Background

The Reserve Bank of India ("RBI") has issued Master Directions on Government Securities Lending ("GSL Directions" or the "Directions") (click here) on December 27, 2023, pursuant to powers granted under Section 45W of the Reserve Bank of India Act, 1934 read with Section 45U of the Act. The directions came in furtherance of invitation for comments from all stakeholders on the Draft Master Direction on Draft Reserve Bank of India (Government Securities Lending) Directions, 2023 (click here) in February 2023.

Applicability

These Directions are applicable to all Government securities lending transactions, undertaken in Over-the-Counter markets (markets where transactions are undertaken in any manner other than on exchanges and shall include those executed on electronic system as defined under section 2(1)(iii) of the Electronic Trading Platform (Reserve Bank) Directions, 2018 (click here).

The key highlights of the Directions are stated below:-

What is a GSL transaction?

A GSL transaction refers to dealing in government securities that involves lending eligible government securities to a borrower on the collateral of other government securities for a predetermined amount of time, at a fee, with an understanding that the borrower will return the borrowed security to the lender and the lender will return the security received as collateral to the borrower at the conclusion of the predetermined period.

GSL Fee

It is the mutually agreed fee paid by the lender of the government security to lender undertaken for the GSL transaction.

Eligible securities

The following securities are eligible for the GSL transaction:-

a) Government securities issued by the Central Government excluding Treasury Bills; b) Loans under GSL transactions are also permitted for securities acquired through Repo transactions; and c) Securities obtained under repo and placed as a collateral in GSL transaction including those made through the Reserve Bank's Liquidity Adjustment Facility, or borrowed under another GSL transaction.

Eligible participants

The following entities are eligible for a GSL transaction:-

a) A company (like any regulated entity, listed corporate, Any unlisted company, All India Financial Institution (FIs) viz. Exim Bank, NABARD, NHB and Small Industries Development Bank of India (SIDBI) etc.) conducting repo transactions in accordance with the Repurchase Transactions (Repo) (Reserve Bank) Directions, 2018 (click here);

b) Entities (like Scheduled Commercial Banks, Primary Dealers, Urban Cooperative Banks, and any other regulated entity which has the approval of the concerned regulator etc.) that are qualified to conduct short sale transactions in accordance with the Short Sale (Reserve Bank) Directions, 2018 (click here).

Tenor

The minimum tenor of a GSL transaction shall be one day and the maximum tenor shall be the maximum period prescribed to cover short sales in terms of the Directions on RBI's Secondary Market Transactions in Government Securities – Short Selling (click here).

Trading Platform

Any mutually agreed trading mechanism, whether a) bilateral or multilateral; b) order-driven or quote-driven, c) anonymous or not, may be used for GSL transactions.

Settlement

The GSL transactions shall be settled in the following manner:-

a) All GSL transactions to be settled on a Delivery versus Delivery basis; b) the first leg to be settled either on a T+0 or T+1 basis; and c) All GSL transactions to be settled through Clearing Corporation of India Ltd. (CCIL) or any other Central Counterparty (CCP) approved by the RBI.

Pricing of securities, haircut and margin

The Securities/collateral under a GSL transaction shall be valued transparently at prevailing market prices in the first leg of the transaction. Further, the Haircut/ margins relating to GSL transactions shall be decided by the CCP settling the transactions.

Security borrowed and Collateral Substitution

Securities borrowed under a GSL transaction may be:- a) can be sold used for outright sale, or a repo transaction or used for meeting a delivery obligation in a short sale; b) used for availing Reserve Bank's Liquidity Adjustment Facility; and c) lent under another GSL transaction.

The borrower may replace securities deposited as collateral with other securities that meet the requirements of the CCP.

Reporting of trades

Within fifteen (15) minutes of their execution, all GSL transactions must be notified to the CCIL or any other organization that the Reserve Bank has designated for that purpose.

Disclosure and Accounting

GSL transactions must be reported by organizations subject to RBI regulations annexed in the directions and shall be recorded by other qualified participants in accordance with the relevant accounting guidelines.

Computation of Statutory Liquidity Ratio (SLR)

The borrower may count the SLR-eligible securities borrowed under a GSL transaction toward their SLR. As such, the securities lent under a GSL transaction will not be eligible for the lender to count towards SLR.

The lender may consider SLR-eligible securities that were received as collateral under a GSL transaction. As such, the securities pledged as collateral in a GSL transaction will not be eligible for the borrower to deduct them from their SLR.

Arrangement

In order to conduct GSL transactions, participants must sign a standard bilateral master GSL agreement with their counterparty in accordance with the FIMMDA finalized documents. Participants in GSL transactions that are traded on ETPs that are permitted under the terms of the Electronic Trading Platform (Reserve Bank) Directions, 2018 (click here) subject to the platform's rules and regulations.

Direction Violation

In addition to any legal penalties or regulatory proceedings, the person or agency that violates the GSL Directions may be prohibited from engaging in GSL Transactions for a maximum period of one (1) month at a time (after a fair opportunity for a hearing).

Conclusion

The announcement of the Directions is intended to facilitate effective price discovery and give the government securities market more depth and liquidity. By giving investors a way to use idle stocks and improve portfolio returns, the system is anticipated to enable greater involvement in the securities lending market.

Please find a copy of the RBI's Master Directions here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.