Skip to main content

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


Follow at - Telegram   Instagram   LinkedIn   X   Facebook

Labels:

Comments

Post a Comment

Popular Posts

Credit Cards and Debit Cards

Reserve Bank of India (RBI) has issued directions on issuance of credit cards and debit cards. To whom are the directions applicable? The directions are applicable to the following Regulated Entities (REs) – Commercial Banks  Small Finance Banks (SFBs) Regional Rural Banks (RRBs) Primary (Urban) Co-operative Banks (UCBs) Non-Banking Financial Companies (NBFCs) for all layers – NBFC-Investment and Credit Companies (NBFC-ICC) NBFC-Factor  NBFC-Micro Finance Institutions (NBFC-MFI)  Housing Finance Company (HFC)  What is a credit card? Credit Card is a physical / virtual payment instrument issued with a pre-approved revolving credit limit that can be used to purchase goods and services or draw cash advances. What is a debit card? Debit Card is a physical / virtual payment instrument linked to a Savings Bank / Current Account which can be used to withdraw cash, make online payments, do Point of Sale (PoS) terminal / Quick Response (QR) code transactions, fund transfer, e...
Post a Comment
Read more

Credit Derivatives

Reserve Bank of India (RBI) has issued directions on credit derivatives. What is Credit Derivative? Credit derivative means a derivative contract whose value is derived from the credit risk of an underlying debt instrument or an index of underlying debt instruments. What is Credit Default Swap (CDS) and Total Return Swap (TRS)? Credit Default Swap (CDS) means a credit derivative contract in which one counterparty (protection seller) commits to pay to the other counterparty (protection buyer) in the case of a credit event with respect to a reference entity and in return, the protection buyer makes periodic payments (premium) to the protection seller until the maturity of the contract or the credit event, whichever is earlier. Total Return Swap (TRS) means a credit derivative contract under which one counterparty (total return payer) commits to transfer the entire economic performance of a reference asset to the other counterparty (total return receiver), and, in return, receives a pre-d...
Post a Comment
Read more

Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR)

Reserve Bank of India (RBI) has issued the directions on maintenance of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) by banks. To whom are the directions applicable? The directions are applicable to the following Regulated Entities (REs) – Commercial Banks  Small Finance Banks (SFBs) Payments Banks (PBs) Local Area Banks (LABs) Regional Rural Banks (RRBs) Primary (Urban) Co-operative Banks (UCBs) Rural Co-operative Banks – State Co-operative Banks (StCBs) District Central Co-operative Banks (DCCBs) What is CRR? Every bank shall maintain in India by way of cash reserve, a sum equivalent to such percent of its Net Demand and Time Liabilities (NDTL) in India, as the RBI in terms of Section 42(1) of the RBI Act, 1934 (for scheduled banks) and Section 18(1) of the Banking Regulation Act (BR Act), 1949 (for non-scheduled banks) [including provisions of Section 18(1) of the BR Act as applicable to co-operative banks], may specify. What is incremental CRR? In terms of Secti...
Post a Comment
Read more

Special Rupee Vostro Accounts (SRVAs)

Reserve Bank of India (RBI) has consolidated the guidelines governing Special Rupee Vostro Accounts (SRVAs). Who can open and maintain Special Rupee Vostro Accounts (SRVAs)? Authorised Dealer (AD) banks in India may open Special Rupee Vostro Accounts (SRVAs) of its branch outside India or a bank resident outside India. Which transactions can be settled through SRVA? The settlement of cross-border trade transactions through SRVA is an additional arrangement for invoicing, payment and settlement of exports and imports in Indian Rupee (INR).  All permissible capital and current account transactions under Foreign Exchange Management Act (FEMA) may be settled through the SRVA.  AD banks maintaining SRVA are permitted to open additional current account for exporter / importer, exclusively for settlement of export / import transactions. What can be the source and use of funds in SRVA? SRVA may be funded by way of inward remittances or transfer from other repatriable INR accounts in t...
Post a Comment
Read more

Payment of Agency Commission to Agency Banks (ABs) and Disbursement of Government Pension by ABs

Reserve Bank of India (RBI) has issued guidelines on the conduct of Government business by Agency Banks (ABs), payment of agency commission to ABs and disbursement of Government pension by ABs. Who are ABs? ABs mean all Public Sector Banks (PSBs), scheduled Private Sector Banks (PVBs), scheduled Payments Banks (PBs), and scheduled Small Finance Banks (SFBs) appointed by the RBI under Section 45 of the RBI Act, 1934, by mutual agreement, to carry out Government banking business of the Central Government (CG) / State Governments (SGs). What is agency commission? Agency commission means the remuneration paid by the RBI to an AB in consideration of it acting as an agent of the RBI in the conduct of general banking business of the CG and the SGs at the places and in the manner specified in the agreement between the RBI and the bank, with the exception of the functions relating to the management of the public debt. What are the guidelines on appointment of ABs? Any eligible bank which intend...
Post a Comment
Read more