The Reserve Bank of India (RBI) announced new guidelines on December 27, 2023, focused on lending and borrowing practices of government securities. The central bank aims to deepen the market for securities lending and borrowing and enhance the depth and liquidity of the Government Securities (G-Sec) market. This move is expected to help better price discovery. Under newly issued guidelines, Government Securities (excluding Treasury Bills) issued by the central government are eligible for lending or borrowing through a Government Security Lending (GSL) transaction.
The securities obtained under a repo transaction, including through RBI's Liquidity Adjustment Facility or borrowed under another GSL transaction would also be eligible to be lent under a GSL transaction, as per the notification. Further, G-Secs, including Treasury Bills and state government bonds, can also be used as collateral in GSL transactions.
Earlier in February, the central bank introduced the draft RBI (Government Securities Lending) Directions, 2023. After gathering feedback on the draft, the final guidelines have now been issued, said an RBI release.
The minimum tenure for a GSL transaction is one day, while the maximum period would be the maximum period prescribed to cover short sales.
The guidelines also highlighted the flexibility in using different mutually agreed trading processes or platforms for government securities lending transactions. On the settlement front, the central bank said that all GSL transactions shall settle on a Delivery versus Delivery basis. Further, it said the first leg of all GSL transactions shall settle either on a T+0 or T+1 basis and transactions shall settle through Clearing Corporation of India Ltd. (CCIL) or any other central counterparty or clearing arrangement approved by RBI for the purpose, the release said.
Securities/collateral under a GSL transaction shall be valued transparently at prevailing market prices in the first leg of the transaction and haircut/ margins relating to GSL transactions shall be decided by the central counterparty settling the transactions, release added.
Further, entities engaging in GSL transactions may use borrowed securities for various purposes like sales, meeting delivery obligations, and availing the RBI's Liquidity Adjustment Facility.
This move aims to broaden participation in the securities lending market by providing investors an option to utilise idle securities, potentially boosting portfolio returns.