NDS extended to call, term-money marts

ANNUAL POLICY 2005-06/ DEBT MARKET REFORMS

Move will lead to better price discovery and transparency in deals.

The Reserve Bank of India today extended the facility of screen based negotiated quote driven system for all deals in call/notice and term money market.

As part of the announcements in the annual policy statement released today, the RBI said all members of the negotiated dealing system are required to report their term money deals on the NDS platform.

Currently the screen-based quote driven negotiated dealing system is used for dealing in government securities and reporting of the deals as well. This is in addition to the telephone-based dealing facility used by banks and traders.

In call money and term money, banks use telephone based trading platform for striking the deals and later report it on the NDS platform.

However in order to impart more transparency and fluctuations in the call money and term money deals, the RBI proposes to extend the NDS and screen based system for trading and reporting.

Call money refers to the overnight funds lent and borrowed by banks for daily liquidity management. It is one day money which is currently dealt at 4.75 per cent. Term money refers to longer-term money, the tenor of which could stretch upto one month or two month.

There is no parameter for judging the market price for the funds of such maturity and the next underlying benchmark in the market is that of the 91 day treasury bills which has a tenor of three months.

Banks with surplus funds can virtually demand any rate for a bank in need of funds for coping up with liquidity mismatches.

With the advent of the risk management systems, smaller banks with not so savvy systems and even bigger banks with huge capital base often face short term liquidity mismatches and have to borrow at much higher rates for short term funds.

Thus, if these deals -- call money and term money-- get dealt and reported on the NDS system, it will help in better price discovery and transparency.

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In the open

• All members of the negotiated dealing system are required to report their term money deals on the NDS platform.
• Currently the screen-based quote driven negotiated dealing system is used for dealing in gilts
• Call money refers to the overnight funds lent and borrowed by banks for daily liquidity management.
• Term money refers to longer-term money, the tenor of which could stretch upto one month or two month.