Delving into RBI’s Directions on Government Securities Lending

On December 27, 2023, the Reserve Bank of India (“RBI”) released the RBI (Government Securities Lending) Directions, 2023 (“Directions”) to enable lending and borrowing of government securities and prescribe a framework for the same.[1] Earlier this year, draft directions were made available to the public, seeking comments on the same. Upon consideration of the comments so received, the Directions were finalised. This article delves into the new directive and its accompanying accounting standards, shedding light on the key aspects that are poised to shape the landscape of Government Securities Lending (“GSL”) transactions.

Key Elements of the Directions

A government security is any security created and issued by the government for the purpose of raising a public loan or for any other purpose as may be notified by the government in the official gazette.[2] GSL transactions involve the lending of eligible government securities by the owner (lender) to a borrower for a specified period, with the borrower providing collateral in the form of other government securities. The agreement stipulates that the borrower must return the borrowed security, and the lender would return the collateral at the end of the agreed period based on the terms of a standard bilateral master GSL agreement.[3] The Directions specify eligible securities as any government security issued by the central government.[4] According to the Directions, all GSL transactions can be routed via any mutually agreed trading platform.[5]

In the hope of providing investors with a platform to utilise idle securities efficiently and streamline business processes, the initial leg of the transaction will be settled by the Clearing Corporation of India Limited (“CCIL“)[6] on either a T+0 or T+1 basis.[7] Notably, the RBI’s dynamic directive aims to enhance transparency and efficiency in GSL transactions by valuation based on market prices and allowing for versatile use of borrowed securities, including sale, repo transactions, meeting delivery obligations, and participation in other GSL transactions. The directive also permits collateral substitution with eligible securities, enhancing transparency and efficiency in India’s financial landscape. Aspects of misreporting or multiple reporting of the same OTC market deal by a counterparty are required to be reported to the CCIL. Additionally, aside from prohibiting the party from engaging in any GSL transactions for a period not exceeding one month, the new framework provides for penal or regulatory action for any party violating the prescribed direction.[8]

Accounting Guidelines

The Directions stipulate a set of accounting guidelines that will apply to all GSL transactions. The accounting treatment outlines steps that ensure that the economic essence of the GSL transaction is accurately reflected in the books of both the borrower and the lender, based on the agreed terms of the transaction.[9] For instance, the security lender must maintain the securities lent in its investment account, while the security borrower should not include borrowed securities in its balance sheet during the GSL transaction. In terms of pricing, the first leg shall see lending in market prices and the same prices have to reflect in the second leg, provided it includes a consideration amount for the GSL fee. Additionally,  GSL income or expenditure shall be accounted for on an accrual basis, with outstanding GSL fee balances transferred to the Profit and Loss account; for transactions on the balance sheet date, only accrued income or expenditure is considered, and any remaining amounts are accounted for in the subsequent period.[10] Lastly, In GSL transactions, lenders shall continue accruing interest on lent securities, and borrowers shall do the same on collateral. If the interest payment date occurs within the loan period, borrowers shall promptly pass on the coupon to lenders. This prospective approach ensures a seamless and fair treatment of coupon or discount, enhancing transparency and financial integrity in the process.[11]

Conclusion

The RBI has demonstrated a commitment to swift and impactful regulatory changes, notably enhancing time efficiency and ensuring increased liquidity for investors compared to the draft directions issued earlier in the year. In particular, the centralisation of GSL transactions through the CCIL and the flexibility provided for routing GSL transactions via any mutually agreed trading platform aim to streamline and simplify the GSL process, fostering a more agile and investor-friendly financial environment. The regulatory amendments, coupled with the emphasis on transparent accounting practices and the prospective treatment of coupon or discount, collectively contribute to an auspicious start for GSL transactions in the upcoming year.

References:

[1] Reserve Bank of India (Government Securities Lending) Directions, 2023 which can be found at https://rbidocs.rbi.org.in/rdocs/notification/PDFs/GSLDIRECTIONS0AF9CACC130344C0A261EAD47F277AF0.PDF

[2] Section 2(f) of the Government Securities Act, 2006.

[3] Direction No. 15 of the Reserve Bank of India (Government Securities Lending) Directions, 2023

[4] Direction No. 3 of the Reserve Bank of India (Government Securities Lending) Directions, 2023

[5] Direction No. 6 of the Reserve Bank of India (Government Securities Lending) Directions, 2023

[6] Direction No. 10 of the Reserve Bank of India (Government Securities Lending) Directions, 2023

[7] Direction No. 7 of the Reserve Bank of India (Government Securities Lending) Directions, 2023

[8] Direction No. 16 of the Reserve Bank of India (Government Securities Lending) Directions, 2023

[9] Clause 2, Annex to the Reserve Bank of India (Government Securities Lending) Directions, 2023

[10] Clause 4, Annex to the Reserve Bank of India (Government Securities Lending) Directions, 2023

[11] Clause 5, Annex to the Reserve Bank of India (Government Securities Lending) Directions, 2023

Image Credits:

Photo by Foryou13 on Canva

The RBI has demonstrated a commitment to swift and impactful regulatory changes, notably enhancing time efficiency and ensuring increased liquidity for investors compared to the draft directions issued earlier in the year. In particular, the centralisation of GSL transactions through the CCIL and the flexibility provided for routing GSL transactions via any mutually agreed trading platform aim to streamline and simplify the GSL process, fostering a more agile and investor-friendly financial environment. The regulatory amendments, coupled with the emphasis on transparent accounting practices and the prospective treatment of coupon or discount, collectively contribute to an auspicious start for GSL transactions in the upcoming year.

POST A COMMENT