The Hindu Business Line : A new edge to gilt trading

GILTS TRADING IN the country is poised to make a big leap forward. A new anonymous screen-based order matching system for the debt market, on the lines of the hugely successful one that obtains on the National Stock Exchange for equities, is all set to debut. The new system, to be put through the Negotiated Dealing System (NDS), has been reviewed by a working group headed by Dr R. H. Patil. Earlier, the Reserve Bank of India, in its annual Credit Policy statement for 2004-05 while seeking a review of the NDS from the point of view of improving its operational efficiency, had suggested the introduction of a screen-based order-matching system for Gilts. The system, it is claimed, can be introduced at short notice. Leading market players — many of whom have participated in process trials — are reportedly comfortable with the system. One reason may be that even after its introduction, there is no proposal to do away with the existing telephone-based system: A mandatory migration to the new regime is possible only if there is a consensus among all leading players. For the moment there is not one even though the new system is said to be superior to the one that obtains now. For all practical purposes the only market that exists for government securities is the Over the Counter (OTC) market through telephone. Interestingly, as far back as in 1994, the NSE promoted a wholesale debt market (WDM) but for various reasons it did not achieve the desired results.

One critical intermediary, the brokers are the ones aggrieved. The Gilts market is essentially wholesale. Its major participants — banks, primary dealers, mutual funds and financial institutions — trade on a principal-to-principal basis. Brokers are not allowed as counter parties but play a facilitating role. Since banks and institutions are not members of the exchange, trades among them are put through by brokers via the WDM platform. This has led to an anomalous situation where the role of brokers is exaggerated. In fact, the brokers' opposition to the proposed system on the NDS platform is that they will lose a substantial share of their business. To begin with, they will have no access to NDS that is not an exchange under the existing securities legislation. Under a dynamic anonymous order matching system they may well be squeezed out. Needless to add, the role of brokers will have to be redefined as the new technology is put in place. A consolidation phase among intermediaries seems inevitable, as happened among those dealing in equities.

The difference, of course, is that the debt market has resisted previous attempts to go retail. Brokers who service retail equity investors are not particularly enthused here. Not only is the level of retail participation in the Gilts segment low but the brokerage is negligible compared to what they earn in equity trades. One other obstacle to the new system is the lack of regulatory clarity: Who will have primary jurisdiction, the RBI or the Securities and Exchange Board of India? Hopefully, the brokers' fears of marginalisation as also the regulatory issues will be addressed soon, and the new system will get going.

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