by The Negotiated Dealing System, or NDS, is an electronic trading platform operated by the Reserve Bank of India to facilitate the issuing and exchange of government securities and other types of money market instruments. The goal was to reduce inefficiencies stemming from telephone orders and manual paperwork, while increasing transparency for all market participants.
Understanding Negotiated Dealing System (NDS)
The Negotiated Dealing System was introduced in February 2002 to help the Reserve Bank of India, or RBI, enhance the dealings of fixed income investments. Prior to the NDS, the country’s government securities market was primarily telephone-based, which meant that buyers and sellers had to place trades over the phone, submit physical Subsidiary General Ledger transfer forms, and issue checks for the settlement of funds to the Reserve Bank of India. These slow and inefficient procedures led to the development and implementation of the NDS.
In August 2005, the RBI introduced the Negotiated Dealing System – Order Matching system, or NDS-OM, an electronic, screen-based, anonymous, order-driven trading system for dealing in government securities. The system is designed to bring transparency to secondary market transactions, while enabling members to place bids and offers directly on the NDS-OM screen.
There are two types of NDS-OM members, including:
Direct Members: Direct members have current accounts with the RBI and can directly settle trades on NDS-OM.
Indirect Members: Indirect members do not have current accounts with the RBI and must settle through NDS-OM members that have direct accounts. Most foreign institutional investors have indirect access, while resident entities may have direct access.
Many other countries have similar electronic systems in place for managing government securities, money market accounts, and related securities to increase transparency and lower costs.
Functions of Negotiated Dealing System
The NDS facilitates members to submit bids for government securities electronically. These bids for the purchase of government securities can be made when the RBI conduct auctions for them. The auction process take place in the primary market using the NDS platform. Participants are primary dealers, commercial banks etc.
In the secondary market (market for trading the already issued G-Secs), the NDS facilitates the settlement of transactions in G-Secs. Here, it provides an interface to the Public Debt Office, RBI, Mumbai for the settlement of transactions conducted in the secondary market. Secondary market trading in Government securities mostly happen over-the-counter (OTC).
The Negotiated Dealing System (NDS) has thus two modules one for the primary market and the other for the secondary market.
Membership in NDS
Membership to the NDS is restricted to members holding SGL and/or Current Account with the RBI, Mumbai.
NDS-OM
Secondary market trading is vital to give liquidity to Government Securities. For enhancing secondary market activity in G-Sec segment, the RBI launched Negotiated Dealing System-Order Matching system (NDS-OM) in 2005. The NDS-OM is a screen based electronic anonymous order matching system for secondary market trading in Government securities.
This is an order driven electronic system, where the participants can trade anonymously by placing their orders on the system or accepting the orders already placed by other participants. The Clearing Corporation of India on behalf of the RBI operates the NDS-OM.
The NDS-OM brings transparency in secondary market transactions in Government securities as there is anonymity about the traders who offer trading. Members can place bids (buy orders) and offers (sell orders) directly on the NDS-OM screen. Being order driven, the system matches bids and offers on price/ time priority.
Negotiated Dealing System Modules
The Negotiated Dealing System consists of two modules, which are designed for different types of member institutions.
These modules include:
- Primary Market Module: The RBI uses the primary auction platform for the auction of federal and state securities, as well as treasury bills. The platform enables participants to electronically submit their bids in primary auctions and receive allotment reports.
- Secondary Market Module: Over-the-counter trading often happens over the phone, but everyone is required to report these trades using the NDS secondary market module. The data then flows to the Clearing Corporation of India Ltd. for clearing and settlement, which avoids the need for paper-based settlement processes.
Securities Settlement Systems
System which permits the transfer of securities: either free of payment, such as free delivery (for example in the case of pledge), or against payment.
Settlement of securities occurs on securities deposit accounts held with a Central Securities Depository (private CSDs or a central bank acting as a CSD) or with a central bank (safe custody operational accounts).
In the latter case, the central bank acts as the intermediate custodian of the securities. The final custodian is normally a CSD.
Settlement of cash occurs in an interbank funds transfer system (IFTS), through a settlement agent.
As an essential part of a nation’s financial sector infrastructure, securities clearance, and settlement systems must be closely integrated with national payment systems, so that safety, soundness, certainty, and efficiency can be achieved at a cost acceptable to all participants. Central banks have paid considerable attention to payment systems, but securities clearance, and settlement systems have only recently been subjected to rigorous assessment. The Western Hemisphere Payments and Securities Clearance and Settlement Initiative (WHI), led by the World Bank, and in cooperation with the Centro de Estudios Monetarios Latinoamericanos (CEMLA), gave the authors a unique opportunity to observe how various countries in Latin America, and the Caribbean undertake securities clearance, and settlement. To do so, the authors developed a practical, and implementable assessment methodology, covering key issues that affect the quality of such systems. In this paper they discuss the objectives, scope, and content of a typical securities system, identify the elements that influence the system’s quality, and show how their assessment methodology works. They focus on the development of core principles, and minimum standards for integrated systems of payments, and securities clearance and settlement.
