Measures to strengthen the Government Securities Market Infrastructure

For bringing about an improvement in trading and settlement in the money market and government securities market, the Negotiated Dealing System (NDS) and Clearing Corporation of India Limited have been set up.

Negotiated Dealing System: The Reserve Bank introduced NDS with a view to reforming the secondary market in government securities and money market operations, introducing transparency and facilitating electronic bidding in auctions. Test runs on the NDS started in November 2001 and phase I was operational from February 15, 2002, with 41 participants.

The NDS provides an on-line electronic bidding in the primary auctions of central/state government securities, OMOs/LAF auctions. It enables screen based electronic dealing and reporting of transactions in money market instruments including repo, secondary market transactions in government securities and dissemination of information on trades with the least time lags.

The NDS is integrated with the securities settlement system (SSS) of the Public Debt Office as also with the CCIL to facilitate paperless settlement. if transactions in government securities and treasury bills and bring about improvement in services to investors in government securities. Once a trade is done/reported over NDS, it can be settled either through CCIL or directly through RBI-SGL. Settlement through CCIL is on Delivery versus Payment (DVP–II) mechanism. DVP –II refers to settlement of securities on gross (trade by trade basis) while funds will settle on net basis.

Banks, primary dealers, and financial institutions having SGL accounts and current accounts with the Reserve Bank are eligible to participate in NDS. It provides an electronic dealing platform for these participants in government securities. It enables the execution of deals in computer matching mode or a chat mode for negotiating deals on the system itself. Members are expected to report all the trades negotiated outside the system for settlement. If facilitates member participation in the primary auctions of government securities and treasury bills by submitting their bids/applications for auctions/floatation through their own terminals or pooled terminals. The pooled terminal facility is provided at all regional offices for use by SGL account holders not having member terminals. NDS is sued by the Reserve Bank for extending the liquidity adjustment facility to eligible members. All entities having SGL accounts with Reserve Bank were advised to become members of the NDS by May 31, 2002. Till August 5, 2002, 138 SGL account holders were members of NDS. On an average, 526 deals were reported daily on NDS, of which 473 deals for Rs 11,688 crore were ready for settlement during the quarter ended June 2002. These deals comprised money market deals (109 deals for Rs8,762 crore), outright government securities trades (344 deals for Rs 2,080 crore) and repo transactions among member participants. The settlement of the government securities transactions through the CCIL constituted 91.3 per cent of the total government securities trades dealt/reported on the NDS.

The NDS has brought about significant improvements in secondary markets also. It has helped in increasing the level of transparency of the dealings in government securities, T-bills and other instruments. The system has facilitated screen based trading provision of on-line trade information and reporting through trade execution system for settlement.

Clearing Corporation of India Limited: CCIL was registered on April 30, 2001 under the Companies Act, 1956. The State Bank of India is the chief promoter of CCIL. Its other promoters are banks, financial institutions, and primary dealer. It has been set up as an ordinary limited liability non-government company under the Companies Act, 1956 with an equity capital of Rs 50 crore. It functions like a business entity that is subject to corporate tax on its business profits.

It casts as the central counterpart in the settlement of all trades in government securities, treasury bills, money market instruments, repos, inter-bank foreign exchange deals, and derivatives of any kind where the underlying instruments is a security or money market instrument. CCIL is the clearing, and settling agency in respect of all trades by institutional players such as Banks, DFIs, primary dealers, mutual funds, corporates, and NBFCs who account for more than 98 per cent of the total trades.

The CCIL manages various such as credit and market risk, liquidity risk and operational risk to avoid serious system failures.

In securities the CCIL covers the credit and market risk by making members maintain initial margins as well as mark-to-market margins to cover future adverse movements of securities and notional loss respectively. Members are required to maintain adequate balances in the Settlement Guarantee Fund (SGF) in the form of eligible government securities/treasury bill and cash (minimum 10 percent) to cover the margin requirements in respect of their trades.

In foreign exchange transactions, CCIL resorts to loss allocation mechanisms to manage credit and market risk and restricts the membership to authorized dealers only.