Introduction to DVP, NDS-OM, CCIL
and RTGS – Jan 01, 2013
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.
Introduction to G-Sec markets
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).
a. Treasury bills (<= 1 yr)
b. Dated government securities (> 1 yr)
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.
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.
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.
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.
Categorization of investments
(RRBs)
• Permanent Category
No requirement for marking to market.
Entire SLR securities can be under HTM till 2012-13.
 Profit should be taken to Investment Fluctuation
Reserve (IFR) and loss should be taken to profit and
loss account
• 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.
Evolution of G-sec markets
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
Pre reform status
• Prior to 1992 – Characterized by
– 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
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)
Delivery Versus Payment System,
RTGS and Securities Settlement
System
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.
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 1995. 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.
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).
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.
Types of Transactions
•
•
•
•
Institutional transactions.
Customer Transactions.
Delivery Vs Payment transactions.
Multi-lateral Net Settlement transactions.
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
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.
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
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.
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.
Securities Settlement System – Players
involved
•
•
•
•
IDMD
PDO
DAD
CCIL
SSS - Infrastructure
Owned by
RBI but
managed
by CCIL
Auction of securities
(incl. T-Bills)
OTC outright
trades in G-Sec
Trading on
NDS-OM
NDS
Trades in
CBLO
Repo trades
on CROMS
Owned and
managed by
CCIL
OTC Repo
trades in G-Sec
CCIL
Owned and
managed by RBI
Reserve Bank of India
Securities
settlement in
PDO
DvP
Funds settlement
in DAD
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).
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. 200.00 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. 100.00 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.
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.
Primary Issuance Framework &
Secondary Market
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
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
2011-12, 120 were re-issuances
Auction Process cont..
• Yield 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
YIELD BASED AUCTIONNotified Amount Rs. 1,000 cr
No.
Yield
Amount (cr)
Cumulative Total
Price(8%)
1
2
3
4
5
6
6.00%
500
500
113.89
7.00%
200
700
110.13
7.00%
100
800
110.13
8.00%
200
1000
100
8.00%
200
1200
100
9.00%
150
1350
96.98
PRICE BASED AUCTION(8% security) Notified Amount Rs. 1,000 cr
Price per
Rs. 100
No.
Amount (cr)
Cumulative Total
1
120
500
500
2
115
200
700
3
110
100
800
4
105
200
1000
5
105
200
1200
6
102
150
1350
Multiple/Uniform Price auction
•
No.
Yield
Amount (cr)
Cumulative Total
Price(8%)
1
6.00%
500
500
113.89
2
7.00%
200
700
110.13
3
7.00%
100
800
106.56
4
8.00%
200
1000
100
5
8.00%
200
1200
100
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. 13.89) than Bid No. 4).
curse
Winners’
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
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
Secondary Market - trading
• Over the Counter- reported
Negotiated Dealing System (NDS)
on
PDO-
• Negotiated Dealing System-Order Matching
(NDS-OM)
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.
• 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
•




Eligibility criteria for NDS-OM membership :
Current account with RBI.
SGL account with PDO Mumbai.
INFINET membership.
NDS membership
Benefits of trading on NDS-OM
• NDS-OM ensures anonymity of participants.
• The system provides information – both pretrade 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
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.
Data Dissemination – OTC trades (RBI website)
Data Dissemination – Order Matching trades (RBI
website)
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.
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.
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).
Process flow – Secondary market
transactions
• Secondary market transactions in NDS & NDSOM 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.
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
Primary Dealers
 21 PDs in operation, of which 13 are banks.
 Absorbed
47.7% in 2011-12of primary issues
of dated securities and 71.2 % of T-Bills
 Capital adequacy prescribed 15%
55
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.
Development of Market Bodies for
co-ordination
• Establishing Fixed Income Money Market and
Derivative Association of India (FIMMDA)
1997
• Primary Dealers Association of India (PDAI)
1997
• Technical Advisory Committee (TAC)
– For integrated approach to Money, Forex and GSec markets
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 : http://www.fimmda.org/
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.
Trading in G-Secs
Trading in G-Secs
• Over the counter (OTC)
• Negotiated Dealing system
• Negotiated Dealing System – Order Matching
(NDS-OM)
•
•
•
•
•
•
•
Dos and don’t s for dealing in GSecs
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
Risks in G-Sec investment
• Market risk
• Reinvestment risk
• Liquidity risk
Risk mitigation
• Holding securities in HTM category
• Rebalancing portfolio – selling short term &
buying long term
• Using derivatives such as interest rate swaps
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)
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.
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.
Basic Bond Terminology
•
•
•
•
•
•
•
Accrued interest
Coupon
Competitive / Non-Competitive bid
Duration
Odd lot
Yield to Maturity
Weighted Average Price/Yield
Thank You
akashsolanki@rbi.org.in