May 22, 2011
Chief General Manager
Reserve Bank of India
Internal Debt Management Department
Central Office Building, 23rd floor
Fort, Mumbai 400001
Dear Sir:
On behalf of the Securities Industry and Financial Markets Association (SIFMA), theAsia Securities Industry & Financial Markets Association (ASIFMA), and our member
companies, we present the following comments on the Reserve Bank of India’s Proposed
Guidelines on Authorization of Primary Dealers (“PDs”) in India. We appreciate theopportunity to comment on the Guidelines and share the global banking industry’sperspective.
As of April 25, 2011, there were eight standalone PDs and 13 bank PDs operating inIndia. We understand these PDs play an active role in the Government securities market
by underwriting and bidding for fresh issuances and acting as market makers for thesesecurities. We appreciate and are encouraged by PDs continued work with the RBI toensure that credit is available to the productive sectors of the economy, institutions areestablished to assist with building the country’s financial infrastructure, and access toaffordable financial services is expanded.
It is our hope that the following comments will serve to inform and support continued
deliberation of this critical policy issue.

Sincerely,Kenneth E. Bentsen, Jr.
EVP, Public Policy and Advocacy
SIFMA

Nicholas de Boursac
CEO & Managing Director
ASIFMA
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BACKGROUND

1.1

The system of PDs in the Government Securities (“G-Sec”) market wasintroduced in 1995 to strengthen the infrastructure in the G-Sec market, improve
the secondary market trading system, which would contribute to price discovery,
enhance liquidity and turnover, and encourage voluntary holding of G-Sec
amongst a wider investor base, and make PDs an effective conduit for conducting
open market operations (“OMO”). The current guidelines to authorize PDs in theIndian G-Sec market were prescribed in 1995 when the PD system wasintroduced in India.

1.2

The Reserve Bank of India (“RBI”) has now issued a set of Proposed Guidelines
on the Authorization of Primary Dealers in India (published on its website onMay 4, 2011) (the “Proposed Guidelines”) and has invited banks, nonbanking
financial institutions, all stakeholders and the public at large to comment on theGuidelines.

1.3

We understand the purpose of the guidelines is to make the PD authorization
policy more transparent and ensure that new PDs have sound capital, adequate
experience and expertise in the G-Sec market, and prudent risk-management
measures to enable them to meet their roles and obligations in the Government
debt market in an effective manner.

1.4

SIFMA brings together the shared interests of hundreds of securities firms, banks
and asset managers. SIFMA, with offices in New York and Washington, D.C., isthe U.S. regional member of the Global Financial Markets Association(“GFMA”).

1.5

ASIFMA is an independent association whose mission is to promote thedevelopment of liquid, efficient and transparent capital markets in Asia andfacilitate their orderly integration into the global financial system. Association
priorities are driven by the active participation of over 40 member companies,
including global and regional banks, securities dealers, brokers, asset managers,
credit rating agencies, law firms, trading and analytic platforms, and clearance
and settlement providers involved in Asian capital markets. ASIFMA is located in
Hong Kong and is the Asian regional member of GFMA.

21.6We appreciate that the RBI has invited public comments on the Proposed
Guidelines and take this opportunity to make recommendations on some of thekey policies that RBI has set out for the authorization of primary dealers in India.

1.7

The comments in this submission represent the general collective views of SIFMA
and ASIFMA’s member companies, rather than the response of any individualmember. Nothing in this industry submission is intended to negate or substitutefor more detailed, case-specific consultations by individual members or otherindustry associations.

2.

Submission

2.1

Two-year time period for compliance with the minimum turnover
requirement

2.1.1

Issue of Concern
As described in Paragraph 17 of the Proposed Guidelines, existing PDs would
be given a two-year time period to comply with the minimum turnover
requirement of 15 percent of their total turnover in the G-Sec business during thepreceding financial year, to be achieved on behalf of mid-segment (Provident
Funds, Urban Cooperative banks, Regional Rural banks, Trusts etc.) and retail(individual) investors.

2.1.2 Comments
Though we understand that PDs are committed to expanding the Government
bond market in the retail segment, we believe that PDs may be constrained indealing with a significant number of players in the mid-segment because of thefollowing factors:
The Know Your Customers (“KYC”) norms would be restrictive in the caseof Urban Cooperative banks, Regional Rural banks, and Trusts, etc., due tothe presence of a high number of politically exposed people on the boardsof these entities.

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

The financial health of the Urban Cooperative banks and Regional Ruralbanks may not be financially stable enough for PDs to take exposure onthem.

As standalone PDs, we do not currently provide custodial services. Becauseof this, it would be very difficult to open a Constituent Subsidiary General
Ledger (“CSGL”) account and hold or trade securities on behalf of theseclients.

Additionally, PDs would not have as an extensive reach as banks have inthe case of retail customers.

We respectfully disagree with the minimum turnover requirement of 15
percent of the total turnover in the G-Sec business during the preceding
financial year. Though at this time we are unable to provide specific dataon the topic, our general estimates are that the existing market volume inthis segment is less than 1 percent of the total volume.

The current percentage of total retail participation is less than 1 percent of
the total market turnover, mainly because there are currently no incentives
for retail investors to invest in Government bonds. Individual investors are
more likely to invest in other quasi- sovereign instruments, such as Postbank savings or National Stock Exchange (“NSE”) certificates, which offer
better tax adjusted returns.

Additionally, we believe more clarity is required to better determine what iscounted toward the “turnover” requirement outlined in Paragraph 17.
2.1.3 Recommendation
Instead of mandating a minimum turnover requirement of 15 percent, the RBI
should develop an incentive-based program aimed at increasing the depth ofGovernment securities in the mid- and retail segment. Our recommendations
include:42.2•

In the current electronic market Negotiated Dealing System OrderMatching (“NDS-OM”) system, which accounts for more than 90 percentof the total market volume, access is limited to wholesale participants andthe tradable lot size is restricted to INR 50 mio. The RBI should reduce theminimum lot size to INR 1 mio which would help mid- and retail market
participants to get a better price and may also lead to an increase in theoverall volume of the G-Sec market.

•The creation of an internet-based trading platform, which can be accessedby the mid- or retail market segment, would help to expand the reach of
the market. Primary dealers could make markets on the platform byproviding two-way quotes on securities.

•Currently, most retail products marketing, such as Mutual Fund units andPost Office savings schemes, which have a similar credit risk, offer acommission structure for the agents. We suggest a similar commission
structure for PDs to encourage mid- and retail market investors toparticipate in Government bond primary auctions.

Exit/Termination Procedures

2.2.1 Issue of Concern
Item iii) in Paragraph 19 allows the RBI to suspend or terminate a PD, as it
may deem fit, under the following circumstance: repeatedly providing bids andoffers in the primary and/or secondary market that are not “reasonablycompetitive.”
2.2.2 Comments
The term “reasonably competitive” is too broad and requires a more precise
definition.
Recommendation
2.2.3 We respectfully ask for more clarity on the term “reasonably competitive” tobetter understand the scope of the RBI’s ability to suspend or terminate a PD.

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For inquiries or additional information, please contact:
Kenneth E. Bentsen, Jr.
EVP, Public Policy and Advocacy
Securities Industry and Financial Markets Association+ 202-962-7400
kbentsen@sifma.org
Nicholas de BoursacCEO and Managing Director
Asia Securities Industry & Financial Markets Association+852-2537-4198
ndeboursac@asifma.org

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