Issuance of securities, profitable or uncontrollable

At the opening ceremony of the 29th Conference on Monetary and Banking Policies, the Governor of the Central Bank announced the issuance of foreign exchange securities in the coming days as a new innovation in the banking industry. Slow and repay it will be in the form of currency. What model is used to publish these papers and when it will be profitable and in which cases it will be uncontrollable and increasing fluctuations is a topic that we will address.

To cover the risk of exchange rate fluctuations and foreign exchange financing, financial markets are considering various strategies to attract investors and investors and preserve their capital. The use of foreign exchange derivative contracts (such as exchange rate futures or currency swaps) is a common solution in the field of risk management of exchange rate fluctuations. But since these derivative contracts have not yet been implemented in the country’s capital market, it is important to find another way to cover the risk of exchange rate fluctuations.

Foreign exchange securities and profits from their issuance

Currency bonds are issued by the issuing institution, according to which it can collect Rial or foreign currency resources and pay the principal and interest of these bonds in Rials or foreign currency at the time of maturity in accordance with the exchange rate change rate and the set interest rate. Therefore, in foreign exchange securities, foreign exchange resources or other expressions of foreign banknotes are not transferred and currency changes are the only basis for calculating the repayment of these securities at maturity.

Bonds can have coupons or no coupons, so that the issuer can determine the nature of the bonds according to their needs and market environment.

In the first step, the central bank issues these bonds, and then other institutions and companies can issue these bonds in proportion to their foreign exchange support.

The main benefit of issuing foreign exchange securities for the issuing entity is that it can finance it in this way. By issuing foreign exchange securities, the company collects the required resources from the market and after receiving its foreign exchange resources, can pay the principal and interest of the securities on the maturity date.

Another benefit of issuing these securities is that the pressure to provide foreign exchange in the market is also reduced and companies come to the market for essential needs and not incentives to maintain capital. The issuance of foreign exchange securities also has benefits for the buyer.

The first benefit is the availability of a reliable source of investment. On the other hand, if a person’s analysis shows that foreign exchange assets have a higher profit than Rial assets, he can invest in this context.

One of the interests of policymakers in issuing these bonds is that it creates a new tool for managing the foreign exchange market, the government can even adjust part of its foreign exchange policy by using the supply of these bonds.

In the event of a shift in investment demand from banknotes to securities, the policymaker will have the necessary foreign exchange resources to manage the foreign exchange market.

Issuance of securities only in foreign currency

The jurisprudential specialized committee of the Stock Exchange and Securities Organization, at the suggestion of the Center for Islamic Research, Development and Studies in 2017, examined the models of issuing foreign exchange securities to cover the risk of exchange rate fluctuations as well as foreign exchange financing. For this purpose, it issued and approved the issuance of foreign exchange securities in three ways.

1- Collection of purely foreign exchange resources, payment of foreign exchange interest and settlement of foreign exchange, 2- Issuance of foreign exchange securities and collection of resources in Rials, calculation of foreign exchange earnings and payment in Rials, calculation of final securities profit and loss in foreign currency but with Rial settlement (Bond bonds), 3- The option of payment and settlement in Rials or foreign currency. All three models are different from each other so that only the first model can be called currency issuance; While the second model is the link currency model and the third model is the hybrid model.

Dr. Salehabadi’s statements and announcements are more like issuing papers only in the currency method than other models. In this method, bonds are issued, periodic interest payments are paid, and settlements are made in foreign currency. In this method, foreign investors or investors who have foreign exchange are usually targeted. For example, in the issuance of € 1 million lease bonds for the purchase of aircraft, the sponsor of the aircraft purchase receives euros from investors, pays the resulting profits in euros, and the settlement is in euros.

The currency issuance model is no different from the rial model and differs only in the amount paid by investors at certain maturities. Therefore, other issues of bond issuance will not be substantially different from currency issuance. Issuance of foreign exchange bonds can apply to a variety of patterns of issuance of Islamic securities, including participation bonds, lease bonds, Murabaha bonds and the like. The common denominator among all types of foreign exchange securities is equipping resources in foreign currency and allocating it with the same reference currency. In this case, if the expenses are incurred during the period and before the maturity of the securities based on a currency other than the reference currency, the conversion of currencies will occur and the calculation will be based on the market day rate of the same reference currency.

In the studies and research of this group, the issuance of foreign exchange futures is mentioned as the best solution because investors calculate the amount of its current value from the discount value of the future value of their commodity and their profit is obtained from this difference. In this case, the central bank can use this tool to prevent the influx of small investors into the foreign exchange market due to speculative demand and estimate the amount of demand for a certain currency from the actual need for delivery on a certain maturity date.

The need to create a regulatory infrastructure

It is noteworthy that the central bank must also determine how to finance these bonds, because the use of monetary base resources to cover the profits of these bonds can have an inflationary effect. Economists emphasize that these bonds should have short maturities to be more attractive.

It is necessary for the Central Bank, as the institution in charge of this matter, to review and implement the regulatory infrastructure and expert solutions so that these securities are not sold in the open market (such as 4200 Tomans) and if it is possible to sell, solutions to prevent price changes, fluctuations. Prevent currency and the benefit of a particular group. The basis of foreign currency securities in the current environment of our country and the control of the central bank and regulatory bodies are among the issues of concern that require the need for monitoring and review before announcement and implementation.