1. Introduction to DVP, NDS-OM, CCIL and RTGS – Jan 01, 2013

2. Structure 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.

3. Introduction to G-Sec markets

4. Government Security
Definition : 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)

5. Types of dated securities
Fixed rate bonds
Floating rate bonds
Zero Coupon bonds
Capital indexed bonds
Bond with call/put Options
Special Securities e.g. Oil bonds, fertilizer bonds etc.

6. Importance
Facilitates 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.

7. Advantages of investment in G-Sec
Real time price information
Risk free investment for portfolio risk management
Wide range of maturity spectrum (91days – 30 yrs)
Liquidity – easy to encash at competitive prices
Can be used as collateral to borrow funds
Can be held in de-mat form, obviating the need for safe keeping. 7

8. Regional 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.

9. Categorization of investments (RRBs)
Permanent Category
No requirement for marking to market.
Entire SLR securities can be under HTM till
Profit should be taken to Investment Fluctuation Reserve (IFR) and loss should be taken to profit and loss account

10. Securities 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.

11. Evolution of G-sec markets

12. Reforms in G-sec markets
First round – as part of overall financial sector reforms in 1992
Second round- to address the issues arising out of FRBM

13. Pre reform status Prior to 1992 – Characterized by Consequently,
Huge fiscal deficits
Automatic Monetisation
Directed Investment
Administered Rates – to keep the cost low
Consequently,
Secondary market remained dormant
High interest rates in the system due to cross subsidisation by banks

14. Reforms Fiscal & Monetary Policy:
Abolition of Ad-hoc treasury bills( 1994)
Ad-hoc treasury bills were issued for short term funding of Government
Institution of Ways and Means advances(1997)
Fiscal discipline
Reduction in Statutory Liquidity Requirement (38.5% to 25%)
Even the floor removed by latest legal amendment
SLR brought down to 24% ( recent measures)

15. Delivery Versus Payment System, RTGS and Securities Settlement System

16. Delivery 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.

17. DVP (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.

18. Real 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).

19. Types of RTGS Members
Type 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 transactions
Type C – Avail RTGS facility through a sponsor bank.
Type D – Clearing entities submit multi lateral net settlement batches.

20. Types of Transactions Institutional transactions.
Customer Transactions.
Delivery Vs Payment transactions.
Multi-lateral Net Settlement transactions.

21. RTGS-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

22. RTGS 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.

23. Securities 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

24. SSS- 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.

25. Benefits - 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.

26. Securities Settlement System – Players involved
IDMD
PDO
DAD
CCIL

27. SSS - Infrastructure Reserve Bank of India NDS CCIL
Owned by RBI but managed by CCIL
OTC outright trades in G-Sec
OTC Repo trades in G-Sec
Auction of securities (incl. T-Bills)
Trading on NDS-OM
NDS
Trades in CBLO
Repo trades on CROMS
CCIL
Owned and managed by RBI
Reserve Bank of India
Owned and managed by CCIL
Securities settlement in PDO
Funds settlement in DAD
DvP

28. Government 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).

29. CSGL eligibility
The 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.

30. Settlement – 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.

31. Primary Issuance Framework & Secondary Market

32. Primary Issuance Framework
Auctions (1992)
Price discovery
Auction formats
Uniform Price
Multiple Price
Electronic bidding ( 2002)
Wider reach
Operational ease
Shortening of processing time
Results same evening
Auction Process is STP

33. Primary Issuance framework
Non-competitive Bidding
Eliciting retail participation
Earmarking of a portion of notified amount
Re-issuance of bonds
Consolidation
Of the 127 issuances of securities conducted during , 120 were re-issuances

34. Auction Process cont.. Yield based auction Price based auction
For new securities issued
Coupon rate (CUT-OFF) decided in the auction
Applications up to maximum rate of yield are accepted
Applications above the cut-off rate of yield are rejected
Value converted into price
Price based auction
Where existing securities are reissued/reopened
Cut-off price is decided in the auction
Applications up to minimum price( CUT-Off) are accepted
Applications below the cut-off price are rejected 34

35. YIELD BASED AUCTION- Notified Amount Rs. 1,000 cr
Amount (cr)
Cumulative Total
Price(8%) 1
6.00%
500
113.89 2
7.00%
200
700
110.13 3
100
800 4
8.00%
1000 5
1200 6
9.00%
150
1350
96.98 35

36. PRICE BASED AUCTION- (8% security) Notified Amount Rs. 1,000 cr
Price per Rs. 100
Amount (cr)
Cumulative Total 1
120
500 2
115
200
700 3
110
100
800 4
105
1000 5
1200 6
102
150
1350 36

37. Multiple/Uniform Price auction
No.
Yield
Amount (cr)
Cumulative Total
Price(8%) 1
6.00%
500
113.89 2
7.00%
200
700
110.13 3
100
800
106.56 4
8.00%
1000 5
1200 6
9.00%
150
1350
96.98
Bid No. 1 is seeking only 6%. But gets a security with coupon 8% under uniform price, he gets to keep it
Under multiple price, he pays more ( Rs ) than Bid No. 4). Winners’ curse

38. Secondary Market - milestones
G-sec holding in Book entry form
Mandatory dematerialization
SGL at Public Debt Offices
Gilt account facility for others
Delivery Vs Payment (1995)
Mitigate the settlement risk
Extended to DvP III (2004)
Reporting Platform for deals
Negotiated Dealing System (2002)
Dissemination of traded data

39. Secondary Market Reforms
Clearing Corporation
The Clearing Corporation of India Ltd. (2001)
Clearing trades in G-secs ( both outright & repo), in addition to CBLO and forex
Novation & Central Counterparty
Guaranteed Settlements
Provision for LOC
Provision for SLOC
Daily Margining system

40. Secondary Market - trading
Over the Counter- reported on PDO-Negotiated Dealing System (NDS)
Negotiated Dealing System-Order Matching (NDS-OM)

41. NDS & 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.

42. Negotiated 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

43. Eligibility criteria for NDS-OM membership :
Current account with RBI.
SGL account with PDO Mumbai.
INFINET membership.
NDS membership

44. Benefits 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

45. Web-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.

48. Data Dissemination – OTC trades (RBI website)

49. Data Dissemination – Order Matching trades (RBI website)

50. INDIAN 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.

51. CCIL
Setting 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.

52. Risk 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).

53. Process 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.

54. Market makers – Primary Dealers
PD system made functional in 1996
strengthen the securities market infrastructure.
Objectives
Ensure maximum participation in primary auctions
Underwrite the auctions
Enhance the liquidity by quoting two way
Provide inputs to Reserve Bank

55. Primary Dealers
21 PDs in operation, of which 13 are banks.
Absorbed 47.7% in of primary issues of dated securities and 71.2 % of T-Bills
Capital adequacy prescribed 15%
Role of PDs in G-Sec Mkt
Year Primary Subscription Turnover (Outright) Gsec in Total Assets
% 31% 61%

56. Recent 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.

57. Development 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

58. FIMMDA - functions
FIMMDA – 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 :

59. FIMMDA Code of Conduct
FIMMDA 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.

60. Trading in G-Secs

61. Trading in G-Secs Over the counter (OTC) Negotiated Dealing system
Negotiated Dealing System – Order Matching (NDS-OM)

62. Dos and don’t s for dealing in G-Secs
Segregate the dealing and back office functions
Monitor all transactions
Keep a record of all SGL forms issued
Seek a SCB, PD or a FI as counterparty
Approved list of brokers (5 % individual limit)
Open and maintain only one gilt account
Open a funds account with SCB or StCB

63. Risks in G-Sec investment
Market risk
Reinvestment risk
Liquidity risk

64. Risk mitigation Holding securities in HTM category
Rebalancing portfolio – selling short term & buying long term
Using derivatives such as interest rate swaps

65. Factors affecting price of GS
Changes in interest rates in the economy
Macro economic factors such as inflation
Developments 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)

66. Return on a GS
Return on a GS = Coupon income + Gain/loss on the security
Note : Coupon income remains constant, but due to marking to market there can be gain/losses.

67. Relationship 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.

68. Basic Bond Terminology
Accrued interest
Coupon
Competitive / Non-Competitive bid
Duration
Odd lot
Yield to Maturity
Weighted Average Price/Yield

69. Thank You