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Government Securities Lending

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

Which transactions will be covered under the directions?

The directions shall 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 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 to the lender the security borrowed and the latter shall return the security received as collateral to the former at the end of the agreed period.

Government Security Lending Fee (GSL Fee) means the fee paid by the borrower to the lender of the Government 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
Obtained under a repo transaction, including through RBI’s Liquidity Adjustment Facility, or borrowed under another GSL transaction For lending
Issued by the Central Government (including Treasury Bills) and the State Governments For placing as collateral
Obtained under a repo transaction, including through RBI’s Liquidity Adjustment Facility, or borrowed under another GSL transaction For placing as collateral

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?

The minimum tenor of a GSL transaction shall be 1 day and the maximum tenor shall be the maximum period prescribed to cover short sales in terms of the Directions on ‘Secondary Market Transactions in Government Securities – Short Selling’ dated July 25, 2018 (i.e. 3 months from the date of transaction).

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 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 be contracted using any mutually agreed trading process / platform, including but not limited to, bilateral or multilateral, quote driven or order driven process, 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 under a GSL transaction may be –
    • Sold either through an outright or a repo transaction or used for meeting a delivery obligation in a short sale
    • Used for availing RBI’s Liquidity Adjustment Facility
    • Lent under another GSL transaction
    • Placed as collateral under another GSL transaction
  • Securities placed as collateral may be substituted by the borrower with other eligible 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, by both counterparties to the transaction or by the ETP operator concerned.
  • 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
SLR eligible securities borrowed / lent under GSL transaction Eligible to be reckoned for SLR by the borrower
Not eligible to be reckoned for SLR by the lender
Securities received / placed as collateral under GSL transaction Eligible to be reckoned for SLR by the lender
Not eligible to be reckoned for SLR by the borrower

What will be the accounting guidelines for GSL transactions?

  • Market participants may lend eligible securities from any category of investments.
  • The lender shall continue to accrue the coupon / discount on the securities lent during the loan period. Similarly, the borrower shall continue to accrue the coupon / discount on the securities placed as collateral during the loan period. 
  • In case the interest payment date of the securities lent (placed 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, on value date basis, as the cash consideration payable by the borrower in the second leg does not include any intervening cash flows.
  • The transacting parties shall continue to mark to market / value the securities lent or placed as collateral under GSL transactions as per applicable regulations / accounting standards.


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, December 27). 'Reserve Bank of India (Government Securities Lending) Directions, 2023'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12580&Mode=0

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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