The Hindu Business Line : Gilt-edged trading

TRADING IN GOVERNMENT securities is set to get a big boost with the Reserve Bank of India formally launching an electronic order matching module on its Negotiated Dealing System (NDS). The new system — NDS-OM, for short — is an anonymous order matching system where the identity of parties is not revealed before or after the trade. The need for such a system, which is similar to the hugely successful model pioneered by the National Stock Exchange for the equity segment, has been felt for a while. Ever since the NDS became operational, in February 2002, there has been no dearth of either know-how or technological infrastructure. However, while the NDS achieved success in such areas as paperless trading and considerably improved transactional efficiency and transparency, it could not provide a user-friendly trading platform for Gilts. The Credit Policy for 2004-05 promised a review of the NDS specifically to remove this shortcoming.

The R. H. Patil Committee, which undertook the review and conceptualised the NDS-OM, reported that considerable investment in time and effort had gone into preparing the initial set of users: banks, primary dealers and financial institutions, all of whom are members of the NDS and are regulated by the Reserve Bank of India. It is good that they are not going to be hustled into the new system; the use of the NDS-OM trading module is voluntary for now, and the conventional telephone-based trading option will also be available. A compulsory migration to the new system can be thought of later after the players acquire familiarity. There are very good reasons for such a gradualism in introducing a new Gilts trading platform. The G-Sec market is now almost entirely wholesale, with banks, primary dealers, financial institutions and mutual funds as the major players. Earlier attempts to introduce electronic trading in Gilts through the stock exchange mechanism were not successful. As far back as 1994 the NSE had promoted a Wholesale Debt Market Segment (WDM) but it is the telephone market (OTC) that has dominated securities trading.

This is largely attributable to a regulatory overlap; the principal players — banks and other financial intermediaries — trade on a principal-to-principal basis and are regulated by the RBI. None of them is a member of a stock exchange. Brokers, who come under the purview of the Securities and Exchange Board of India, do facilitate trades but cannot be counterparties. Hence, though a substantial percentage of trades in the wholesale market happens with the intervention of brokers, none is done on the WDM platform. In fact, it is this fear among brokers of being marginalised in a new anonymous order matching system that reportedly delayed the launch of the NDS-OM module. By allowing the telephone system to continue, in tandem, it is hoped the grievances of the brokers have been addressed, at least partially. Regulatory overlap is a major issue not just in securities trading. The recent report of the Justice Kania Committee, which looked into the SEBI Act, has recommended that the Government take a considered decision looking at the roles of the various financial intermediaries.

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