Report of the Advisory Group on Payment and Settlement System (Part - II) December 2000 - आरबीआय - Reserve Bank of India
Report of the Advisory Group on Payment and Settlement System (Part - II) December 2000
M.G. Bhide |
A/5, Bageshree |
Chairman |
Shankar Ghanekar Road |
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Prabhadevi |
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Mumbai - 400 025. |
December 9, 2000
Dear Dr. Reddy,
It is matter of great pleasure in forwarding to you the Part II of the Report of the Advisory Group on Payment and Settlement System covering G-30 recommendations on Securities Settlement System.
The Report is mainly in the form of a matrix. In this Report, the Group has examined the positions obtaining relating to trading and settlement of Securities (Equities, Corporate Debt and Government Securities segments) in India vis-a-vis G-30 recommendations on Securities Settlement System. The Group has also taken note of various ongoing as also proposed infrastructural and other changes in securities market, viz., project on Negotiated Dealing System (NDS) and Public Debt Office (PDO) computerisation, setting up of Clearing Corporation for the development of repo market and settlement of retail transactions of securities, developments in rolling settlement in equity segment, real-time gross settlement of payment system, etc. which are at various levels of development. We may reiterate that the views of the Group specifically pertain to the G-30 recommendations on Securities Settlement System. We understand that a joint Task Force comprising officials from the Bank for International Settlements (BIS) and International Organisation of Securities Commissions (IOSCO) on Securities Settlement System is in the process of reviewing G-30 recommendations and is likely to come out with a fresh set of Core Principles on Securities Settlement System which are likely to be released for public comments by end of this year.
The Group is thankful to distinguished members of the Advisory Group as also to senior executives of the RBI for their valuable contributions in preparing the matrix.
With best regards
Yours sincerely
(M. G. Bhide)
Dr. Y.V. Reddy
Chairman
Standing Committee on International Financial Standards and Codes
Reserve Bank of India
Mumbai.
Major Issues
In Part I of the Report of the Advisory Group on Payment and Settlement Systems, we have critically examined two issues, viz., status of our clearing house operations as well as responsibilities of the Reserve Bank of India (RBI) in the light of the consultative report on "Core Principles for Systemically Important Payment Systems" released by the BIS first in December 1999 followed by a revised version in July 2000. In continuation of our effort, the Group has now examined the status of existing payment and settlement systems in Indian equity and debt markets including Government securities market and suggested ways for improvements in these markets with a view to achieving compliance with the recommendations made by the G-30 in the context of securities settlement system. These have been captured in a matrix form shown in the Annexure. On a macro basis, the Group has commented on five broad issues as indicated below.
First, with regard to settlement cycle of transactions, the Group holds the view that given our present infrastructure, we could not move from T+5 to T+3 cycle without certain improvements in payment system infrastructures in place. However, the important issue here is how to introduce rolling settlement in T+5 cycle. It is found that at present rolling settlement has been introduced largely in the illiquid segment of securities and, therefore, the Group recommends that there is a need to introduce it in the liquid segment of the equity market. However, simultaneously the payment system also needs to be improved for effective movement of funds by implementing modern systems such as Electronic Funds Transfer (EFT) and Real-time Gross Settlement (RTGS) system.
Second, the Group has deliberated on whether the clearing corporations and the depositories as non-banks could be given access to settlement facility on the books of the RBI. In this regard, it feels that only banks could be granted such facility, and any non-bank wishing to avail of such facility should convert itself at least to become a limited purpose bank. In that eventuality, the RBI will have to indicate the relative regulatory regime and also prescribe the prudential guidelines flowing therefrom so that it does not create any moral hazard problem on the part of limited purpose banks and cause systemic crises. Pending such organisational change, it maintains that clearing corporation could send their instructions for settlement on the books of the RBI, and the RBI could act on those instructions only when it receives clear mandate from banks for effecting such debit clearings on its books. The Group, however, feels that the risk of co-mingling has to be addressed by taking up such debits only after inter-bank clearing is fully processed and settled. In this connection, as a risk reduction measure, the Group indicates that any shortfall in funds would need to be adjusted against the balance to be maintained by the clearing corporation with the RBI for settlement. The clearing corporation in that eventuality will need to appropriately authorise the RBI for this purpose. Accordingly, the Group recommends that the clearing corporation should be given the current account facility with the RBI. However, the Group perceives that the final solution, perhaps, lies in the grant of limited purpose banking licence and accordingly, the suggested course as indicated above should be treated as an interim arrangement only as it offers an improvement over the existing arrangement.
Third, the Group expresses concern that with increasing liberalisation, participants would tend to have multiple exposures in various markets at any particular point of time. Unless there exists an institutional mechanism through which all such information is gathered and prudential norm in the form of cross-margining is applied, financial system may prove to be more vulnerable than ever. In view of this, the Group recommends that a system of centralised collection of information, its availability to the market players and relative prudential guidelines with a view to implementing cross-margining across the markets should be explored in India at the earliest.
Fourth, one of the Lamfalussy Standards prescribe that the deferred net settlement (DNS) system should at least be capable of ensuring timely settlement in the event of default of a single largest net debtor. It has been found that most of the systems under equity segment in India have the ability to settle even in the event of failure by three or more larger members over several settlement cycles. The Group has appreciated that the arrangement obtaining in India is better than the one prescribed by the Lamfalussy standards. It, therefore, recommends that such standard should continue and be emulated in debt segment also.
Fifth, on securities borrowing and lending system, at present institutions are not allowed to borrow securities towards settlement. The Group recommends that it should be put in place in both equity and debt segments in India.
(M.G.Bhide) |
(A.Shah) |
(P.K.Bindlish) |
ANNEXURE
Positions obtaining vis-a-vis G30 Recommendations on Securities Settlement System
Reference to G30 recommendation |
Position obtaining in the Equities segment |
Position obtaining in the Corporate debt segment |
Position obtaining in the Government Debt segment |
Views of the Advisory Group |
Comparison of trades between direct market participants should occur as soon as possible after trade execution, preferably on trade date (T+0). |
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2. Trade confirmation/Affirmation Indirect market participants should affirm the trades as soon as possible after trade execution, preferably on T+0. Use of automated trade matching and automated links should be established. |
While the National Stock Exchange (NSE) provides access to a clearing window to the indirect participants for trade affirmation, the other major stock exchange (i.e., BSE) provides a telecom linkage between the brokers and the indirect participants. In the exchange based order driven system, the confirmation/ affirmation is instantaneous in domestic market. However, in case of FIIs the confirmation of trade at NSE is T+1 and on BSE it is upto T+2. |
As soon as the trade is matched on the system of the stock exchange, in respect of exchange traded deals, trade confirmation is generated. |
There is no provision for affirmation of trades by indirect market participants. Only direct market participants who are maintaining Subsidiary General Ledger (SGL) and constituent SGL accounts are only eligible entities for confirmation of trades. |
When government securities are settled through Clearing Corporation, it should be possible to introduce affirmation by indirect market participants. |
3. Straight Through Processing (STP) STP should be the objective of Securities Settlement Systems (SSSs). |
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4. Settlement Cycles Rolling settlement should be adopted by all SSSs. Final settlement should occur on T+3. |
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5. Settlement Rate A SSS is achieving settlements within its specified settlement cycle timeframe only if at least ninety percent of the trades are settled in that time frame. |
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6. Netting Multilateral netting systems should at a minimum be capable of ensuring the timely completion of daily settlements in the event of an inability to settle by the participant with the largest single net debit position and should evaluate the need for capability beyond this standard.
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7. Margining Margining and the use of collateral should be used as a method to help protect the SSS against losses resulting from a participant default. The adequacy of margin requirements should be periodically reviewed. Cross-margining agreements between and among SSSs should be considered as a method to reduce liquidity pressures among common participants. |
Margining requirements include daily margins, concentration margins and additional volatility margins. The mark-to-market margin is computed on the basis of the potential loss that may arise in case the net outstanding position of the member in all the securities at the end of the day is closed out. The shortfall in the margin is made good by deposit of cheques which are realized on the following day. The adequacy of margins is constantly reviewed by the exchanges and SEBI the market regulator. The SSSs in India are distinct and specific to exchanges and there are no cross-margining agreements between and among them. However, it is a desirable standard to be achieved. |
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8.Securities Lending Securities lending and borrowing should be encouraged as a method of expediting the settlement of securities transactions. Existing regulatory and taxation barriers that inhibit the practice of lending securities should be removed. |
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9. Central Security Depository (CSD) A CSD should be in place and the broadest possible industry participation should be encouraged. |
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10. Delivery versus Payment (DvP) DvP should be employed as the method for settling all securities transactions. |
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11. Same day Funds Payments associated with securities transactions should be made in same-day funds. |
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12.Common Message Standard The standard for securities messages and the international securities identification numbering (ISIN) system developed by the International Organisation for Standardisation should be adopted. |
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