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Trading volumes in the debt segment of stock exchanges is expected to remain low, with lack of same-day settlement and criteria of only listed corporate bonds being traded on the segment. Insurance companies, which were permitted trade in the segment by the finance ministry in his budget speech, are also going slow, owing to these structural issues.
"In the institutional segment, we have been asking for settlement guarantee and a low margin to be kept with the exchanges. While we have placed our concerns before the concerned parties, it appears that they would first want volumes to pick up before changes are made to the settlement process," said a senior investment official of a private life insurer. Delivery versus Payment (DvP I) mode for settlement is being used for these transactions presently and after volumes build up, DvP III mode will be used according to insurance players.
Delivery versus Payment (DvP) is the mode of settlement of securities wherein the transfer of securities and funds happen simultaneously. This ensures that unless the funds are paid, the securities are not delivered and vice versa. DvP settlement eliminates the settlement risk in transactions. DvP I refers to when the securities and funds legs of the transactions are settled on a gross basis, that is, the settlements occur transaction by transaction without netting the payables and receivables of the participant.
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In DvP III, both the securities and the funds legs are settled on a net basis and only the final net position of all transactions undertaken by a participant is settled. Liquidity requirement in a gross mode is higher than that of a net mode since the payables and receivables are set off against each other in the net mode.
In his budget speech, finance minister P Chidambaram had said that with the object of developing the debt market, stock exchanges will be allowed to introduce a dedicated debt segment on the exchange. Banks and primary dealers will be the proprietary trading members.
"In order to create a complete market, insurance companies, provident funds and pension funds will be permitted to trade directly in the debt segment with the approval of the sectoral regulator," he said.
Later, the Insurance Regulatory and Development Authority (Irda) had also written to the government that it is ready to let insurers participate as trading members in the separate debt segment proposed to be created on the stock exchanges.
"While DvP I does not have a margin requirement, it does not offer settlement guarantee. Hence, even though Irda does not have an objection in us entering the segment, the fundamental issues with it have been a hindrance for us to take a serious call on trading in it," said the chief investment officer of a private life insurer.
While DvP III, said insurers, would offer settlement guarantee, industry experts also pointed that high margin requirement was a dissuading factor from institutional players to stay away from the segment. Ajay Manglunia, senior vice-president, Edelweiss Securities said, "Trading volumes in DvP III mode of settlement on debt segment at exchanges is not taking off because of factors like lack of T+0 settlement, only limited papers like public issue listed corporate bonds only can be traded currently and there is a requirement of 10 per cent margin for guaranteed settlement."
The Securities and Exchange Board of India (Sebi) has approved the launch of a separate debt segment for trading by the BSE, National Stock Exchange (NSE) and MCX-SX.
