Bonds to be settled under 'dirty price' mechanism, says BSE

Corporate and government bonds trading under clean price mechanism will be settled under the dirty price system, which takes into account both face value and accrued interest component of the bond, BSE has said.
The leading stock exchange has decided to move trading of some corporate and government bonds on to the Clean Price and Yield mechanism in order to align with the debt Over the Counter (OTC) market. The changes will be effective August 8.
Currently, trading of all the bonds that are part of 'F' or 'G' group is done under the dirty price mechanism.
In the clean price system, the price of a bond is expressed in 100 basis points and excludes accrued interest, while yield of a bond is that rate which equates discounted value of future cash flows to the present price of the bond.

According to BSE, under the clean price mechanism, bonds will be made part of 'FC' and 'GC' groups for corporate and government bonds, respectively.
"... Settlement of trades in bonds in the 'FC' and 'GC' group would be as per the dirty price mechanism," BSE said in a notice dated July 26.

According to the exchange, existing norms in place for 'Clearing and Settlement and Risk Management' for securities traded in the 'F' and 'G' group would be applicable for those in the 'FC' and 'GC' groups.
On July 25, BSE said the closing price of all the bonds forming part of FC and GC group which were traded on dirty price shall be converted to clean price on the end of day of August 5.

"In order to align with the debt OTC market, the exchange proposes to move trading of some corporate and government bonds on clean price and yield to market (YTM) mechanism. In clean price and yield trading mechanism, the trader has an option of entering order using clean price or yield," the exchange had said in a circular.
In debt OTC market, bonds are traded on clean price and yield.