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RBI/2007-2008/57
IDMD.PDRS.02/03.64.00/2007-08
July 02, 2007
All Scheduled Commercial Banks
(Excluding RRBs)
Dear Sir,
Master Circular: Operational guidelines for banks undertaking/ proposing to undertake Primary Dealer Business in Government Securities Market
As you are aware, the Reserve Bank of India has, from time to time, issued a number of guidelines/instructions/circulars to the Primary Dealers (PDs) in regard to their operations in the Government Securities Market. Subsequent to the expansion of the Primary Dealership system permitting banks, which fulfill certain minimum eligibility criteria, to undertake Primary Dealer activity operational guidelines were issued vide circular IDMD.PDRS.1431 /03.64.00/2006-2007 dated October 5, 2006. With a view to incorporate the changes and consolidate the instructions issued by the Reserve Bank of India, this updated Master Circular is being issued. The list of circulars consolidated is given in Appendix IV.
Please acknowledge receipt.
Yours faithfully
(G. Mahalingam)
Chief General Manager
Table of Contents
1. Primary Dealership System
1.1 Introduction
1.2 The objectives of Primary Dealer System
1.3 Eligibility conditions
1.4 Procedure for Authorisation of Primary Dealers
2. Applicability of the guidelines issued for Primary Dealers
3. Maintenance of books and accounts
4. Capital Adequacy and Risk Management
5. Supervision by RBI
6. Violation/Circumvention of Instructions
Appendices :
I. Form of Undertaking
II. Statements/Returns required to be submitted by
III. Format PDR-II
IV. List of circulars consolidated
1. Primary Dealership System
1. Introduction
In 1995, the Reserve Bank of India (RBI) introduced the system of Primary Dealers (PDs) in the Government Securities Market, which comprised of independent entities focused on Primary Dealer activity. In order to broad base the Primary Dealership system, the permitted structure of Primary Dealership business was expanded to include banks in 2006-07. As on date, there are eight standalone PDs and 10 banks authorized to undertake PD business departmentally.
1.2 The objectives of Primary Dealer System
The objectives of the PD system are :
(i) To strengthen the infrastructure in the government securities market in order to make it vibrant, liquid and broad based.
(ii) To ensure development of underwriting and market making capabilities for government securities outside the RBI so that the latter will gradually shed these functions.
(iii) To improve secondary market trading system, which would contribute to price discovery, enhance liquidity and turnover and encourage voluntary holding of government securities amongst a wider investor base.
(iv) To make PDs an effective conduit for conducting open market operations (OMO).
1.3 Eligibility conditions for banks proposing to undertake PD business (bank-PDs)
The following categories of banks would be eligible to apply for PD licence:
(i) Banks which do not have a partly or wholly owned subsidiary undertaking PD business and which fulfill the following criteria :
(a) Minimum net owned funds (NOF) of Rs.1000 crore
(b) Minimum CRAR of 9 per cent
(c) Net NPAs of less than 3 per cent and a profit making record for the last three years.
(ii) Indian banks which are undertaking PD business through a partly or wholly owned subsidiary and wish to undertake PD business departmentally by merging / taking over PD business from their partly / wholly owned subsidiary subject to fulfilling the criteria at 1.3(i)(a) to (c).
(iii) Foreign banks operating in India who wish to undertake PD business departmentally by merging the PD business being undertaken by group companies subject to fulfillment of criteria at 1.3(i)(a) to (c).
1.4 Procedure for Authorisation of bank-PDs
1.4.1 Banks eligible to apply for Primary Dealership, for undertaking PD business, may approach the Chief General Manager, Department of Banking Operations & Development (DBOD), Reserve Bank of India, Central Office, Centre I, World Trade Centre, Cuffe Parade, Mumbai-400 005. On obtaining an in-principle approval from DBOD, banks may then apply to the Chief General Manager, Internal Debt Management Department, Reserve Bank of India, 16th Floor, Central Office Building, Fort, Mumbai- 400 001 for an authorization for undertaking PD business departmentally.
1.4.2 The banks, willing to undertake the PD business by merging / taking over PD business from their partly / wholly owned subsidiary, or foreign banks, operating in India, willing to undertake PD business departmentally by merging the PD business being undertaken by group companies, will be subject to the terms and conditions, as applicable, of the undertaking given by such subsidiary/ group company till such time a fresh undertaking is executed by the bank.
1.4.3 The banks authorized to undertake PD business will be required to have a standing arrangement with RBI based on the execution of an undertaking (Appendix I) and the authorization letter issued by RBI each year (July-June).
Note: The decision to enlist a bank to undertake Primary Dealer business will be taken by Reserve Bank of India based on its perception of market needs, suitability of the applicant and the likely value addition to the system.
2. Applicability of the guidelines issued for Primary Dealers
2.1 The bank-PDs will be subjected to operational guidelines issued to Primary Dealers contained in Master Circular IDMD.PDRS.01/03.64.00/2007-08 dated July 02, 2007 and other guidelines issued to Primary Dealers from time to time, as made applicable, unless specifically stated.
2.2 The bank-PDs' role and obligations in terms of supporting the primary market auctions for issue of Government dated securities and Treasury Bills, underwriting of Dated Government Securities, market-making in Government securities and secondary market turnover of Government Securities will be as per the Master Circular IDMD.PDRS.01/03.64.00/ 2007-08 dated July 02, 2007 issued to Primary Dealers.
2.3 Bank-PDs are expected to join Primary Dealers Association of India (PDAI) and Fixed Income Money Market and Derivatives Association (FIMMDA) and abide by the code of conduct framed by them and such other actions initiated by them in the interests of the securities markets.
2.4 The requirement of ensuring minimum investment in Government Securities and Treasury Bills on a daily basis based on net call/ RBI borrowing and Net Owned Funds will not be applicable to bank-PDs which shall be guided by the extant guidelines applicable to the banks.
2.5 As banks have access to the call money market, refinance facility and the Liquidity Adjustment Facility (LAF) of RBI, bank-PDs will not have separate access to these facilities and liquidity support as available to the standalone PDs.
2.6 It is clarified that for the purpose of "when-issued trades" issued vide circular IDMD.No/2130/11.01.01 (D)/2006-07 dated November 16, 2006, bank-PDs will be treated as Primary Dealers.
2.7 Bank-PDs shall be guided by the extant guidelines applicable to the banks as regards borrowing in call/notice/term money market, Inter-Corporate Deposits, FCNR (B) loans /External Commercial Borrowings and other sources of funds.
2.8 The investment policy of the bank may be suitably amended to include PD activities also. Within the overall framework of the investment policy, the PD business undertaken by the bank will be limited to dealing, underwriting and market-making in Government Securities . Investments in Corporate/ PSU/ FIs bonds, Commercial Papers, Certificate of deposits, debt mutual funds and other fixed income securities will not be deemed to be a part of PD business.
2.9 The classification, valuation and operation of investment portfolio guidelines as applicable to banks in regard to "Held for Trading" portfolio will also apply to the portfolio of Government Dated Securities and Treasury Bills earmarked for PD business.
2.10 The Government Dated Securities and Treasury Bills under PD business will count for SLR.
2.11 Bank-PDs shall be guided by the extant guidelines applicable to the banks as regards business through brokers, ready forward transactions, interest rate derivatives (OTC & exchange traded derivatives), investment in non-Government Securities, Issue of Subordinated Debt Instruments, declaration of dividends, capital Adequacy and risk management.
3. Maintenance of books and accounts
3.1 The transactions related to Primary Dealership business, undertaken by a bank departmentally, should be executed through the existing Subsidiary General Ledger (SGL) account of the bank. However, such banks will have to maintain separate books of accounts for transactions relating to PD business (distinct from normal banking business) with necessary audit trails. It should be ensured that, at any point of time, there is a minimum balance of Rs. 100 crore of Government Securities earmarked for PD business.
3.2 Bank-PDs should subject 100 per cent of transactions and regulatory returns submitted by PD department to concurrent audit. An auditors' certificate for having maintained the minimum stipulated balance of Rs. 100 crore of Government Securities in the PD-book on an ongoing basis and having adhered to the guidelines/ instructions issued by RBI, should be forwarded to IDMD, RBI on quarterly basis.
4. Capital Adequacy and Risk Management
4.1 The capital adequacy requirement and risk management guidelines will be as per the extant guidelines applicable to banks. For the purpose of assessing the bank's capital adequacy requirement and coverage under risk management framework, the PD activity should also be taken into account.
4.2 The bank undertaking PD activity may put in place adequate risk management systems to measure and provide for the risks emanating from the PD activity.
5. Supervision by RBI
5.1 Off-site supervision: The banks authorized to undertake PD business are required to submit prescribed periodic returns to RBI promptly. The current list of such returns and their periodicity, etc. is furnished in Appendix II.
5.2 On-site inspection: RBI will have the right to inspect the books, records, documents and accounts of the banks. Bank-PDs are required to make available all such documents, records, etc. to the RBI inspectors and render all necessary assistance.
6. Violation/Circumvention of Instructions
Any violation/circumvention of the above guidelines or the terms and conditions of the undertaking executed by a bank-PD with the Reserve Bank of India (Annex I) would be viewed seriously and such violation would attract penal action including the withdrawal of authorisation for carrying on the business as a Primary Dealer, and/or imposition of monetary penalty or liquidated damages, as the Reserve Bank may deem fit.
Reserve Bank of India reserves its right to amend or modify the above guidelines from time to time, as may be considered necessary.
Appendix I
UNDERTAKING
To,
The Chief General Manager,
Internal Debt Management Department,
Reserve Bank of India,
Central Office Building,
Mumbai-400 001.
By
………………………………………………………………..
Registered Office ……………………………………………..
…………………………………………………………………
………………………………………………………………….
WHEREAS the Reserve Bank of India (RBI) has offered in principle to permit us undertake Primary Dealer activity in Government securities in accordance with the guidelines conveyed vide circular DBOD.FSD.BC.No. 64 / 24.92.001/ 2005-06 dated February 27, 2006 for the banks undertaking Primary Dealership business in Government Securities Market
AND WHEREAS as a precondition to our being authorised to undertake Primary Dealership activity we are required to furnish an undertaking covering the relative terms and conditions
AND WHEREAS at the duly convened Board of Directors meeting of ________________ on __________, the Board has authorised Shri/Smt./Kum. _________________ and Shri/Smt./Kum. __________________ to execute and furnish an UNDERTAKING to the Reserve Bank of India jointly and severally as set out below:
NOW, THEREFORE, in consideration of the RBI agreeing to permit us to undertake Primary Dealer activity, we hereby undertake and agree:
1. To commit to aggregatively bid in the auction of Treasury Bills to the extent of …….per cent of each issue of auction and for a minimum amount equal to the underwriting commitment (allotted under Minimum Underwriting Commitment and Additional Competitive Underwriting) for Government of India Dated Securities and to maintain the success ratio in aggregate winning bids at not less than 40 per cent for Treasury Bills.
2. To offer to underwrite primary issues of Government of India dated securities, Treasury Bills and State Government securities, for which auction is held, and accept devolvement, if any, of any amount as may be determined by RBI in terms of prevalent Scheme for bidding, underwriting.
3. To adhere to prudential ceilings, with the prior approval of the Board of Directors of the bank, subject to the guidelines, if any, issued by the Reserve Bank in this regard.
4. To offer firm two-way quotes through the Negotiated Dealing System/ over the counter telephone market/ recognised Stock Exchanges in India and deal in the secondary market in Government dated securities and Treasury Bills of varying maturity from time to time and take principal positions.
5. To maintain a sizeable portfolio in Government securities and to actively trade in the Government securities market.
6. To maintain separate books of account for transactions relating to PD business (distinct from the normal banking business) with necessary audit trails and to ensure that, at any point of time, there is a minimum balance of Rs. 100 crore of Government securities earmarked for PD business.
7. To achieve an annual turnover of not less than 5 times in Government dated securities and not less than 10 times in Treasury Bills of the average of month-end stocks, in the book separately maintained for the Primary Dealership business, subject to the turnover in respect of outright transactions being not less than 3 times in government dated securities and 6 times in Treasury Bills.
8. To maintain infrastructure in terms of both physical apparatus and skilled manpower for efficient participation in primary issues, trading in the secondary market, and for providing portfolio advice and education to investors.
9. To continue to have in place the “Guidelines on Securities Transaction to be followed by Primary Dealers” issued under cover of IDMC.No.PDRS/2049-A/03.64.00/99-2000 dated December 31, 1999 and Master Circular as also other necessary internal control systems for fair conduct of business and settlement of trades and maintenance of accounts.
10. To comply with all applicable Reserve Bank of India/Securities and Exchange Board of India (SEBI) requirements under the guidelines existing, and which may be laid down from time to time in this behalf, failing which RBI would be at liberty to cancel the authorisation to undertake Primary Dealer activity.
11. To abide by the code of conduct as laid down by RBI/SEBI or the Primary Dealers’ Association of India/ Fixed Income Money Market and Derivatives Association of India.
12. To maintain and preserve such information, records, books and documents pertaining to Primary Dealer activity as may be specified by the RBI from time to time.
13. To permit the RBI to inspect all records, books, information, documents and make available the records to the Inspectors and render all necessary assistance.
14. To submit in prescribed formats periodic reports including daily transactions and market information, monthly report of details of transactions in securities and risk position and performance with regard to participation in auctions, annual audited accounts and an annual performance review and such statements, certificates and other documents and information as may be specified by RBI from time to time.
15. To report the matter immediately to RBI and abide by such orders, instructions, decisions or rulings given by the RBI if and when any kind of investigation/inquiry/inspection is initiated against us by statutory/ regulatory authorities, e.g. SEBI/RBI, Stock Exchanges, Enforcement Directorate, Income-tax authorities, etc.
16. To pay an amount of Rupees Five Lakh, or as applicable, to the Reserve Bank, for violation of any of the instructions issued by the Reserve Bank in the matter or for non-compliance with any of the undertakings given hereinabove.
We do hereby confirm that the above undertakings will be binding on our successors and assigns.
Dated this day of Two Thousand
Signed, sealed and delivered by the )
within named, being the authorized )
persons, in terms of the Resolution )
No._______ of the Board of )
Directors at the duly convened )
Meeting held on in the )
in the presence of _______________ )
Signatory (i)
(ii)
Witness (i)
(ii)
Appendix II
Statements / Returns required to be submitted by banks on their Primary
Dealer business to IDMD* :
Sr. No.
Reproduced for reference with acknowledgment — Source: Reserve Bank of India · RBI/2007-2008/57 · issued 02 Jul 2007. The plain-English explanation above is BankPulse’s own independent summary.