Date:05/11/2004 URL: http://www.thehindubusinessline.com/2004/11/05/stories/2004110501720800.htm

Back `NDS gilt trading must be under RBI watch' — Panel seeks screen-based order matching system

Our Bureau

Mumbai , Nov. 4

THE Reserve Bank of India Working Group on `Screen Based Trading In Government Securities' has called for the immediate introduction of a screen-based anonymous order matching system on the Negotiated Dealing System (NDS). This would ensure transparency and better price discovery in debt market transactions.

The operationalisation of the NDS order matching system needs to be spread over sequential phases for proper implementation and smooth migration. The members must be allowed sufficient time to gain experience in handling an order matching system, the group has recommended in its report to the apex bank.

It has also been suggested that a corporate agency or body should conduct an independent technical study of the Indian Financial Network (INFINET) maintained by Institute for Development and Research in Banking Technology (IDRBT).

"An urgent review of the performance and technical capability of INFINET is necessary, as it has a significant bearing on the performance of the NDS," the group has said in its report. Several issues relating to both hardware and software have been highlighted and they need to be addressed immediately to enhance the tradability of the system.

The group has argued that given the situation of a very high fiscal deficit in India, there is a strong case in favour of keeping the wholesale government security (G-sec) market of NDS members separate from the retail-mid segment market that would be developed on the stock exchanges.

Since movements in G-sec prices reflect the level of interest rates in the financial system, the G-sec market of NDS members should remain under the close regulatory scrutiny of RBI on a real time basis.

Therefore, as long as the levels of gross government market borrowings remain high, it is desirable that the management and regulation of wholesale debt market (WDM) remain with RBI. The group has said that the Securities and Exchange Board of India (SEBI) and stock exchanges need to initiate steps to build awareness amongst the mid-segment investors about the facilities available for gilt trading on the exchanges.

"Brokers of WDM segment of exchanges should be compelled to engage in market making of gilts on the exchanges with appropriate cover operations being permitted to them through conclusion of deals with NDS members," the group has recommended. While primary dealers may be asked to facilitate trading on the exchange for the retail segment (preferably through their subsidiaries), banks should confine themselves to the NDS market.

The creation of appropriate electronic interfaces between the exchanges, depositories and RBI's public debt office is imperative for faster and value-free transfer capabilities to facilitate the settlement of securities traded on exchanges.