RBI regulated Trading Market

April 12, 2022
Posted by: OptimizeIAS Team
Category: DPN Topics

RBI regulated Trading Market

Subject :Economy

Section :Monetary Policy

Context:

The Reserve Bank of India (RBI) has decided to restore the opening time for regulated financial markets to their pre-pandemic timing of 9 am with effect from April 18, 2022.

RBI regulated markets:

Major market segments under the regulatory ambit of the Reserve Bank are interest rate markets, including Government Securities market and money markets; foreign exchange markets; derivatives on interest rates/prices, repo, foreign exchange rates as well as credit derivatives.

Call/notice/term money market-Banks and Primary Dealers borrow and lend overnight or for the short period to meet their short term mismatches in fund positions. This borrowing and lending is on unsecured basis
- Call Money refers to the borrowing or lending of funds for 1 day.
- Notice Money refers to the borrowing and lending of funds for 2-14 days.
- Term money refers to borrowing and lending of funds for a period of more than 14 days. Notice Money is also known as Short Notice Money.
Commercial Paper and Certificates of Deposit market-
- Commercial paper (CP) is a popular instrument for financing working capital requirements of companies. The CP is an unsecured instrument issued in the form of a promissory note. This instrument was introduced in 1990 to enable the corporate borrowers to raise short-term funds. It can be issued for a period ranging from 15 days to one year. Commercial papers are transferable by endorsement and delivery. The highly reputed companies (Blue Chip companies) are the major players of the commercial paper market.
- Certificate of Deposit-Certificate of Deposit (CDs) are short-term instruments issued by Commercial Banks and Special Financial Institutions (SFIs), which are freely transferable from one party to another. The maturity period of CDs ranges from 91 days to one year. These can be issued to individuals, co-operatives and companies.
Repo in Corporate Bonds-– It is a money market instrument, which enables collateralized short term borrowing and lending through sale/purchase operations in debt instruments.Generally, the repo is conducted with the highest-rated papers of private firms and public sector undertakings. RBI regulation prescribes AA as the minimum rating for a repo.The rates offered in the market are at par or lower than the repo rate offered by the Reserve Bank of India (RBI) through its liquidity adjustment facility (LAF).
Government Securities (Central Government Securities, State Development Loans and Treasury Bills)-The Government securities market, which trades securities issued by Central and State Governments. Trading largely takes place on the Negotiated Dealing System-Order Matching (NDS-OM), an anonymous order-matching trading platform. All the secondary market transactions in Government Securities are settled through a central counterparty mechanism under Delivery Versus Payment mode. Multilateral netting is achieved with a single funds settlement obligation for each member for a particular settlement date. The settlement is achieved in the RTGS (Real Time Gross Settlement) Settlement/Current Account maintained by the member in the Reserve Bank.
Foreign Currency/Indian Rupee Trades, including Forex Derivatives (other than those traded on recognised stock exchanges)-In the foreign exchange market, the Foreign Exchange Management Act, 1999 (Act 42 of 1999), better known as FEMA, 1999, provides the statutory framework for the regulation of Foreign Exchange derivatives contracts. Residents can hedge their foreign exchange exposures through various products, such as, forward contracts, options involving rupee and foreign currencies, currency swaps and cost reduction option structures in the OTC market. Foreign investors can also hedge their investments in equity and/or debt in India through forwards and options.

In addition, trading within specified position limits is permitted on exchange traded currency futures in four currency pairs and in USD for currency options. Residents are also permitted to hedge their commodity price risk, as per specific guidelines, in the overseas OTC markets and exchanges.

Rupee Interest Rate Derivatives (other than those traded on recognised stock exchanges)-An IDR is a financial instrument with a value that is linked to the movements of an interest rate or rates. These may include futures, options, or swaps contracts. They are often used by institutional investors, banks, companies, and individuals to protect themselves against changes in market interest rates.
Market repo in Government Securities -A repurchase agreement (repo) is a form of short-term borrowing for dealers in government securities. In the case of a repo, a dealer sells government securities to investors, usually on an overnight basis, and buys them back the following day at a slightly higher price. That small difference in price is the implicit overnight interest rate. Repos are typically used to raise short-term capital.
Tri-party repo in Government Securities markets-Tri-party repo is a type of repo contract where a third entity (apart from the borrower and lender), called a Tri-Party Agent, acts as an intermediary between the two parties to the repo to facilitate services like collateral selection, payment and settlement, custody and management during the life of the transaction.

The RBI has notified the introduction of triparty repo in India in its April 11, 2017, Draft Directions. The aim to introduce Tri-party repo was that would contribute to better liquidity in the corporate bond repo market, thereby providing markets an alternate repo instrument to Government securities repo. Tri-Party repos are transacted through a Tri-Party agent in terms of Tri-Party Repo (Reserve Bank) Directions dated August 10, 2017.