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MUMBAI: In a bid to give bond traders and banks a chance to have access to better pricing of bonds, the Reserve Bank of India on Wednesday allowed banks and bond houses to cover their positions in short-sale and when-issued transactions outside the NDS-OM platform. The central bank had proposed such a move in its mid-term monetary policy review.
This means that bond traders will now be able to make use of modes of communication, outside the online domain, such as the telephone or the electronic mail (email) or, better still, the chatting mode to contact counter-parties and cover their positions.
They could also cover their positions through purchases in the primary market. This will in turn increase the number of participants in the bond market, which in turn will lead to better price discovery.
However, the central bank has clarified that all such transactions will need to be settled only on the negotiated dealing system’s order matching platform.
Apart from banks and primary dealership firms, asset management companies (AMCs), insurance companies and superannuation funds are active bond traders. Among these, there are very few players who currently have an access to the NDS-OM platform. By allowing banks and bond houses to cover their transactions outside the NDS-OM platform, the other set of entities such as mutual funds and insurance companies can also benefit.
The central bank has asked banks and primary dealers to put in place appropriate internal controls to ensure that the
stipulated limits are adhered to, after taking into consideration the operations done on the NDS-OM and those conducted outside the system.
Short-sale is defined as sale of securities one does not own. The central bank had introduced short-selling in government securities for a five-day period in January 2007. RBI had allowed bond traders to take positions in a security prior to its auction through the when-issued platform in July 2006.
However, trading volumes have not picked up in either of these markets, since their inception. According to a senior treasury manager, primarily, it has been only the MNC banks and the bond houses, which are seen active in short-selling of government securities.
PSU banks need to seek approval from their board to begin trading in either of these platforms and still remain inactive in these segments. In case of the when-issued market, there have not been many new issues in recent times as the RBI has largely resorted to issuing already existing securities in most of the auctions held in the last few months.
Also, one point to mention is also that the bond market, itself, has been on a bearish mode, with a severe crunch in cash conditions and rising yields causing trading volumes to dip. This could also be one reason why neither of these platforms have actually taken off.
However, the beginning of the new calendar year seems to have brought in ample cash flows through government spending and few redemptions. It remains to be seen if these modes of trading may take off in the improved scenario.
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