What changed
Previously, PDs had to keep all government securities in the trading book and mark them to market, with only net depreciation provided for. Now, standalone PDs can classify a portion of their G-sec portfolio as HTM, subject to board-approved policies and quarterly transfer limits. Only securities acquired in primary auctions are eligible, and the HTM amount is capped at 100% of the preceding year's paid-up capital.
What it means for you
This move reduces the P&L impact of market volatility for standalone PDs by allowing them to hold a portion of G-secs at cost. It provides balance sheet relief and encourages participation in primary auctions. However, transfers to/from HTM require board approval and must be at the least of cost, book value, or market value, with any depreciation fully provided for. Banks doing PD activities departmentally must continue following existing bank investment norms.
What you must do
- Formulate a board-approved policy for HTM classification and transfer of government securities.
- Ensure only securities acquired in primary auctions are classified as HTM, capped at 100% of paid-up capital as of end-March of the previous year.
- Limit transfers to/from HTM to once per quarter and record at the least of acquisition cost, book value, or market value, providing for any depreciation.
- Direct concurrent auditors to verify compliance with these instructions.
- Note that this facility is available only until end-March 2010; plan accordingly.
Who it affects
Standalone Primary Dealers, Banks undertaking PD activities departmentally (must follow existing bank norms)
Can PDs classify any government security as HTM?
No, only securities acquired through primary auctions are eligible for HTM classification.
What is the maximum amount that can be classified as HTM?
Up to 100% of the PD's paid-up capital as at end-March of the preceding financial year.
How often can securities be transferred to/from HTM?
Transfers are permitted only once per quarter, with board approval and at the least of cost, book value, or market value.