What changed
RBI announced the introduction of STRIPS in government securities, effective April 1, 2010, as per the Annual Policy Statement 2009-10. This allows separate trading of interest and principal components of eligible government securities, creating zero-coupon instruments.
What it means for you
Banks and institutional investors gain a new tool for asset-liability management with zero reinvestment risk, as STRIPS eliminate periodic interest payments. The move also helps develop a market-determined zero-coupon yield curve, enhancing pricing benchmarks for fixed-income markets.
What you must do
- Review the detailed operational guidelines enclosed with the circular for stripping/reconstitution processes.
- Update internal systems and trading platforms to handle STRIPS transactions from April 1, 2010.
- Train treasury and risk management teams on the features and uses of zero-coupon sovereign bonds.
- Assess potential benefits for asset-liability matching and retail product offerings using STRIPS.
Who it affects
All market participants in government securities, Institutional investors (banks, insurance companies, pension funds), Retail and non-institutional investors, Treasury departments of banks
What are STRIPS in government securities?
STRIPS allow the separate trading of the interest and principal components of eligible government securities, creating sovereign zero-coupon bonds with no periodic interest payments.
When do these guidelines take effect?
The guidelines come into effect from April 1, 2010, as per the RBI circular dated March 25, 2010.
How do STRIPS benefit investors?
STRIPS eliminate reinvestment risk since they are discounted instruments with no intermediate cash flows, making them useful for asset-liability management and attractive to retail investors.