Widening the G-Sec mart

MONETARY POLICY MID-TERM REVIEW 2007-08/ MARKETS

Brokers can once again act as market intermediaries for fixed-income securities.

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.