SEBI Prescribes Guidelines for providing dedicated Debt Segment on Stock Exchanges

CIR/MRD/DP/03/2013
                                                                                January 24, 2013
To

All Stock Exchanges and Clearing Corporations

Dear Sir / Madam,

Sub: Guidelines for providing dedicated Debt Segment on Stock Exchanges.

1.  The market for debt securities differs from equity markets in several ways such
as risk, returns, liquidity, type of participants and method of trading. While publicly
issued debt securities are listed, traded and settled in   a manner similar to equity,
privately placed debt is usually traded between institutional investors on ‘Over the
Counter'  (OTC) basis. Such OTC transactions are mandatorily reported on reporting platforms at FIMMDA, BSE and NSE. The settlement for such transactions is different from that in equity markets or publicly issued debt securities.

2.  Whereas the equity markets in India offer trading infrastructure comparable to the best available globally, the debt markets lack such infrastructure. In order to cater to the unique characteristics of debt markets, it has been decided to  provide
dedicated a debt segment on the stock exchanges.

3.  The debt segment shall offer separate trading, clearing,  settlement,  reporting
facilities and membership to deal in :

(i)  "debt securities" as defined in Securities  and Exchange Board of India (Issue
and Listing of Debt Securities) Regulations, 2008;

(ii)  Government Securities, Treasury Bills, State Government loans, SLR and
Non-SLR Bonds issued by Financial Institutions, municipal bonds, single bond
repos, basket repos and CBLO kind of products subject to RBI approval ,
where required;

(iii)  Securitized debt instruments as defined in SEBI (Public Offer and Listing of
Securitised Debt Instruments)Regulations, 2008;

(iv)   any other debt instruments as may be specified from time to time by the
competent authority.

4.  An existing stock exchange or new stock exchange desirous of setting up debt
segment may make an application to SEBI, providing  operational, regulatory and
any other necessary details.

5.  The broad framework /features for debt segment shall be as under-

(A)  Listing:  This segment shall list all the securities  and debt instruments
mentioned at para 3 above.

(B)  Trading :
(i)  The debt segment shall offer electronic, screen based trading  providing  for
order matching, request for quote, negotiated trades etc.

(ii)  The trading facility  may  be provided using exchange network including using
access methods such as internet trading, mobile trading or any other methods
specified by SEBI.

(iii)  The debt segment shall provide  separate platforms for the markets described below -

a.  Retail market  -  which shall be a market for listing of and trading in
publicly-issued debt  instruments  and where participation by registered
trading members can be on their own account or for execution of
orders placed their clients.

b.  Institutional market  -  which shall be a market for non-publicly-issued
debt instruments with a market lot size of minimum Rs 1 crore.

(iv)  In addition to institutional investors, Direct Market Access (DMA) facility shall
be extended to other investors to participate in Institutional market of debt
segment. In this regard, the provisions as stipulated in SEBI circular MRD/
DoP/SE/Cir-  7 /2008 dated April 03, 2008, MRD/DoP/SE/Cir-  03 /2009 dated
February 20, 2009 and CIR/MRD/DP/ 20 /2012 August 02, 2012  and
modifications thereto shall be applicable.

(C)  Trading Rules:
(i)  The trading hours shall be from 9:00 hours to 17:00 hours  to be  in alignment
with trading hours of government securities as issued by RBI.

(ii)  The day count convention of Actual/Actual shall be followed for calculating
interest rates.

(iii)  The  stock exchange shall facilitate availability of price quotes on clean price,
dirty price and yield.

(iv)  There shall be no shut period during which trades/ transfers are restricted for
payment of interest or part redemptions. For other corporate actions such as
redemptions/ put-call options, issuers may choose to specify a shut period.

(v)  The record date shall be fixed not more than 15 days prior to date of
corporate  action which shall be displayed on trading terminal by stock
exchanges.

(vi)  In case of  negotiated  trades by members of the debt segment, the trades
shall be reported to stock exchange within 30 minutes of the trade.

(D)  Clearing and Settlement:
(i)  All trades shall be cleared and settled through a clearing corporation. For this
purpose, all trading  members shall be self clearing members or may clear
through a clearing member.

(ii)   The settlement shall depend on the market type, as given below:

a)  For institutional market:  All trades  shall  be settled on  T+1 rolling
settlement on  DVP-I basis  using RBI RTGS account.  Stock
exchanges/clearing corporation may opt to provide clearing and
settlement on DVP-II or DVP-III basis for this market in future and shall put
in place appropriate risk management framework for the same.

b)  For retail market:  The trades shall be settled on T+2 rolling settlement on
DVP-III basis with settlement guarantee.

(E)  Risk management framework:
(i)  For retail market, a uniform margin rate of 10% shall be applicable on debt
instruments  with rating of AA or above (or with similar rating nomenclature) by
recognised credit rating agencies  and 25% for all other  debt instruments.
Further, in case of shortages, there shall be compulsory close-out with a mark
up of 5% in case of debt instruments which are assigned a credit rating of  AA
and above and 10% in case of other debt instruments.

(ii)  For institutional  market, as and when settlement is done  on  DVP-II or DVP-III basis, appropriate margins may be prescribed after approval by SEBI.

(iii)  The clearing corporation shall specify appropriate risk management
framework for each market, wherein it shall, inter-alia, provide for computation
and collection of margins, capital adequacy norms and collateral requirements
for the clearing members, settlement guarantee fund  as applicable.  This shall
be approved by SEBI.

(F)  Trade repository:  With an objective to have centralised  repository  for trades  in debt instruments, the stock exchanges shall report trade information to a
common trade repository as may be specified by SEBI.

(G)  Membership:
(i)  Any entity  desirous of becoming trading member,  self clearing  member and/or clearing member of debt segment shall seek registration under SEBI (Stock
Broker and Sub-Broker) Regulations, 1992.

(ii)  Institutions such as scheduled commercial banks, primary dealers, pension
funds, provident funds, insurance companies, mutual funds and any other
investors as may be specified by sectoral regulators from time to time, can trade
on the debt segment either as clients of registered trading members or directly as
trading member on  proprietary basis only (i.e own-account trades only). Such
institutions desirous of trading on own account only shall be given trading
membership under SEBI (Stock Broker and Sub-Broker) Regulations, 1992  as
proprietary trading member.

(iii)  For an interim period of six months from the date of  this  circular or till the
application for registration  as per amended SEBI (Stock Broker and Sub-Broker)
Regulations,1992 is refused by the Board or till cessation of membership,
whichever is earlier, the transitional provisions shall be -

a.  Institutional market of debt segment:  Any existing registered trading
member  and/or clearing member/self clearing member  in derivative segment
or currency derivatives segment desirous of trading  or clearing trades in debt
segment shall be permitted to trade or clear trades.

b.  Retail market of debt segment: Any existing registered stock broker/trading
member  and /or clearing member/self clearing  desirous of trading or clearing
trades in debt segment shall be permitted to trade or clear trades.

(iv)  The  trading member, proprietary trading member, clearing member and self
clearing member of debt segment shall have net worth  and deposit as prescribed
in SEBI (Stock Broker and Sub-broker) Regulations, 1992.

(v)  The Base Minimum Capital  for stock broker/trading member shall be in line with SEBI circular dated December 19, 2012.

(vi)   The stock exchanges and clearing corporation  may  specify additional
membership criteria  for trading member/proprietary trading member and clearing
member/self clearing member respectively.

(H)  Market Making:  With the view to infuse liquidity in the market, market makers
shall be permitted in the debt segment. Market making may be provided by
merchant bankers, issuers through brokers  or any other entity as may be
specified. The rules for market making shall be specified by the stock
exchanges with approval of SEBI.

6.  The stock exchanges and clearing corporations  desirous of  introducing debt segment are advised to -

(i) Incorporate /frame separate Bye Laws, Rules and  Regulations on debt segment in consonance with aforesaid guidelines

(ii)  Make necessary amendment to their existing byelaws, rules and/or regulations, if required

(iii)  Send duly completed application for introducing debt segment to SEBI, along with necessary byelaws and rules.

7.  This circular is being issued in exercise of powers conferred under Section 11 (1) of the Securities and Exchange Board of India Act, 1992 to protect the interests of investors in securities and to promote the development of, and to regulate the
securities market.

                                                                          Yours faithfully,

                                                                          Maninder Cheema
                                                                          Deputy General Manager
                                                                          Email: maninderc@sebi.gov.in