RBI issues draft guidelines on STRIPS trading

In a bid to attract banks to trade in Separate Trading of Registered Interest and Principal of Securities (STRIPS), the Reserve Bank of India, in its draft guidelines on stripping/reconstitution of government securities, said that these financial instruments will be reckoned as eligible government securities for statutory liquidity ratio (SLR) purposes.

Further, STRIPS will be eligible securities for market repo as well as repo under RBI’s liquidity adjustment facility but with appropriate haircut. Primary Dealers (PDs) will act as market makers in STRIPS and provide two-way quote in the market. Stripping is the process of separating a standard coupon-bearing government security into its individual coupon and principal components. For example, a five-year coupon bearing government security can be stripped into 10 coupon and one principal instrument, all of which thenceforth would become zero-coupon bonds.

Reconstitution is the reverse of stripping, where the Coupon STRIPS and Principal STRIPS are reassembled into the original government security.

Stripping/reconstitution of government securities, as per the draft, will be carried out at RBI as an automatic process within the Public Debt Office-Negotiated Dealing System.

Any entity, including individuals, holding balances of government securities (in a securities general ledger/Gilt account with a constituent) that are eligible for stripping/reconstitution can strip/reconstitute these securities through a PD. The minimum amount of securities that needs to be submitted for stripping/reconstitution will be Rs 1 crore (face value) and multiples thereof.

To begin with, securities issued by Government of India with coupon dates as January 2 and July 2, irrespective of the year of maturity, will be eligible for stripping/reconstitution. STRIPS, to begin with, will be tradeable only in the over-the-counter market. Hence, trades in STRIPS will have to be struck in the OTC market and reported on the negotiated dealing system for clearing and settlement.

RBI will not charge any fees for stripping/reconstitution of Government Securities. Further, the Draft indicated that to begin with, PDs, who are authorised for authorising requests for stripping/reconstitution in the PDO-NDS, may also not charge the participants for carrying out this activity.