Sebi allows MFs to net of trades in G-Secs

Written by Markets Bureau | Mumbai, Apr 16 | Updated: Apr 18 2008, 05:20am hrs
In a move to develop the debt market and create a level-playing field for mutual funds which trade in government securities, the Securities and Exchange Board of India (Sebi) has allowed netting of trades to MFs in the G-Sec market. Sebi said it has now decided to allow MFs to sell G-Secs contracted for purchase in DVP III mode in accordance with the guidelines issued by Reserve Bank of India (RBI) in this regard.

Under the DVP III mode of settlement, it is possible to sell government securities, already contracted for purchase without taking delivery, provided the transaction is guaranteed by an approved central counterparty, Clearing Corporation of India Ltd (CCIL). Mutual funds cannot now sell such securities contracted for purchase as they are required under Sebi regulations to take the actual physical delivery.

The Sebi board at its meting in Mumbai on Wednesday tood a decision to this effect. This will put MFs on par with other market participants like banks, primary dealers (PDs) and insurance companies as they can now go in for the net settlement of G-Sec transactions.

Sebi board also approved participation of MFs in when-issued market. When-issued is a sub segment of the G-Sec market, where the transactions takes place ahead of the issuance of securities. Normally, the time period of this market is a week, ahead of issuance of securities. This market is significant from the point of view that it allows players to take position in the security ahead of the issuance of it and help the price discovery.

Sebi said necessary amendments to its MF regulations will be caried out soon to allowing MFs participation in G-Sec market. Explaining the modalities of DVP III mode, maket participants said, it works like trade to trade (TTT) in the equities market. In this segment of the market, players are not allowed of netting their positions and every trade (buy or sell) results in delivery. However, with neting allowed to MFs, their contribution to G-Sec turnover is expected to rise significantly, they added.