Description
The report describes the Objectives of Primary Dealer System, Role and Obligations of Primary dealers, Facilities given by the RBI to Primary dealers.
A Note on Primary Dealers: PD’s
In 1995 , the Reserve Bank of India introduced the system of PD’s in the Government Securities Market which earlier comprised independent entities that were undertaking PD’s activity .Banks were permitted to undertake PD business in 2006-7.As on June 30, 2009 there are six standalone PD’s and 11 banks authorized to undertake PD business departmentally. The Objectives of Primary Dealer System: 1. To strengthen the infrastructure in the G-Sec market in order to make it vibrant and liquid 2. To ensure development of underwriting and market making capabilities for government securities outside the RBI so that the latter will gradually shed these functions. 3. To improve secondary market trading system which would contribute to price optimization, enhancing liquidity and turnover and encourage the holding of government securities among a wide customer base 4. To make PD’s an effective conduit for conducting open market operations (OMO) What are G-Sec’s? : G-Sec’s are sovereign securities which are issued by the RBI on behalf of the Government of India It represents the borrowing by the Central Government. The different kinds of Govt Securities are : ? ? Central and State Government Securities Treasury Bills (can be of different maturities such as 364 days or 91 day T bills. The 91 day T bills are usually issued to overcome short term mismatches and do not form part of the borrowing programme of the Central Government.
These dated securities are sold through auctions or through floatation of loans. Role and Obligations of PD’s: PD’s are expected to play an active role both in the primary and secondary market. The PD is expected to have a standing arrangement with the RBI and have to execute an undertaking. The RBI issues an authorization letter each year to the PD’s. The major roles are: ? ? PD’s are required to support auctions for the issue of Government dated securities and Treasury Bills as per the minimum norms for underwriting, bidding as prescribed by the RBI. PD’s should act as market makers and offer two way prices in Government securities through the Negotiated Dealing System and recognized Stock Exchanges in India and take active positions in the secondary market. PD’s investment in Government Securities and Treasury Bills on a daily basis should be equal to its net call/notice/repo (including CBLO)borrowing plus net RBI borrowing (through LAF/IntraDay Liquidity/any Liquidity Support)plus minimum NOF.
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Commercial Banking November 2009 Raji Ajwani[Type text] Page 1
A Note on Primary Dealers: PD’s
PD’s should annually achieve a minimum turnover ratio of 5 times for Government dated securities and 10 times for T Bills of the average month end stocks. The total turnover ratio (ratio of total purchase and sales during the year in the secondary market to average month end stocks) should not be less than 3 times for government dated securities and 6 time in T Bills. ? PD’s are required to maintain adequate infrastructure and skilled staff to undertake participation in the primary and secondary markets and to advise investors. ? PD’s need to provide access to the RBI to all records, books, information and documents as and when required. ? They should have an efficient control system for the fair conduct of business and trading and settling of accounts. Facilities given by the RBI to PD’s : ? Current Account and Subsidiary General Ledger (SGL) Account facility (for Government securities) with the RBI. ? Access to the Liquidity Adjustment Facility( LAF) of the RBI ? Memberships to electronic dealing platforms ( INFINET/RTGS/CCIL) ? Permission to borrow and lend money in the money market including call money market and to trade in money market instruments. Who can become a PD? ? Subsidiary of scheduled commercial banks and all India FI’s ? Companies incorporated under the Companies Act ? Subsidiaries/JV set up by entities incorporated abroad under the approval of the Foreign Investment Promotion Board (FIPB) ? A non bank entity applying for permission as a PD shall obtain Certificate of Registration as an NBFC under Section 45-1A of the RBI Act from the Department of Non-banking Supervision ? A non-bank applicant shall have net owned funds of a minimum Rs 50 crores. In case of PD’s planning to diversify into permissible activities, minimum NOF shall be Rs 100 crores. ? Banks who don’t have a partly or wholly owned subsidiary undertaking PD business shall fulfill the following criteria: o Minimum NOF of Rs 1000 crores o Minimum CRAR of 9% o Net NPA’s less than 3% and profit making for the last three years. Examples of some PD’s: ICICI Securities, PNB Gilts Activities of PD’s: These can be broadly classified as: 1. Core Activities: a. Dealing and underwriting in Government securities b. Dealing in Interest Rate Derivatives Commercial Banking November 2009 Raji Ajwani[Type text] Page 2 ?
A Note on Primary Dealers: PD’s
Providing broking services in Government securities Lending in Call/Notice/Term/Repo/CBLO Market Investing in Commercial Papers and CD’s Investment in debt mutual funds where the entire corpus is invested in debt securities Investment in security receipts issued by Securitization Companies and Asset Backed Securities and Mortgage backed securities 2. Non Core Activities a. :Activities which are expected to consume capital i. Underwriting public issues of equity ii. Investing in units of equity oriented mutual funds iii. Investment/trading in equity and derivatives market b. Services which do not require significant capital outlay i. Portfolio Management Services ii. Issue Management Services iii. M&A Advisory Services iv. Professional Clearing Services v. Distribution of Mutual Funds / Insurance vi. Consultancy Services vii. Project Appraisal Services viii. P.E Management Services PD’s need to take specific approvals of the regulators, before pursuing these activities. Core activities (investment in Government Securities) should have pre dominance over non core activities. Diversification into non core activities requires allocation of some capital for risk management. The minimum NOF for a PD who wishes to diversify into non core activity is Rs 100 crores as against Rs 50 crores for a PD who does not diversify. c. d. e. f. g.
Commercial Banking November 2009 Raji Ajwani[Type text] Page 3
doc_522083388.pdf
The report describes the Objectives of Primary Dealer System, Role and Obligations of Primary dealers, Facilities given by the RBI to Primary dealers.
A Note on Primary Dealers: PD’s
In 1995 , the Reserve Bank of India introduced the system of PD’s in the Government Securities Market which earlier comprised independent entities that were undertaking PD’s activity .Banks were permitted to undertake PD business in 2006-7.As on June 30, 2009 there are six standalone PD’s and 11 banks authorized to undertake PD business departmentally. The Objectives of Primary Dealer System: 1. To strengthen the infrastructure in the G-Sec market in order to make it vibrant and liquid 2. To ensure development of underwriting and market making capabilities for government securities outside the RBI so that the latter will gradually shed these functions. 3. To improve secondary market trading system which would contribute to price optimization, enhancing liquidity and turnover and encourage the holding of government securities among a wide customer base 4. To make PD’s an effective conduit for conducting open market operations (OMO) What are G-Sec’s? : G-Sec’s are sovereign securities which are issued by the RBI on behalf of the Government of India It represents the borrowing by the Central Government. The different kinds of Govt Securities are : ? ? Central and State Government Securities Treasury Bills (can be of different maturities such as 364 days or 91 day T bills. The 91 day T bills are usually issued to overcome short term mismatches and do not form part of the borrowing programme of the Central Government.
These dated securities are sold through auctions or through floatation of loans. Role and Obligations of PD’s: PD’s are expected to play an active role both in the primary and secondary market. The PD is expected to have a standing arrangement with the RBI and have to execute an undertaking. The RBI issues an authorization letter each year to the PD’s. The major roles are: ? ? PD’s are required to support auctions for the issue of Government dated securities and Treasury Bills as per the minimum norms for underwriting, bidding as prescribed by the RBI. PD’s should act as market makers and offer two way prices in Government securities through the Negotiated Dealing System and recognized Stock Exchanges in India and take active positions in the secondary market. PD’s investment in Government Securities and Treasury Bills on a daily basis should be equal to its net call/notice/repo (including CBLO)borrowing plus net RBI borrowing (through LAF/IntraDay Liquidity/any Liquidity Support)plus minimum NOF.
?
Commercial Banking November 2009 Raji Ajwani[Type text] Page 1
A Note on Primary Dealers: PD’s
PD’s should annually achieve a minimum turnover ratio of 5 times for Government dated securities and 10 times for T Bills of the average month end stocks. The total turnover ratio (ratio of total purchase and sales during the year in the secondary market to average month end stocks) should not be less than 3 times for government dated securities and 6 time in T Bills. ? PD’s are required to maintain adequate infrastructure and skilled staff to undertake participation in the primary and secondary markets and to advise investors. ? PD’s need to provide access to the RBI to all records, books, information and documents as and when required. ? They should have an efficient control system for the fair conduct of business and trading and settling of accounts. Facilities given by the RBI to PD’s : ? Current Account and Subsidiary General Ledger (SGL) Account facility (for Government securities) with the RBI. ? Access to the Liquidity Adjustment Facility( LAF) of the RBI ? Memberships to electronic dealing platforms ( INFINET/RTGS/CCIL) ? Permission to borrow and lend money in the money market including call money market and to trade in money market instruments. Who can become a PD? ? Subsidiary of scheduled commercial banks and all India FI’s ? Companies incorporated under the Companies Act ? Subsidiaries/JV set up by entities incorporated abroad under the approval of the Foreign Investment Promotion Board (FIPB) ? A non bank entity applying for permission as a PD shall obtain Certificate of Registration as an NBFC under Section 45-1A of the RBI Act from the Department of Non-banking Supervision ? A non-bank applicant shall have net owned funds of a minimum Rs 50 crores. In case of PD’s planning to diversify into permissible activities, minimum NOF shall be Rs 100 crores. ? Banks who don’t have a partly or wholly owned subsidiary undertaking PD business shall fulfill the following criteria: o Minimum NOF of Rs 1000 crores o Minimum CRAR of 9% o Net NPA’s less than 3% and profit making for the last three years. Examples of some PD’s: ICICI Securities, PNB Gilts Activities of PD’s: These can be broadly classified as: 1. Core Activities: a. Dealing and underwriting in Government securities b. Dealing in Interest Rate Derivatives Commercial Banking November 2009 Raji Ajwani[Type text] Page 2 ?
A Note on Primary Dealers: PD’s
Providing broking services in Government securities Lending in Call/Notice/Term/Repo/CBLO Market Investing in Commercial Papers and CD’s Investment in debt mutual funds where the entire corpus is invested in debt securities Investment in security receipts issued by Securitization Companies and Asset Backed Securities and Mortgage backed securities 2. Non Core Activities a. :Activities which are expected to consume capital i. Underwriting public issues of equity ii. Investing in units of equity oriented mutual funds iii. Investment/trading in equity and derivatives market b. Services which do not require significant capital outlay i. Portfolio Management Services ii. Issue Management Services iii. M&A Advisory Services iv. Professional Clearing Services v. Distribution of Mutual Funds / Insurance vi. Consultancy Services vii. Project Appraisal Services viii. P.E Management Services PD’s need to take specific approvals of the regulators, before pursuing these activities. Core activities (investment in Government Securities) should have pre dominance over non core activities. Diversification into non core activities requires allocation of some capital for risk management. The minimum NOF for a PD who wishes to diversify into non core activity is Rs 100 crores as against Rs 50 crores for a PD who does not diversify. c. d. e. f. g.
Commercial Banking November 2009 Raji Ajwani[Type text] Page 3
doc_522083388.pdf