RBI proposes short selling in government securities, with set limit for participants
New Delhi, June 26
The Reserve Bank of India has proposed that eligible participants in government securities can maintain short positions as per a set rules. In a draft directions issued on Thursday, the Central Bank has set limits on the government bond market participants can short-sell.
As per the draft directions, for liquid government bonds or securities, short positions can be up to two per cent of the total bonds available in the market, or Rs 500 crore, whichever is higher. "Liquid Government security: 2 per cent of the outstanding stock of the Government security, or Rs 500 crore, whichever is higher," it said.
Meanwhile, for other eligible government securities, short positions can be up to one per cent of the total bonds, or Rs 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.
Banks and major dealers can buy a larger share of government bond auctions, while other investors have a smaller limit, as per the draft.
Scheduled commercial banks and standalone primary dealers can bid for up to 25 per cent of the notified amount in a government securities auction. Other eligible participants are allowed to bid for up to 10 per cent of the notified amount in the government securities.
It also laid down a detailed framework for trading in "when-issued" securities. When issued (WI) 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/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. Short selling enables traders to sell bonds they do not currently own, with the expectation of buying them back later at a lower price.
— ANI
Reader Comments
Honestly, I'm a bit skeptical. Short selling in government securities feels like giving more power to big players. The 25% bid limit for banks and primary dealers is fine, but what about smaller investors? We need transparency and strict enforcement, or else this could backfire. Let's see how it works in practice.
Good to see RBI aligning with global practices. Short selling is a common tool in developed markets. The limits seem conservative enough to prevent manipulation. But I wonder how this will impact bond yields and the rupee. Would love to hear expert analysis on this.
Yaar, this might be good for professionals but for common people like us, it's confusing. Just hope it doesn't lead to volatility in bond markets. The 'when issued' transactions sound complex too. RBI should also focus on educating retail investors about these changes. Otherwise, it's all Greek to me! 😅
Interesting move. The distinction between liquid and other government securities makes sense. However, I'm concerned about the netting off of 'when issued' trades - that could lead to settlement risks if not handled properly. Overall, a positive step towards market efficiency, but implementation is key.
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