RBI to open up bond market to smaller firms

RBI to open up bond market to smaller firms

Mumbai: The Reserve Bank of India (RBI) will introduce a Web-based bond trading platform on Monday that can be accessed by any entity interested in trading sovereign paper, opening up the government bond market to small institutions.

To trade in the government bond market, an entity has to, among other things, have Indian Financial Network (Infinet) connectivity, which is restricted to institutions that maintain a so-called subsidiary general ledger (SGL) account with RBI. It also involves building sizeable infrastructure with dedicated servers for trading.

Such conditions have deterred individuals and smaller institutions such as cooperative banks, regional rural banks, small pension funds and trusts from trading in the government bond market. With the launch of the Web-based trading platform, anyone can open a gilt account with an SGL member and start trading in bonds in real time.

The Web-based system is an extension of the existing Negotiated Dealing System-Order Matching (NDS-OM), a platform provided by RBI on which bond trading takes place anonymously. The buyers and the sellers do not know each other and a trade is executed when the bid and ask prices match.

However, the membership criterion for this platform is strict and limited to banks, primary dealers, some large insurance or mutual funds companies.

NDS-OM controls about 80% of the market volume. The average daily volume in the bond market is about 15,000-16,000 crore with volumes touching as high as about 39,000 crore in a single day this May.

Using the Web-based platform, traders will now be able to buy and sell central government bonds, state bonds as well as treasury bills, or short-term government bonds that mature within one year.

Till date, anybody who had to take positions in bond market had to do it by calling in brokers or requesting banks to take positions on their behalf. They had to pay the fees being quoted by these institutions. The transaction cost was high.

“With NDS-OM Web, these small players will finally get to know real-time prices and trade on a real-time basis. They can sell any securities as soon as they buy it and don’t have to wait for the banks to give them quotes or hold them till the day ends and the bank updates the customer’s accounts," said a senior official with the Clearing Corporation of India Ltd (CCIL), an RBI-owned organization that works as a central counterparty in any government bond trade; it’s also the developer of both the NDS-OM and its Web version.

IDBI Bank Ltd has already tried offering a similar platform to its customers for bond trading. However, the bank’s platform is more for investments rather than trading. Moreover, the prices on IDBI’s platform are not real-time but are updated frequently.

Bond traders sees the new Web-based platform as helpful in bringing new participants into the niche market.

“Hopefully, a new set of investors will come with this Web-based application. Earlier, they were not allowed to take part in bond market trading directly. The Web version of NDS-OM will add to the depth in the market," said Devendra Dash, a senior dealer with Development Credit Bank.

However, retail traders may still shy away from trading because of the complexities of bond trading. The minimum lot size of 10,000 can also deter small investors.

“Truth be told, the bond market is essentially an institution-driven market. Globally, very few retail investors invest in government bonds," said the CCIL official who didn’t want to be named because he isn’t authorized to speak to the media. “We are not anticipating a huge retail participation because of the web portal. However, many other small entities, like co-operative banks and small funds, that were left out from the market, will definitely come (in)."