam: Bhasa Prayoga Vyasalu, and Bhasaparivesam: Bhasanubhava Vyasalu.

Dr. Ramarao is however known more for the columns and essays that he wrote on varied literary aspects—feminist, minority, Dalit writings and poetry—under his pen name, Chera, in Telugu news papers, magazines and journals. ‘Smruti Kinankam’, a compendium of his literary essays, won him Kendra Sahitya Academy Award for the year 2002.  It is these incisive literary analyses and critiques that won him a permanent place in the Telugu literary world.

He is one linguist who is at ease in analyzing poetry meaningfully imparting educative value to it. For instance, look at the essay written about the ballad “Palanadu velaleni maganira!”penned by Pulupula Venkatasivayya. Here, drawing our attention to the verse, “Venuka taramulavari veeracharitala sirulu / narvoci tygampu neervetti penchara! / virici sukhamulu pandura, palanadu, / velaleni maganira!” he concludes that it had inspired Dasaradhi to write the poem: “Rajarajula bogada vandimagadhuduganu / rytujathiki nenu vitalikudananna / pothanna kavi geethalo / telangana chitanyamepandera!” More than his identifying what song would have inspired whom, what merits our appreciation in the essay most is his describing how one Mr. B. Gopalam sang that ballad, “Palanadu velaleni maganira!” that too during his school days and how the audience were carried away by him to an altogether distant world.  He said that while singing the line, “varnadharmalanna ukku chattam pagili”, Gopalam, elongating the syllable, ‘ca’ and applying the stress on the syllable ‘ta’ in the word chattam could simply mesmerize the audience. In the same vein, while singing the line, “kanneganti Hanumanthu korameesamu drippy / palnati prajalache pannulega bettinche”,  Gopalam, exhibiting extreme anger in his face and tone had indeed, enhanced his roudram further by stressing on the syllable ‘gam’ and ‘mam’ in kanneganti and Hanumanthu and  then immediately switching over to marthavam, soft-mood by dimming his voice to match the bhavam, expression of the line, “bali ichhe Hanumanthnu, palnadu”—thus sliding with ease from one line to the other in “run on verse” style, Gopalam, with matching modulation of the tone said to have swayed the audience in emotions of different rasa. Obviously, it is not for the heck that poets like Sivareddy said: “Dr. Ramarao taught us how to write poetry, how to sing and how to understand it.”    
       

That aside, Dr. Rao is known for mentoring many a young modern poets by honoring them with his foreword. Indeed, his judgment had become the final word on the literary works of contemporary prose writers. Incidentally, you turn any modern poetry book in Telugu and you would invariably find a foreword under the name Chera. It is a wonder as to how this could have happened. Of course, the reason for such a phenomenon is obvious: as a linguist having a thorough grip on generative grammar, transformational grammar, semantic interpretation, phonetic interpretation, etc., and importantly being appreciative of the ‘rule-governed creativity’ and ‘rule-changing creativity’ he is no doubt a better equipped Pundit to apply the logic in judging the quality of poetic output.  But there appears to be something more than his profound linguistic grasp that made young writers keen about seeking his foreword. To appreciate this undercurrent, we may have to take a look at his forewords. In one of his forewords, comparing a verse of the author—“Pagalu gadichpoie sayantram kagane / Pittalu kuvakuvaladuthoo / tirigi neredu chettu meeda valatai / …” —with his own verse that he wrote long back, he commented: “the similarity between these two verses ends with our humanizing the tree” and when it comes to the  poetic beauty, he categorically states, “mine is no match to this verse.” That is the ‘integrity’ that Dr Rao displayed while analyzing a young poet’s output, which obviously could have made the modern poets beeline to his residence seeking his foreword. Similarly, he had never shown poverty of expression when it comes to encouraging a writer. Take the same foreword referred earlier and you will find him saying, “Except while practicing medicine, whatever Vaidehi speaks in Telugu, perhaps, sounds more as poetry. Nindina kavitaswarupini Vaidehi. A poetess incarnation is what Vaidehi is. Soon she shall shine like a polestar in Telugu literary field is what my hope is. And my desire too.”  

Dr. Rao is said to be one among those mature critics who are known to receive compliments with a smile but listen to criticism enthusiastically. He is also said to have exhibited tremendous amount of clarity in differentiating the person and his literary output that is being critiqued. Though he is known for his Marxist leanings, he ensured that it never came in the way of his critiquing any kind of literature—a rare phenomenon of equanimity.      

Whence did the like of ‘Chera’ come again!

***

Keywords: Chera, Eminent Telugu Linguists,‘Telugu Vakyam’, Smruti Kinankam’

Banking & Research -I

The State is undergoing a process of liberalization of markets, privatization of ownership and globalization of the economy. The stress that these changes have caused to the Indian economy during the last five to six years is perhaps more than what has been experienced during the past 50 years put together.

Banking is no exception to this phenomenon. In fact, banking by virtue of its intimate association with the pursuit of wealth by every citizen in one way or the other had to face much of the brunt of these changes. This together with the changing needs and ever-growing expectations of the information-rich customers, fast growing competition from within and outside, ability and the ease with which corporate clients can today move across borders in search of finer interest rates and the resulting threat to the banks’ spreads have simply made banking quite formidable.

It’s not that these structural changes are unique to India for globalization and the technological advances made under computation and communication had changed the very style of management across the globe. World over, managements are re-orchestrating their  management style not on their own volition but because non-linear explosive economic growth is calling for a move away from computations to connections; technology to knowledge; solutions to innovations; value chain to value system; customer satisfaction to customer success; and competition to collaboration. Resultantly, organizations are today looking for knowledge workers who are in the habit of continuous learning and willing to apply their learning to actions.

To stay competitive in an ever changing market scenario, banking leadership has to innovate new ways of managing funds: it has to move away from fixing problems to chasing opportunities; from perfection to creating wealth by imperfectly seeking the unknown; from reengineering to re-creation and from optimization to sensible and deliberate disequilibrium.

All this calls for a corpus of research and analytical work and its easy availability to the leadership so that, they could take well-informed decisions. It is in appreciation of this need to promote research activities on bank-related issues both in academia and banks and to build and document such corpus and make it available to the bank leadership for using such findings as industry benchmarks, an attempt is being made here to present a gist of a select few research papers that address some such critical issues. Let us take a look at  some such  articles that have a relevance to Indian banking scenario:

“Emerging Challenges in Indian Banking” by MG Bhide, A Prasad and Saibal Ghosh maps the banking sector reforms launched in India and their beneficial impact on the overall performance of the banking system during the nineties. It also analyses the current weaknesses of the Indian banks vis-à-vis the reforms launched and highlights the need for supporting reforms in the rest of the financial sector. The authors have evaluated the efficacy of prudential measures introduced by conducting a stress test of credit risk and estimated the loss of interest income to be around Rs. 21.55 bn.  The authors have concluded the study with a caution: “Tread a careful middle path between the excathedra overzeal for intervention and a complacent belief in the ability of the banking system to self-rectify its deficiencies.”

In the recent past, Value at risk model has almost become a standard measure of financial market risk.  But with the increased size and diversified trading accounts at many of the large commercial banks, it is increasingly being felt that VaR models are not structurally capable of accurately measuring the joint distribution of all material market risk factors as well as the relationships between the joint distribution of all material market risk factors  and trading positions. Against this backdrop, Jeremy Berkowitz and james O’ Brien—authors of the article—“How accurate are value at risk models at commercial banks?” have for the first time analyzed the distribution of historical trading P&L and the daily performance of VaR-estimates of six large US banks and found that VaRs are less useful as a measure of actual portfolio risk.

With the adoption of stringent provisioning norms in the banking sector, the concern even among researchers for problem loans has gone up.  The other area of concern is the productive efficiency of banks. Allen N Berger and Robert De Young in their article—“problem loans and cost efficiency in commercial banks” have analyzed the intersection between the problem loan literature and the bank efficiency literature.  Using Grange-causality techniques they have tested four hypotheses regarding the relationships among loan quality, cost efficiency, and bank capital.  Their findings have revealed that the inter-temporal relationships between problem loans and cost efficiency run in both directions. The data suggests that rise in NPAs is usually followed by decreases in measured cost efficiencies, which could probably be due to the increased spending on credit monitoring and enforcement of securities. The data further suggests that bad management practices not only results in excess expenditure but also in poor monitoring practices that eventually lead to increased NPAs. The authors suggest that cost efficiency as an important indicator of future problem loans and problem banks but caution that these are only inferences drawn based on statistical association.

Customer relationship management has almost become a fad in the global marketing scenario. Although, much has been said as to how CRM can improve the performance of business, there are very few set of practical guidelines on how to design and implement CRM successfully. Against this background, Adam Lindgreen and Michael Antioco have addressed this problem by discussing a CRM program that has recently been designed and implemented by an European Bank in their article “Customer Relationship Management; One European Bank’s Experiences”. They have, by employing a case study method, collected empirical evidence to identify as to what constitutes a good CRM practice. The study has also revealed the shortcomings of the CRM programs. 

(ijbm Vol. I No.1 Nov 2002)

Dealing Room Operations: Risks & Their Management

With free flow of capital all around the globe and the resultant rise in volumes, the need for risk identification in Dealing room operations and its management has become quite imperative. Let us take a look at different types of risks associated with forex dealing.

1 Open Position Risk

     Long/overbought/plus     –    means bought more dollars than sold

     Short/Oversold/minus     –    means sold more dollars than bought

If one is overbought and currency weakens, one will be able to square up over bought position by selling the currency at a loss. On the other hand, if one is oversold and currency hardens, he can only cover it at excess cost i.e. by incurring loss.

2 Maturity Mismatch Risk

Gaps arising out of merchant transaction position and other trades pose a mismatch risk. Unmatched forward maturities may cause loss if forward differentials go against the bank.

3 Credit/Counter Party Risk

It arises out of failure of the counter party to honour his side of the contract. It also arises due to Contract Risk: Assume one has sold forward $ to a customer say at Rs.43.30 per $. Before the contract matures, if the customer fails, the dealer has to dispose off the earmarked dollars in the market at the going rate even if it has weakened say to Rs.43.10 per dollar. This is nothing but Replacement Cost or pre-settlement risk.

There is yet another kind of credit risk known as Clean Risk: Assume we have sold Euro against $ and accordingly, we have credited Euro to the Bank A/c – say in Germany and waiting for the German Bank to deposit Dollars in our New York A/c. Till German Bank credits Dollars in our New York A/c., we will be running Clean Risk and if, in between the Bank fails, we have to put up with the  loss. This type of risk, also known as Settlement Risk, may arise in international transactions owing to time-zone differences.

4 Interest Rate Risk

Owing to adverse movements in implied interest rates or actual interest rate differentials relating to foreign currency deposits, forward contracts, currency swaps, FRAs, etc.

5 Legal Risk

If the contracts are of a defective nature, they cannot be enforced. This kind of problems are more under swap deals.

6 Operational Risks

Omissions/commissions in operational procedures viz. – Dealing & Accounting functions: Follow-up of dealings and contract confirmation; Settlement of funds; Pipeline transactions; and Overdue bills and contracts.

7 Sovereign Risk

Risk of Externalisation: The countries may suddenly impose instructions on free movement of forex exchanges. It is basically political in nature. This arises in transactions including banks located in other countries.

2. Management of Dealing Room Risks

Banks, assessing the risk involved in trading and non-trading activities, usually put in operation a well-drafted risk management procedure that could be well understood by Dealers, Back Office staff etc., and execute it with much ease. Such a mechanism shall assist in effective monitoring and limiting risk prone activities across the Dealing Room. Some such time-tested mechanisms are:

2.1 Open Position Risk

Since these positions are taken at a particular rate, any adverse movement in the rate leads to loss. To prevent/minimise such losses, banks prescribe various limits consistent with adequacy of its capital to undertake such activities.

·      Day light Limit – Dealer cannot take a position of more than day light limit prescribed by the Bank.

·     Overnight Limit – Fixes overnight limit for an open position in each currency – usually lesser than daylight limits; Global limit for all the currencies put together is also fixed.

·    Cut-loss Limit – While undertaking transactions, if the rate goes on moving against the bank, one never knows, where the loss would end. Hence, banks fix a cut-loss-limit. Irrespective of the Dealer’s view, if the rate moves so adversely that the resultant loss is equivalent to the limit, the dealer has to liquidate the position and book loss.

All deals done in the day should be accounted for against the corresponding limits. The limits when exceeded should be promptly reported to the Senior Management and got approved. People not connected with Dealing room operations should constantly monitor compliance with these limits through timely, accurate and comprehensive MIS.

2.2 Maturity Mismatch Risk

·   Individual Gap Limit (IGL): Bank prescribes limits on mismatch in the currency bought and sold for a particular month.

·    Aggregate Gap Limit (AGL): Aggregate gap limit for each currency on all the O/B and O/S positions for various months.

·       Total Aggregate Gap Limit: Aggregate of all the AGLs in all currencies for dealing room as a whole.

 2.3 Credit Risk

To minimize credit risk, banks impose exposure limits on customers as well as on other Banks. In general, separate limits are fixed for spot and forward, the latter being lower than the spot. In case of Forwards, the limits are prescribed as the maximum level of the net outstanding Forward contracts.

2.4 Operational Risk

Dealing and execution functions are separated for early discovery of any transgression of the imposed limits – by dividing dealing room into front office solely concentrating on dealings and back office for recording the transactions and pursuing settlements etc. Systems and procedures are put in place to obtain ‘deal-confirmations’ in time and prompt follow-up for execution of ‘funds-transfer’ instructions. Back office is also entrusted with the responsibility to monitor export bills and forward contracts for their delivery in accordance with the tenor.

2.5 Legal Risk

To obviate the risk involved in enforcing compliance with contractual obligations/securities, banks usually enter into the following master agreements with counter party banks/clients:

·       Spot & Forward Exchange – International foreign Exchange Master Agreement.

·       Foreign Exchange Options – International Currency Options Market Agreement.

·       All others – International Swap Dealers’ Association Master Agreement.

     Banks also obtain Board Resolutions from their Corporate Clients, specifically authorising their officials to deal and execute contracts. Back offices obtain specific confirmation for each transaction with full details regarding amount, rate, value date, etc., duly signed by the authorised signatories.

2.6 Sovereign Risks

It is managed by prescribing limits against each overseas party based on ‘countryrisk’ perceptions.

King Richard II—“Landlord of England art thou now, not king.”

(Story-line)

With the death of King Edward III, Richard, son of the good-natured and gallant Black Prince who died prematurely, and grandson of Edward, becomes the King of England at the age of eleven. People celebrate his coronation gaily, hoping much from him. But, as the time goes on, the hopes of the commoner are dashed: Richard is weak, wasteful in his expenditure, unwise in choosing councilors, regal in his approach, and detached from his country and its people.

Initially, Richard rules the country discreetly, but often finds himself carried away by flattery. Fearing the Duke of Gloucester, his uncle, Richard seizes and sends him to Calais, where Thomas Mowbray is the governor. There, in a prison, he dies mysteriously. There is no sure indication of Richard’s involvement, but people believe that he was murdered by the King’s order.

His other uncle, John of Gaunt and Duke of Lancaster, has a son by name Henry Bolingbroke. He is a soldierly man. His wife is the sister of Gloucester’s widow. He too could not accuse cousin Richard of the murder. But he charges that Mowbray, Duke of Norfolk, who was the governor of Calais at the time of Gloucester’s murder, was involved in the treachery.

The King summons the appellant and the accused to appear before him. Bolingbroke accuses Mowbray on three counts: detaining 8000 nobles, which should have been paid to King’s soldiery, treasons committed, and importantly for the death of the Duke of Gloucester. Then the King demands response from Mowbray, assuring that he need not fear, for the King’s eyes and ears are impartial. Mowbray then lies to Bolingbroke. Failing in his mediation attempt to appease them, the King orders them to appear at Coventry on St. Lambert’s day to settle their differences with sword and lance.

On the appointed day, when the combatants are readying for the fight, the King stops them and announces his sentence of banishment of both. He banishes Bolingbroke for 10 years and Mowbray ‘never to return.’ He then calls both of them and asks to swear on his sword that they will never meet and plot against him. As soon as Mowbray leaves, Richard, looking at old Gaunt, his uncle and father of Bolingbroke, reduces the banishment of Bolingbroke to six years. Bolingbroke leaves the court bidding farewell to his countrymen warmly.

Richard, thus relieved of the anxiety that one day the Crown may pass on to Bolingbroke, to whom common people have shown such affability, and having already emptied his coffers for his selfish extravagance, begins to rent out parcels of English land to wealthy noblemen to raise money to carry on with his wars in Ireland. On the death of his uncle Gaunt, he confiscates his estate and money for his own royal use, dispossessing Bolingbroke. This makes the noblemen and the commoners realize that Richard has gone too far.

Once Richard leaves for Ireland to pursue a war, the Earl of Northumberland, head of the great house of Percy, starts questioning the conduct of King. Hearing that Bolingbroke has landed with an army at Ravenspurgh in the north-east of England, the Earl of Northumberland joins him. The commoners, being fond of Bolingbroke and being angry at Richard’s mismanagement of the country, welcome his invasion and join his forces.

As Bolingbroke marches with his army to Berkeley, Gloucestershire, he meets his uncle, old York, who challenges his advance. Bolingbroke pleads with him: “My gracious uncle, in what have I offended? My belongings have been seized. I only came to lay my claim in person.” Hearing his argument, old York turns neutral. One by one, Richard’s allies among the nobility desert him and join Bolingbroke, as he marches through England.

Richard, thus loses his grip over the country, much before his return from Ireland. On returning from Ireland, though his aids advise him to use all the means to stall the invasion, Richard assures them that “not all the water in the sea has power to wash the balm from an anointed King.” He expects god’s angel to fight for him. Thus, there indeed is no actual battle. Bolingbroke takes him as a prisoner in Wales and brings him to London, where the crown is passed on to Bolingbroke by Richard himself.

Bolingbroke is thus crowned as King Henry IV. Richard is imprisoned in the castle of Pomfret in north England. There, an assassin murders him. Of course, no one is sure of the role of the King in the murder, though King Henry repudiates the murder. He also undertakes a journey to Jerusalem to cleanse himself of his part in Richard’s death. Nevertheless, the beginning of the new regime of King Henry starts off inauspiciously.

Forex Markets: Dealing Room Operations

Forex market operations are essentially transacted through banks’ dealing rooms. A relatively small proportion of these transactions actually finances cross-border purchases of goods and services. Instead, it is the investors seeking the highest return on their funds by investing around the globe that are known to generate most of the currency trading. The cross border capital movements have accelerated since the 80s offering unparalleled personal and financial freedom to make money as well as lose it in no time. Let us now examine how dealing rooms operate to facilitate trading in foreign currencies/exchange of currencies.

 1. Dealing Room – What is it all about?

A dealing room is a centralised establishment, usually of a commercial bank, which is willing to make/offer a two way dealing price for different currencies at all times, even when they may not wish to deal, but all during prescribed business hours. Banks trading actively in the forex market and offering variety of products usually segregate their dealing room functions into two or three (which has become the current trend in large dealing rooms): One, front office – that undertakes the actual dealing/trading operations in the interbank market; two, mid office – if established, is entrusted with the job of risk management and accounting policies, MIS; market research, etc; and three, back office – which is made accountable for settlement of transactions, reconciliation and accounting. Today, dealing rooms of major banks are known to house as many as 50 to 100 dealers, all operating simultaneously from the same dealing room on different currencies/markets/ products. The current trend is towards integrated dealing rooms that are capable of offering foreign exchange services along with derivatives such as swaps, options etc. Indeed, major banks have moved a step further by establishing integrated dealing rooms which are imultaneously operating in forex, derivatives and money markets. Such integration is believed to afford better ‘real-time’ interaction between all the three markets, which is felt necessary to take well-informed trading decisions for maximizing profit.

 1.1  Front Office

It is the very hub of the dealing activities – the nerve center from where dealers trade in the Forex market. A large Dealing Room will be controlled by a Chief Dealer, who may not actually undertake dealing activities by himself. He would be responsible to implement management policies. He leads morning discussions with his junior Dealers on forecasts and strategies for the day, before dealing begins. He is also responsible to assess the effectiveness of Dealers working under him as also to guide them in their day-to-day business transactions. Under the Chief Dealer, there can be Senior Dealers being individually responsible for a group of currencies/a major currency/spot forward trades, etc. Dealers are freed from undertaking accounting work of any kind, as otherwise they would not be able to concentrate on the market.

Currency trading is a game of good judgment of markets and the psyche of the counter party calling in the dealing rooms. Hence, a forex dealer must be good at understanding the changing nature of markets; quick to react to new opportunities and situations; quick in reversing a previous stance; able to overcome the natural tendency to salvage something from a loss-making situation; full of hunches as to which market will do better next rather than sticking to his own view, and be able to work under stress. To be effective, a Dealer must establish himself in the market as “trust worthy”, as he needs all the friends he can get in the market for obvious reasons and hence needs to be fair and honest in his dealings with others. It is only individuals having such quick reflexes and steel nerves that are chosen and trained as dealers to operate from the dealing rooms.

Front Offices are provided with many supporting gadgets: real-time financial data providers such as Reuters monitor services/Bridge/Blombergs which provide real-time bid and offer quotations of contributing banks; other market information that has a bearing on currency movements. The latest version of Reuters is not only capable of functioning as a dealing system but also acts as an electronic broker by matching the quoted rates of the subscribing banks. Electronic Data Processing systems ensure automatic recording of trading date, time and transaction serial number with no scope for the Dealers to alter. These systems usually are of multi-user type so that consolidation of various dealers’ positions and results can be obtained. The Chief Dealer enjoys the facility of logging on to any part of the system to see overall totals – the net positions under various currencies and quotes, at any given time.

In India, interbank market deals are done on the telephone. Dealers maintain “deal slips” indicating the name of the broker, if any, the counterparty bank, currency, amount, time, rate and due date under his signature as soon as the deal is struck and pass it on to back office for further processing. However, in an automatic system, separate “deal slips” are redundant. Some Dealing Rooms do maintain gadgets like voice recorders, etc., to record the Dealing Room conversations for such taped conversations hasten resolution of differences, if any, that may arise at a later date. Non-bank customer transactions are entertained during normal banking business hours while interbank transactions are carried on up to 5 PM.

1.2 Back Office

Striking a deal with a counter party from a dealing room to buy and sell a certain currency is not the end of forex transaction. There is a lot more to be done after that: details of the trade have to be processed; amounts agreed to be exchanged must be debited and credited, etc. It is the back office that undertakes all these activities silently from behind the front office. These two offices are physically separated.

     The back office comprises various sub-sections with specifically assigned functions:

·    Merchant desk: It has two key functions: one, it receives and consolidates the various foreign exchange transactions put through from different centers of the bank and arranges appropriate cover by forwarding them to the dealing room; and two, analyzes the pattern of the foreign exchange usiness of the bank and makes use of this analysis to frame merchant rate for the customers.

·   Contract desk: It processes the interbank contracts booked by the dealing room and ensures that no contract remains in the bank’s books that is not backed by a counter part Confirmation. In fact, it is the ‘trade ticket’ that initiates accounting action at the back office. The trade tickets bear serial numbers into which every single foreign exchange trade undertaken by every dealer is entered. It basically consists of two sets of information: one, that which caters to the needs of the dealer himself such as name and amount of the base currency, exchange rate and the side of the deal; and two, the information for back office for accounting purposes, such as the name and city location of the counter party, transaction date, maturity date, name and amount of the base currency, relevant exchange rates, buying or selling of the base currency, other foreign currency name and amount, name of the trader, method of execution and payment and received instructions. name of the trader, method of execution and payment and received instructions.

  As a part of its accountability in handling these trading tickets, back office undertakes: obtaining confirmation of contracts for all deals from counterparties; checking contents of contracts and signatures thereon, and rectification of defects if any, on the same day; and obtaining stamped agreements from the counter parties and keeping on record wherever computer generated confirmation slips are forthcoming.

·      Funds settlement desk: It ensures that the funds have been received and paid out at both the foreign and Indian centers in accordance with the deals concluded. The identification and follow-up of the discrepancies, collection of over-due interest thereof are the key functions of this desk.

·      Funds/pickups desk: It monitors the Nostro accounts and ensures that Nostro balances are maintained at optimum levels.

·       Messaging desk: Inter-bank messages about the deals struck, modalities of transfer/payments style etc., through SWIFT and other means of communication are handled by this disk.

·      Reconciliation desk: Monitors entries in the Nostro and Vostro accounts of different banks and follows up reconciliation of entries.

As a part of its overall responsibility, back office undertakes additional jobs such as: monthly evaluation of profit and loss; submission of daily currency position; maintenance of positions and funds registers; and preparation of rates can reports and enquires into wide variations, if any, in the deals struck from the on-going market rates.

1.3 Mid Office

Big dealing rooms have of late created another segment in the dealing rooms calling it mid office and entrusted it with the responsibilities of – control functions; drafting management policies, and management information systems that generate daily and weekly reports for management use etc. Another key function that the mid office undertakes is to constantly monitor, analyze and interpret macroeconomic indicators that have an impact on exchange rate movement.

Dealing rooms function essentially with three objectives: one, to give the best possible service to customers; two, to manage the bank’s position so that inventory in each foreign currency is kept at the desired level; and three, to produce profit for the bank while accomplishing the first two objectives.

1.4 Who knocks at the dealing rooms and why?

Essentially, it is all those who are in need of exchange requirement that call on the dealing rooms either through their bank branches or directly. Normally, in India, every customer calls on a bank branch/branches with whom they transact their banking operations for all such conversions. Individuals of high networth/corporates with large requirements are today known to call on the dealing rooms directly and “ask for the market”.

·     Corporates, Firms, Individuals: For payment towards Imports, conversion of export receipts, hedging of receivables and payables, payment of interest and principal of foreign currency loans. Giant multinationals, of course, do take speculative positions purely for profit generation through their own well-established treasury/dealing rooms (our exchange regulations do not permit such speculative trading).

·    Commercial Banks: Around 90% of world Forex Trade is accounted for by interbank transactions. They are mostly to meet client requirements. Merchant transactions are less than 2%. They also buy and sell on their own account and carry inventory of currencies for speculative purposes since foreign exchange trading profits have become an important source of revenue for commercial banks.

·    Central Banks: Central banks of many countries intervene in the exchange markets to arrest volatility in exchange rate movement or to give a direction to its movement. Such interventions could be in the spot or forward markets, but mostly such interventions are carried out surprisingly and intermittently.

1.5 Currencies

Multinational banks deal, in large number of currencies:

·       Major currencies: US Dollar, Euro, Yen, Pound Sterling, Swiss Franc.

·       Minor currencies: Australian $, Singapore $.

·       Widening domestic forex market is slowly catapulting leading banks, particularly of Mumbai, to trade in all major currencies.

In the Dealing Room parlance, major currencies are denoted by abbreviations-

EUR             –          Euro

US $             –          US Dollar

GBP             –          British Pound

Ch S             –          Swiss Franc

BeF              –          Belgian Franc

DKk              –          Danish Kroner

A$                –          Australian Dollar

Jap Y           –          Japanese Yen

The trading at each center is predominantly confined to a single pair of currencies – say, for example, in Mumbai it is confined to dollar/rupee. It is from this market rates, that dealers work out cross-rates for other currency prices like, Rupee/Yen or Rupee/Euro, etc.

2. Dealers Offer Two-way Quotes

In forex market, it is customary for a dealer to quote both the prices at which he is willing to buy and sell foreign currency, which in usual parlance known as two way quote/bid and offer rate e.g. US $ Vs. Rupee =59.6950/7050. While offering a two-way quote, a trader will always ensure some profit margin by fixing buying and selling prices differently. It is needless to say that a dealer, while quoting a bid and offer rate, would always work on it from bank’s point of view i.e., desires to give less units of home currency while purchasing foreign currency and give less units of foreign currency while selling it against rupees. So, in a direct quotation, the market dictum would be “buy low, sell high” or “give less, take more”.

2.1 Dealers are Market Makers

Dealing rooms of major commercial banks act as ‘Market Makers’ in most of the major currencies by offering “two-way” quotes. In a normal two-way market, a Dealer expects “to be hit” on both sides of his quotes in roughly equal amounts. But it is not necessary to happen always that way. He may suddenly find “being hit” on one side of his quote, much more often than on the other side. It means that he is either buying many more dollars than he is selling or vice versa. This leads to the trader building up “a position”:

·       If he has sold more $ than he has bought, he is said to have a “short position”;

·       If he has bought more $ than he has sold, then he is said to have a “long position”.

In a highly volatile Forex market a long or short position that, too, for long can be risky. For instance, net short position may lead to loss if it is to be covered at an appreciated price or gain if currency depreciated. Similarly, a net long position may lead to loss if it is to be sold at a lower price or gain if it is to be sold at a higher price. Therefore, a Dealer, realising that he has built up an undesirable net position, quickly adjusts his bid offer quote in such a manner that it discourages one type of deal (which has already landed him in a over bought/sold position) and encourages the opposite deal or at least the counterparty who asked for the quota may walk away.

2.2 Foreign Exchange Brokers

They act as middlemen between two market-users. They provide information to market-making banks about prices at which there are firm buyers and sellers in a pair of currencies. They carry out bank’s instructions to buy or sell a specific amount of currency at a specified rate and collects commission on the conclusion of the deal. Banks also use brokers to acquire information about the general state of the market.

In the Indian context, brokers are prohibited from acting as principals and maintaining positions in foreign currencies. Brokers’ notes should be received promptly by the dealers before close of the day’s business. Nomination of brokers for deals not done through them is not permitted. It is desirable to have a panel of brokers and shuffle the business among them. Dealers are required to maintain separate broker-wise records of transactions carried out, payment of brokerage claims, etc.

2.3 How Exchange Rates are Quoted

·      A currency dealer in Mumbai starts his day with a look at the New York closing prices of major currencies like Dollar, Euro, etc. of the previous day and opening rates in Tokyo, Hong Kong and Singapore. He would then elicit information from the local dealing rooms/brokers about the current market rates, their momentum, market mood, etc. and also looks at his own position of the previous night and makes up his mind as to what should be his quote.

·      A dealer usually calls another dealer and “asks for the market”. The caller does not say whether he wants to buy or sell, nor does the caller state the amount to be traded. Normally, the caller says – “your market in dollar please”. This means, “at what price are you willing to buy and at what price are you willing to sell dollars for rupees”. While replying, the dealer attempts to assess if the caller wants to buy or sell and relates it with his current position in that particular currency and accordingly, offers his quotes, all within a fraction of a second.

·   Simultaneously, a dealer would be looking for a rate at which he can remain “squared”. Here, “Squared” means, covering every large purchase with a matching sale in every currency so that no gaps are left that are vulnerable for rate fluctuations. Such disposals are usually made at the ruling interbank spot rate that gives no profit or loss. Such a rate is known as “cover rate”.

·     Now, based on the interbank spot rate/cover rate and adding a little cushion to the “cover rate” for remaining on the safer side, a Dealer arrives at his “base rate”. To make it more explicit, let us look at this example. Suppose, an export customer calls on a bank for selling his export proceeds that are in dollars. Say, at that moment interbank US dollar INR spot rate is 59.6950/7050. It means that there are Banks/Dealers, who are prepared to buy dollars @ Rs.59.69 and sell dollars @ Rs.59.70. As seen already, these are the rates at which dealers can square their currencies and are known as “Cover Rates”. Since the dealer has to quote a rate for purchasing dollars from the customer, he has to base his quote on the cover rate i.e. the rate at which other banks are willing to buy dollars from the market. However, as Rupee is freely floating In the interbank market, a Dealer would always wish, of course, depending on the market trend/mood, to add a little cushion to these cover rates to guard himself from adverse movement in rates, while formulating his base rates/quotes to his customers.

·       There are thus two kinds of rates in the forex market: one, “interbank spot rate” that is meant for wholesale transactions, and the other, known as “base rate” for working out rates for retail market.