Mr Reddy discusses issues in fixed income markets  (Central Bank Articles and Speeches, 11 Feb 99)
Central bank: rbi | Type: speech | Date: 1999-02-11

## Mr Reddy discusses issues in fixed income marketsInaugural address by Dr Y V Reddy, a Deputy Governor of the Reserve Bank of India, at the s on

fixed income markets, organised by the National Stock Exchange and ISMA in Mumbai 11/02/99. (Dr Reddy expresses his gratitude to Dr A Prasad for his valuable assistance.)I am happy to be with you today at this seminar organised by the National Stock Exchange and the International Securities Market Association (ISMA).

The NSE needs no introduction audience.

Mr Patil has been, at our request, working closely with the Reserve Bank of India various issues and we value his advice.

The NSE also has representatives on a number of com looking into different aspects of the market.ISMA has been performing the role of an effective self regulatory organisation (SRO) and framed by ISMA have become a benchmark for the fixed income securities market.

Hence, expertise and experience that ISMA has gained over the years would be valuable to us in RBI we continue to develop our markets.The objective of this seminar is to assess recent changes in the Indian fixed income mark the international experience in the development of this segment of financial markets and agenda for future action.Major reform measures in the financial sector have been undertaken by the Reserve Bank o since the beginning of the 1990s.

Reform in the government securities market is important i its role in setting benchmarks in the rest of the financial markets.

It is also crucial fo an effective and reliable transmission channel for the use of indirect instruments of monet A notable change was the switch from administered low coupon government borrowings to auct in government securities at market related rates.

Introduction of primary dealers has to improved the liquidity in the secondary market.

Innovative financial instruments were in such as zero coupon bonds, floating rate bonds, capital indexed bonds, securities on which is made in instalments, etc. In addition, 14, 91 and 364-day T-bills presented investment deployment of short-term funds to investors.

Counterparty risk in securities settlement eliminated with the introduction of Delivery versus Payment system (DVP).I had, in an earlier speech a couple of months ago on debt markets, presented an agenda f action, which covered, among others, technology, regulatory and legal issues, and the standardisation of practices in the debt markets.

In fact, only a couple of weeks ago, I sp on reforms in the money market also.

So, perhaps there is no need to go into the detail reform measures or agenda for action in these markets today.I observe that today's seminar is structured in three sessions: transparency in fixed inco regulation in repo markets and regulation issues in an integrated market environment.

The are of critical importance in the development of the debt markets and it may be useful review what we have achieved so far and what needs to be done.

I will therefore address o issues that are receiving specific attention in the seminar today.

## Transparency in fixed income marketsIt is widely recognised that weaknesses in the provision and use of information played a in the development and spread of recent international financial crises.

A number of int groups have since been examining issues relating to the stability of the financial system working group of The Willard Group examined transparency and accountability issues.

This has defined transparency as a process by which information about existing conditions, deci actions is made accessible, visible and understandable.

Undeniably, transparency contribu efficient allocation of resources by ensuring that market participants have sufficientThis information is meant to enable them to identify risks and to distinguish on circumstances from another's.

Moreover, transparency helps inform market expectations.

I this helps stabilise markets during periods of uncertainty and also contributes to the eff announced policies.

However, admittedly, there are limits to transparency.

Some catego information are costly to compile.

In such cases, infrequent disclosure may be justifie confidentiality may be warranted in some circumstances.In determining the appropriate degree of transparency, the benefits must be balanced agai Transparency should not mean that there will be a one-size-fits-all code on this.

Of cou final analysis, transparency will be with reference to factors considered relevant, w depends on the model for analysis that is considered useful.

Also, transparency gives inference is a different matter and a judgment based on such inference is yet anothe Personally, I believe that transparency is primarily the best test of our good intentions.Hence, the Reserve Bank of India is disseminating exhaustive information relating to activ in the primary and secondary markets, especially the government securities market.

For detailed results of auctions of T-bills and dated governments securities including weight price, devolvement on primary dealers and RBI, and information on fixed rate repos are through regular press statements.

The RBI also issues a daily press release giving secondary market transactions in the government securities markets.

In addition to informat bills and dated government securities, the monthly RBI Bulletin and the Weekly Sta Supplement to the RBI Bulletin contain information relating to open market operations a transactions of the RBI.

The RBI website, which has been appreciated by many, as emul international standards in excellence, also contains up-to-date information on financial maUntil 1994, the debt market was purely a telephone market meaning that all trades were ne and concluded directly by investors.

The NSE introduced a screen-based trading system w objective of increasing transparency in the market.

But the general experience is that w trade is still negotiated over the counter, mere reporting is done through such a system greater use of the online trading system is required rather than a mere reporting of trade enhance transparency.

Success will depend mainly on an increase in the number of transact large number of transactions would result in a successful continuous order book for matc trades.

If the negotiated telephone deals are moved to a screen-based system, full informa volume and price of transacted security would be available online.

This would result in b discovery and promote transparency and efficiency in the market.Currently, the daily available information to the market regarding secondary market trade on actual settlement through Subsidiary General Ledger on a particular date.

This m necessarily reflect a deal concluded on the same date as the SGL transfer form has to within 24 hours of the contract but not necessarily on the date of actual deal.

Thus, an gap exists between the deal date, contract date and actual settlement date.

Screen-bas would obviate this shortcoming.The RBI is actively coordinating with the Primary Dealers Association in developing an El Dealing System to facilitate dealing in money market, government securities and othe instruments.

This will lend transparency and efficiency to market operations.

It will als RBI to monitor developments in the market online.The RBI has embarked on computerisation of its Public Debt Offices.

This would link Publi Offices in the RBI with banks' treasury offices.

Hopefully, primary dealers/satellite de SGL account holders and stock exchanges will also be linked.There is enormous advantage in providing member terminals to SGL account holders as this enable them to view RBI announcements regarding fresh auction, floatation of issue, conve loans, repo auctions, interest rate resets for floating bonds and other such informat participants will also be able to tender bids in auctions of dated government securities, repos from all centres.

The entire auction process, including allotment, determin communicating payment amount, and advising successful and rejected bids to bidders, wi online.

The list of successful bidders and the consideration amount payable would form the the settlement and servicing system.While the link-up has advantages, it can be made operational only through electronic SGL Early enactment of the new Government Securities Act replacing the Public Debt Act 19 essential since it will provide the RBI with substantive powers to design and introduce SGL transfer forms.

## Regulation in the repo marketIn our market, interbank repos are permitted under regulated conditions.

After the irreg securities transactions in 1992, eligible participants and instruments have generally bee but subsequently liberalised in a gradual manner.

Now, all government securities have be eligible for repo.

Besides banks, primary dealers are allowed to undertake repo/reve transactions.

Nonbank participants have also recently been allowed to lend money through repo to other eligible participants.

In terms of instruments, repos have also been permi bonds and private and corporate debt securities, provided they are held in dematerialised depository and the transactions are done through a recognised stock exchange.

However, thi operationalised after the government issues a clarification regarding applicability of sta transactions in dematerialised instruments.Admittedly, the interbank repo market in India needs to be made more transparent and standardised.

I have, time and again, been encouraging market participants to evolve cod practices in the repo market through the Primary Dealers Association or FIMMDAI.

The RBI also been actively pursuing this issue in the Advisory Committee on Government Securities and the Standing Committee on Money Market.

Issues relating to evolving a code of best p such as eligibility of participants and their requirements, eligibility of instruments fo standards, systems and documentation, legal agreement, margin, deal confirmations, and scenario were discussed in the recent meeting of the Standing Committee on Money Market he February 3, 1999.

In fact, pursuant to the discussions on the same subject in the m Technical Advisory Committee on Government Securities Market held in November 1998, a internal subgroup of that committee is already looking into various aspects of repo expansion, including issues comprising legal status, regulatory framework, standardisatio contracts and accounting system and introduction of tripartite repos.

The subgroup is ex complete its report by mid-March 1999.

We expect that a standard repo agreement will emerg soon from the subgroup's recommendations.

We also expect the participants to adopt them on considered appropriate by the RBI.In this connection, I wish to recall that the RBI announced in the October 1998 review of policy that call/notice/term money market should purely be an interbank market with ad access only to primary dealers.

This implies that nonbank players have to be encouraged t their short-term surpluses in other money market instruments.

For instance, they can be a borrow and lend freely through repos in both government and non-government securities. development of repo market assumes increased significance in the interest of further refo financial markets.

## Issues in regulation under an integrated market environmentIn an integrated market, the regulatory framework should ensure that there are no regulator or regulatory gaps in the financial system.

The Deshpande Committee highlighted these ga overlaps and recommended amendment to Section 29A of the Securities Contract (Regulation) 1956 to enable the government to provide jurisdiction to the RBI also in regulation over m debt markets.

With this, the respective regulatory roles of the RBI and SEBI in the debt m be formalised.

The proposed change in the SCRA is bound to pave way for a much more active market.In the PSU and corporate bond market, an important issue relates to large resources raise private placement.

No doubt, private placements offer a number of advantages.

However, this remains largely unregulated.

Healthy development of the private placement market calls f transparency, better disclosure and protection of investor interests.A liberalised and integrated market environment also means that risks get transmitted segment of the market to another more rapidly.

Market participants have to ensure that pr management systems are in place.

In India, banks are the major players in the financial ma RBI has already circulated draft guidelines for ALM for banks, which indicate prudential call borrowings.

These guidelines will be operative from April 1, 1999.

## ConclusionAs I mentioned at the beginning, I have flagged some issues that are currently engaging our in the fixed income market.

I trust that these and other issues would be deliberated upon the day.

I would be happy to have feedback from the organisers about the outcome of the sem