Changes in direction in money markets are welcome – Commentary
Main changes in the 2021 guidelines
In December 2020, the Reserve Bank of India (RBI) presented a draft of instructions on the money markets at maturity, notice and term with “the objective of standardizing products in terms of issuers, investors and other participants ”and to“ streamline existing regulations covering different money market products. ”Following comments from market participants in April 2021, the RBI issued general instructions on maturity money markets, on notice and eventually.
“Call money” means to borrow or lend unsecured funds overnight. “Notice money” borrows or lends unsecured funds for up to 14 days, while “term money” borrows or lends unsecured funds for more than 14 days and up to one year.
The call, notice and futures money markets were regulated by the RBI General Instructions of 2016, which applied to commercial banks, cooperative banks, and primary traders. These guidelines were extended to payment banks and small finance banks in 2018, and to regional rural banks in 2020. The 2021 general guidelines consolidate all previous instructions, and specifically authorize commercial banks, payment banks, small finance banks, regional rural banks, cooperatives, banks and primary dealers to participate in call, notice and term money markets, both as borrowers and as lenders.
Key changes in Orientations 2021
While the 2021 guidelines are largely in line with the 2016 version, key changes have been introduced. Although there are similar prudential limits for borrowing operations in the call, notice and term money markets, a participant can now decide on prudential limits for lending operations within the regulatory framework prescribed by the RBI. with the approval of its board of directors.
The 2021 guidelines allow the cancellation and termination of sight, notice and term payment transactions. While sight, notice, or forward money transactions should not normally be canceled, a notice or forward money transaction can now be terminated prior to maturity at a mutually agreed price. Any cancellation or termination must be reported on the Negociated Dealing System-CALL (NDS-CALL) platform, the electronic trading platform for the execution and reporting of transactions on the call money markets, notice and eventually, within 15 minutes of this action. .
The 2021 instructions allow the RBI or anyone authorized by the RBI to publish anonymized data relating to transactions in call, notice and futures money markets. The RBI can, among other sanctions, prohibit any offender from making call, advice and futures trading in the money markets for up to one month after giving them the opportunity to defend themselves. The RBI may make such actions public. As in the 2016 guidelines, participants are free to decide on interest rates for operations on call, notice and forward money markets. Participants should follow standard market practices, methodologies and documentation prescribed by the Fixed Income Money Market and Derivatives Association of India and the RBI with respect to call, notice and term fund transactions.
Participants in the call, notice and futures money markets are also required to join the NDS-CALL platform. Call, notice and money market futures transactions, other than those executed on the NDS-CALL platform, must be reported to the NDS-CALL platform within 15 minutes of their execution by the trading counterparties or by the relevant electronic trading platform. The RBI may request additional information from those involved in such transactions. Call, notice and money futures transactions must be executed on over-the-counter markets, including the NDS-CALL platform or any electronic trading platform authorized by the RBI. The call, notice and futures market is open from 9 a.m. to 5 p.m. each working day.
Critics may argue that the changes are not substantial and are inconsequential. However, the inclusion of a wider set of participants in a consolidated framework and the relaxation of certain controls on call, notice and futures transactions in money markets, such as the authorization of cancellations, is a recognition by the RBI of the growing maturity of the financial sector. It also illustrates the RBI’s desire to systematize a patchwork of regulations. The 2021 guidelines are a welcome step in the right direction.
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