35 International Financial Markets and Instruments
35.1 Meaning
International financial markets are the markets in which financial instruments — debt, equity, and their hybrids — are issued, bought and sold across national boundaries, outside the home jurisdiction of the issuer or in a currency other than the issuer’s home currency (vij2021?; apte2020?; cherunilam2020?).
Three working ideas anchor the field:
- They allow issuers to raise capital outside their home market, often at lower cost.
- They allow investors to diversify internationally and access higher returns.
- They allow firms to match foreign-currency assets and liabilities.
35.2 Structure of International Financial Markets
| Segment | Tenor | Working content |
|---|---|---|
| International money market | Short-term (< 1 year) | Eurocurrency deposits, commercial paper, certificates of deposit |
| International capital market | Long-term (> 1 year) | Eurobonds, foreign bonds, international equity, syndicated loans |
| International derivatives market | Mixed | Currency and interest-rate forwards, futures, options, swaps |
| International equity market | Long-term | ADR, GDR, IDR, dual listings, foreign issues |
| Eurocurrency market | Short-to-medium | Foreign-currency deposits and loans outside the home country |
35.3 Eurocurrency Market
A Eurocurrency is any currency held on deposit, or borrowed, outside its country of issue. The most important is the Eurodollar — a US-dollar deposit held in a bank outside the United States. The “Euro” prefix is historical (originating with London-based dollar deposits) and has nothing to do with the euro currency (vij2021?).
| Feature | Working content |
|---|---|
| Currency vs location | Deposit currency differs from country of holding |
| Regulation | Light — outside the home regulatory regime |
| Spread | Narrower than domestic (fewer reserve requirements, no FDIC-type insurance fees) |
| Tenor | Mostly short-term — 1, 3, 6 months |
| Dominant centres | London (the original), Singapore, Hong Kong, Cayman, Bahamas |
The benchmark interest rate for Eurodollar lending was historically LIBOR — the London Interbank Offered Rate. Following the 2012 LIBOR-rigging scandal, LIBOR has been phased out; most settings ceased on 30 June 2023. The successor benchmarks are risk-free rates such as SOFR (USD), €STR (EUR), SONIA (GBP), TONA (JPY) and SARON (CHF).
35.4 Eurobond Market
A Eurobond is a bond denominated in a currency other than that of the country in which it is issued, sold in multiple national markets simultaneously. A US firm raising USD by issuing a bond in London is issuing a Eurodollar bond; a Japanese firm raising USD outside Japan is doing the same.
| Dimension | Eurobond | Foreign Bond |
|---|---|---|
| Currency of issue | Different from country of issue | Same as country of issue |
| Issued in | International market | A specific foreign country |
| Issuer regulation | Light, international-syndicate norms | Subject to host-country regulation |
| Examples | A US firm’s USD bond issued in London | A US firm’s GBP bond issued in London |
Foreign bonds go by colourful names by country of issue:
| Name | Country | Currency |
|---|---|---|
| Yankee bond | USA | USD |
| Samurai bond | Japan | JPY |
| Bulldog bond | UK | GBP |
| Matador bond | Spain | EUR (formerly ESP) |
| Maple bond | Canada | CAD |
| Kangaroo bond | Australia | AUD |
| Panda bond | China | CNY |
| Dim sum bond | Hong Kong | offshore CNY |
| Masala bond | London (and other offshore) | INR — by Indian or international issuers |
The Masala bond — INR-denominated bonds issued offshore — was popularised by International Finance Corporation (IFC) issuance from 2014, allowing Indian firms to raise INR funds without taking currency risk; the investor takes the rupee risk.
35.5 International Equity Markets — Depositary Receipts
A Depositary Receipt (DR) is a negotiable certificate, issued by a depositary bank, representing ownership of a specified number of underlying shares of a foreign company. The DR trades on a local exchange in local currency, while the underlying shares remain in custody in the issuer’s home country.
| Instrument | Listing market | Underlying issuer |
|---|---|---|
| ADR — American Depositary Receipt | US exchanges (NYSE, NASDAQ, OTC) | Non-US firm |
| GDR — Global Depositary Receipt | London, Luxembourg (and elsewhere) | Non-US firm; aimed at international investors |
| IDR — Indian Depositary Receipt | BSE / NSE, India | Foreign issuer; aimed at Indian investors |
| EDR — European Depositary Receipt | European exchanges | Non-European firm |
ADRs are classified into Levels I, II and III by listing requirements (Level III allows public capital raise on a US exchange) and a separate Rule 144A private-placement category for qualified institutional buyers.
Indian companies that have raised capital through ADRs / GDRs include Infosys, Wipro, Reliance Industries, ICICI Bank, HDFC Bank and Tata Motors. Standard Chartered Bank listed an IDR in India in 2010 — the first IDR — though the IDR mechanism has had limited subsequent uptake.
35.6 Other International Debt Instruments
| Instrument | Working content |
|---|---|
| External Commercial Borrowings (ECB) | Indian-resident foreign-currency loans from non-resident lenders, under RBI guidelines |
| Foreign Currency Convertible Bonds (FCCB) | Bonds denominated in a foreign currency, convertible into equity at the issuer’s option |
| Foreign Currency Exchangeable Bonds (FCEB) | Bonds exchangeable into shares of another group company |
| Eurocredit / syndicated loan | Large medium-to-long-term loan from a syndicate of banks; floating-rate (formerly LIBOR + spread) |
| Euro Commercial Paper (ECP) | Short-term unsecured promissory note issued in a Eurocurrency |
| Euro Medium-Term Note (EMTN) | Flexible note programme, multi-currency, multi-tenor |
| Note-Issuance Facility (NIF) / Revolving Underwriting Facility (RUF) | Underwritten programmes for short-term-paper issuance |
35.7 Offshore Financial Centres and Tax Havens
Offshore financial centres — Cayman Islands, Bermuda, BVI, Mauritius, Singapore, Cyprus, Channel Islands, Luxembourg, Netherlands — host a disproportionate share of international finance because of low or zero tax, light regulation, legal predictability and banking secrecy. FATF (Financial Action Task Force) and the OECD now press these centres on transparency, anti-money-laundering and base-erosion-profit-shifting (BEPS) standards.
35.8 India’s International Financial Centre — GIFT City
India established its first International Financial Services Centre (IFSC) at Gujarat International Finance Tec-City (GIFT City) in 2015. The International Financial Services Centres Authority (IFSCA), set up in 2020, is the unified regulator for banking, insurance, securities and asset management at GIFT IFSC.
| Feature | Content |
|---|---|
| Inception | 2015 (DIFC inspiration) |
| Regulator | IFSCA (single, unified regulator since 2020) |
| Currency of operation | Foreign currency — primarily USD |
| Tax incentives | 100 % income-tax holiday for any 10 of 15 years for IFSC units |
| Offerings | Banking, insurance, capital markets, asset management, fintech, aircraft and ship leasing |
| Stock exchanges | India INX (BSE) and NSE IFSC; trade derivatives, gold, sovereign bonds |
| Bullion exchange | India International Bullion Exchange (IIBX), launched 2022 |
35.9 Indian Companies in International Markets — Snapshot
| Vehicle | Use |
|---|---|
| ADR / GDR | Equity capital raise abroad (Infosys, Wipro, Reliance, ICICI, HDFC) |
| FCCB | Convertible foreign-currency bonds — popular pre-GFC |
| ECB | Foreign-currency loans, under RBI guidelines |
| Masala bonds | INR-denominated offshore bonds |
| Eurocurrency loans | Syndicated loans for large project finance |
| Listing on Singapore / London | Dual listing or secondary listing |
35.10 Recent Developments
A few developments stand out for an exam-going candidate.
- End of LIBOR, with risk-free rates such as SOFR replacing it from 2023.
- Rise of green and sustainability-linked bonds in international markets.
- GIFT IFSC as India’s offshore financial hub, with banks, insurers, exchanges and bullion exchange operating in dollar terms.
- Sovereign Green Bonds issued by Government of India in domestic and international markets.
- Sustainable Finance Disclosure Regulation (SFDR) and EU Taxonomy changing how international bonds are labelled.
35.11 Exam-Pattern MCQs
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| Bond | Country of issue | ||
| (i) | Yankee bond | (a) | UK |
| (ii) | Samurai bond | (b) | China |
| (iii) | Bulldog bond | (c) | USA |
| (iv) | Panda bond | (d) | Japan |
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| DR | Listing market | ||
| (i) | ADR | (a) | London / Luxembourg |
| (ii) | GDR | (b) | BSE / NSE in India |
| (iii) | IDR | (c) | NYSE / NASDAQ |
| (iv) | EDR | (d) | European exchanges |
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| Instrument | Characteristic | ||
| (i) | Eurobond | (a) | Bond denominated in a currency other than the country of issue |
| (ii) | Foreign bond | (b) | Bond exchangeable into shares of another group company |
| (iii) | FCCB | (c) | Bond denominated in the local currency, issued by a foreign firm |
| (iv) | FCEB | (d) | Foreign-currency bond convertible into the issuer's own equity |
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- International financial markets: money, capital, equity, derivatives, Eurocurrency segments.
- Eurocurrency = currency held outside its country of issue. Eurodollar = USD held outside USA.
- LIBOR phased out 30 June 2023; replaced by risk-free rates: SOFR (USD), €STR (EUR), SONIA (GBP), TONA (JPY), SARON (CHF).
- Eurobond vs Foreign bond: currency same as country (foreign) vs different (Eurobond).
- Foreign-bond names: Yankee (USA), Samurai (Japan), Bulldog (UK), Matador (Spain), Maple (Canada), Kangaroo (Australia), Panda (China), Dim sum (Hong Kong CNY offshore), Masala (INR offshore).
- DR types: ADR (USA), GDR (London/Luxembourg), IDR (India), EDR (Europe).
- Indian instruments: ADR/GDR (equity), FCCB / FCEB (convertible foreign-currency bonds), ECB (foreign-currency loans, RBI rules), Masala bonds (INR offshore), Eurocurrency syndicated loans.
- GIFT City IFSC (2015) under IFSCA (2020) — single regulator. India INX, NSE IFSC, IIBX (2022).
- Tax havens / offshore centres: Cayman, Bermuda, BVI, Mauritius, Luxembourg; FATF and OECD push transparency.
- Recent: green / sustainability-linked bonds, Sovereign Green Bonds, EU SFDR, end of LIBOR.