Presentation on theme: "Introduction to DVP, NDS-OM, CCIL and RTGS – Jan 01, 2013"— Presentation transcript:
1Introduction to DVP, NDS-OM, CCIL and RTGS – Jan 01, 2013
2Structure of Presentation Introduction to G-Sec mkt.Evolution of G-Sec mkt.Delivery Vs Payment System, RTGS and Securities Settlement System.Primary Issuance Framework and Secondary mkt.Trading in G-Sec.
4Government SecurityDefinition : Govt. Security is a tradeable instrument issued by the Central or State Govts. Such Securities are both long term (> 1 yr) & short term (<= 1 yr).Treasury bills (<= 1 yr)Dated government securities (> 1 yr)
5Types of dated securities Fixed rate bondsFloating rate bondsZero Coupon bondsCapital indexed bondsBond with call/put OptionsSpecial Securities e.g. Oil bonds, fertilizer bonds etc.
6ImportanceFacilitates public borrowings at reasonable costs by the Government.Provides the backbone for most fixed income markets through the creation of benchmarks.Facilitates the use of indirect instruments of monetary policy viz., open market operations (OMO) and repo operations.
7Advantages of investment in G-Sec Real time price informationRisk free investment for portfolio risk managementWide range of maturity spectrum (91days – 30 yrs)Liquidity – easy to encash at competitive pricesCan be used as collateral to borrow fundsCan be held in de-mat form, obviating the need for safe keeping.7
8Regional Rural Banks (RRBs) – Section 24 of BR Act 1949 (AACS) RRBs are required to maintain Statutory Liquidity Ratio (SLR) at 25 % of its demand and time liabilities in India in the form of cash, gold or unencumbered Government and other approved securities.
9Categorization of investments (RRBs) Permanent CategoryNo requirement for marking to market.Entire SLR securities can be under HTM tillProfit should be taken to Investment Fluctuation Reserve (IFR) and loss should be taken to profit and loss account
10Securities are held in this category with an intention to trade. Current Category –Securities are held in this category with an intention to trade.Profit or loss on sale of securities from this category are taken to profit and loss account.
12Reforms in G-sec markets First round – as part of overall financial sector reforms in 1992Second round- to address the issues arising out of FRBM
13Pre reform status Prior to 1992 – Characterized by Consequently, Huge fiscal deficitsAutomatic MonetisationDirected InvestmentAdministered Rates – to keep the cost lowConsequently,Secondary market remained dormantHigh interest rates in the system due to cross subsidisation by banks
14Reforms Fiscal & Monetary Policy: Abolition of Ad-hoc treasury bills( 1994)Ad-hoc treasury bills were issued for short term funding of GovernmentInstitution of Ways and Means advances(1997)Fiscal disciplineReduction in Statutory Liquidity Requirement (38.5% to 25%)Even the floor removed by latest legal amendmentSLR brought down to 24% ( recent measures)
15Delivery Versus Payment System, RTGS and Securities Settlement System
16Delivery Vs Payment (DVP) Delivery versus Payment (DvP) is the mode of settlement of securities wherein the transfer of securities and funds happen simultaneously. This ensures that unless the funds are paid, the securities are not delivered and vice versa. There are three types of DVP :DvP I – The securities and funds legs of the transactions are settled on a gross basis, that is, the settlements occur transaction by transaction without netting the payables and receivables of the participant.DvP II – In this method, the securities are settled on gross basis whereas the funds are settled on a net basis, that is, the funds payable and receivable of all transactions of a party are netted to arrive at the final payable or receivable position which is settled.DvP III – In this method, both the securities and the funds legs are settled on a net basis and only the final net position of all transactions undertaken by a participant is settled.
17DVP (Contd) …The settlement of G-sec transactions in secondary market is being done on a Delivery versus Payment (DvP) mechanism (which helps to eliminate the risk that the seller will give out securities but not receive corresponding funds from the buyer and vice versa) in the books of RBI since In July 1995, when this mechanism was first introduced, the RBI followed DvP-I system wherein both securities and funds were settled on a gross basis (that is, each transaction is settled individually). Though this helped to reduce the risk as stated above, it still did not provide an arrangement whereby settlement failures did not take place i.e., defaults in settlement of SGL transactions. Since April 2, 2004 the DvP-III mechanism is being followed whereby both securities (security-wise) and funds are netted. This helps to reduce liquidity requirements for settlement. The securities obligations are settled at Mumbai PDO in the Securities Settlement System and the funds are settled in Mumbai DAD.
18Real Time Gross Settlement (RTGS) RTGS system is a funds transfer mechanism where transfer of money takes place from one bank to another on a 'real time' and on 'gross' basis. 'Gross settlement' means the transaction is settled on one to one basis without bunching with any other transaction. Considering that money transfer takes place in the books of the Reserve Bank of India, the payment is taken as final and irrevocable.RTGS is a large value (minimum value of transaction should be 2,00,000) funds transfer system whereby financial intermediaries can settle interbank transfers for their own account as well as for their customers.Customers can access the RTGS facility between 9 am to 4:30 pm on weekdays and 9 am to 1:30 pm on Saturdays.Banks could use balances maintained under the CRR and the intra-day liquidity (IDL) to be supplied by the central bank, for meeting any eventuality arising out of the real time gross settlement (RTGS). The RBI fixed the IDL limit for banks to three times their net owned fund (NOF).
19Types of RTGS MembersType A - All Scheduled banks allowed to raise both inter bank and customer transactions and are eligible for intra day liquidity facility from the Central Bank.Type B – All Primary Dealers allowed to raise only inter bank transactionsType C – Avail RTGS facility through a sponsor bank.Type D – Clearing entities submit multi lateral net settlement batches.
20Types of Transactions Institutional transactions. Customer Transactions.Delivery Vs Payment transactions.Multi-lateral Net Settlement transactions.
21RTGS-Process Flow Y-shaped message flow architecture is followed. The sending bank transmit the full payment message to a central processor. The central processor then validates the message and sends only the core settlement information to the settlement account with Central Bank (Reserve Bank of India). The original message is kept in the central processor. After settlement the RBI informs the central processor and the central processor rebuilds the entire message and sends to the receiving bank.The attraction of Y architecture is that it enables a distinction to be drawn between the Central Bank's core role as settlement agent and the rest of the system processing can be attended to by a third entity
22RTGS Vs National Electronic Funds Transfer (NEFT) NEFT is an electronic fund transfer system that operates on a Deferred Net Settlement (DNS) basis which settles transactions in batches. In DNS, the settlement takes place with all transactions received till the particular cut-off time. These transactions are netted (payable and receivables) in NEFT whereas in RTGS the transactions are settled individually. For example, currently, NEFT operates in hourly batches - there are eleven settlements from 9 am to 7 pm on week days and five settlements from 9 am to 1 pm on Saturdays. Any transaction initiated after a designated settlement time would have to wait till the next designated settlement time Contrary to this, in the RTGS transactions are processed continuously throughout the RTGS business hours.
23Securities Settlement System (SSS) – Introduction A system which permits the holding and transfer of securities, either free of payment or against payment (delivery versus payment) or against another asset (delivery versus delivery). It comprises all the institutional and technical arrangements required for the settlement of securities trades and the safekeeping of securities. The system can operate on a real-time gross settlement, gross settlement or net settlement basis. A settlement system allows for the calculation (clearing) of the obligations of participants. Source : OECD
24SSS- Centralization of SGL accounts One of the objectives of setting up the NDS system was to provide an efficient settlement mechanism for secondary market transactions in G-secs. This was achieved in the form of Securities Settlement System (SSS) a part of the PDO-NDS/SSS application, which holds all balances in all types of SGL Accounts of members.
25Benefits - SSS Enables STP of securities transactions. Enables participants to put up collateral to CCIL in various segments – intra-day liquidity under RTGS etc.Overall management of securities balances by members.
26Securities Settlement System – Players involved IDMDPDODADCCIL
27SSS - Infrastructure Reserve Bank of India NDS CCIL Owned by RBI but managed by CCILOTC outright trades in G-SecOTC Repo trades in G-SecAuction of securities (incl. T-Bills)Trading on NDS-OMNDSTrades in CBLORepo trades on CROMSCCILOwned and managed by RBIReserve Bank of IndiaOwned and managed by CCILSecurities settlement in PDOFunds settlement in DADDvP
28Government Securities – SGL a/c & CSGL a/c SGL a/c : RBI offers SGL facility to select entities who can maintain SGL account with PDO Mumbai.Gilt a/c : An investor can open a Gilt Account with a SGL a/c holder, who is eligible to open Constituents’ Subsidiary General Ledger Account (CSGL).
29CSGL eligibilityThe entities mentioned below are eligible to open and maintain a CSGL account with the Bank on behalf of their constituents, i.e., Gilt Account Holders (GAHs):Scheduled commercial banks.Scheduled urban co-operative banks with net worth of Rs cr or more and CRAR of 10% & above and belonging to the States which have signed MOU with the Reserve Bank of India.Scheduled State co-operative banks with net worth of Rs cr or more.Primary Dealers. Provided that the above entities obtain a no-objection certificate from the concerned regulatory department of the Reserve Bank of India to the effect that they meet the above eligibility criteria (as applicable) and that the Bank has no regulatory/supervisory discomfort.
30Settlement – Primary & Secondary Mkt Once the allotment process in the primary auction is finalized, the successful participants are advised of the consideration amounts that they need to pay to the Government on settlement day. The settlement cycle for dated security auction is T+1, whereas for that of Treasury bill auction is T+2. On the settlement date, the fund accounts of the participants are debited by their respective consideration amounts and their securities accounts (SGL accounts) are credited with the amount of securities that they were allotted.The transactions relating to Government securities are settled through the member’s securities / current accounts maintained with the RBI, with delivery of securities and payment of funds being done on a net basis. The Clearing Corporation of India Limited (CCIL) guarantees settlement of trades on the settlement date by becoming a central counter-party to every trade through the process of novation, i.e., it becomes seller to the buyer and buyer to the seller.All outright secondary market transactions in Government Securities are settled on T+1 basis. However, in case of repo transactions in Government securities, the market participants will have the choice of settling the first leg on either T+0 basis or T+1 basis as per their requirement.
32Primary Issuance Framework Auctions (1992)Price discoveryAuction formatsUniform PriceMultiple PriceElectronic bidding ( 2002)Wider reachOperational easeShortening of processing timeResults same eveningAuction Process is STP
33Primary Issuance framework Non-competitive BiddingEliciting retail participationEarmarking of a portion of notified amountRe-issuance of bondsConsolidationOf the 127 issuances of securities conducted during , 120 were re-issuances
34Auction Process cont.. Yield based auction Price based auction For new securities issuedCoupon rate (CUT-OFF) decided in the auctionApplications up to maximum rate of yield are acceptedApplications above the cut-off rate of yield are rejectedValue converted into pricePrice based auctionWhere existing securities are reissued/reopenedCut-off price is decided in the auctionApplications up to minimum price( CUT-Off) are acceptedApplications below the cut-off price are rejected34
36PRICE BASED AUCTION- (8% security) Notified Amount Rs. 1,000 cr Price per Rs. 100Amount (cr)Cumulative Total11205002115200700311010080041051000512006102150135036
37Multiple/Uniform Price auction No.YieldAmount (cr)Cumulative TotalPrice(8%)16.00%500113.8927.00%200700110.133100800106.5648.00%10005120069.00%150135096.98Bid No. 1 is seeking only 6%. But gets a security with coupon 8% under uniform price, he gets to keep itUnder multiple price, he pays more ( Rs ) than Bid No. 4). Winners’ curse
38Secondary Market - milestones G-sec holding in Book entry formMandatory dematerializationSGL at Public Debt OfficesGilt account facility for othersDelivery Vs Payment (1995)Mitigate the settlement riskExtended to DvP III (2004)Reporting Platform for dealsNegotiated Dealing System (2002)Dissemination of traded data
39Secondary Market Reforms Clearing CorporationThe Clearing Corporation of India Ltd. (2001)Clearing trades in G-secs ( both outright & repo), in addition to CBLO and forexNovation & Central CounterpartyGuaranteed SettlementsProvision for LOCProvision for SLOCDaily Margining system
40Secondary Market - trading Over the Counter- reported on PDO-Negotiated Dealing System (NDS)Negotiated Dealing System-Order Matching (NDS-OM)
41NDS & NDS-OM Negotiated Dealing System (NDS) : Introduced in Feb 2002. Facilitates submission of bids electronically or applications for Auctions.Membership to NDS restricted to members holding SGL and Current account with RBI.
42Negotiated Dealing System – Order Matching (NDS-OM) Introduced in Aug 2005.Anonymous order matching.NDS-OM is operated by CCIL on behalf of RBI.Direct access* is limited to Commercial Banks, PDs, Insurance Cos & MFs etc.Other participants can access NDS-OM through their custodians.* The access has been extended to UCBs and NBFCs-ND-SI subject to certain financial criteria and NOC by the regulatory department
43Eligibility criteria for NDS-OM membership : Current account with RBI.SGL account with PDO Mumbai.INFINET membership.NDS membership
44Benefits of trading on NDS-OM NDS-OM ensures anonymity of participants.The system provides information – both pre-trade and post trade – bids and offers.To facilitate trading in small lot sizes of less than Rs 5 cr, an odd-lot segment is available.There is high level of operational ease as the entire process is automated.Reporting happens simultaneously with trades on NDS-OM
45Web-based NDS-Auction/OM module To facilitate direct participation of retail and mid-segment investors in G-Sec auctions, the Reserve Bank has allowed web-based access to negotiated dealing system (NDS)-auction system developed by the CCIL. The system allows gilt account holders to directly place their bids in the auction system through a primary member’s portal, as against the earlier practice wherein the primary member used to combine bids of all constituents and bid in the market on their behalf.A similar web-based access to NDS-order matching (OM) system for secondary market transaction has been developed and implemented on June 29, 2012.
49Data Dissemination – Order Matching trades (RBI website)
50INDIAN FINANCIAL NETWORK (INFINET) INFINET is the communication backbone for the Indian Banking and Financial Sector. All Banks, Public Sector, Private Sector, Cooperative, etc., and the premier Financial Institutions in the country are eligible to become members of the INFINET.INFINET is a Closed User Group [CUG] Network for the exclusive use of member banks and financial institutions. The communication backbone is based on IP VPN Layer 3 Network with full mesh VPN network. Presently, the network is spread across 300 cities in our country.
51CCILSetting up – CCIL was set up in April, 2001 for providing exclusive clearing and settlement for transactions in Money, G-Secs and Foreign Exchange.Objective - The prime objective has been to improve efficiency in the transaction settlement process, insulate the financial system from shocks emanating from operations related issues, and to undertake other related activities that would help to broaden and deepen the money, debt and forex markets in the country.Functions - CCIL provides settlement of money, g-sec and forex transactions. It also manages NDS-OM (trading platform on behalf of RBI.
52Risk Mitigation mechanism – CCIL Settlement Guarantee Fund (SGF):SGF is a fund maintained by market participants with CCIL in the form of cash or G-Secs. The SGF helps in settlement of secondary market transactions if there is a failure by any of counterparty to complete its part of the transaction (buy or sell g-secs).
53Process flow – Secondary market transactions Secondary market transactions in NDS & NDS-OM are obtained by CCIL.The obligations for both funds & securities are sent to RBI Mumbai for settlement under DVP.The securities obligations are settled at PDO Mumbai and funds are settled in Mumbai DAD.In case of any shortage, guarantee given by CCIL is invoked.
54Market makers – Primary Dealers PD system made functional in 1996strengthen the securities market infrastructure.ObjectivesEnsure maximum participation in primary auctionsUnderwrite the auctionsEnhance the liquidity by quoting two wayProvide inputs to Reserve Bank
55Primary Dealers21 PDs in operation, of which 13 are banks.Absorbed 47.7% in of primary issues of dated securities and 71.2 % of T-BillsCapital adequacy prescribed 15%Role of PDs in G-Sec MktYear Primary Subscription Turnover (Outright) Gsec in Total Assets% 31% 61%
56Recent developments – PDs PDs to hold Government securities in Held to Maturity category (HTM) to the extent of their audited Net Owned Funds (NOF) as at end March of the preceding financial year.PDs borrowing limit from call money market in a reporting fortnight, was increased to 225% of their Net-Owned Funds (NOF) from 200% earlier.The minimum NOF for stand-alone PDs undertaking only G-sec business, was increased from Rs. 50 crore to Rs. 150 crore and for the stand-alone PDs, which intend to undertake other permissible activities, NOF is enhanced to Rs.250 crore from the existing level of Rs. 100 crore.Existing PDs shall have to submit an annual target along with plan of action for turnover to be achieved on behalf of mid-segment and retail investors at the time of renewal of their PD authorisation. The annual target should not be less than 75% of minimum NOF for standalone PDs/bank PDs.
57Development of Market Bodies for co-ordination Establishing Fixed Income Money Market and Derivative Association of India (FIMMDA)Primary Dealers Association of India (PDAI)Technical Advisory Committee (TAC)For integrated approach to Money, Forex and G-Sec markets
58FIMMDA - functionsFIMMDA – incorporated on June 03, 1998 u/s 25 of Cos act.Membership – Nationalized banks, Pvt sector banks, Foreign banks & PDs.Acts as an interface between RBI and market participants.Developmental activities – introduction of benchmark rates and new derivative instruments.Releases rates of various G-Secs.Best market practices.Website :
59FIMMDA Code of ConductFIMMDA Code of conduct was introduced in Oct 2011.Code of conduct seeks to lay down directives to the users of NDS-OM system, so that anonymity, ease of dealing, provided by the system are not misutilized.FIMMDA has also prescribed a price band under the code – 20 bps and 25 bps over previous day’s closing prices in case of G-Sec and SDL respectively.
61Trading in G-Secs Over the counter (OTC) Negotiated Dealing system Negotiated Dealing System – Order Matching (NDS-OM)
62Dos and don’t s for dealing in G-Secs Segregate the dealing and back office functionsMonitor all transactionsKeep a record of all SGL forms issuedSeek a SCB, PD or a FI as counterpartyApproved list of brokers (5 % individual limit)Open and maintain only one gilt accountOpen a funds account with SCB or StCB
63Risks in G-Sec investment Market riskReinvestment riskLiquidity risk
64Risk mitigation Holding securities in HTM category Rebalancing portfolio – selling short term & buying long termUsing derivatives such as interest rate swaps
65Factors affecting price of GS Changes in interest rates in the economyMacro economic factors such as inflationDevelopments in other markets like money, foreign exchange, credit and capital markets.Developments in international bond markets.Policy actions by RBI such as changes in policy rates (repo and reverse repo)
66Return on a GSReturn on a GS = Coupon income + Gain/loss on the securityNote : Coupon income remains constant, but due to marking to market there can be gain/losses.
67Relationship between Price and Yield If interest rates or market yields rise, the price of a bond falls. Conversely, if interest rates or market yields decline, the price of the bond rises. In other words, the yield of a bond is inversely related to its price. The relationship between yield to maturity and coupon rate of bond may be stated as follows:When the market price of the bond is less than the face value, i.e., the bond sells at a discount.When the market price of the bond is more than its face value, i.e., the bond sells at a premium.When the market price of the bond is equal to its face value.
68Basic Bond Terminology Accrued interestCouponCompetitive / Non-Competitive bidDurationOdd lotYield to MaturityWeighted Average Price/Yield