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RBI Primary Dealers -

This presentation is on RBI Primary Dealers. It covers history, eligibility, Roles and Obligations; Facilities offered by RBI and Regulatory returns to submitted by PD to RBI. It also covers in detail Underwriting process, MUC (Minimum Underwriting Commission) & ACU (Additional Competitive Underwriting). It also touches few key concepts like Short sale and When Issued.

www.abhijeetdeshmukh.com

This presentation is on RBI Primary Dealers. It covers history, eligibility, Roles and Obligations; Facilities offered by RBI and Regulatory returns to submitted by PD to RBI. It also covers in detail Underwriting process, MUC (Minimum Underwriting Commission) & ACU (Additional Competitive Underwriting). It also touches few key concepts like Short sale and When Issued.

www.abhijeetdeshmukh.com

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RBI Primary Dealers -

  1. 1. Primary Dealers ABHIJEET DESHMUKH WWW.ABHIJEETDESHMUKH.COM
  2. 2.  In 1995, the Reserve Bank of India (RBI) introduced the system of Primary Dealers (PDs) in the Government Securities (G-Sec) Market.  The objectives of the PD system are  to strengthen the infrastructure in G-Sec market,  development of underwriting and market making capabilities for G-Sec,  improve secondary market trading system and  to make PDs an effective conduit for open market operations (OMO).  As on July 13, 2015, there are Seven Standalone PDs and Fourteen Banks authorized to undertake PD business departmentally.
  3. 3. Eligibility Conditions – Standalone PD Subsidiary of scheduled Commercial bank/s and All India Financial Institutions (AIFI) & Company incorporated under the Companies Act, 1956  Should be registered as an NBFC under RBI Act, 1934 for at least ONE year prior to the submission of application.  Should have minimum Net Owned Funds (NOF) of Rs.150 crore for undertaking Core activities and Rs.250 crore for undertaking Diversified activities  Should have Exposure in the securities business and in particular to the G-Sec market for at least one year prior to the submission of application. Exposure for this purpose would be as under:  Applicant’s Turnover in the G-Sec business during preceding year should be at least equal to 15 per cent of its total turnover.  Its Assets in G-Sec during the year preceding the year of application should be at least equal to 15 per cent of its total assets Subsidiaries/Joint ventures set up in India by entities incorporated abroad,  The applicant should have approval of Foreign Investment Promotion Board.  The parent foreign company directly or through its subsidiaries should have been in PD business for three years or more in active markets.  Such entity should suitably ring fence its system from its parent and associates
  4. 4. Eligibility Conditions – Bank PD  Minimum net owned funds (NOF) of Rs. 1,000 crore.  Minimum Capital to Risk Weighted Assets Ratio (CRAR) of 9 per cent.  Net non-performing assets (NPA) of less than 3 per cent and  a profit making record for last three years. Additional Conditions  The applicant bank should have approval of Department of Banking Regulation, Central Office, Reserve Bank of India, Mumbai.  Applicant bank should submit an annual target along with plan of action for turnover to be achieved on behalf of mid-segment and retail investors at the time of submission as applicable to existing PDs.  The annual target for July 2014-June 2015 should not be less than 150 per cent of minimum NOF for standalone PDs and 100 per cent of minimum NOF for bank PDs. The target will be reviewed annually.
  5. 5. Role and obligations of the PDs  PDs are expected to play an active role in the G-Sec market, both in its primary and secondary market segments through various obligations like  participating in Primary auction,  market making in G-Secs,  predominance of investment in G-Secs,  achieving minimum secondary market turnover ratio,  maintaining efficient internal control system for fair conduct of business etc.  A PD is required to have a standing arrangement with RBI based on the execution of an undertaking and the authorization letter issued by RBI every three years. Undertaking will be based on passing of a fresh Board resolution by the PD every three years.
  6. 6. Facilities from RBI  access to Current Account facility with RBI;  access to Subsidiary General Ledger (SGL) Account facility with RBI;  access to e-Kuber (Core Banking system of RBI)facility for primary auction;  permission to borrow and lend in the money market including call money market and to trade in all money market instruments;  memberships of electronic dealing, trading and settlement systems (NDS platforms/INFINET/RTGS/CCIL);  access to the Liquidity Adjustment Facility (LAF) of RBI;  access to liquidity support from RBI under a scheme separately notified for standalone PDs; and  access to OMO by RBI.
  7. 7. Returns Statements / Returns required to be submitted by PDs to IDMD / Non IDMD Sr. No. Return/Report Periodicity Last date for submission 1 PDR-I* (Sources and application of funds maintained on daily basis) Fortnightly Next working day of the reporting fortnight. 2 PDR-II* (Securities market turnover on monthly basis) Monthly 10th of the following month. 3 PDR-III* (Statement on capital adequacy) Quarterly 15th of the month following the reporting quarter 4 PDR IV* (Financial and balance sheet indicators) Quarterly 15th of the month following the reporting quarter. 5 Return on FRAs / IRS* Monthly 10th of the following month. 6 Annual Report & Annual Audited A/cs Annual As soon as annual accounts are audited and finalized. 7 Auditor's Certificate on Net Owned Funds Yearly 30th June. 8 Details of dividend declared during the accounting year Yearly Within a fortnight from the payment of dividend. 9 Return on FRAs / IRS Fortnightly MPD 10 Statement showing balances of Govt. Securities held on behalf of each Gilt A/c holder Half-Yearly PDO 11 Return on Call Money transactions with Commercial Banks Fortnightly DEPR 12 Information for Issue of Commercial Paper On each issue of CP MPD
  8. 8. Underwriting Commitment - MUC The underwriting commitment on dated securities of Central Government will be divided into two parts –  a) Minimum Underwriting Commitment (MUC), and  b) Additional Competitive Underwriting (ACU).  The MUC of each PD will be computed to ensure that at least 50 percent of the notified amount of each issue is mandatorily underwritten equally by all the PDs and will be communicated by RBI for each auction.  For example, with the current number of PDs at 21, each PD will be deemed to underwrite about 2.38 per cent of the notified amount of each auction as MUC.  The MUC will be uniform for all PDs, irrespective of their capital or balance sheet size. Underwriting Commission on MUC  Those PDs who succeed in the ACU for 4 per cent and above of the notified amount of the issue, will be paid commission on the MUC at the weighted average of all the accepted bids in the ACU.  Others will get commission on the MUC at the weighted average rate of the three lowest accepted bids in the ACU.
  9. 9. Underwriting Commitment - AUC  In the ACU auction, each PD would be required to bid for an amount at least equal to its share of MUC.  A PD cannot bid for more than 30 per cent of the notified amount in the ACU auction.  Bids will be tendered by the PDs within the stipulated time, indicating both the amount of the underwriting commitment and underwriting commission rates.  All successful bidders in the ACU auction will be paid underwriting commission on the ACU segment as per the auction rules.  Underwriting commission will be paid on the amount accepted for underwriting by the RBI by credit to the current account of the respective PDs
  10. 10. Instrument Name XXXXXXXX Auction Type Multiple Notified amount (NA) 4200 Total No. of PDs (n) 21 Minimum Underwriting Commitment (MUC) 2100 Per PD MUC (MUC/n) 100 Total PD commitment under MUC collectively (Adjusted MUC) 2100 Additional Competitive Underwriting (ACU) ACU = (NA - Adjusted MUC) 2100 Minimum bidding by each PD in ACU (equal to per PD MUC) 100 Total underwriting commitment for each PD under MUC and ACU 200 Total Underwriting ( 212 *19) 4200 Minimum allotment to a PD to be eligible for higher commission on MUC i.e. min 4% of Notified Amoun 168 Illustration showing the underwriting amount, cut-off of fee quoted and commission payable to PDs
  11. 11. Sr No PDs participate d Amount of bid in ACU (Rs. Cr) Cumulative Amount (Rs. Cr) Underwriting fee (in paise / Rs.100) Amount of bid * U/w fee Remarks Weighted Average underwriting fee (paise / Rs.100) 1 A ! 150.00 1.52 228.00 1.52 2 B 155.00 305.00 2.56 396.80 2.05 3 A 60.00 365.00 3.50 210.00 Three lowest bids 2.29 4 C 95.00 460.00 3.70 351.50 2.58 5 B 200.00 660.00 3.94 788.00 2.99 6 B 25.00 685.00 4.00 100.00 3.03 7 D 120.00 805.00 4.00 480.00 3.17 8 E 95.00 900.00 4.49 426.55 3.31 9 F 70.00 970.00 4.50 315.00 3.40 10 G 50.00 1020.00 4.75 237.50 3.46 11 E 115.00 1135.00 4.90 563.50 3.61 12 C 90.00 1225.00 4.94 444.60 3.71 13 F 220.00 1445.00 4.95 1089.00 3.90 14 G 200.00 1645.00 5.00 1000.00 4.03 15 H 120.00 1765.00 5.00 600.00 4.10 16 I 120.00 1885.00 5.00 600.00 4.15 17 I 109.00 1994.00 5.00 545.00 CUT-OFF 4.20 Bids submitted under Additional Competitive Underwriting Auction
  12. 12. Sr No PDs participate d Amount of bid in ACU (Rs. Cr) Cumulative Amount (Rs. Cr) Underwriting fee (in paise / Rs.100) Amount of bid * U/w fee Remarks Weighted Average underwriting fee (paise / Rs.100) 18 I 25.00 2019.00 5.50 137.50 4.22 19 J 120.00 2139.00 5.94 712.80 4.31 20 K 120.00 2259.00 6.00 720.00 4.40 21 L 120.00 2379.00 6.00 720.00 4.48 22 M 55.00 2434.00 6.50 357.50 4.53 23 N 120.00 2554.00 6.94 832.80 4.64 24 O 120.00 2674.00 7.00 840.00 4.75 25 P 120.00 2794.00 7.00 840.00 4.84 26 Q 120.00 2914.00 7.00 840.00 4.93 27 R 106.00 3020.00 8.00 848.00 5.04 28 S 106.00 3126.00 8.50 901.00 5.16 29 M 80.00 3206.00 9.00 720.00 5.25 30 K 100.00 3306.00 9.25 925.00 5.38 Rate of commission payable to PDs on MUC for those who have been allotted an amount >= 4% of ACU amount 4.20 (weighted average of all allotted bids) Rate of commission payable to other PDs on MUC 2.29 (weighted average of three lowest bids)
  13. 13. PD Wise eligible commission on ACU and ACU Allotment [a] [b] [c] [d]={[b]*10000000*[c]/10 0}/100 Successful PDs Successful bids in ACU (Rs. Cr) Underwriting fee bid (in paise / Rs.100) Bid wise commission payable on ACU (In Rs.) A 150 1.52 228,000.00 A 60 3.50 210,000.00 A Total 210 438,000.00 B 155 2.56 396,800.00 B 200 3.94 788,000.00 B 25 4.00 100,000.00 B Total 380 1,284,800.00 C 95 3.70 351,500.00 C 90 4.94 444,600.00 C Total 185 796,100.00 D 120 4.00 480,000.00 D Total 120 480,000.00 E 95 4.49 426,550.00 E 115 4.90 563,500.00 E Total 210 990,050.00 F 70 4.50 315,000.00 F 220 4.95 1,089,000.00 F Total 290 1,404,000.00 G 50 4.75 237,500.00 G 200 5.00 1,000,000.00 G Total 250 1,237,500.00 H 120 5.00 600,000.00 H Total 120 600,000.00 I 120 5.00 600,000.00 I 101 5.00 505,000.00 I Total 221 1,105,000.00
  14. 14. PD MUC amount accepted ACU amount accepted Amount Accepted AUC >= 4% MUC Fee Commnon MUC Commn on ACU Total Commission A 106 210 316 YES 4.20 445,200 438,000 883,200 B 106 380 486 YES 4.20 445,200 1,284,800 1,730,000 C 106 185 291 YES 4.20 445,200 796,100 1,241,300 D 106 120 226 NO 2.29 242,740 480,000 722,740 E 106 210 316 YES 4.20 445,200 990,050 1,435,250 F 106 290 396 YES 4.20 445,200 1,404,000 1,849,200 G 106 250 356 YES 4.20 445,200 1,237,500 1,682,700 H 106 120 226 NO 2.29 242,740 600,000 842,740 I 106 221 327 YES 4.20 445,200 1,105,000 1,550,200 Underwriting Commission on MUC & AUC
  15. 15. J 106 0 106 NO 2.29 242,740 0 242,740 K 106 0 106 NO 2.29 242,740 0 242,740 L 106 0 106 NO 2.29 242,740 0 242,740 M 106 0 106 NO 2.29 242,740 0 242,740 N 106 0 106 NO 2.29 242,740 0 242,740 O 106 0 106 NO 2.29 242,740 0 242,740 P 106 0 106 NO 2.29 242,740 0 242,740 Q 106 0 106 NO 2.29 242,740 0 242,740 R 106 0 106 NO 2.29 242,740 0 242,740 S 106 0 106 NO 2.29 242,740 0 242,740 TOTAL 2014 1986 4000 6,029,280 8,335,450 14,364,730 PD MUC amount accepted ACU amount accepted Amount Accepted AUC >= 4% MUC Fee Commnon MUC Commn on ACU Total Commission
  16. 16. Secondary Market activities  Market making in G-Sec: PDs should offer two-way prices in G-Sec through the Negotiated Dealing System-Order Matching (NDS-OM), over-the-counter (OTC) market and recognized Stock Exchanges in India and take principal positions in the secondary market for G-Sec.  Turnover ratio: Turnover ratio is the ratio of total purchase and sales during the year in the secondary market to average month-end stocks).  A PD should annually achieve a minimum Turnover Ratio of 5 times for Government dated securities and 10 times for T-Bills/CMBs of the average month-end stocks.  The turnover ratio in respect of outright transactions should not be less than 3 times in Government dated securities and 6 times in T-Bills/CMBs
  17. 17. RBI Annual Report 2014-15  Reserve Bank paid total underwriting commission of Rs 33 cr to PDs during 2014-15 as compared to 481 cr during 2013-14.  Underwriting commission was on the lower side as compared to last year due to  softening of yields during the year (10 year benchmark yield decreased by around 86 bps)  on account of various reasons like RBI rate cut by 75 bps,  softening of crude prices;  fall in CPI and WPI etc.  As the market conditions were gentle and kind. and risk of devolvement reduced, PDs demanded less underwriting commission as compared to last year when market conditions turned volatile after taper tantrum by US Fed in May 2013  With relatively comfortable liquidity and stable market conditions during 2014-15, there was lower devolvement of Rs 5,300 Cr on primary dealers (PDs) on three occasions as compared with 26 instances amounting to Rs 17,500 Cr in 2013-14.
  18. 18. When Issued (WI) transactions in GSec ‘When, as and if issued’ (commonly known as ‘when-issued’ (WI)) security refers to a security that has been authorized for issuance but not yet actually issued. ‘WI’ trading takes place between the time a new issue is announced and the time it is actually issued. All 'when issued' transactions are on an 'if' basis, to be settled if and when the actual security is issued. Transactions in a security on a ‘When Issued’ basis shall be undertaken in the following manner.  ‘WI’ transactions can be undertaken in the case of securities that are being reissued as well as newly issued, on a selective basis.  ‘WI’ transactions would commence on the issue notification date and it would cease on the working day immediately preceding the date of issue.  All ‘WI’ transactions for all trade dates will be contracted for settlement on the date of issue.  At the time of settlement on the date of issue, trades in the ‘WI’ security will be netted off with trades in the existing security, in the case of reissued securities.
  19. 19. When Issued (WI) transactions in GSec  ‘WI’ transactions may be undertaken only on NDS-OM.  Only PDs can take a short position in the ‘WI’ market. In other words, non-PD entities can sell the ‘WI’ security to any counterparty only if they have a preceding purchase contract for equivalent or higher amount.  Open Positions in the ‘WI’ market are subject to the following limits:  In case a PD is unable to deliver securities to the buyer after the auction on the settlement (or issue) date, the transaction will be settled as per the default settlement mechanism of CCIL.  In the event of cancellation of the auction for whatever reason, all ‘WI’ trades will be deemed null. Category Reissued security Newly issued security Non-PDs Long Position, not exceeding 5 per cent of the notified amount. Long Position, not exceeding 5 per cent of the notified amount. PDs Long or Short Position, not exceeding 10 per cent of the notified amount Short Position not exceeding 6 per cent and Long Position not exceeding 10 per cent of the notified amount.
  20. 20. Short Sale in GSec  PD are allowed to execute the sale leg of short sale transactions in the OTC market, in addition to the NDS-OM platform;  PD can undertake short position (face value) in any security subject to the following limits:  Liquid securities: 0.75% of the total outstanding stock issued of each security or Rs. 600 crore, whichever is lower.  Illiquid securities: 0.25% of the total outstanding stock issued of each security.  In case a liquid security becomes illiquid during the period of short sale resulting in a lower short sale limit, a bank/PD can continue to hold the already executed short position till it is closed out  The short sale position executed in the OTC market should be reported on the NDS-OM platform within 15 minutes of the execution of the trade  Banks / PDs should submit a report of the daily security-wise short sale position
  21. 21. Annexure 12/5/2015 Reserve Bank of India - About Us data:text/html;charset=utf-8,%3Ch2%20class%3D%22page_title%22%20style%3D%22font-family%3A%20Arial%2C%20Helvetica%2C%20sans-serif%3B%… 1/2 ABOUT US List of Primary Dealers in Government Securities Market (As on July 13, 2015) STANDALONE PRIMARY DEALERS BANK PRIMARY DEALERS ICICI Securities Primary Dealership Limited ICICI Centre H.T.Parekh Marg Churchgate Mumbai­ 400 020 Phone: (022) 22882460/70, 66377421 Bank of America Treasury Operations Gr.Floor, Express Towers Nariman Point, Mumbai­ 400 021 Phone: (022) 66323000 extn.3150 Morgan Stanley India Primary Dealer Pvt. Ltd. 18F / 19F One Indiabulls Centre Tower 2, Jupiter Mills Compound Elphinstone Road Mumbai ­ 400013 Phone : (022) 61181000 Fax : (022) 61181011 Bank Of Baroda Specialised Integrated Treasury 4th & 5th Floor, Baroda Sun Tower, C­34, G­Block, Bandra Kurla Complex Bandra East, Mumbai­400 051 Phone:(022) 66363636 / 67592705 Nomura Fixed Income Securities Pvt. Ltd. Ceejay House, 11th Level Plot F, Shivsagar Estate Dr.Annie Besant Road Worli Mumbai ­ 400 018 Phone : (022) 40374037 Fax : (022) 40374111 Canara Bank Domestic Back Office Integrated Treasury Wing VI Floor, Canara Bank Building C­14, G Block, Bandra Kurla Complex Bandra East Mumbai­ 400 051 Phone: (022) 26725126, 123 PNB Gilts Ltd. 5, Sansad Marg New Delhi­ 110 001 Phone: Mumbai ­ (022) 22693315/17 New Delhi ­ (011) 23325751, 22693315/17 Citibank N.A FIFC, 12th floor, C­54 and 55, G block, Bandra Kurla Complex, Mumbai – 400 051. Phone:(022) 6175 7187 SBI DFHI Ltd 3rd Floor, Voltas House, 23, J.N.Heredia Marg, Ballard Estate, Mumbai­ 400 001 Phone:(022) 22625970/73, 22610490 ,66364696 Corporation Bank Investment & International Banking Division 15, Mittal Chambers, Nariman Point Mumbai­400 021 Phone:(022) 22833238/22023304, 22832429/22022796/22871054 STCI Primary Dealer Limited Marathon Innova, Marathon Nextgen Compound, Off Ganpatrao Kadam Marg, Lower Parel(W), Mumbai­ 400 013 Phone:(022) 30031100, 66202261 /2200 HDFC Bank Ltd. Treasury Mid Office, 1st Floor,HDFC Bank House Senapati Bapat Marg, Lower Parel Mumbai­ 400 013 Phone:(022) 24904702/4935/ 3899,66521372/9892975232 Goldman Sachs (India) Capital Markets Pvt. Ltd. 951­A, Rational House, Appasaheb Marathe Marg, Prabhadevi, Mumbai 400 025 Phone : (022) 66169000 Hongkong and Shanghai Banking Corpn. Ltd.(HSBC) Treasury Services 52/60,Mahatma Gandhi Road Mumbai­ 400 001 Phone:(022) 22681031/34/33, 22623329/22681031/34/38   J P Morgan Chase Bank N.A, Mumbai Branch J.P. Morgan Tower Off C.S.T. Road, Kalina Santacruz (East) Mumbai ­ 400 098 Phone ­61573000 Fax­ 61573990 & 61573916   Kotak Mahindra Bank Ltd. 27BKC, 5th Floor Plot No. C­27, G­Block Bandra Kurla Complex Bandra East Mumbai 400 051. Phone:(022) 6659 6022/6454, 66596235/6454
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