SEBI relaxes norms for debt trading

SEBI said the settlement cycle for DVP-3 trades will be on a T+1 basis, while trades under DVP-1 can be settled on the same day

January 01, 1970 5:30 IST | India Infoline News Service
To boost liquidity and attract investor participation in the debt market, SEBI (Securities and Exchange Board of India) on Thursday has announced new measures.

Accepting market feedback, SEBI has permitted trade settlement on a net basis (DVP 3) on select bonds in the institutional segment.

Under the DVP-3 (delivery versus payment) settlement trades are settled on a net basis, while currently settlement is only allowed on a gross settlement i.e. DVP-1 basis.

DVP-3 settlement, which allows netting of payables and receivables, enables investors to trade with an upfront margin. Whereas, in DVP-1 the transfer of securities and funds happen simultaneously. Currently, DVP-3 is allowed for retail participants in the debt segment.

SEBI has said the settlement cycle for DVP-3 trades will be on a T+1 basis (next day of the trade), while trades under DVP-1 can be settled on the same day.

The stock exchanges shall continue to settle trades on DVP-3 basis in retail market of debt segment for publicly issued corporate bonds, SEBI said in the notification.

SEBI has allowed DVP-3 settlement for corporate bonds rated 'AA+' or above. Also, the yield differential, between these bonds and similar tenure government securities, will have to be less than 150 basis points.

Liquid corporate bonds will also be allowed to be settled on a DVP-3 basis. For a security to be eligible as liquid, it will have to be traded at least five trading days in every month or must have a minimum trading volumes of Rs 25 crore every month.

The list of eligible bonds may be reviewed on monthly basis and made applicable from 15th of subsequent month, SEBI added.

Clearing corporations will have to provide settlement guarantee for trades settled on DVP-3 basis and will have to create a settlement guarantee fund on similar lines as in the equity or currency segment, SEBI said.

Clearing corporation will impose initial margins to cover 99% of the value at risk (VaR) over a one day horizon, the circular added.

Stock Exchanges can follow a VaR estimation model similar to Interest Rate Futures, it added.

The minimum initial margin shall be 2% for residual maturity up to three years, 2.5% for residual maturity above three years and up to five years; and 3% for maturity above five years. The margin shall be calculated as percentage of traded price of the bond expressed in terms of clean price i.e. without taking accrued interest into account, SEBI added.

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