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Lending of Government Securities

Reserve Bank of India (RBI) has issued draft directions on lending of Government securities.

Which transactions will be covered under the directions?

The directions will be applicable to all Government securities lending transactions, undertaken in Over-the-Counter (OTC) markets.

What is Government Securities Lending (GSL) transaction?

“Government Securities Lending (GSL) transaction” refers to dealing in government securities involving lending of eligible Government securities for a GSL fee by the owner of those securities (the lender) to a borrower, on the collateral of other Government securities, for a specified period of time, with an agreement that the borrower shall return the security borrowed to the lender and the latter shall return back the security received as collateral to the former at the end of the agreed period.

“GSL Fee” means the fee paid by the borrower to the lender of the Government security for lending the security as mutually agreed between them for undertaking the transaction.

First leg of GSL transaction
Lending eligible
Government 
security
Owner (lender) -------------------------------> Borrower
Owner (lender)<-------------------------------- Borrower
Collateral of other
Government securities
Second leg of GSL transaction
Return of eligible
Government 
security
+ GSL fee
Owner (lender) <------------------------------- Borrower
Owner (lender) -------------------------------> Borrower
Return of 
Government Securities 
received as collateral

What is Over-the-Counter (OTC) Market?

“Over-the-Counter (OTC) Markets” refers to markets where transactions are undertaken in any manner other than on exchanges and shall include those executed on electronic trading platforms (ETPs).

Which securities will be eligible for GSL transactions?

Type of Government security Eligible under GSL transaction
Issued by the Central Government excluding Treasury Bills For lending / borrowing
Issued by the Central Government (including Treasury Bills) and the State Governments For placing as collateral

The eligible participants may lend eligible securities from any of the 3 categories of investments –

  1. Held to Maturity (HTM) – means the category of investment portfolio maintained by the banks with intention to hold securities up to maturity.
  2. Available for Sale (AFS) – means the category of investment portfolio of banks, which do not fall within the HTM or HFT category.
  3. Held for Trading (HFT) – means the category of investment portfolio maintained by the banks with intention to trade in securities by taking advantage of the short-term price / interest rate movements.

Who will be eligible to participate in GSL transactions?

Entity Eligible to participate in GSL transactions
An entity eligible to undertake repo transactions in Government securities As lenders of securities
Entities that are eligible to undertake short sale transactions As borrowers of securities

What shall be the tenor of GSL transactions?

GSL transactions shall be undertaken for a minimum period of one day and a maximum period of 90 days.

How shall the GSL transactions be priced?

  • Securities / collateral under a GSL transaction shall be valued at prevailing market prices in the first leg of the transaction.
  • Haircut / margins relating to GSL transactions shall be decided by the central counterparty settling the transactions.

Who is Central Counterparty?

“Central Counterparty” (CCP) means a system provider, who by way of novation interposes between system participants in the transactions admitted for settlement, thereby becoming the buyer to every seller and the seller to every buyer, for the purpose of effecting settlement of their transactions. For GSL transactions, Clearing Corporation of India Ltd. (CCIL) acts as central counterparty.

What shall be the trading and settlement processes for GSL transactions?

  • GSL transactions may use any mutually agreed trading process, including but not limited to, bilateral or multilateral, quote driven or order driven processes, anonymous or otherwise.
  • All GSL transactions shall settle on a Delivery versus Delivery basis.
  • The first leg of all GSL transactions shall settle either on a T+0 or T+1 basis.
  • All GSL transactions shall settle through CCIL.

What is Delivery versus Delivery?

“Delivery versus Delivery” means a settlement mechanism which stipulates that transfer of securities from the borrower of securities is made simultaneously with the transfer of securities by the lender of securities.

How the securities forming part of GSL transactions can be used?

  • Securities borrowed or received as collateral under a GSL transaction may be sold either through an outright transaction or a repo transaction or lent under another GSL transaction.
  • Securities placed as collateral may be substituted by the borrower with other securities in terms of the rules of the central counterparty.

What will be the reporting guidelines for GSL transactions?

  • All GSL transactions shall be reported to the CCIL, within 15 minutes of execution (the time when GSL fee is agreed), by both counterparties to the transaction or by the Electronic Trading Platform concerned, as the case may be.
  • Any misreporting or multiple reporting of the same OTC market deal by a counterparty shall be immediately brought to the notice of CCIL.

How Statutory Liquidity Ratio (SLR) will be computed for securities forming part of GSL transaction?

Status of the security Eligibility under SLR
Securities borrowed / lent under GSL transaction Eligible for SLR for the borrower provided the security is primarily eligible for SLR
Not eligible for SLR for the lender
Securities received / placed as collateral under GSL transaction Eligible for SLR for the lender provided the security is primarily eligible for SLR
Not eligible for SLR for the borrower

What will be the accounting guidelines for GSL transactions?

  • In case the interest payment date of the securities lent (paced as collateral) under a GSL transaction falls within the loan period, the coupon received by the borrower (lender) of the security should be passed on to the lender (borrower) on the date of receipt as the cash consideration payable by the seller in the second leg does not include any intervening cash flows.
  • The transacting parties shall continue to mark to market the securities lent or placed as collateral under GSL transactions as per the investment classification of the security.


References

Reserve Bank of India. (2023, February 17). 'RBI releases Draft Reserve Bank of India (Government Securities Lending) Directions, 2023'. Retrieved from https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=55238

Reserve Bank of India. (2023, February 17). 'Reserve Bank of India (Government Securities Lending) Directions, 2023 - Draft'. Retrieved from https://www.rbi.org.in/Scripts/bs_viewcontent.aspx?Id=4237


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