Criteria

The parameters that CRISIL considers for determining the complexity levels of financial instruments are:

 

  • Ease of calculation of payout and returns
    The ease of calculation of payouts and returns affects the complexity of a financial instrument. For instance, in a corporate bond, the interest rate and debt repayment schedule are known beforehand, making payout calculation simple for an investor. On the other hand, determining the payouts for an equity-linked debenture requires considerable understanding and computational effort.
  • Clarity on timing of cash flows
    Certainty in cash flow timing helps investors plans their investments well. Any uncertainty will affect returns, and will need to be managed. For instance, prepayments on asset- or mortgage-backed securities expose investors to reinvestment risk, adding to the complexity of the investment process.
  • Number of counterparties involved in the transaction
    The number of counterparties involved in the instrument also adds to the complexity. For instance, consider a guaranteed corporate bond. The investor will have to take into consideration the risk associated with both the issuer and the guarantor, and also factor in the guarantee mechanism. In a plain vanilla bond, on the other hand, the investor is only concerned with the issuer's credit risk. This makes the plain vanilla bond far easier to analyse.
  • Familiarity of market participants with the instrument
    An instrument type that has been in the market for some time is easier for market participants to understand than one that has just been introduced. For instance, equity shares have been a routine investment for decades, and the market's understanding of shares is therefore good. On the other hand, when equity derivatives were introduced, there were very few participants who understood these instruments at all well. Over time, as the market gains familiarity with an instrument type, the implied complexity reduces. Hence, the Complexity Level of an instrument may change over time, as the market becomes increasingly familiar with it.

Disclaimer

 

CRISIL Complexity Levels are based on information obtained by CRISIL from sources it considers reliable. CRISIL Complexity Levels reflect the ease of understanding and analysing the risk elements in capital market instruments. The initiative is on a voluntary and pro-bono basis. CRISIL does not guarantee the completeness or accuracy of the information on which the categorisation is based. A CRISIL Complexity Level is not a recommendation to buy, sell or hold the instrument; it does not comment on the market price or suitability for a particular investor. CRISIL is not responsible for any errors and especially states that it has no financial liability whatsoever to the subscribers / users / transmitters / distributors of this product.

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