Entities reluctant to get into new segment till settlement and margin issues are addressed
Trading volumes in the debt segment of stock exchanges would remain low as long as certain structural issues in the way aren’t resolved, say observers.
These hurdles are mainly the lack of same-day settlement and the criterion of only listed corporate bonds being traded.
The Securities and Exchange Board of India has approved the launch of a separate debt segment for trading by the BSE, National Stock Exchange and MCX-SX.
Insurance companies, recently permitted by the finance ministry to trade in the segment, are also going slow due to these structural issues.
“In the institutional segment, we have been asking for a settlement guarantee and a low margin to be kept with the exchanges. While we have placed our concerns before the parties concerned, it appears they would first want volumes to pick up before changes are made to the settlement process,” said a senior investment official of a private life insurer.
The Delivery versus Payment-I (DvP-I) mode for settlement is being used for these transactions at present and after volumes build up, the DvP-III mode will be used, say insurance companies. DvP is the mode of settlement wherein transfer of securities and funds happen simultaneously.
This ensures that unless the funds are paid, the securities are not delivered and vice versa. DvP settlement eliminates the settlement risk in transactions. DvP-I is when the securities and fund legs of the transactions are settled on a gross basis, that is, the settlements occur transaction by transaction, without netting the payables and receivables of the participant.
In DvP-III, both legs are settled on a net basis and only the final net position of all transactions undertaken by a participant is settled. So, the liquidity requirement in a gross mode is higher than in a net mode.
In this year’s Budget speech, Finance Minister P Chidambaram had said with the object of developing the debt market, stock exchanges will be allowed to introduce a dedicated debt segment on the exchange. Banks and primary dealers will be the proprietary trading members.
“In order to create a complete market, insurance companies, provident funds and pension funds will be permitted to trade directly in the debt segment, with the approval of the sectoral regulator,” he said.
Later, the Insurance Regulatory and Development Authority (Irda) had written to the government that it was ready to let insurers participate as trading members in the separate debt segment proposed to be created on the stock exchanges.
“While DvP-I does not have a margin requirement, it does not offer a settlement guarantee. Hence, though Irda does not have an objection in us entering the segment, the fundamental issues with it have been a hindrance for us to take a serious call on trading in it,” said the chief investment officer of a private life insurer.
While DvP-III would offer a settlement guarantee, experts say the high margin requirement was a dissuading factor in institutional entities staying away from the segment. Ajay Manglunia, senior vice-president, Edelweiss Securities, said: “Trading volumes in the DvP-III mode of settlement on the debt segment at exchanges is not taking off because of factors like lack of T 0 settlement, only limited papers like public issue listed corporate bonds only allowed to be traded and the requirement of 10 per cent margin for guaranteed settlement.”