Master Circular: Operational guidelines for banks undertaking/ proposing to undertake Primary Dealer Business in Government Securities Market - આરબીઆઈ - Reserve Bank of India
Master Circular: Operational guidelines for banks undertaking/ proposing to undertake Primary Dealer Business in Government Securities Market
RBI/2007-2008/57 July 02, 2007 All Scheduled Commercial Banks Dear Sir, Master Circular: Operational guidelines for banks undertaking/ proposing to undertake Primary Dealer Business in Government Securities Market As you are aware, the Reserve Bank of India has, from time to time, issued a number of guidelines/instructions/circulars to the Primary Dealers (PDs) in regard to their operations in the Government Securities Market. Subsequent to the expansion of the Primary Dealership system permitting banks, which fulfill certain minimum eligibility criteria, to undertake Primary Dealer activity operational guidelines were issued vide circular IDMD.PDRS.1431 /03.64.00/2006-2007 dated October 5, 2006. With a view to incorporate the changes and consolidate the instructions issued by the Reserve Bank of India, this updated Master Circular is being issued. The list of circulars consolidated is given in Appendix IV. Please acknowledge receipt. Yours faithfully (G. Mahalingam) Table of Contents 1. Primary Dealership System In 1995, the Reserve Bank of India (RBI) introduced the system of Primary Dealers (PDs) in the Government Securities Market, which comprised of independent entities focused on Primary Dealer activity. In order to broad base the Primary Dealership system, the permitted structure of Primary Dealership business was expanded to include banks in 2006-07. As on date, there are eight standalone PDs and 10 banks authorized to undertake PD business departmentally. 1.2 The objectives of Primary Dealer System The objectives of the PD system are : 1.3 Eligibility conditions for banks proposing to undertake PD business (bank-PDs) The following categories of banks would be eligible to apply for PD licence: (iii) Foreign banks operating in India who wish to undertake PD business departmentally by merging the PD business being undertaken by group companies subject to fulfillment of criteria at 1.3(i)(a) to (c). 1.4 Procedure for Authorisation of bank-PDs1.4.1 Banks eligible to apply for Primary Dealership, for undertaking PD business, may approach the Chief General Manager, Department of Banking Operations & Development (DBOD), Reserve Bank of India, Central Office, Centre I, World Trade Centre, Cuffe Parade, Mumbai-400 005. On obtaining an in-principle approval from DBOD, banks may then apply to the Chief General Manager, Internal Debt Management Department, Reserve Bank of India, 16th Floor, Central Office Building, Fort, Mumbai- 400 001 for an authorization for undertaking PD business departmentally. 1.4.2 The banks, willing to undertake the PD business by merging / taking over PD business from their partly / wholly owned subsidiary, or foreign banks, operating in India, willing to undertake PD business departmentally by merging the PD business being undertaken by group companies, will be subject to the terms and conditions, as applicable, of the undertaking given by such subsidiary/ group company till such time a fresh undertaking is executed by the bank. 1.4.3 The banks authorized to undertake PD business will be required to have a standing arrangement with RBI based on the execution of an undertaking (Appendix I) and the authorization letter issued by RBI each year (July-June). Note: The decision to enlist a bank to undertake Primary Dealer business will be taken by Reserve Bank of India based on its perception of market needs, suitability of the applicant and the likely value addition to the system. 2. Applicability of the guidelines issued for Primary Dealers 2.1 The bank-PDs will be subjected to operational guidelines issued to Primary Dealers contained in Master Circular IDMD.PDRS.01/03.64.00/2007-08 dated July 02, 2007 and other guidelines issued to Primary Dealers from time to time, as made applicable, unless specifically stated. 2.2 The bank-PDs' role and obligations in terms of supporting the primary market auctions for issue of Government dated securities and Treasury Bills, underwriting of Dated Government Securities, market-making in Government securities and secondary market turnover of Government Securities will be as per the Master Circular IDMD.PDRS.01/03.64.00/ 2007-08 dated July 02, 2007 issued to Primary Dealers. 2.3 Bank-PDs are expected to join Primary Dealers Association of India (PDAI) and Fixed Income Money Market and Derivatives Association (FIMMDA) and abide by the code of conduct framed by them and such other actions initiated by them in the interests of the securities markets. 2.4 The requirement of ensuring minimum investment in Government Securities and Treasury Bills on a daily basis based on net call/ RBI borrowing and Net Owned Funds will not be applicable to bank-PDs which shall be guided by the extant guidelines applicable to the banks. 2.5 As banks have access to the call money market, refinance facility and the Liquidity Adjustment Facility (LAF) of RBI, bank-PDs will not have separate access to these facilities and liquidity support as available to the standalone PDs. 2.6 It is clarified that for the purpose of "when-issued trades" issued vide circular IDMD.No/2130/11.01.01 (D)/2006-07 dated November 16, 2006, bank-PDs will be treated as Primary Dealers. 2.7 Bank-PDs shall be guided by the extant guidelines applicable to the banks as regards borrowing in call/notice/term money market, Inter-Corporate Deposits, FCNR (B) loans /External Commercial Borrowings and other sources of funds. 2.8 The investment policy of the bank may be suitably amended to include PD activities also. Within the overall framework of the investment policy, the PD business undertaken by the bank will be limited to dealing, underwriting and market-making in Government Securities. Investments in Corporate/ PSU/ FIs bonds, Commercial Papers, Certificate of deposits, debt mutual funds and other fixed income securities will not be deemed to be a part of PD business. 2.9 The classification, valuation and operation of investment portfolio guidelines as applicable to banks in regard to "Held for Trading" portfolio will also apply to the portfolio of Government Dated Securities and Treasury Bills earmarked for PD business. 2.10 The Government Dated Securities and Treasury Bills under PD business will count for SLR. 2.11 Bank-PDs shall be guided by the extant guidelines applicable to the banks as regards business through brokers, ready forward transactions, interest rate derivatives (OTC & exchange traded derivatives), investment in non-Government Securities, Issue of Subordinated Debt Instruments, declaration of dividends, capital Adequacy and risk management. 3. Maintenance of books and accounts 3.1 The transactions related to Primary Dealership business, undertaken by a bank departmentally, should be executed through the existing Subsidiary General Ledger (SGL) account of the bank. However, such banks will have to maintain separate books of accounts for transactions relating to PD business (distinct from normal banking business) with necessary audit trails. It should be ensured that, at any point of time, there is a minimum balance of Rs. 100 crore of Government Securities earmarked for PD business. 3.2 Bank-PDs should subject 100 per cent of transactions and regulatory returns submitted by PD department to concurrent audit. An auditors' certificate for having maintained the minimum stipulated balance of Rs. 100 crore of Government Securities in the PD-book on an ongoing basis and having adhered to the guidelines/ instructions issued by RBI, should be forwarded to IDMD, RBI on quarterly basis. 4. Capital Adequacy and Risk Management 4.1 The capital adequacy requirement and risk management guidelines will be as per the extant guidelines applicable to banks. For the purpose of assessing the bank's capital adequacy requirement and coverage under risk management framework, the PD activity should also be taken into account. 4.2 The bank undertaking PD activity may put in place adequate risk management systems to measure and provide for the risks emanating from the PD activity. 5. Supervision by RBI5.1 Off-site supervision: The banks authorized to undertake PD business are required to submit prescribed periodic returns to RBI promptly. The current list of such returns and their periodicity, etc. is furnished in Appendix II.5.2 On-site inspection: RBI will have the right to inspect the books, records, documents and accounts of the banks. Bank-PDs are required to make available all such documents, records, etc. to the RBI inspectors and render all necessary assistance.6. Violation/Circumvention of Instructions Any violation/circumvention of the above guidelines or the terms and conditions of the undertaking executed by a bank-PD with the Reserve Bank of India (Annex I) would be viewed seriously and such violation would attract penal action including the withdrawal of authorisation for carrying on the business as a Primary Dealer, and/or imposition of monetary penalty or liquidated damages, as the Reserve Bank may deem fit. Reserve Bank of India reserves its right to amend or modify the above guidelines from time to time, as may be considered necessary. UNDERTAKING To, By AND WHEREAS as a precondition to our being authorised to undertake Primary Dealership activity we are required to furnish an undertaking covering the relative terms and conditions AND WHEREAS at the duly convened Board of Directors meeting of ________________ on __________, the Board has authorised Shri/Smt./Kum. _________________ and Shri/Smt./Kum. __________________ to execute and furnish an UNDERTAKING to the Reserve Bank of India jointly and severally as set out below: NOW, THEREFORE, in consideration of the RBI agreeing to permit us to undertake Primary Dealer activity, we hereby undertake and agree: We do hereby confirm that the above undertakings will be binding on our successors and assigns. Dated this day of Two Thousand Signed, sealed and delivered by the ) Signatory (i) Witness (i) Statements / Returns required to be submitted by banks on their Primary
* In addition to reports on "when issued" transactions and short-sales. Appendix IV
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