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When Issued Market and Short Sale of G-Sec

'When Issued’ market facilitate purchase / sale of securities even before they are issued and 'Short Sale' option allows sale of a security one does not own.

What is ‘When Issued’ market?

"When, as and if issued" security refers to a security that has been authorized for issuance but not yet actually issued. 

‘When Issued’ trading takes place between the time a Government Security is announced for issuance and the time it is actually issued. All 'When Issued' transactions are on an 'if' basis, to be settled if and when the actual security is issued. 

Which securities are eligible for ‘When Issued’ market?

Both new and reissued Government securities issued by the Central Government are eligible for ‘When Issued’ transactions. Eligibility of an issue for ‘When Issue’ trades is indicated in the respective specific auction notification. 

Who can participate in ‘When Issued’ market?

Participants eligible to undertake net long and short position in ‘When Issued’ market are –

  • All entities which are eligible to participate in the primary auction of Central Government securities are eligible to undertake both net long and short position in ‘When Issued’ market.
  • Resident individuals, Hindu Undivided Families (HUF), Non-Resident Indians (NRI) and Overseas Citizens of India (OCI) are eligible to undertake only long position in ‘When Issued’ securities. 

Entities other than scheduled commercial banks and Primary Dealers (PDs), need to close their short positions, if any, by the close of trading on the date of auction of the underlying Central Government security.

What are the limits for trading in ‘When Issued’ market?

The open position limits in the ‘When Issued’ market are as below –

Categories Limits on Long position Limits on Short position
PDs and scheduled commercial banks Not exceeding 25% of the notified amount in the auction Not exceeding 25% of the notified amount in the auction
Other eligible entities Not exceeding 25% of the notified amount in the auction Not exceeding 10% of the notified amount in the auction (Individuals, HUFs, NRIs and OCIs are not allowed to take short positions in the ‘When Issued’ market)

How are transactions carried out in ‘When Issued’ market?

  • ‘When Issued’ transactions commence after the issue of a security is notified by the Central Government and it cease at the close of trading on the date of auction. 
  • All ‘When Issued’ transactions for all trade dates shall be contracted for settlement on the date of issue. 
  • ‘When Issued’ transactions shall be undertaken only on the Negotiated Dealing System-Order Matching (NDS-OM) platform. However, an existing position in a ‘When Issued’ security may be closed either on the NDS-OM platform or outside the NDS-OM platform, i.e., through Over-the-Counter (OTC) market. All OTC ‘When Issued’ transactions shall be reported to NDS-OM within 15 minutes of the trade.

What is ‘Short Sale’?

‘Short sale’ means sale of a security one does not own. 

Banks may treat sale of a security held in the investment portfolio as a short sale. These transactions shall be referred to as ‘notional’ short sales. 

Which entities are eligible to undertake short sales?

Entities eligible to undertake short sales are –

  • Scheduled commercial banks
  • Primary Dealers
  • Urban Cooperative Banks 
  • Any other regulated entity which has the approval of the concerned regulator [Securities and Exchange Board of India (SEBI), Insurance Regulatory and Development Authority (IRDA), Pension Fund Regulatory and Development Authority (PFRDA), National Bank for Agriculture and Rural Development (NABARD) and National Housing Bank (NHB)]. 

What are the limits for short sale of securities?

The maximum amount of a security (face value) that can be short sold is –

Category Limits
Liquid securities 2% of the total outstanding stock of each security, or, ₹500 crore, whichever is higher.
Other securities 1% of the total outstanding stock of each security, or, ₹250 crore, whichever is higher.

‘Liquid security’ means a security identified and published by Fixed Income Money Market and Derivatives Association of India (FIMMDA) / Financial Benchmarks India Limited (FBIL) as a ‘liquid security’ for the purpose of short sale transactions.

‘Other security’ means a security other than liquid security and eligible for short sale transactions.

How are short sale transactions settled?

  • Short sales shall be covered within 3 months from the date of transaction (inclusive of the date). 
  • Short sales, including notional short sales by banks, shall be covered by outright purchase of an equivalent amount (face value) of the same security, either in the secondary market or in primary auction, including in the ‘When Issued’ market.
  • Securities that are short sold are to be invariably delivered on the settlement date. Entities shall meet their delivery obligations by borrowing securities in the repo market or through outright purchase. However, securities acquired under Reserve Bank of India’s (RBI’s) Liquidity Adjustment Facility or any other liquidity facility shall not be used for delivery into short sales.
  • Banks undertaking ‘notional’ short sales shall ordinarily borrow securities from the repo market to meet delivery obligations, but in exceptional situations of market stress (e.g., short squeeze), it may deliver securities from its own investment portfolio.
  • The short sale position executed in the OTC market should be reported on the NDS-OM platform within 15 minutes of the execution of the trade.


References

Reserve Bank of India. (2018, July 25). 'Secondary Market Transactions in Government Securities – Short Selling'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11346&Mode=0

Reserve Bank of India. (2018, July 28). 'Transactions in the ‘When Issued’ (WI) market in Central Government Securities'. Retrieved from https://rbi.org.in/scripts/BS_CircularIndexDisplay.aspx?Id=11344

Reserve Bank of India. (2020, April 01). 'Government Securities Market in India – A Primer'. Retrieved from https://www.rbi.org.in/Scripts/FAQView.aspx?Id=79


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