RBI Regulations

Reserve Bank Directions, 2020- Draft Call, Notice and Term Money Markets

RBI Directions, 2020- Draft Call, Notice and Term Money Markets

This notification relates to money market operations. This is the Notification No-FMRD. DRD/2020-21, dated December 4, 2020.

The directions are issued by the RBI, which is called as the Call, Notice, and Term Money Markets (Reserve Banks) Directions 2020[1]. These directions are given in pursuance of the powers conferred under section 45W r/w Section 45U, of RBI-The Reserve Bank of India Act 1934, which has been suppression of Section 1 of the Directions No. FMRD Master Direction No. 2/2016-17 dated July 07, 2016, issued following guidelines for the entities or agencies eligible to indulge in the call, notice and term money markets.

What is a Money Market?

A market which is for the short term financial assets which are the close substitutes of the money. The money market instruments are readily convertible into cash. It is a liquid, and it can be turned into cash quickly at the lowest cost.

It creates avenues for the short term availability of surplus funds for the lenders and borrowers both in the Market.

The call, notice and term money transactions form the vital part of the Market. Important segment of the money market operations in India. The funds in this Market are usually transacted between the periods of 2 to 14 days. 

Section 45W of RBI Act, 1934:

It states that power to regulate the transactions in derivatives, money market instruments, etc-

In this section the Bank in the public interest or the regulation of the financial system, of the country can take advantage of the and determines the policy relating to the financial interest or interest rate products, and give directions in that behalf, to all agencies, dealing in them, or dealing in securities, money market instruments, foreign exchange, derivatives, or the other instruments of the like nature, as the Bank may specify from time to time.

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Section 45U of RBI Act, 1934:

According to this section, the money market instruments have been defined as the easily convertible instruments into cash in less than a period of 1 month.

Participants who are affected by this notification:

These are the following eligible entities who participate to call, notice, and money market both as borrower and lenders:

  1. Scheduled Commercial Banks
  2. Payment Banks
  3. Small Finance Banks
  4. Regional Rural Banks
  5. State Co-operatives Banks, District Co-operative Banks, Urban Co-operative Banks (called as Co-operative Banks), and
  6. Primary Dealers

Changes in the Prudential Limits as follows for the above-stated category as follows:

S.No.Participant CategoryPrudential Limit
1.Scheduled Commercial Banks, Payment Banks, Small Finance Banks, and Regional Rural Banks,100 percent  of the capital funds, on a daily average basis, in reporting the fortnight125 per cent of the capital funds on any given day
2.Co-operative Banks2.0% of the aggregate deposits at the end of the previous financial year
3.Primary Dealers22.5 percent of the net owned funds at the end of the previous financial year

These prudential limits formed by the eligible participants of the money market shall be informed to the CCIL-Clearing Corporation of India Ltd, to set up the boundaries for NDS-CALL-Negotiated Dealing system. They are controlled under the Financial Market Regulations Department –FMRD, of Reserve Bank of India. 

General Guidelines to be followed by the Participants:

There are specific guidelines which have to be followed by all the participants:

Guidelines for Participants in Money Market
  1. Interest Rates to be charged

The participants are free to decide the interest rates, in the call, notice, and term money markets.

  1. Venue of Trading
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Such transactions can be executed in the Over the Counter-OTC for the call, notice, and term money transactions. This shall include the transactions for the NDS-CALL or the other approved ETP for Reserve Bank.

  1. Timings for Market Trading

There specific timings for the transactions of call, notice and term money which can be traded b/w 9:00 am to 5:00 pm, on every business day or day specified by the Reserve Bank of India.

  1. Documentation as per standards of Market

FIMMDA-Fixed Income Money Market and Derivatives Association of India, the market standards have to be followed by the eligible participants and follow methodologies, and documentation prescribed by the FIMMDA, in consultation with RBI.

Procedure for the Termination and Cancellation

  1. There cannot be any cancellation, of a call, notice or term money transactions.
  2. At a mutually agreed price, term money transactions can be terminated
  3. All the termination and cancellation have to be reported.

The procedure of Reporting for the call, notice and term money

Main Bodies Controlling - Money Market Transactions
  1. After the execution of the transactions of call, notice and term money, it shall be informed to the NDS-CALL-Negotiated Deposit System within 15 minutes, by each party to the transaction, by the ETP, as the case may be.
  2. The participants can take membership with the NDS-Call, all participants of call, notice and term money.
  3. The participants who are not members of the NDS-CALL, on the date when these directions came into effect. They will have a period of 3 months to get registered/ or obtaining membership.
  4.  The transactions need not be separately reported when done over NDS-CALL platform.
  5. Whenever any transactions are called off –the call, notice and term money transactions, must be reported within 15 minutes, of the cancellation by each party or by the concerned ETP.
  6. In case of any misreporting by the parties, repeated reporting by the parties, it should be brought to the notice of the Clearing Corporation of India, Financial Market Regulations Department, Reserve Bank of India,
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Notification of FMRD Master Direction No. 2/2016-17 dated July 07, 2016, compared with Notification No-FMRD. DRD/2020-21, dated December 4, 2020.

The RBI’S notification of December 2020 is the result of the drawbacks of 2017 information. The 2016-2017 notification was about the main components of the money market. The transaction of calls, notice, short term transactions are important to the money market transactions. There was a shift in the prudential limits from 2017, under the implication, through the section 45W of the RBI Act, 1934, where the limits of the borrowers and lenders have been amended.  There is a significant shift, and as a result the establishment of the CCIL and NDS –CALL system has been laid down. Here the bodies informed from the execution of the transaction in the money and our duty-bound to convey the cancellation of the transactions. There is also establishment of the FMRD, under the supervision of the RBI. Their primary function is to supervise the money market, components, call, notice and short term. The systems like NDS-where the manual work and paperwork have been reduced to an electronic system for the trading of securities in the money market. It is a system which facilitates in the exchange and issuing of securities and another type of money market instruments. The establishment of the CCIL is a joint-stock company with a share capital contribution by central banks, and other financial institutions are held with them. CCIL is exclusively a government clearing and settlement agency which deals in all types of government securities. This eases the trade between the parties, which was earlier settled via different banks and now one clearing and settlement agency takes care with those banks.

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