Non-bank bond brokers hesitant to opt for NDS-OM platform over cost burden

Bonds

Some non-bank brokers, wanting to deal in government securities are citing additional cost burden and lower volumes by retail investors while directly accessing the electronic bond trading platform, people aware of the development told Moneycontrol.

The brokers are reluctant to opt for the Negotiated Dealing System-Order Matching (NDS-OM) platform, used in trading government securities in secondary market, owing to lower retail participation and additional cost that has to be incurred by brokerage firms, three people aware of the development have told Moneycontrol.

During the February monetary policy, the Reserve Bank of India (RBI) had allowed non-bank brokers registered with Sebi to directly access bond-trading platform NDS-OM on behalf of their clients.

NDS-OM is an electronic trading platform for secondary market transactions in government securities, and access to this is available to regulated entities and clients of banks or standalone primary dealers.

Email sent to RBI did not elicit response till time of publishing this story.

RBI’s norms say that entities eligible to seek direct access to NDS-OM must have Subsidiary General Ledger (SGL) with the RBI, a Current Account with the Reserve Bank or a Designated Settlement Bank, and membership of securities settlement segment of the Clearing Corporation of India (CCIL).

Sources said to start this facility, there are two major problems – one, the need for expertise to handle the segment, and two, running a team for it will mean additional cost for the brokerages.

The Subsidiary General Ledger (SGL) with the RBI is free of cost, but the membership charges have to be paid to the CCIL.

The retail participation in government securities too seems to be lower than institutional investors, evident from RBI’s Retail Direct scheme, where the total secondary volume stood at Rs 1756.08 crore since the inception of the scheme on November 12, 2021.

A comparatively lower liquidity in G-secs in the odd lot segment on the CCIL too is a reason for poor retail participation in secondary market.

On the negotiated dealing system-order matching (NDS-OM), there are two lot segments where trades happen - first is the standard lot segment where trades happen in multiples of Rs 5 crore, and for retail investors, there is an odd lot segment where trades happen in multiples of Rs 10,000.

The standard lot segment is generally used by institutional investors in the secondary market, where liquidity is higher, for trades.

As of today, in the 10-year benchmark bond, in the standard lot, 965 trades have taken place. Whereas, in odd lot only 30 trades have taken place.

Sources added that retail investors are lower in number in G-sec’s secondary market due to lack of awareness and complexity involved in trading G-sec on the platform.

After RBI’s decision to allow non-bank brokers to access NDS-OM platform, Sebi has come up with guideline for entities to have a Separate Business Unit (SBU) of the stock broking entity itself.

Stock brokers are required to ensure that activities of their SBU for the NDS-OM are segregated and ring-fenced from other securities market-related activities, and arms-length is maintained, Sebi has said. The net worth of the brokers’ SBU shall be kept segregated from that of the main entity, and brokers shall prepare and maintain a separate account for the SBU.