RBI Draft Allows Short Selling in Government Securities with Caps
The Reserve Bank of India (RBI) has issued draft directions allowing eligible participants to maintain short positions in government securities, subject to specified limits. The proposal, released on Thursday, aims to provide a structured framework for short selling in the government bond market.
Short Position Limits for Liquid and Other Securities
Under the draft, short positions in liquid government securities are capped at 2% of the outstanding stock of the security or ₹500 crore, whichever is higher. For other eligible government securities, the limit is set at 1% of the outstanding stock or ₹250 crore, whichever is higher. This ensures traders cannot exceed a fixed percentage or absolute amount.
Auction Participation Limits for Different Participants
The draft also specifies auction participation limits. Scheduled commercial banks and standalone primary dealers can bid for up to 25% of the notified amount in a government securities auction. Other eligible participants are restricted to a maximum of 10% of the notified amount.
Framework for When-Issued Securities
A detailed framework for trading in "when-issued" (WI) securities has been laid out. WI transactions are conditional trades for securities that have been announced but not yet issued. According to the draft, "When Issued transactions may commence after the issue/re-issue of the eligible Government security is notified and shall cease at the close of trading on the date of auction of the Government security." Settlement of such transactions will occur alongside the settlement of secondary market transactions on the date of issue/re-issue, and will be netted off with trades in the same security.
Short Selling Allowed Only in Central Government Securities
The RBI clarified that short selling is permitted only in Central Government securities, excluding Treasury Bills. Short selling allows traders to sell bonds they do not currently own, with the expectation of buying them back later at a lower price. This mechanism can enhance market liquidity and price discovery.
