RBI Governor announced vide Monetary and Credit Policy for the year 2001-2002 that following the announcement made in the Union Budget for 2001-02, a Clearing Corporation and an electronic Negotiated Dealing System (NDS) are expected to be made operational and the Public Debt Act is proposed to be replaced by the Government Securities Act to promote retailing, individuals and Provident Funds will be allowed on non-competitive basis through PDs and SDs.

The proposed Negotiated Dealing System (NDS), the electronic dealing platform in government securities and money market instruments, was set up for acceptance testing in July, 2002 the RBI official said at a seminar on "NDS and PDO development", arranged by the Fixed Income Money Market & Derivatives Association of India (FIMMDA). The first phase of the NDS project has been completed, and a local area network (LAN) environment has been created for acceptance testing by RBI involving market participants effective from July 16. The NDS software was installed on July 2 on IBM S-390 for acceptance testing, the project report stated. The RBI has set the system for parallel run for two months to gain market confidence on the software. The time period depends upon the number of participants who are connected to network. The RBI also taken initiatives to link repos and reverse-repos with NDS. In the next phase, interest payments and redemptions will also be integrated with the payment system. The process will be operational from December, 2002.

A Negotiated Dealing System (NDS) (Phase I) has already been operationalized effective from February 15, 2002. Banks, Primary Dealers and Financial Institutions having Subsidiary General Ledger and Current Accounts with RBI will be eligible to become members of the system. In Phase I, the NDS provides online electronic bidding facility in primary auctions, daily LAF auctions, screen based electronic dealing and reporting of transactions in money market instruments, facilitates secondary market transactions in Government securities and dissemination of information on trades with minimal time lag. In addition, the NDS enables "paperless" settlement of transactions in Government securities with electronic connectivity to CCIL and the DvP settlement system at the Public Debt Office through electronic SGL transfer form.

The implementation of the next phase of the PDO-NDS project involving integration with security settlement system and primary markets operations, automation and inter-connectivity of PDOs, electronic maintenance of record of ownership, etc., is already under way.

NDS will facilitate electronic submission of bids/application by members for primary issuance of Government Securities by RBI through auction and floatation. The system of submission of physical SGL transfer form for deals done between members will, on implementation of NDS, be discontinued. NDS will also provide interface to Securities Settlement System (SSS) of Public Debt Office, RBI, thereby facilitating settlement of transactions in Government Securities including treasury bills, both outright and repos.

NDS will use INFINET, a closed user group network as communication backbone. Hence, membership to the NDS is restricted to members of INFINET. Membership of INFINET entails holding SGL and/or Current Account with RBI or as may be prescribed from time to time. After NDS has become operational the physical SGL forms will continue to be used exclusively for settlement of trades between a member and non-member to the NDS. Once the NDS is fully operational, RBI may consider discontinuing physical SGL transfer form for settlement purposes in SGL accounts.

Once the settlers' approvals have been accorded to the deal, the deal can not be revoked from the system. However, prior to the settlers' approval, either the dealer or the settler of the dealing member can reject the deal entered into the system. In the first phase of NDS, once the setters' approve the deal, it can not be cancelled. In next phase when NDS is integrated with Securities settlement subsystem, provision for cancellation of a deal, if agreed to by both parties (seller/buyer) of the deal, has been made before the date of settlement. However, this would have to be done within a specified time frame i.e. prior to settlement date. On the date of settlement, it is not possible to cancel a deal.

In the physical SGL system SGL forms were being rejected on technical grounds such as clerical mistakes. After introduction of NDS consistency checks have already been built into the system. Hence there is no reason for rejection of the deals on the above grounds. Deals can however be rejected on grounds of insufficient funds/securities in the trading parties' accounts with RBI. CCIL, however, will provide settlement guarantee for trades done/reported on NDS in respect of government securities including treasury bills (both repo and outright).

NDS system does not permit a member to interface its back office system S to view/validate online its SGL account position in RBI's' books. This is on account of security reasons. The system however provides for Oracle View Option or the Flat File down load facility (for deal data) at discrete time intervals at the choice of members, which could be used by the members to build APIs to their own back office systems. SGL account position information is not available in the NDS system in the first phase.

NDS will provide an interface to the Securities Settlement System. All Outright and Repo transactions in Treasury Bills and Government dated securities (Central and State governments) will settle through NDS. NDS will not settle trades in Call Money/Notice Money, CPs and CDs. This is because NDS provides for settlement interface to Securities Settlement System at PDO, RBI for transactions relating to Government Securities and Treasury Bills (outright and repos). The settlement of other Money Market Instruments will be as per existing procedures. Corporate bond also can not be traded on NDS.

There is no restriction on deals concluded between member brokers of the National Stock Exchange/Bombay Stock Exchange from being entered into the NDS. However such deals have to be reported only by NDS members for settlement through NDS in PDO-RBI. Brokers cannot become members of NDS. This is because the basic requirement for NDS is membership to INFINET. Since INFINET membership is restricted to those entities having SGL and/or Current account with RBI or as may be prescribed from time to time, brokers are not eligible to become members of NDS.

The first version of the NDS software has been developed taking into account the member and its users (clients) in a LAN environment i.e. in same domain. The securities features - electronic digital signature which provides for non repudiation, encryption, decryption, and confidentiality, are at the member server. Hence the NDS, in this version, will not support the locations of the Front and Back offices at two different places. However, this issue will be addressed in the next version when members will be able to use the NDS in a WAN environment.

It is almost impossible that two members can access a firm quote exactly at the same time. The Central Host Server will decide the access to a firm quote depending on the order of messages received from them. Besides, after a member responds to the firm quote, the system will complete certain operations like reduction in available amount at firm quote, before giving access to the second member, who may be in queue. A member cannot also modify his/her quote if another member has already accessed it. This is not possible as the Central Server will place a lock on his/her quote as long as another member is responding to it. Similarly, if a member has withdrawn his/her own quote for modification, access to that quote will not be available to other members

A member can deal on NDS on behalf of its own constituent account holder in government securities, based on the price given by the client but only for outright transactions. Presently repo transaction can not be entered by the member on behalf of its constituent.

One of the basic objectives of NDS is dissemination of on-line price information of transactions in government securities and money market instruments. In order to achieve this objective, transactions not concluded over NDS will have to be necessarily reported through the NDS.

Identity of the parties will not be disclosed to the market. Only the vital information of a transaction viz., ISIN of the security, nomenclature, amount (face value), price/rate and/ or indicative yield, in case applicable, will be disseminated to the market, through Market and Trade Watch.

NDS is an electronic trading platform which will also provide interface to Securities Settlement System. CCIL is an agency which will extend guaranteed settlement for trades done/reported on NDS in government securities including Treasury Bills, both outright and Repos through the process of Novation. Novation is the process by which government securities transactions are settled through CCIL. This means that CCIL will act as a buyer to the seller of security and simultaneously will act as a seller to the buyer of the security. This will in effect remove the credit risk faced by members vis-�-vis their counterparties. Besides, CCIL provides the additional comfort of improved risk management practices through daily marking to market of collateral, maintenance of daily margins by members and through a Guarantee Fund.

Once a trade is done/reported over NDS it can be settled either though CCIL or directly through RBI - SGL. Settlement through CCIL will be on Delivery Versus Payment II (DVP II) mechanism. DVP II refers to settlement of securities on gross basis (trade by trade basis) while funds will settle on net basis. Settlement through RBI-SGL will follow DVP-I mechanism i.e. settlement of both securities and funds on gross basis. It is being envisaged that in order to widen the repo market and provide improved risk management practices, all repo transactions in government securities done/reported on NDS should settle through CCIL. Further it is also envisaged that outright transactions in government securities for cut-off amount Rs.20 crore and below (face Value) should settle through CCIL. Option will be made available to members to settle outright transactions in government securities for face value above Rs. 20 crore either directly through RBI-SGL or through CCIL. Only NDS members can route their deals done among themselves for settlement through the CCIL.

THE Reserve Bank of India has asked all SGL members to become members of the negotiated dealing system (NDS) by March 31, 2003. The physical SGL transfer form will be discontinued from April 1.

All banks had to put in place a system, which would link them to the NDS, the Clearing Corporation of India (CCIL) and finally the RTGS. With regard to non-banks, there is no compulsion for them to become members of the NDS. ``If these players feel that they do not require such a system, there is no need for them to become members. NDS, which had commenced operations on February 15,2002 had 60 members, with 15 more members in the process of joining the NDS. As on March 18, on an average, the number of deals on the NDS was 308, with the number of deals ready for settlement at 273 amounting to Rs 6,498 crore. On an average, the number of deals settled through CCIL was 223 amounting to Rs 1,620 crore while eight deals were settled through the PDO amounting to Rs 95 crore.