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Tuesday, April 13, 2010

RBI allows FIIs to use govt bonds as collateral for stocks

The central bank on Monday allowed foreign institutional investors (FIIs) to use their government bond holdings as collateral for stock market transactions, doing away with an earlier rule that only allowed cash to be used.

The new rule is only applicable for spot transactions, while there is no change in guidelines for collateral in derivative transactions in the share market, the bank said in a notification on its website.

However, “cross-margining” or netting off margin requirement of government securities by foreign investors between derivatives and cash segment in stock exchanges will not be allowed, the RBI said.

Stock market regulator Securities Exchange Board of India (Sebi) will announce operational guidelines for the same, the RBI said.

“This was a long-pending demand from FIIs as FIIs’ holding of government bonds is huge now. So, it is better to use g-sec as collateral than cash. There will be no impact of demand for this,” said a senior treasury official at a foreign bank.

FIIs have already invested around $4.5 billion in government bonds out of the maximum limit of $5 billion, dealers say.

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