In-Depth Insight: RBI's Government Securities Lending Directions Unpacked

The Reserve Bank of India (RBI) issued the Master Directions on Government Securities Lending (GSL) on December 27, 2023, leveraging authority granted under the RBI Act sections 45W and 45U. These directions mark a pivotal step toward enhancing transparency and accessibility within the securities lending domain, following an invitation for stakeholder feedback on the Draft Master Direction earlier in February 2023 (Click Here).

Understanding GSL Transactions

GSL transactions involve lending eligible government securities against collateral for a predetermined duration. It's essentially an agreement wherein a lender loans out securities to a borrower against collateral of other government securities, with a mutual understanding that the borrower returns the borrowed security while the lender reciprocates by returning the collateral at the transaction's conclusion.(Click Here)

Key Highlights from the Directions

GSL Fee: This represents the agreed-upon fee paid by the lender for undertaking the GSL transaction.

A)    Eligible Securities: The GSL transaction covers government securities issued by the Central Government, excluding Treasury Bills, along with loans permitted for securities acquired through Repo transactions and those obtained under repo and placed as collateral in GSL transactions, including those facilitated through the Reserve Bank's Liquidity Adjustment Facility.(Click Here)

B)    Eligible Participants: Entities eligible for GSL transactions include regulated companies, listed or unlisted, engaging in repo transactions in line with Repurchase Transactions (Repo) (Reserve Bank) Directions, 2018. Additionally, entities qualified to conduct short sale transactions, as per the Short Sale (Reserve Bank) Directions, 2018, are also eligible. (Click Here)

Tenor: GSL transactions must span a minimum of one day and a maximum duration as prescribed for covering short sales under RBI’s Secondary Market Transactions in Government Securities – Short Selling. (Click Here)

Trading Platform & Settlement: GSL transactions may occur via mutually agreed trading mechanisms, whether bilateral or multilateral, order-driven or quote-driven, and settled on a Delivery versus Delivery basis. Settlements can be facilitated through Clearing Corporation of India Ltd. (CCIL) or any RBI-approved Central Counterparty (CCP).

Pricing, Haircut, & Margin: Valuation of securities/collateral at prevailing market prices in the first leg of the transaction, with haircut/margins decided by the settling CCP.

Security Borrowed & Collateral Substitution: Flexibility in utilizing borrowed securities for various purposes and replacing collateral with securities meeting CCP requirements.

Reporting of Trades: All GSL transactions must be promptly reported to CCIL or any other organization designated by the RBI within fifteen (15) minutes of execution.

Disclosure and Accounting: Organizations subject to RBI regulations must report GSL transactions as per annexed directions, while qualified participants should record transactions following relevant accounting guidelines.

Computation of Statutory Liquidity Ratio (SLR): SLR-eligible securities borrowed under GSL transactions can be counted toward the borrower's SLR, while securities lent under GSL transactions are not eligible for the lender's SLR count. However, the lender may consider SLR-eligible securities received as collateral.

Arrangement & Direction Violation: Participants must sign a standard bilateral master GSL agreement with their counterparties, in line with FIMMDA finalized documents. Violation of GSL Directions could result in a prohibition from engaging in GSL Transactions for a maximum period of one (1) month at a time, following a fair hearing. (Click Here)

Implications and Conclusion

The introduction of these Directions by the RBI holds a two-fold objective: to enable effective price discovery and augment depth and liquidity within the government securities market. By offering investors a means to leverage idle stocks and potentially enhance portfolio returns, this system envisages greater engagement and activity in the securities lending landscape.

Copy of the RBI’s Master Directions here.

This regulatory move transcends mere compliance; it aims to empower market stakeholders, fostering a more robust and adaptable financial environment. The anticipated outcomes indicate not just compliance with norms but also an enriched avenue for market participants. Stay tuned for more comprehensive insights into these transformative developments!

Updated By-

Prakhar Tiwari (Partner)

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