Day 1 of CBDC

  • November 2, 2022
  • Posted by: OptimizeIAS Team
  • Category: DPN Topics
No Comments

 

 

Day 1 of CBDC

Subject: Economy

Context:

Government securities worth ₹275 crore were traded using the central bank digital currency (CBDC), on the first day of a pilot project in the wholesale segment according to the data published by the Clearing Corp. of India (CCIL) .

Details:

RBI opened a new platform called ‘Negotiated Dealing System-Order Matching (NDS-OM) CBDC’ for the 9 banks(authorized to deal in CBDC) to conduct the transactions, which they used to buy and sell government securities among themselves.

Concept:

Negotiated Dealing System-Order Matching (NDS-OM) CBDC

Banks can sell or buy securities at the available price on the normal NDS-OM platform, where secondary market transactions are executed.

How?

  • Banks send a request to RBI to convert the cash lying in the cash reserve ratio (CRR) account into digital rupee which is then stored in the CBDC digital rupee account opened by each bank with RBI.
  • The transactions were settled instantly by RBI, without the help of any third party.
    • Normal trades are settled on a T+1 basis through CCIL, meaning the settlement happens one business day after the trade is executed.
  • The securities were then credited to the banks’ SGL (subsidiary general ledger) account maintained with the Reserve Bank.

Benefit?

  • There is no intermediary risk -transactions are settled with the central bank directly.
  • Banks are also able to monitor their digital rupee account and convert the remaining CBDC to CRR at any time.
  • CBDC wholesale transactions are free as it is settled with the RBI directly, unlike regular transactions where banks pay transaction charges to CCIL.
  • It will make the interbank market efficient-Settlement in central bank money would cut transaction costs by doing away with the need for settlement guarantee infrastructure or collateral to mitigate risks.

NDS-OM?

  • The RBI introduced the NDS-OM in August 2005. It is an electronic, screen based, anonymous, order driven trading system for dealing in G-secs.
  • NDS-OM is a screen based electronic anonymous order matching system for secondary market trading in Government securities owned by RBI.
  • Presently the membership of the system is open to entities like Banks, Primary Dealers, Insurance Companies, Mutual Funds etc. i.e entities who maintain SGL accounts with RBI. These are Primary Members (PM) of  NDS and are permitted by RBI to become members of NDS-OM.
  • Gilt Account Holders which have a gilt account with the PMs are permitted to have indirect access to the NDS-OM system i.e they can request their Primary Members to place orders on their behalf on the NDS-OM system.

A Subsidiary General Ledger (SGL) Account 

  • It is an account opened and held with the Bank for holding or/and transacting in Government Securities.
  • The entities mentioned below are eligible to open and maintain an SGL account with the Bank:
    • A licensed bank
    • A Primary Dealer
    • A Financial Institution as defined in terms of Section 45-I (c) (ii) of the Reserve Bank of India Act, 1934 (2 of 1934).
  • Provided that the above entities obtain a no-objection certificate from the concerned regulatory department of the Bank, to the effect that they meet the eligibility criteria (as applicable) and that the Bank has no regulatory/supervisory discomfort.
    • Central Government.
    • State Governments.
    • Insurance Companies regulated by the Insurance Regulatory and Development Authority.
    • Mutual Funds regulated by the Securities & Exchange Board of India.
    • Provident and Pension Funds having investment of ` 500 crore or more in Government securities.
    • Foreign Central Banks with prior approval of the Bank.
    • Pension Fund Managers regulated by the Pension Fund Regulatory and Development Authority.
  • In addition, the entities mentioned below can open and maintain an SGL account with the Bank.
    • National Securities Depository Limited (NSDL).
    • Central Depository Services (India) Limited (CDSL).
    • Stock Holding Corporation of India Limited (SHCIL).
    • Such other entities may be approved by the Bank from time to time.
economy