According to the Reserve Bank guidelines, institutions willing to register as Primary Dealers (PDs) should have sufficient and continuous presence in the government securities market and minimum net owned funds of Rs 50 crore. Capital adequacy guidelines for PDs were revised in December 2000. PDs now have to work out market risk based on the value at risk (VaR) model and standardized method and they have to maintain capital charges based on the higher of the two. As a transitional measure, until PDs stabilize their VaR model and get these vetted by the Reserve Bank, they have been allowed to work out the market risk requirements at 7 percent of the portfolio. VaR is an indicator of the maximum loss that a portfolio can suffer within a given time horizon at a pre-specified confidence level. According to the Reserve Bank guidelines, each PD is required to provide for capital to the tune of 3.3 times the 60 day average of the 99 percent VaR over a 30-day horizon, as measured by models developed internally. The objective behind the introduction of the VaR model is to stabilize the financial system. In view of their systemic importance, PDs have been brought under the supervision and jurisdiction of the Board for Financial Supervision (BFS).
In January 2002, PDs were advised to follow a prudent distribution policy so as to build up sufficient reserves even in excess of the regulatory requirements which can act as a cushion against any adverse interest rate movements in the future. The daily reporting format of PDs was modified to reflect the diversified nature of sources and application of funds. PDs were advised to restrict the acceptance of Inter-Corporate Deposits (ICDs) to 50 per cent of their net owned funds and evolve a policy for the acceptance of ICDs after due consideration of the risks involved. The Asset-Liability Management (ALM) discipline was also extended to PDs during 2001-02. Their entire portfolio of government securities has been allowed to be treated as liquid.
Prudential limits on exposure of PDs to call/notice money market are slated to come into effect in October-December 2002.
The off-site surveillance of PDs is done on the basis of three basic returns – PDR I, II, III. PDR I is a daily statement of sources and uses of funds and is used to monitor the deployed of call borrowing and the RBI liquidity support, leverage and duration of PDs portfolio. PDR I return has been revised to capture more details on sources such as ICDs and CPs. PDR II is a monthly statement on the basis of which bidding commitments success ratio, underwriting performance, secondary market turnover of PDs, and so on are monitored. PDR III is quarterly return on the basis of which the capital adequacy of PDs is monitored. Apart from these regular returns, additional details are called for as and when necessary. The ALM guidelines for NBFCs with some modifications were also made applicable to PDs.
Number of PDs:
DFHU and STCI were accredited as primary dealers on March 1, 1996. On June 1,1996, four more PDs – SBI gilts, Gilts Securities Trading corporation Limited and ICICI Securities became operational. As on March 31, 2002, there were 18 approved PDs in the gilts market. The initial six PDs constitute the subsidiaries of RBI/nationalized banks/financial institutions, while the remaining new PDs represent private sector participants. These 18 PDs have net owned funds of over Rs 4,000 crore and total assets of Rs 15,658 crore out of which government securities constitute Rs 12,236 crore (78 percent of total assets).