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RBI guidelines for intra-day G-sec trading

Written by: Staff

Mumbai, Mar 1 (UNI) Reserve Bank of India (RBI) today announced that primary dealers (PDs) and banks engaged in the secondary market transactions in Government Securities (G-Sec) markets will face disciplinary action in case of their failure to cover a short position during the trading day itself.

''Under no circumstances should the short position be left uncovered at the end of the day. Inability to cover a short position during the trading day itself shall be treated as an instance of ''SGL(security general ledger) bouncing'' and will be liable to the disciplinary action,'' said RBI in its policy guidelines.

The guidelines are in relation to the introduction of intra-day short selling in G-Sec trading beginning from today.

Banks and PDs may undertake outright sale of Central Government dated security that they do not own, subject to the same being covered by outright purchase from the secondary market within the same trading day.

Intra-day short sale transaction and also the covering of short position should be executed only on the Negotiated Dealing System Order Matching (NDS-OM) platform.

At no point of time should a bank/PD accumulate a short position in excess of 0.25 per cent of the outstanding stock of a security, RBI said in its guidelines.

The information regarding the outstanding stock of each Government dated security is being made available on the RBI website with effect from today to facilitate monitoring in this regard.

Gilt Accounts Holders (GAHs), under CSGL facility are not permitted to undertake intra-day short selling. Those entities providing CSGL facility are required to ensure that no short-sale is undertaken by the GAHs.

Before actually undertaking transactions in terms of this circular, banks/PDs are required to have in place a written policy on ''intra-day'' short sale which should be approved by their respective Boards of Directors.

The policy should lay down the internal guidelines which should include, inter alia, risk limits on short position, an aggregate nominal short sale limit (in terms of face value) across all eligible securities, the internal control systems to ensure adherence to regulatory and internal guidelines, reporting of short selling activity to the top management and the RBI, procedure to deal with violations.

A copy of the said policy should be sent for prior information to the Internal Debt Management Department (IDMD) of the RBI. A bank/PD must have in place a system to detect violations immediately within the same trading day. A bank/PD which cannot ensure such prompt detection should not undertake short sale, the guidelines suggested.

The concurrent auditors should specifically verify compliance with these instructions and report violations, if any, on the date of trade itself, within a reasonably short time, to the appropriate internal authority.

Any violation of regulatory guidelines noticed in this regard should immediately be reported to the Public Debt Office(PDO) of RBI.

These guidelines will be reviewed periodically to consider modifications and continuance, as appropriate.


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