SDB Club Benchmark Real Estate

Central Government Securities Market

1. Floating Rate Bonds
The floating rate bonds (FRBs) issued by the Government of India till September 2004 were linked to the cut-off yields of the 364-day Treasury Bills (TBs), which led to certain issues relating to the pricing of FRBs in the secondary market. Reflecting this experience and in consultation with market participants and the Technical Advisory Committee on Money, Foreign Exchange and Government Securities Markets, the structure has been revised. The revised structure contemplates that: (1) the auction will be conducted through the “price based” process as against the “spread based” process earlier; and (2) the base yield for FRBs will be linked to the primary market cut-off yield of the 182-day TBs. The revised structure is expected to simplify the methodology for pricing of FRBs in the secondary market. The revised issuance structure for FRBs has been built into the negotiated dealing system (NDS) auction format being developed by the Clearing Corporation of India Limited (CCIL).

The indicative calendar for the issuance of Central Government securities provides for the issuance of FRBs. Accordingly:
- any new issuance of floating rate bonds would be in terms of the revised issuance structure.

2. Auction Process of Government of India Securities
As indicated in the Mid-Term Review of October 2008, the recommendations of the Internal Working Group (Chairman: H.R. Khan) involving the Reserve Bank such as reduction of the time gap between bid submission and declaration of auction results have already been implemented. The other recommendations of the Working Group such as: (1) withdrawal of the facility of bidding in physical form and submission of competitive bids only through the NDS; and (2) submission of a single consolidated bid on behalf of all its constituents by the bank/primary dealer (PD) in respect of non-competitive bids will be implemented after the amendments in the specific notification and in the scheme for non-competitive bidding facility by the Government of India.

Ways and Means Advances to the Government of India : Status
The Reserve Bank, in consultation with the Government of India, has revised the extant limits for the Ways and Means Advances (WMA) for the financial year 2009-10. As per the revised arrangements, the WMA limits will continue to be fixed on a half-yearly basis, and are placed at Rs.20,000 crore for the first half and Rs.10,000 crore for the second half of 2009-10. The applicable interest rate on WMAs and overdrafts will, as it is the practice now, continue to be linked to the repo rate. The Reserve Bank of India, however, retains the flexibility to revise the limits in consultation with the Government of India, taking into consideration the prevailing circumstances.

Debt Management for State Governments

1. Non-Competitive Bidding in the Auction of State Development Loans (SDLs): Status
In order to widen the investor base and enhance the liquidity for SDLs, a scheme for non-competitive bidding in the auction of SDLs was notified by all the State Governments on July 20, 2007. Subsequent to the announcement in the Mid-Term Review of October 2008, the necessary system changes required to handle non-competitive bidding in the auction of SDLs have been carried out in the NDS auction platform developed by the CCIL.

The scheme for non-competitive bidding in SDLs will be operationalised during the current financial year.

2. Ways and Means Advances Limits for the State Governments: Status
The State-wise limits of normal WMA for the year 2009-10 have been kept unchanged at the limits set for the year 2008-09. Accordingly, the aggregate normal WMA limit for State Governments is placed at Rs.9,925 crore, including the WMA limit of Rs.50 crore for the Government of the Union Territory of Puducherry. All other terms and conditions of the scheme remain unchanged.

Development of Market Infrastructure

1. Separate Trading for Registered Interest and Principal of Securities (STRIPS)
Stripping is the process of converting periodic coupon payments and the principal of an existing Government security into tradable zero-coupon securities, i.e., separate trading for registered interest and principal of securities (STRIPS). The availability of STRIPS across the term structure will aid the development of a sovereign zero-coupon yield curve. As indicated in the Annual Policy Statement of April 2008, all operational arrangements for the introduction of STRIPS are ready. The required software development, critical for the introduction of STRIPS, has been carried out as part of the public debt office NDS (PDO-NDS) platform maintained by the Reserve Bank. Furthermore, in order to ensure sufficient volume/liquidity in STRIPS and considering the fungibility of coupon STRIPS, securities have been identified that will be eligible for stripping/reconstitution by the market participants. Accordingly:

- draft guidelines prepared in consultation with the market participants are being placed on the Reserve Bank‘s website for comments and feedback by end-May 2009. With the finalisation of the guidelines, STRIPS will be launched during the current financial year.

2. Revision of Repo Accounting
The accounting norms on repo transactions prescribed by the Reserve Bank in 2003, treated repo as a set of two independent outright transactions. Consequent upon the amendment in 2006 to the Reserve Bank of India Act, 1934, repo has been defined as an instrument for borrowing funds by selling securities. Accordingly, it was proposed to revise the accounting guidelines to capture the economic essence of repo as a collateralised lending and borrowing instrument and not as outright sale and purchase. Accordingly, it is proposed:

- to issue revised guidelines on repo accounting, taking into account comments on the draft guidelines earlier placed on the Reserve Bank’s website, by end-June 2009 for implementation from April 1, 2010.

3. Multi-modal Settlements in Government Securities: Status
As indicated in the Annual Policy Statement of April 2008, a new settlement mechanism (Multi-modal Settlement) through commercial banks has been put in place to facilitate entities such as mutual funds (MFs), which do not hold a current account with the Reserve Bank, to directly participate in the government securities market. Under the new mechanism, while settlement of the securities leg continues to take place in the SGL account maintained with the Reserve Bank, the funds leg will settle through the “designated settlement banks” (DSBs) appointed by the CCIL. The guidelines in the matter were issued on June 2, 2008. From June 30, 2008 onwards, secondary market transactions in government securities undertaken by MFs are being settled only through this mechanism.

The facility of multi-modal settlements can also be availed of by other non-bank entities such as insurance companies, pension funds and co-operative banks which do not maintain a current account with the Reserve Bank.

4. Clearing and Settlement of OTC Rupee Interest Rate Derivatives: Status
As indicated in the Mid-Term Review of October 2008, the CCIL has operationalised a clearing and settlement arrangement for over-the-counter (OTC) rupee interest rate derivatives on a non-guaranteed basis since November 27, 2008. As at end-March 2009, 13 members have decided to participate in the non-guaranteed settlement of OTC rupee interest rate derivatives. The trade reporting platform for OTC rupee interest rate derivatives is already functional.

5. Settlement of OTC Trades in Corporate Bonds
For facilitating settlement of OTC corporate bond transactions in real-time gross settlement (RTGS) system on a DvP-I basis (i.e., on a trade-by-trade basis), it has been decided, in consultation with the SEBI, to allow the clearing houses of the exchanges to have a transitory pooling account facility with the Reserve Bank. Under the proposed settlement mechanism, the buyer of securities will transfer the funds through his bank to this transitory account through RTGS. The clearing house will thereafter transfer the securities from the seller’s account to the buyer’s account and effect the release of funds from the transitory account to the seller’s account.