| Macro-Economic Stability Issues |
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Authority to borrow |
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Establish clear government borrowing authority in law with transparent legislative process and limits |
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Establish the process of issuance including delegation of authority to issuing agency - in law |
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Budgetary regulation |
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Borrowing should be regulated by the budgeting process |
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Off-budget liability |
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Limits and monitoring of debt should encompass off-budget borrowings as well (as well as contingent liabilities) |
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Borrowing from Central Bank |
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In view of the monetary implications of borrowing from central bank, such access should be absent or limited |
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Debt manager should minimise rollover cost and stabilise interest burden over time by appropriate mixture of fixed and floating bonds |
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Also a proper mix of domestic and foreign borrowing to minimise cost and contain currency risk |
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| Legal Framework in India |
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Constitution of India |
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Article 292 - Authorizes Union Government to borrow within such limits as may be fixed from time to time by Parliament by law similar authorization to issue guarantees |
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Article 293 Authorizes States to borrow within such limits as may be fixed by the State Legislature from time to time by Law Similar authorization for issue of guarantees; additional conditions |
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State can only borrow within the territory of India |
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With consent of Govt of India |
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Public Debt Act, 1944 |
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Framework for issue and servicing of Government securities |
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RBI is the sole manager of Government debt |
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RBI Act, 1934 |
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Section 21(2) RBI to be responsible for management of public debt and issue of new loans |
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Securities Contract Regulation Act, 1956 |
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Allocation of regulatory responsibility between RBI and SEBI in 2000 |
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RBI regulates G-Sec markets, including repos, money markets and gold related securities |
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SEBI regulates equity and corporate debt markets and all exchange absed transactions |
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Fiscal Responsibility and Budget Management Act, 2003 |
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Constraint on expansion of total liabilities |
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Prohibition of direct borrowing from RBI from 2006 |
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Banking Regulation Act - 1949 |
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Regulation of banks, which are the major participants in securities markets |
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| Debt Markets in India |
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Government Securities Market Rs.10,776 bn. |
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Centre o/s Rs.8,750 bn ($194
bn) |
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States o/s Rs. 2,026 bn. ($45
bn) |
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Daily secondary market volume
Rs. 40 bn |
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Corporate Debt Market o/s about Rs. 2,000 bn ($44 bn) |
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Daily secondary market volume Rs.2 bn to Rs.4 bn |
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Participants |
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A diversified investor base - high liquidity and stable demand |
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Ownership - Largely Banks (59%), insurance companies (about 20%), provident funds, trusts, apart from RBI(5.5%) and Primary Dealers |
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Inclusion of co-operative banks and RRBs recently |
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Broadening the Retail Base Non-Competitive Bidding; Retailing through
Banks/PDs |
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Products |
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To meet funding and hedging needs |
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Hedge interest rate risk, balance sheet risk, inflation risk |
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Largely fixed rate bonds |
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Maturity up to 30 years Average maturity increased from 5.5 yrs (1995-96) to 14.94 yrs in 2003-04 |
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Floating Rate Bonds Reduce interest
rate risk |
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Bond with call/put option |
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STRIPS in the process of being introduced |
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Repos in Government securities active
market |
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Interest Rate Derivatives |
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Interest Rate Swaps/FRAs introduced in July 1999 (o/s notional amount in excess of Rs.8000 bn
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Interest Rate Futures introduced in June 2003 Product being modified now |
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Secondary Market |
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Manifold increase in turnover from Rs.1270 bn in 1995-96 to Rs. 33,700 bn - a stock turnover ratio of about 4. |
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Largely a telephone based OTC market |
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An anonymous order matching trading system on the exchanges available but not liquid |
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| Market Infrastructure |
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Securities Settlement System: DvP 1995; DVP III 2004 |
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Negotiated Dealing System (NDS) February 15, 2002 |
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On line electronic bidding facility |
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Screen based electronic dealing and reporting |
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paperless settlement of transactions in government securities with electronic connectivity to CCIL and PDOs |
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Introduction of electronic order matching system on the anvil |
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Clearing Corporation of India Limited
(CCIL) February 15, 2002. |
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Central counterparty through novation |
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Guaranteed settlement |
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Limit settlement risk - Settlement guarantee fund, lines of credit |
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All Repo and outright transactions |
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| Regulatory Framework |
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Government Securities Issuance |
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Treasury (US) |
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Central bank (India) |
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Separate agency (DMO of UK) |
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Secondary Market Regulation |
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Developing Countries |
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Market Regulator and Central bank |
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Developed Countries |
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Market Regulator - Central Banks also play a role in G-sec markets |
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Singapore - MAS - Single Regulator for all markets |
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India RBI for G-Sec Markets and SEBI for Corporate Debt Markets and Exchange based products |
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| International Best Practices in Regulation |
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IOSCO Principles |
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Three objectives - Investor Protection; Fair, efficient and transparent markets; Reduction of systemic risk |
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Eight Categories |
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Regulator - responsibilities; Independence; Adequate powers, |
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Self Regulation - Some direct oversight responsibility |
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Enforcement - Comprehensive inspection, and enforcement powers |
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Regulatory Cooperation |
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Issuers - Disclosure standards; Accounting and auditing standards |
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Collective Investment |
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Market Intermediaries - Minimum entry standards; Capital adequacy |
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Secondary Market - |
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Regulation of trading systems |
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Proper arrangements to manage default and market disruption |
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Effective clearing and settlement systems |
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| Benchmarking India |
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Advisory Group on Securities Market Regulation |
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Recommendations |
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Strengthening regulatory cooperation |
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SROs like FIMMDA/PDAI to establish comprehensive code of conduct and have mechanism to enforce these codes |
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Shift from institution specific regulation to market specific regulation |
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Movement of G-Sec and Money markets to screen based trading |
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Comprehensive dematerialisation |
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Current Status |
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Regulatory Coordination through HLCCM |
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Electronic trading platforms available in G-Sec markets NDS & exchanges |
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Government Securities Bill Largely address legislation issues |
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| G-Sec Market - Major Regulations |
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Short Selling in G-securities prohibited |
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Forward trading in G-secs not permitted - Section 16 of SCRA - exception - Repos |
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Direct Dealing encouraged |
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Only brokers registered on BSE, NSE & OTCEI can be used |
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5% per broker limit |
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| Regulation of Banks |
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Investment Policy approved by the Board |
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Repo Contracts |
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Only in G-Secs & T-Bills |
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By SGL (demat accounts with RBI by banks/ institutions) and regulated CSGL entities |
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No double ready forward |
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Transactions through SGL Accounts |
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No bouncing in SGL Account |
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No sale by way of return of SGL forms |
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No use of BRs |
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Classification - HTM (max 25%), HFT and AFS |
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Transfer across categories with approval |
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AFS to HFT only under exceptional caicumstances |
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At least of cost/BV/MV |
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Valuation |
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HTM - No Marking to Market - Amortization of Premium |
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AFS - Quarterly or more frequent |
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Net depreciation to be provided |
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Net appreciation ignored |
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HFT - Monthly |
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Net appreciation/depreciation treated like AFS |
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90 day defeasance period |
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Valuation on the basis of
actual/FIMMDA prices |
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Capital Adequacy |
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Risk Weight of 2.5% flat - Too low |
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IFR - 5% over 5 years |
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Capital charge for Market Risk |
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| Regulation of Primary Dealers |
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Legal Status |
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Contractual annual MOU with RBI |
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Since 2003 under BFS - being NBFCs u/s 45(1) (A) of RBI Act |
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Minimum investment in G-Secs |
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Entire minimum capital Rs.50 crore |
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Net call/repo borrowing |
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Support to Primary Issuance |
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Market making in Government Securities |
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Prudential Guidelines |
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| Regulation of Primary Dealers |
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Support to Primary Issuance |
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Underwriting Obligations |
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Auction of underwriting commission |
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Up to 30% of the notified amount |
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Not exceed 5 times of NOF on a single day |
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Devolvement set off against accepted bids |
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Bidding Commitments at primary auctions |
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Bidding commitments finalised at beginning of year |
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Amount for bonds; % of notified amount for T-Bills |
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Success ratio 40% - HY basis |
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Market making in Government Securities |
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Firm two-way quotes |
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Principal positions in secondary market |
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Minimum turnover ratio |
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5 times average month end stocks for bonds |
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10 times for T-Bills |
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Prudential Guidelines |
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15% capital adequacy, including for market risk |
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VAR based market risk measurement |
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99% confidence interval |
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Higher of |
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3.3 times of previous 60 days average VAR or |
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Previous days VAR |
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Investment guidelines as applicable to banks |
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Call Limits |
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Borrowing 200% of NOF FN Average |
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Lending 25% of NOF |
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ICD No Lending; Borrowing limit 50% of NOF |
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Internal Limits on Leverage |
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| Regulation of Derivatives |
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Introduction of OTC derivatives in 1999 |
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IRS and FRA |
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Interest Rate Futures in June 2003 |
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Harmonization between Exchange Traded and OTC |
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Eligible Underlying - Trading Book |
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Accounting treatment |
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Capital Requirement |
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Legal Status of OTC Derivatives |
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Under SCRA - No underlying security, so wagering? |
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Legislation to clear ambiguity |
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Sizeable growth of Market |
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Outstanding Notional Amount |
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More than Rs.6,00,000 crore |
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| Regulation of Corporate Debt Market |
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Public issue of debt regulated |
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But mostly private placement - Largely unregulated |
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RBIs Role indirect |
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Monetary Policy transmission |
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Exposure of Banks |
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SEBI Guidelines on Issue of Private Placement of Debt |
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Sep 30 2004 modified Dec 22, 2004 |
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Applicable to all listed companies; for unlisted companies privately placed debt to be listed |
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Applicable only to bonds |
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Disclosure Schedule II of Companies Act; Chapter VI of
SEBI(DIP) Guidelines and SE Listing Regulations |
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Trading only between QIBs and HNIs |
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Demat |
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Compulsory rating |
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RBIs non-SLR guidelines to control from the investors (banks) side |
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Nov 12, 2004 modified Dec 10 , 2004 |
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Not apply to CPs and CDs, equity, Equity
MFs, JVs |
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No investment in MM instruments other than CP/CD |
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No investment in unrated paper |
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Unlisted investments not to exceed 10% of
non-SLR |
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Exceptions Securities Receipts issued by
Securitisation/Reconstruction Companies |
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ABS/MBS if investment grade |
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| Netting Legislation |
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Netting legislation |
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Bilateral Close out Netting |
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Enables termination of contract if counterparty becomes insolvent |
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Market Netting Multilateral |
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Legalises novation for a clearing entity |
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Set-off of obligation in the event of a default |
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Bilateral Netting legislation should |
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Prevent cherry picking by liquidator |
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Effective alienation of interests under a contract subject to netting provisions |
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India Netting of determined obligations recognised by case law; but not netting of future obligations |
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| Regulation Issues (contd) |
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Multiplicity of Acts |
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Regulatory gaps and overlaps |
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Coordination |
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Self Regulation |
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Market Microstructure |
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