1 / 69

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

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.

Download Presentation

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

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  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.

  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 2012-13. • Profit should be taken to Investment Fluctuation Reserve (IFR) and loss should be taken to profit and loss account

  10. 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 • 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 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.

  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 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. 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.

  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 2011-12, 120 were re-issuances

  34. 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

  35. YIELD BASED AUCTION- Notified Amount Rs. 1,000 cr

  36. PRICE BASED AUCTION-(8% security) Notified Amount Rs. 1,000 cr

  37. Multiple/Uniform Price auction • 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). 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.

  46. Data Dissemination – OTC trades (RBI website)

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

  48. 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.

More Related