Bond dealer gets Rs 10 cr as bonus

Bond dealers are walking away with hefty bonuses "" even though volumes in the bond market have been shrinking on lacklustre trading and prices of government securities have been going down, pushing up their yields (the prices of and the yields on securities move in a reverse direction).

The chief of treasury at a foreign bank bagged as much as Rs 10 crore as bonus for the year. Another bond dealer got a bonus of Rs 3.5 crore. The range of bonus earned by dealers with foreign banks was anywhere between Rs 1 crore and Rs 10 crore.

So what's going on? Quite simply, a surge in the derivatives trade in foreign exchange helped bond dealers make hefty profits. So bond dealers, particularly those working at foreign banks' treasury operations made a killing in terms of bonuses.

The average trading daily volume of the bond market was Rs 2,487 crore in 2004-2005, down from Rs 3,195 crore in 2003-2004 and Rs 4563 crore in 2002-2003. On certain days in 2003, the trading volume even crossed Rs 13,000 crore.

The yield on the 10-year benchmark government security last year went up from 5.12 per cent to 6.67 per cent. In each of the previous eight years, the yield on government securities went down as the prices rose.

"Despite that, bond dealers with foreign banks pocketed hefty bonuses as they were active in derivatives trading," said a dealer.

Treasury managers with primary dealers (PDs), however, had to compromise on their bonuses. Traditionally, bond dealers of public sector banks do not earn any bonus.

Most of the foreign banks follow the January-December year while Indian banks and PDs start the year in April and end in March.

In addition to derivatives trading, dealers at foreign banks also made money in foreign institutional investors' (FIIs) trading in treasury bills. The limit for this was $1.75 billion last year.

With the yield on the 364-day treasury bill ranging from 4.75 per cent to 5.75 per cent, even on a fully hedged basis (that is, taking forward cover), the FIIs made risk free money in T Bills' trading.

However, PDs dedicated only to the bond market and without any exposure to the equity market have not got any bonus worth talking about.