RBI issues draft norms for STRIPS

Aims to improve liquidity in G-sec market.

The Reserve Bank of India (RBI) today issued draft norms for Separate Trading of Registered Interest and Principal of Securities (STRIPS) to improve liquidity in buying and selling of government bonds.

STRIPS is the process of converting periodic coupon (interest) payments and the principal of an existing government security into tradable zero-coupon securities.

In operational terms, stripping a five-year security will create 11 tradable bonds — 10 coupon securities (representing half-yearly interest payment on respective dates) and another security which represents the principal amount on the date of maturity.

The RBI has also allowed reconstitution of securities, which is the reverse of stripping. Under this, coupon STRIPS and principal STRIPS are reassembled into the original government security.

STRIPS was expected to provide institutional investors an additional instrument for asset-liability management, said the RBI.

Any entity, including individuals, holding balances of government securities is eligible for stripping/reconstitution. They will have to approach a primary dealer (PDs) with a request for stripping/reconstitution.

The RBI said initially, securities with coupon dates as January 2 and July 2 would be eligible for stripping/reconstitution. This is irrespective of the year of maturity.

Those who intend to strip or reconstitute bonds must maintain a demat account and hold government securities in an electronic form. PDs could place requests directly into the negotiated dealing system and need not route the same through another PD, it said.

The minimum amount of securities that needs to be submitted for stripping and reconstitution will be Rs 1 crore (face value) and multiples.

STRIPS can also be used for meeting Statutory Liquidity Ratio norms. They could also be used for market repo as well as repo under the liquidity adjustment facility, but with appropriate haircut.

STRIPS, being zero coupon securities, trade at a discount and redeemed at face value.

Initially, STRIPS will be tradable only in over-the-counter (OTC) market. Hence, trades in STRIPS will have to be struck in the OTC market and reported on the NDS for clearing and settlement through Clearing Corporation of India Ltd.