All participants in Central
Government securities market
Secondary Market Transactions in
Government Securities – Short Selling
The Statement on Developmental and Regulatory Policies released by RBI on
June 06, 2018 proposed to liberalise the eligible short sale
participant base and increase the entity-wise and security category-wise
(liquid/other securities) limits for short selling in Government
2. Accordingly, a comprehensive
review of the existing directions/circulars on ‘Short Sale’ transactions
has been carried out and the revised directions, as attached, are issued.
These directions supersede all existing regulations on short sales in terms
of the list of circulars in Annex I.
The circulars listed in Annex I are
3. These directions are issued
under Section 45 W of Chapter III D of the Reserve Bank of India Act, 1934.
4. The directions will come into
effect from July 26, 2018.
Chief General Manager
BANK OF INDIA
FINANCIAL MARKETS REGULATION DEPARTMENT
1ST FLOOR, CENTRAL OFFICE, FORT
MUMBAI 400 001
(TRS)-2018 dated July 25, 2018
Sale (Reserve Bank) Directions, 2018
In exercise of the powers
conferred by section 45W of the Reserve Bank of India Act, 1934 (RBI Act)
and of all the powers enabling it in this behalf, the Reserve Bank of India
(the Reserve Bank) having considered it necessary in public interest and
with a view to enhance liquidity in the Government securities market of the
country, and to provide participants with a tool to express two way views
on the interest rate, hereby issues the following directions.
1. Short title, commencement and
applicability of the directions
(a) These Directions shall be
called the Short Sale (Reserve Bank) Directions, 2018 and shall supersede
all directions/guidelines issued on the subject, as listed under Annex I. These Directions shall come into force
with effect from July 26, 2018.
(b) These Directions shall be
applicable to ‘Short Sale’ transactions in Central Government dated
In these Directions, unless the
context otherwise requires-
(a) “Scheduled commercial bank” means a bank included in the second schedule of
Reserve Bank of India Act, 1934.
(b) “Government securities” shall have the meaning assigned in Section 2(f) of
the Government Securities Act, 2006.
(c) "Short sale" means
sale of a security one does not own. Banks may treat sale of a security
held in the investment portfolio as a short sale and follow the process
laid down in these directions. These transactions shall be referred to as
‘notional’ short sales. For the purpose of these guidelines, short sale
would include 'notional' short sale.
(d) “Liquid security” means
a security identified and published by Fixed Income Money Market and Derivatives
Association of India (FIMMDA)/ Financial Benchmarks India Limited (FBIL) as
a ‘liquid security’ for the purpose of short sale transactions.
(e) “Other security” means
a security other than liquid security and eligible for short sale
3. Eligible entities
The following entities are
eligible to undertake short sales:
(a) Scheduled commercial banks,
(b) Primary Dealers,
(c) Urban Cooperative Banks as
permitted under circular UBD.BPD (PCB). Circular
No.9/09.29.000/2013-14 dated September 4, 2013.
(d) Any other regulated entity
which has the approval of the concerned regulator.
For the purpose of this
paragraph, regulator shall mean Securities and Exchange Board of India
(SEBI), Insurance Regulatory and Development Authority (IRDA), Pension Fund
Regulatory and Development Authority (PFRDA), National Bank for Agriculture
and Rural Development (NABARD) and National Housing Bank (NHB).
4. Security level limits on
The maximum amount of a security
(face value) that can be short sold shall be as mentioned below:
2% of the total outstanding
stock of each security, or, Rs.500 crore, whichever is higher.
1% of the total outstanding
stock of each security, or, Rs.250 crore, whichever is higher.
5. Operational requirements
Entities undertaking short sales
shall adhere to the following stipulations:
(a) Entities undertaking short
sale transactions and the related cover transactions, shall tag those
transactions in NDS-OM appropriately. The ‘short sale’ tag in NDS-OM shall
not be used for sale transactions of securities that are not in immediate
possession of the entity but will be received by the time of settlement
(e.g., securities used to avail of intra-day liquidity, securities placed
as margin with clearing houses, etc.).
(b) Short sales shall be covered
within a period of three months from the date of transaction (inclusive of
(c) Short sales, including
notional short sales by banks, shall be covered by outright purchase of an
equivalent amount (face value) of the same security, either in the
secondary market or in primary auction, including in the When Issued
(d) Securities that are short
sold are to be invariably delivered on the settlement date. Entities shall
meet their delivery obligations by borrowing securities in the repo market
or through outright purchase. However, securities acquired under Reserve
Bank’s Liquidity Adjustment Facility or any other liquidity facility shall
not be used for delivery into short sales.
(e) Banks undertaking ‘notional’
short sales shall ordinarily borrow securities from the repo market to meet
delivery obligations, but in exceptional situations of market stress (e.g.,
short squeeze), it may deliver securities from its own investment
portfolio. If securities are delivered out of its own portfolio, it must be
accounted for appropriately and reflect the transactions as internal
borrowing. It shall be ensured that the securities so borrowed are brought
back to the same portfolio, without any change in book value.
(f) Members of the Securities
Settlement Segment of Clearing Corporation of India Ltd. (hereafter
referred to as ‘members’) shall be responsible for settlements and
reporting of trades of their constituent entities viz., entities
maintaining gilt accounts or demat accounts. Accordingly, eligible
constituent entities shall undertake short sale transactions to the extent
permitted by the members through whom they settle their securities
transactions, within the limits prescribed in Para 4 of these directions.
(g) An entity is not required to
reduce its short position in a security if the security is removed from the
list of liquid securities published by FIMMDA during the period of short
sale. It can continue to maintain the short position till it is covered.
(h) Short sales shall be
reflected in Securities Short Sold (SSS) A/c, specifically created for this
purpose (Annex II for illustration).
(i) Short sales, as well as
purchase transactions to cover short sales, shall be accounted in the Held
For Trading (HFT) category. Entities undertaking short sales shall mark to
market their entire HFT portfolio, including short sales, on a daily basis.
Note that ‘Held For Trading’ shall have the meaning assigned in Master
Circular – Prudential Norms for Classification, Valuation and Operation of
Investment Portfolio by Banks (DBR No
BP.BC.6/21.04.141/2015-16) dated July 1, 2015, as updated from time
6. Information on outstanding
stock and liquid securities
Information regarding the
outstanding stock of each Government of India dated security is available
on the RBI website.
(URL - https://www.rbi.org.in/scripts/financialmarketswatch.aspx).
The list of liquid securities
shall be disseminated by FIMMDA/FBIL from time to time.
The short sale position executed
in the OTC market should be reported on the NDS-OM platform within 15
minutes of the execution of the trade.
8. Internal control
(a) Before undertaking short
sale transactions, entities shall put in place a written policy on all
aspects of short sales, including, in the case of banks, notional short
sales, which should be approved by their respective Boards of Directors or
equivalent body. The policy should lay down the internal guidelines which
should include, inter alia, risk limits on short position, an
aggregate nominal short sale limit (in terms of face value) across all
eligible securities, stop loss limits, the internal control systems to
ensure adherence to regulatory and internal guidelines, procedure to deal
with violations, etc. Entities shall also put in place a system to detect
(b) All short sale transactions
shall be audited on a daily basis to ensure compliance with all regulatory
and internal requirements. Any violation of regulatory guidelines noticed
in this regard should immediately be reported to the Chief General Manager,
Financial Markets Regulation Department, Reserve Bank of India, Mumbai.
(c) Entities undertaking short
sales should ensure that these transactions are in conformity with fair
market practices and that their activity does not lead to market
distortions. Entities shall also report to RBI any suspected cases of
market abuse regardless of whether it was by their own employee, client or
other market participant.
9. Any default on a short sale transaction shall be
subject to penal measures as prescribed in RBI circular IDMD.DOD.17/11.01.01(B)/2010-11 dated July 14, 2010as
amended from time to time. Reserve Bank may also take additional action
including temporary or permanent debarment of the SGL account holder from
the short sale market as it may deem fit, for violation/circumvention of
the regulatory guidelines or if Reserve Bank is of the view that the
participant has attempted to manipulate the market, involved in market
abuse, or provided information that was incorrect, inaccurate, or
10. The list of previous circulars issued by the
Reserve Bank on ‘Short Sale’ transactions in Central Government dated
securities that are repealed and withdrawn are given in Annex I. Any reference to the circulars
withdrawn, in any other circular/direction of the Reserve Bank, shall be
read as reference to the relevant clause in these directions.
Chief General Manager
of circulars being withdrawn
(i) IDMD.No.03/11.01.01 (B)/2005-06 dated February 28, 2006
(ii) IDMD. No/11.01.01(B)/2006-07 dated January 31, 2007
(iii) IDMD.DOD.No.3165/11.01.01(B)/2007-08 dated January 1,
(iv) IDMD.PCD.14/14.03.07/2011-12 dated December 28, 2011
(v) IDMD.PCD.21/14.03.07/2011-12 dated June 21, 2012
(vi) IDMD.PCD.06/14.03.07/2014-15 dated September 30, 2014
(vii) FMRD.DIRD.02/14.03.007/2014-15 dated December 24, 2014
(viii) FMRD.DIRD.5/14.03.007/2015-16 dated October 29, 2015
(ix) FMRD.DIRD.04/14.03.007/2017-18 dated November 16, 2017