Widening the G-Sec mart
MONETARY POLICY MID-TERM REVIEW 2007-08/ MARKETS
| The RBI, in its mid-term policy review on Tuesday, allowed 'Short-Sale' and 'When Issued' transactions of government securities (G-Sec) outside the NDS-OM system. Guidelines in this regard would be issued after the central bank holds consultation with the dealers associations. |
| Traders said the RBI move would help in widening and deepening the G-Sec market as the players who otherwise cannot access the NDS-OM can also participate in 'when-issued' and 'short sale' of government securities. This includes mutual funds, insurance companies among others. |
| Negotiated Dealing System (NDS) is a screen-based order matching system where the deals are done by matching bids on real-time basis. |
| Outside the NDS-OM, the deals are brokered through telephone and herein comes the role for fixed income brokers. |
| In 2005, the RBI had made it compulsory for all transactions of G-Secs to be operated on NDS-OM, thus bypassing the fixed-income brokers. |
| 'Short-sale' in G-Secs refers to selling of G-Secs without actually having it in the portfolio. |
| However, under the current norms laid down by the RBI, the short-sale is an intra-day transaction which means the deal has be squared off during the day through the physical delivery of the government paper. |
| 'Short-sale' mechanism boosts liquidity of government papers and helps in mobilising resources for intra-day management of funds when one is not in actual possession of particular security. |
| Similarly, 'when-issued' transactions is a mechanism for better price discovery of a government paper which is to be auctioned. The process is usually adopted for government papers that are put for auction in the market. |
| Trading in the paper is allowed 2-3 days ahead of the actual auction date so as to discover the fair price of the security. |
| ''The real benefit will come if the RBI provides direct connectivity of the broking firm's terminals with the clearing house. This will cut down the settlement time and provide a level playing field with banks operating on NDS-OM,'' said Digant Bhansali, vice president at fixed income securities broking firm ICAP. |