Reserve Bank of India vides its communication dated FINANCIAL MARKETS REGULATION DEPARTMENT Notification No. FMRD.DIRD. XX /XX.XX.XXX/2020-21 dated December 4, 2020, placed on its web site the following for your comments which can be sent to fmrdfeedback@rbi.org.in by January 31, 2021.
https://taxguru.in/rbi/rbi-releases-draft-directions-money-market-instruments.html
Let us understand these directions which are addressed to all entities/agencies eligible to deal in the call, notice, and term money market. To interpret its precepts, the following presumptions have to be made: (Exactly reproduced to avoid misinterpretations)
i. “Payment Banks means banks licensed in terms of the Reserve Bank Guidelines for Licensing of Payments Banks dated November 27, 2014, as amended from time to time.(PB)
ii. Regional Rural Bank shall have the definition assigned under clause (ja) of Section 5 of the Banking Regulation Act, 1949 (10 of 1949). (RRB)
iii. Scheduled bank means a bank included in the Second Schedule to the Reserve Bank of India Act, 1934.(SCB)
iv. Small Finance Banks means banks licensed in terms of the Reserve Bank Guidelines for Licensing of Small Finance Banks dated November 27, 2014, as amended from time to time.(SFB)
v. Primary Dealer (PD) means a Non-Banking Financial Company (NBFC) that holds a letter of authorization as a Primary Dealer issued by the Reserve Bank, in terms of the “Guidelines for Primary Dealer in Government Securities Market” dated March 29, 1995, as amended from time to time.
vi. Term Money means borrowing and lending in unsecured funds for a period exceeding 14 days and up to one year.
vii. Call money means borrowing or lending in unsecured funds on an overnight basis
viii. Notice money means borrowing and lending in unsecured funds for tenors up to and inclusive of 14 days excluding overnight borrowing/lending.
ix. Electronic Trading Platform (ETP) shall have the meaning assigned in paragraph 2 (1) (iii) of the Electronic Trading Platform (Reserve Bank) Directions, 2018 dated October 05, 2018, or as modified from time to time.
x. Over-the-Counter (OTC) markets refer to markets where transactions are undertaken in any manner other than on exchanges and shall include those undertaken on electronic trading platforms (ETPs)”
Or in simple language, the period extends 1 day and up to 1 year for unsecured funds that attract these directions.
Prudential norms set the lending and borrowing limit for entities who participate in this market with the approval of their Board of Directors. Let us look at these limits for every one of them.
Participant category Prudential limit
SCB, PB, RRB, SFB 100% of capital funds, on a daily average basis in a reporting fortnight and 125% of capital funds on any given day.
Co-operative bank 2% of aggregate deposits as at the end of the previous financial year.
Primary dealer 225% of net owned funds as at the end of the previous financial year.
Some general guidelines are aptly applicable in this market.
What is the interest rate?
All eligible participants are free to decide and arrive at an interest rate mutually agreeable in the call, notice, and money markets. Normally these rates are mostly in consonance with the rates related to a common rate.
What is the trading venue? Is it a physical one?
Call, notice, and term money transactions can be executed in Over-the-Counter (OTC) markets, including on the NDS-CALL platform or any other ETP approved for the purpose by the Reserve Bank. Only digital commonplace.
Market time: It shall be between 9.00 AM to 5.00 PM on each business day or that may be prescribed by RBI.
Is there any specific documentation or practices notified by RBI?
Standard market practices, methodologies, and documentation prescribed by Fixed Income Money Market and Derivatives Association of India (FIMMDA), in consultation with RBI, from time to time have been informed. These remain the same among all participants and any variation may not stand in the court of law. Being computerized, I do not visualize any difficulty in getting the documentation. With the availability of the best software, this issue is irrelevant.
Can these transactions be terminated, or canceled at will?
No, these transactions shall normally be not canceled at will.
Term money can easily be negotiated provided both the participant agree on mutual terms. This has relevance due to the recent pandemic which wrecked the working of all markets. But cancellations attract reporting requirements which will be covered in the following paras.
What are the reporting requirements and to whom?
a. All call, notice, and term money transactions shall be reported to the NDS-CALL platform within 15 minutes of execution (the time when the price is agreed), by each party to the transaction, or, by the concerned ETP, as the case may be. For this purpose, all participants in the call, notice, and term money market shall obtain membership of the NDS-CALL platform.
Participants who are not members of NDS-CALL on the date these Directions come into effect will have a period of three months from that date for obtaining such membership. Compulsory registration enlists strict observance of instructions, following laid down procedures, and orderly conduct of business enabling orderly conduct of business with virtually no litigations.
b. Transactions executed on the NDS-CALL platform need not be separately reported.
Any cancellation or termination of the call, notice, and term money transactions shall be reported to the NDS-CALL platform within 15 minutes of cancellation by each party to the transaction or by the concerned ETP, as the case may be.
c. In case of any misreporting or repeated reporting of OTC deals by a party, the same should be immediately brought to the notice of Clearing Corporation of India Limited and also to Financial Markets Regulation Department, Reserve Bank of India, Central Office, Fort, Mumbai, either through email (reportfmd@rbi.org.in), or through fax. Violation of these reporting requirements may result in cancellation of membership. Any violation of these instructions may call for cancellation up to 1 month from RBI after providing a suitable opportunity to the participant to explain the situation.
Some more information relevant to these instructions
RBI may get as much information from all participants as per the situation and types of transactions under these types of transactions in the money market.
Obviously, these future instructions get a formal shape after receipt of comments from the common public, and due approvals and present instructions do seem applicable as of date.
Conclusion
These types of instructions have been in vogue from time immemorial, particularly, in the form of physical form. Online business has overshadowed conventional means of meeting, wastage of time, or late communications when speed sets the tone of the business.
How does this help a common man?
It is highly probable that even among human beings on a day-to-day business, similar way of transactions on a personal basis may have a reasonable chance of certainty if proper instructions and responsibility are shown by all parties. Lots of recent transactions in the public domain indicate the diversion of funds from these types of entities by influential entities resulting in even failure of financial institutions. For orderly conduct of business, strict adherence to procedures, instructions, and laid down norms is a must if India has to join the most advanced economies of the world.
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