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Mumbai, Sept. 22 The Reserve Bank of India has cautioned market participants in the Government securities that they should provide sufficient funds in their current account with the RBI on the auction settlement day before 3 p.m, in case of a primary auction. Or else it would be treated as an instance of SGL bouncing, the apex bank said in a notification issued on Monday.

The RBI also said that dealers will be penalised if they don’t provide the funds before auction settlements.

Some primary dealers and banks are meeting the fund requirements of primary auction allotments from their receivables in the secondary market, said the RBI.

Dealers are allowed to sell the stock on the same day as it has been allotted only in order to facilitate distribution of the stock and minimise the risk on the part of the allottees. This should not be done to meet the fund requirement of primary market settlements, it said.

“The primary auction settlement is independent from the secondary market settlements and therefore has to be funded separately,” RBI said.

According to a senior bank official the RBI is taking a precaution, perhaps, because there is a possibility that dealers may leverage their positions given the shortage of funds in the market.

“The RBI is being cautious in the light of the developments in the global market, which may be consequence of over-leveraging,” he said.

However, the head of a primary dealership said that the RBI notice is merely a reiteration of an existing regulation and may have been prompted by some stray incidents. “Market participants have the flexibility to sell the auction securities on the same day they come into the portfolio, in order to minimise the price risk. The RBI is merely saying that dealers should first own the security and then sell it. It is only related to the timing of the payment, and does not have any other market implications,” he said.

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