Automated value-free transfer of securities allowed

RBI ANNUAL POLICY STATEMENT, 2004-05

In order to increase the use of the same government security put in the settlement guarantee fund ( SGF) of the Clearing Corporation of India Ltd (CCIL), the Reserve Bank of India (RBI) allowed automated value-free transfer of securities between market participants and the CCIL.

SGF is the settlement fund maintained by the CCIL to clear the settlement of government security transactions among participating banks under the collateralised borrowing and lending obligation (CBLO), CCIL's indigenously developed money market instrument. This product is akin to the RBI's repo facility.

Automated value transfer will ensure that deals are settled the moment the security is contributed and settlement done. Thus the same paper could be put to other use on the same day, unlike at present where the paper is free for other use after a day.

Further outlining the roadmap for the interbank call money market, the RBI in its annual policy today stated that non-bank participants would be allowed to lend, on an average in a reporting fortnight, up to 45 per cent of their average daily lending in then call/notice money market during 2000-2001 with effect from the fortnight beginning June 26, 2004.

The RBI is in the process of gradually phasing out non bank participants from the money market which will be exclusively used for interbank operations.

To widen the variety of instruments and help investors hedge the risks of interest rate fluctuations, a discussion paper on Capital Indexed Bonds (CIB), detailing the product features of a modified CIB, has been put out for discussion. The RBI had introduced a five-year CIB in December 1997.

The RBI also said that CCIL is also working out an arrangement to settle trades in listed as well as unlisted non-statutory liquidity ratio (SLR) debt instruments by members of the negotiated dealing system (NDS) on a non-guaranteed basis.

This measure is likely to give a boost to the corporate bond market which will resort to a screen based trading system, the RBI's regulated trading mechanism, so as to avoid pricing discrepancies and counterparty risk.

As far as the government securities market is concerned, the RBI constituted a working group chaired by R H Patil to review the performance of the NDS in the context of its operational efficiency.

To strengthen the over the counter (OTC) derivatives market and to mitigate the risks involved, a clearing arrangement through CCIL is being considered.

Counter party risk is a major concern for OTC derivatives as they are traded as off market instruments, unlike exchange traded derivatives.

In outlining the memorandum of understanding detailing the rationale and operational modalities of the Market Stabilisation Scheme (MSS) signed between the Government of India and RBI on March 25, 2004, the RBI stated that treasury bills and dated securities with a face value of Rs 27,000 crore were issued under the MSS up to May 14, 2004, out of which dated securities amounted to Rs 15,000 crore.