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Market regulator Sebi today has announced fresh measures, including small ticket-size trades and net settlement, to boost liquidity and investor participation in the debt segment.
Accepting market feedback, Sebi has permitted trade settlement on a net basis (DVP 3) on select bonds in the institutional segment.
Under the so-called DVP-3 (delivery versus payment) settlement trades are settled on a net basis, while currently settlement is only allowed on a gross settlement or DVP-1 basis.
DVP-3 settlement, which allows netting of payables and receivables, enables investors to trade with an upfront margin. Whereas, in DVP-1 the transfer of securities and funds happen simultaneously. Currently, DVP-3 is allowed for retail participants in the debt segment.
Sebi has said the settlement cycle for DVP-3 trades will be on a T+1 basis (next day of the trade), while trades under DVP-1 can be settled on the same day.
Sebi has allowed DVP-3 settlement for corporate bonds rated 'AA+' or above. Also, the yield differential, between these bonds and similar tenure government securities, will have to be less than 150 basis points.
Liquid corporate bonds will also be allowed to be settled on a DVP-3 basis. For a security to be eligible as liquid, it will have to be traded at least five trading days in every month or must have a minimum trading volumes of Rs 25 crore every month.
Clearing corporations will have to provide settlement guarantee for trades settled on DVP-3 basis and will have to create a settlement guarantee fund on similar lines as in the equity or currency segment, Sebi said in a circular
Clearing corporation will impose initial margins to cover 99% of the value at risk (VaR) over a one day horizon, the circular added.
Stock Exchanges can follow a VaR estimation model similar to Interest Rate Futures, it added.
As per the circular, the minimum initial margin will be between 2% and 3% depending on the residual maturity of the bonds. Also, the margin will be allowed to be deducted upfront from the liquid assets of the member taking into account gross open positions.
Earlier this year, Sebi had issued guidelines to launch debt trading on the stock exchange platform. The debt is a third standalone segment to be traded on the stock exchange after equity and currency.
However, this segment is yet to gain traction as bourses, so far, have found it challenging moving trading in debt instruments from the OTC market to the stock exchange platform.
