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

FX Global Code

Reserve Bank of India (RBI) has signed its renewed Statement of Commitment (SoC) to the FX Global Code.  What is FX Global Code? FX Global Code is a set of global principles of good practice in the foreign exchange market. The Code contains 55 principles that provide a common set of guidelines to promote the integrity and effective functioning of the wholesale foreign exchange market. The principles cover ethics, governance, execution, information sharing, risk management and compliance as well as confirmation and settlement. The establishment of the Code was facilitated by the Foreign Exchange Working Group (FXWG), which operated under the auspices of the BIS Markets Committee.  The Code was developed by a partnership between central banks and market participants from around the globe and was first published in 2017. The Code promotes a robust, fair, liquid, open, and appropriately transparent market in which a diverse set of market participants, supported by resilient infras...
Post a Comment
Read more

Amendments in / additions to forex guidelines

Reserve Bank of India (RBI) has amended various forex guidelines. This article lists out some of the such recent amendments. What are the updates in the existing guidelines? Previous guidelines Revised guidelines Persons resident outside India that maintain a rupee account in terms of regulation 7(1) of Foreign Exchange Management (Deposit) Regulations, 2016 may purchase or sell dated Government Securities / treasury bills. The amount of consideration paid for the purchases shall be out of the funds held in the said rupee account. Persons resident outside India that maintain a rupee account in terms of regulation 7(1) of Foreign Exchange Management (Deposit) Regulations, 2016 may purchase or sell dated Government Securities / treasury bills and non-convertible debentures / bonds and commercial papers issued by an Indian company. The amount of consideration paid for the purchases shall be out of the funds held in the said rupee account. The balance...
Post a Comment
Read more

Lending against Gold and Silver collateral

Reserve Bank of India (RBI) has issued directions on lending against the collateral of gold and silver. To whom are the directions applicable? The directions are applicable to the following regulated entities (REs) – Commercial Banks (including Small Finance Banks, Local Area Banks and Regional Rural Banks, but excluding Payments Banks). Primary (Urban) Co-operative Banks (UCBs) & Rural Co-operative Banks (RCBs), i.e., State Co-operative Banks (StCBs) and Central Co-operative Banks (CCBs). Non-Banking Financial Companies (NBFCs), including Housing Finance Companies (HFCs). Which loans are covered under the directions? The directions shall apply to all loans offered by an RE for the purpose of consumption or income generation (including farm credit) where eligible gold or silver collateral is accepted as a collateral security. What is eligible collateral? Eligible collateral means the collateral of jewellery, ornaments or coins made of gold or silver. A lender shall not grant any ad...
Post a Comment
Read more

Directions on Regulation of Payment Aggregators (PAs)

Reserve Bank of India (RBI) has issued directions on regulation of Payment Aggregators (PAs). Who is Payment Aggregator (PA)? Payment Aggregator (PA) is an entity that facilitates aggregation of payments made by customers to the merchants through one or more payment channels through the merchant’s interface (physical / virtual) for purchase of goods, services or investment products, and subsequently settles the collected funds to such merchants.  What are the categories of PA? PA – Physical (PA-P) – PA that facilitates transactions where both the acceptance device and payment instrument are physically present in close proximity while making the transaction. PA – Cross Border (PA-CB) – PA that facilitates aggregation of cross-border payments for current account transactions, that are not prohibited under Foreign Exchange Management Act, 1999 (FEMA), for its onboarded merchants through e-commerce mode. The 2 sub-categories of PA-CB are – PA-CB facilitating inward transaction (i.e. tr...
Post a Comment
Read more

Investments in Non-SLR instruments by State Co-operative Banks (StCBs) and Central Co-operative Banks (CCBs)

Reserve Bank of India (RBI) has issued directions on investments in non-SLR instruments by State Co-operative Banks (StCBs) and Central Co-operative Banks (CCBs). What is the prudential limit for non-SLR investment by StCBs and CCBs? Total Non-SLR investments shall not exceed 10% of the total deposits of a bank as on March 31 of the preceding financial year. Which instruments are permitted for non-SLR investments by StCBs and CCBs? StCBs / CCBs may invest in the following instruments – "A" or equivalent and higher rated Commercial Papers (CPs), debentures and bonds. Units of Debt Mutual Funds and Money Market Mutual Funds. Shares of Market Infrastructure Companies (MICs), e.g. Clearing Corporation of India Ltd. (CCIL), National Payments Corporation of India (NPCI), Society for World-wide Inter-bank Financial Telecommunication (SWIFT). Share capital of Shared Service Entity (SSE) set up by National Bank for Agriculture and Rural Development (NABARD) for StCBs and CCBs. Which a...
Post a Comment
Read more