Terminology related to Bond market – Buyback, Short sale, When Issued, DvP

Buyback of Securities

Repurchase or buyback of G-Secs is a process whereby the Government of India and State Governments buyback their existing securities, by redeeming them prematurely, from the holders.

The objectives of buyback can be reduction of cost (by buying back high coupon securities), reduction in the number of outstanding securities and improving liquidity in the G-Secs market (by buying back illiquid securities)and infusion of liquidity in the system.

The repurchase by the Government of India is also undertaken for effective cash management by utilising the surplus cash balances. For e.g. Repurchase of two securities (7.59%2016 worth ₹ 9351.563 cr and 7.02%2016 worth ₹ 6177.419 cr) was done through reverse auction on February 22, 2016. State Governments generally buy-back their high coupon (high cost debt) bearing securities to reduce their interest outflows in the times when interest rates show a falling trend.

States also retire their high cost debt pre-maturely in order to fulfill some of the conditions put by international lenders like Asian Development Bank, World Bank etc. to grant them low cost loans.

Governments make provisions in their budget for buying back of existing securities. Buyback can be done through an auction process (generally if amount is large) or through the secondary market route, i.e. NDS-OM (if amount is not large).

Delivery vs Payment

Delivery versus Payment (DvP) is the mode of settlement of securities wherein the transfer of securities and funds happen simultaneously. This ensures that unless the funds are paid, the securities are not delivered and vice versa. DvP settlement eliminates the settlement risk in transactions. There are three types of DvP settlements, viz., DvP I, II and III which are explained below:

i. DvP I – The securities and funds legs of the transactions are settled on a gross basis, that is, the settlements occur transaction by transaction without netting the payables and receivables of the participant.

ii. DvP II – In this method, the securities are settled on gross basis whereas the funds are settled on a net basis, that is, the funds payable and receivable of all transactions of a party are netted to arrive at the final payable or receivable position which is settled.

iii. DvP III – In this method, both the securities and the funds legs are settled on a net basis and only the final net position of all transactions undertaken by a participant is settled.

Liquidity requirement in a gross mode is higher than that of a net mode since the payables and receivables are set off against each other in the net mode.

When Issued

‘When Issued’, a short term of “when, as and if issued”, indicates a conditional transaction in a security notified for issuance but not yet actually issued. All “WI ” transactions are on an “if” basis, to be settled if and when the security is actually issued. ‘WI transactions in the Central G-Secs have been permitted to all NDS-OM members and have to be undertaken only on the NDS-OM platform. WI market helps in price discovery of the securities being auctioned as well as better distribution of the auction stock.

Short Sale

Short Sale is defined as sale of securities one does not own. Scheduled Commercial Banks and Primary Dealers are permitted to undertake short sale of Central Government dated securities in NDS-OM as well as OTC market, subject to limits and other terms and conditions prescribed by the RBI from time to time.

NDS-OM

In August, 2005, RBI introduced an anonymous screen based order matching module called NDS-OM. This is an order driven electronic system, where the participants can trade anonymously by placing their orders on the system or accepting the orders already placed by other participants. Anonymity ensures a level playing field for various categories of participants. NDS-OM is operated by the CCIL on behalf of the RBI. Direct access to the NDS-OM system is currently available only to select financial institutions like Commercial Banks, Primary Dealers, well managed and financially sound UCBs and NBFCs, etc. Other participants can access this system through their custodians i.e. with whom they maintain Gilt Accounts. The custodians place the orders on behalf of their customers. The advantages of NDS-OM are price transparency and better price discovery.