September 23, 2000

IDMC.No.1163 /10.26.55/2000-2001

Banks/Primary Dealers

Dear sir,

Enclosed is a Scheme of Special Fund Facility for Securities Settlement. The scheme will be made effective from October 3, 2000. You are requested to take necessary action.

Please acknowledge the receipt of the circular.

Yours faithfully

sd/-

(Smt.Usha Thorat )
Chief General Manager -in-Charge

Encl: As above

Internal Debt Management Cell

Scheme of Special Fund Facility for Securities Settlement
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The Delivery versus Payment (DVP) system established by RBI at Mumbai since July 1995 has been working generally satisfactorily. However, there have been a few instances of gridlock in the DVP system due to shortfall of funds on a gross basis in the current account of one or more SGL account holders. To take care of such unusual and exceptional occurrences, a scheme of Special Fund Facility for Security Settlement is being introduced as a follow up of the Monetary and Credit Policy announcement for the Year 2000-2001 on April 27, 2000. It has been decided to implement the Scheme with effect from October 3, 2000. The scheme is detailed in the following paragraphs.

1. Objective

Delivery versus Payment (DVP) system that involves simultaneous transfer of securities and funds in government securities transactions, was introduced with effect from July 1995 to alleviate counterparty settlement risk. Under this system trades are settled on a gross trade by trade basis with irrevocable final settlement taking place simultaneously for securities and funds, on ensuring that there are sufficient funds in buyers account and sufficient securities in sellers account. With the increase in government securities transactions, the cases of transactions failing to settle due to shortfall of funds on a gross basis in the current accounts of one or more SGL account holders is possible especially where transactions are linked.

The objective of the new scheme is to provide intra-day funds to banks and primary dealers (PDs) for facilitating settlement of securities transactions in case of gridlock. In such cases, the intra-day facility will not become an overnight credit. It will be available for settlement relating to their transactions in Government of India dated Securities, Treasury Bills and State Government securities in their own SGL accounts as well as in constituent SGL accounts. The scheme provides for automatic invocation of funds facility against undrawn Collateralised Lending Facility (CLF)/Level I - PD Liquidity Support (PDLS).

2. Eligibility

Banks and Primary Dealers who are eligible to avail of CLF/LSF from the Reserve Bank at the Bank Rate will be eligible for special intra day fund facility for securities settlement. The special fund facility will be available against the amount of undrawn CLF/PDLS by banks/primary dealers through collateralised intra-day credit from the Reserve Bank.

3.Rate of Interest

The interest rate on funds provided to a participant under the scheme will be charged at the Bank Rate. The interest cost will be shared equally among all beneficiary participants involved in the settlement of linked securities transactions. In addition, a flat fee of Rs.25 per transaction would be charged from each of the beneficiary participants.

4. Special Intra-Day Fund Limit

Special Intra-day Fund limit would be the undrawn balance against CLF/PDLS and drawal would be restricted to 95 per cent of face value of outstanding securities in Reverse Repo Constituent SGL account (RRCSGL) of a participant after providing for successful bids in Reverse Repo auctions.

5. Eligible securities

All transferable Government of India dated securities and treasury bills (except 14 day treasury bills) will be eligible instruments for automatic invocation of special intra-day fund facility from the Reserve Bank.

6. Margin Requirement

The margin will be uniformly applied in respect of Govt. of India dated securities and treasury bills held in the RRCSGL Account. The amount of securities that will be transferred from RRCSGL Account of the participant for extending special fund facility for securities settlement, will be 105 per cent of fund amount (rounded off to higher lakh) in terms of face value.

7. Settlement of Transactions

The special intra-day funds extended by RBI to a participant for settlement of securities transactions will be reversed on the same day by debiting the current account of the participant. Similarly, securities transferred from RRCSGL to RBIs account will also be reversed on the same day.

8. SLR and Securities held in RRCSGL Account of RBI

The securities held in RRCSGL account in custody by RBI on behalf of the constituents will be counted for SLR purposes. A certificate giving daily balance of securities held in the participants’ name in RRCSGL Account will be issued by RBI on a fortnightly basis.

9. Mechanics of the operations

(i) The RRCSGL Account which is already operational for securities operations facilitating Reverse Repos auctions under Liquidity Adjustment Facility will be used for this scheme. The participant-wise security account in RRCSGL Account will be maintained by the Securities Department of Mumbai Office.

(ii) Banks/Primary Dealers intending to avail of this facility would be required to transfer the securities being offered from their main SGL accounts as collateral to the constituent account of RRCSGL Account along with required SGL transfer forms duly executed by them within the cut-off time of 14.00 hours on all working days (except Saturdays) and 11.00 hours on Saturdays. As the securities held in this account would also be utilised for the purpose of settlement of successful bids in Reverse Repo auction, Special intra-day fund facility will be provided to the maximum extent of 95 per cent of the balance in RRCSGL account after settlement of bids in Reverse Repo auctions.

(iii) As the balance in RRCSGL account at 14.00 hours will be counted for special intra-day fund facility, the securities purchased on the same day will not normally be available for transfer to RRCSGL Account.

(iv) The SGL forms for transferring securities from their own SGL account to RRCSGL account will be submitted to the Securities Department of the Reserve Bank which will operate the scheme.

(v) As and when required by the participant, the facility of accretion/ withdrawal or swapping of securities in RRCSGL account will be extended. This will require execution of SGL transfer form by the participant for transferring the securities to/from participants own SGL account from /to RRCSGL account within the cut-off time of 14.00 hours on all working days (except Saturdays) and 11.00 hours on Saturdays.

(vi) In case gridlock situation arises during the securities settlement, the Reserve Bank will invoke the intra-day fund facility to the extent of funds required to release the gridlock. In case special fund limit of the concerned participant is not sufficient to meet the requirement of maximum fund shortage, the next largest fund shortage of participant would be provided special intra-day fund facility and transactions settled and so on with the objective of keeping the number of fails to a minimum..

(vii) In case of genuine shortfall in the participants current account, the security transaction will be rejected notwithstanding any credit balance in RRCSGL account of the participant for the purpose of automatic invocation of intra-day fund facility for securities settlement.

(viii) Banks/Primary Dealers who agree to avail of this facility for securities settlement are required to submit the Board Resolution and the Undertaking in the formats given in Annex II and III respectively to the Reserve Bank, only for the first time while giving the consent for availment for automatic invocation of special fund facility as per format in Annex -I.

10. The scheme will continuously be reviewed and modified where necessary from time to time. RBI reserves the right to suspend the scheme, if it deems necessary.

Format of Application Form for Special Fund Facility for Settlement of
Securities Transactions

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Chief General Manager
Reserve Bank of India
Securities Section
Mumabi Office
Fort
Mumbai - 400 001

RRCSGL Account : BYRR ...........
in Securities Department, Mumbai

Dear Sir,

Special Fund Facility for Securities Settlement
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We hereby agree with the terms and conditions of the scheme of automatic invocation of special fund facility for settlement of securities transactions against undrawn Collateralised Liquidity Facility/ Primary Dealers Liquidty Support Facility as circulated vide circular IDMC.No.1163/10.26.55/ 2000-2001 dated September 23, 2000.

2. We authorise RBI to operate RRCSGL Account in which securities will be maintained by us for facilitating automatic invocation of special fund only for the purpose of settlement of securities transactions in our own SGL account and constituent SGL account No II.

3. We authorise RBI to extend special fund facility to us for the amount of shortage of funds in the current account for the purpose of settlement of government securities transactions in order to avoid grid lock situation and not for any other purpose of meeting genuine shortfall in the current account.

4. We authorise RBI to debit our current account for the interest amount at the Bank Rate or such other higher rate as applicable due to RBI on the funds provided under the Special Fund Facility Scheme to meet the short fall of funds for settlement of securities transactions. The interest cost will be shared equally among all beneficiary participants involved in gridlock of settlement of securities transactions. In addition, a flat fee of Rs.25 per transaction would be charged from each of the beneficiary participants.

Annex- II

Format

Special Fund Facility for Securities Settlement -
Resolution to be passed by the Board of the Institution
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Board Resolution to be passed by the
Board of the -------------------------------
(Name of the Institution)

1.Resolved that the ........................................... do avail of Special Intra-day fund facility for Securities Settlement by automatic invocation of undrawn Collateralised Lending Facility (CLF) for banks/Level -I Primary Dealers Liquidity Support (PDLS) through collateralised credit from the Reserve Bank of India against Government of India dated securities and auction treasury bills (excluding 14 day treasury bills) solely for the purpose of settlement of transactions in Government of India dated securities, Treasury Bills and State Governments securities in secondary market transactions through SGL Accounts maintained by us with Reserve Bank of India, Mumbai under the Scheme of Special Fund Facility for security settlement.

2. Resolved further that unless and otherwise authorised by the Board, the principal amount of automatic intra-day fund facility against the undrawn CLF/PDLS availed of from the Reserve Bank of India and outstanding at any time during the day shall not exceed the limit sanctioned to us under CLF/PDLS Rs. ................. Crore (Rupees.............................................. only). The limit available for automatic invocation of funds for securities settlement will be against the undrawn balance under the sanctioned limit for CLF/PDLS by RBI subject to 95 per cent of the face value of securities outstanding to our credit in RRCSGL account.

3. Resolved further that the power to submit documents under the Special Fund Facility for securities settlement the aforesaid purpose be and hereby delegated to the following officers, any two of them to act jointly:

4. Resolved that the promissory notes executed in favour of Reserve Bank of India under the CLF/PDLS at the Bank Rate for the limits sanctioned to us will be continuing security for the funds provided under the above scheme.

5. Resolved further that the aforesaid officers be and are hereby authorised, any two of them jointly, to execute in favour of the Reserve Bank of India promissory notes, agreements, declarations and such other documents including statements and returns as may be required by the Reserve Bank of India in connection with the said scheme of special funds facility and generally to do or cause to be done such other acts, deeds or things as may be required by the Reserve Bank of India in connection with the said funds facility for securities settlement.

Form of Undertaking to be obtained from banks /primary dealers

(To be stamped as an agreement in accordance with the stamp law in force)

Place : ___________

Date : ___________

The Chief General Manager
Reserve Bank of India
Securities Section
Mumbai Office
Fort
Mumbai

Dear Sir,

Scheme of Special Fund Facility for settlement of securities
transactions in SGL Accounts at PDO/PAD, Mumbai
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In consideration of your agreeing to make to us from time to time, grant of Special Fund Facility through collateralised credit against undrawn Collateralised Lending Facility (CLF) /Level I - Primary Dealers Liquidity Support (PDLS), at your discretion, which shall be repayable on demand, we agree with, and undertake to you as follows:

1. The said fund facility , made within the undrawn limit of Collateralised Lending Facility (CLF) / Liquidity Support Facility (LSF) available to us and as fixed by RBI, would be based on the undrawn balance against CLF/PDLS and drawal would be restricted to 95 per cent of face value of outstanding securities in Reverse Repo Constituent SGL (RRCSGL) account after providing for successful bids in reverse repo auctions, and subject to the terms and conditions stipulated for availment of automatic fund facility from you.

2. The outstanding balances of the said automatic fund facility at any time shall be repayable by us on demand as specified by you.

3. The outstanding balance of such fund facility will be recovered on the same day from our current account by RBI.

4. We shall pay interest on amount availed of by us under the Special Fund Facility for securities settlement from the Reserve Bank of India, at such rate of interest as may be decided by the Reserve Bank of India from time to time. It is mutually understood and agreed that interest cost on the said availed amount will be calculated on the total amount availed of by us from RBI on daily basis and recovered from us on the next day by debiting our current account with you. The involved participants in the gridlock will share the interest cost equally, accordingly the interest cost will be debited in my current account. In addition, a flat fee of Rs.25 per transaction will be charged from each of the beneficiary participants.

5. In any case, the limit for special fund facility for securities settlement would not exceed the limit granted to us by you under CLF/PDLS. The limit for special fund facility will be based on the minimum of either 95 per cent of face value of securities to our credit in RRCSGL Account or undrawn CLF/LSF available to us.

6. The special fund facility will be extended by RBI to us for the amount of shortage of funds in the current account for the purpose of settlement of government securities transactions in order to avoid grid lock situation and not for any other purpose of meeting genuine shortfall in the current account.

7. We authorise Reserve Bank of India to operate the RRCSGL Account to transfer the security from our credit to RBI credit and vice-versa for making available special funds for securities settlement to meet the short fall in current account.

8. All such securities so transferred to RRCSGL Account by us shall be security to you for invoking automatic fund facility for security settlement in case of shortage of funds for settlement of securities transactions. The securities transferred will cover due payment to you by us of -

9. We further agree to maintain in your favour such margin or margins as you may, from time to time and with respect to each class of securities, prescribe so that the total amount for the time being due to you for principal, interest, charges and costs in respect of the aforesaid special fund facility shall not exceed the balance of the market value of the said securities after deducting the amount of margin required to be maintained.

10. If the amount of the said advances with all interest, charges and costs shall not be paid to you on demand or if we, at any time on demand, fail to restore the above stipulated margin, it shall be lawful for you forthwith or at any time thereafter to sell all or any of the said securities without further notice and to apply the net proceeds of such sale in repayment of the amount due hereunder and we agree to accept your account of such sale as sufficient proof of the correctness of the amount realised by, and the charges and expenses in connection with, such sale. If the net sum so realised should be insufficient to cover the full amount due hereunder, we agree to pay to you forthwith on delivery of your account above mentioned any balance due by us on the footing thereof.

11. The security created by transfer of Government of India securities as aforesaid shall be and remain a continuing security for the balance from time to time due and payable to you in respect of the said scheme notwithstanding the absence of debit balance at any time or any partial payments or fluctuations of accounts or withdrawal or retransfer of any part of the security .

12. We hereby declare that Government of India securities to be transferred by us in RRCSGL Account shall be our absolute property at our sole disposal and free from any prior charge or encumbrance.

13. We agree that the automatic special fund facility for securities settlement will be invoked only when, there would be gridlock situation on account of shortage of funds in our current account. The funds will be provided to a participant with the maximum fund requirement in the gridlock. In case special fund limit of the concerned participant is not sufficient to meet the requirement of maximum fund shortage, the next fund shortage of participant would be provided special intra-day fund facility and transactions settled and so on.

14. We further agree that we will, from time to time and whenever required by you so to do, furnish such information regarding Government of India dated securities as you may require us to furnish.

15. We further agree that the demand promissory note/s submitted to the Reserve Bank for CLF/PDLS sanctioned to us will also cover the daily limit of special fund facility for securities transactions by RBI and the said promissory notes shall be continuing security for all such funds availed of by us from time to time and also for any amount outstanding from us including interest, expenses or otherwise under the said scheme.

16. We further agree to execute on demand such documents as may be required by you for the above purposes.

17. We agree that application for grant of automatic invocation of special fund facility for securities settlement under this agreement will be made to you in such form as you may specify. We shall submit SGL transfer forms duly executed for transferring securities from our own SGL account to RRCSGL Account together with such other documents as you may specify from time to time.

18. Such securities offered for automatic invocation of fund facility in RRCSGL Account of RBI will be held in custody on our behalf for the beneficial interest. The securities outstanding in this account will be reckoned for the SLR purposes, a certificate to this effect will be periodically issued by RBI.

19. We further agree that accretion/ withdrawal or swapping of securities maintained in the RRCSGL Account will be made by us through submission of duly executed SGL transfer form to RBI.