RBI proposes short selling in G-Secs

The Reserve Bank of India has set limits on what government bond market participants can short-sell

PTI

New Delhi

The Reserve Bank of India (RBI) has proposed that eligible participants in government securities can maintain short positions as per a set of rules. In draft directions issued on Thursday, the central bank set limits on what government bond market participants can short-sell.  

As per the draft directions, for liquid government bonds or securities, short positions can be up to 2% of the total bonds available in the market, or ₹500 crore, whichever is higher. "Liquid Government security: 2% of the outstanding stock of the Government security, or ₹500 crore, whichever is higher," the draft said. 

Meanwhile, for other eligible government securities, short positions can be up to 1% of the total bonds, or ₹250 crore, whichever is higher. This means even when short-selling government bonds, traders cannot exceed a fixed percentage or amount limit, whichever is larger. 

Scheduled commercial banks and standalone primary dealers can bid for up to 25% of the notified amount in a government securities auction. Other eligible participants are allowed to bid for up to 10% of the notified amount in the government securities. Banks and major dealers can buy a larger share of government bond auctions, while other investors have a smaller limit, as per the draft. 

The draft directions also laid down a detailed framework for trading in when-issued securities. When-issued transactions are conditional trades made for securities that have been announced but not yet issued. 

" 'When Issued' transactions may commence after the issue/re-issue of the eligible Government security is notified and shall cease at the close of trading on the date of auction of the Government security," it said. 

Settlement of such transactions will be done along with the settlement of secondary market transactions on the date of issue or re-issue of the government security and shall be netted off with trades in the same government security. Meanwhile, the draft also stated that short selling is allowed in Central Government securities, but Treasury Bills are not included.