PRUDENTIAL NORMS- INVESTMENT PORTFOLIO BY BANKS

1 PRUDENTIAL NORMS- INVESTMENT PORTFOLIO BY BANKS Short Sale Short Sale’ is defined as sale of securities one does not own. Banks undertake short sale of Central Government dated securities, subject to the short position being covered within a maximum period of five trading days, including the day of trade. A bank can also undertake 'notional' short sale where it can sell a security short from HFT even if the security is held under its HFT/AFS/HTM book. There are certain conditions under which the Banks can undertake the Short Sale transactions under certain conditions as elaborated in the RBI Master Circular dt. 02.07.2012. ‘When Issued Market ‘ ‘When, as and if issued’ (commonly known as ‘when-issued’ (WI)) security refers to

a security that has been authorized for issuance but not yet actually issued. ‘WI’ trading takes place between the time a new issue is announced and the time it is actually issued. The mechanics of operation of WI is detailed in the RBI Circular. Policy and internal control mechanisms (Short Sale/WI): Banks are required to have in place a written policy giving the guidelines/instructions duly approved by Board before undertaking short sale/WI transactions. Besides this, the transactions are to be verified by concurrent auditors in respect of compliance with the instructions, as well as with internal guidelines and report violations, if any, to the respective Public Debt Office (PDO) where the Subsidiary General Ledger (SGL) account is maintained and Internal Debt Management Department, RBI, Mumbai. Investment Policy i) Banks are required to frame Internal Investment Policy Guidelines with proviso to include Primary Dealer (PD) activities duly approved by respective Boards. The PD business undertaken by the bank will be limited to dealing, underwriting and market-making in Government Securities. Other Investments in bonds, CPs, CDs, debt MF, and other fixed income securities will not be deemed to be part of PD business. • Banks are permitted to undertake investment in equity shares/ debentures subject to have in place adequate expertise in equity research by establishing a dedicated equity research department as warranted by their scale of operations. ii) With the approval of respective Boards, banks may clearly lay down the broad investment objectives to be followed while undertaking transactions in securities on their own investment account and on behalf of clients. While framing the policy guidelines, RBI instructions may strictly be observed in respect of:- 2 1. STRIPS a) “STRIPS” (Separate Trading of Registered Interest and Principal of Securities) are distinct, separate securities that are created from the cash flows of a Government security and shall consist of - • Coupon STRIPS, where the single cash flow of the STRIP represents a coupon flow of the original security • Principal STRIP, where the single cash flow of the STRIP represents the principal cash flow of the original security. Explanation: Stripping of a security shall result in Coupon STRIPS for all outstanding coupon payments and one Principal STRIP for the redemption payment. Each STRIP accordingly becomes a zero coupon bond since it has only one cash flow at maturity. Each STRIP shall be a distinct Government security and shall have a separate...

Website: www.iibf.org.in | Filesize: 96kb
No of Page(s): 14
Download PRUDENTIAL NORMS- INVESTMENT PORTFOLIO BY BANKS ....pdf