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RBI/2005-06/309
IDMD.No 03/11.01.01(B)/2005-06
February 28, 2006
All Scheduled Commercial Banks (other than RRBs
and LABs)
& Primary Dealers
Dear Sirs,
Secondary Market Transactions in
Government Securities - Intra-day short-selling
Please refer to paragraph 64 of
the Reserve Bank’s Mid-Tem
Review of Annual Policy Statement for the year 2005-06 released on October 25,
2005, wherein it was proposed to introduce intra-day short selling in Government
Securities. Accordingly, in continuation of our circular IDMD.PDRS.05/10.02.01/2003-04
dated March 29, 2004, wherein sale of a government security, already contracted
for purchase, was permitted, the following guidelines are being issued.
2. Banks and Primary Dealers
(PDs) may undertake outright sale of Central Government dated security
that they do not own, subject to the same being covered by outright purchase
from the secondary market within the same trading day.
3. Intra-day short selling
is being permitted subject to the following conditions:
a. Intra-day short sale transaction
and also the covering of short position should be executed only on the Negotiated
Dealing System – Order Matching (NDS-OM) platform.
b. Under no circumstances should
the short position be left uncovered at the end of the day. Inability to cover
a short position during the trading day itself shall be treated as an instance
of ‘SGL bouncing’ and will be liable to the disciplinary action prescribed
in respect of SGL bouncing, besides attracting such further regulatory action
as necessary.
c. At no point of time should
a bank/PD accumulate a short position in excess of 0.25 per cent of the outstanding
stock of a security. The information regarding the outstanding
stock of each Government of India dated security is being made available
on the RBI website (URL: www.rbi.org.in)
with effect from March 1, 2006 to facilitate monitoring in this regard.
d. Gilt Accounts Holders (GAHs),
under CSGL facility are not permitted to undertake intra-day short selling.
Those entities providing CSGL facility are required to ensure that no short-sale
is undertaken by the GAHs.
4. Before actually undertaking
transactions in terms of this circular, banks/PDs are required to have in
place a written policy on ‘intra-day’ short sale which should be approved by
their respective Boards of Directors. The policy should lay down the internal
guidelines which should include, inter alia, risk limits on short position,
an aggregate nominal short sale limit (in terms of Face Value) across all eligible
securities, the internal control systems to ensure adherence to regulatory and
internal guidelines, reporting of short selling activity to the top management
and the RBI, procedure to deal with violations, etc. (A copy of the said policy
should be sent for prior information to the Internal Debt Management Department
(IDMD) of the RBI.) A bank/PD must have in place a system to detect violations
if any, immediately, certainly within the same trading day. A bank/PD which
cannot ensure such prompt detection should not undertake short sale.
5. The concurrent auditors
should specifically verify compliance with these instructions and report violations,
if any, on the date of trade itself, within a reasonably short time, to the
appropriate internal authority. As part of their monthly reporting, concurrent
auditors may verify whether the independent back office has taken cognizance
of all such lapses and reported the same within the required time frame. Any
violation of regulatory guidelines noticed in this regard should immediately
be reported to the Public Debt Office (PDO), Mumbai and IDMD, Reserve Bank of
India.
6. Banks / PDs are also required
to report, as per the format in the Annex, to IDMD, RBI on
a monthly basis, the daily security-wise maximum intra-day short sale position.
This report will be sent on the first working day of the succeeding month.
7. These guidelines will be
reviewed periodically to consider modifications and continuance, as appropriate.
Yours faithfully,
(G.Mahalingam)
Chief General Manager
Annex
Monthly report of the daily security-wise maximum
intra-day short sale position
Name of the reporting institution:
Report for the month of:
(in Rs. Crores)
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Trade Date
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Nomenclature of the Security
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Total stock issued of the security *
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0.25 % of the outstanding stock
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Maximum intra-day short position
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* available on RBI website
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