SEBI Request for Quote Platforms for Execution and Settlement of Trade

Nikhil Mogha

01 Jun, 2024

The SEBI, through a circular dated 24^th January 2013, allowed a dedicated debt segment in all the stock exchanges. This move comes as a way of providing good trading infrastructure to the debt markets as the debt securities market is settled by the institutional investors on OTC (Over the Counter) basis and hence is unregulated compared to other equity markets. In pursuant to this, the SEBI has permitted stock exchanges to offer electronic requests for quotes, screen-based trading for order matching etc. Henceforth, to regulate the structure of debt instruments through Request for Quote platforms in the stock exchanges, SEBI issued a present circular on 19^th October 2022.

What is Request for Quote Platforms?

The Request for Quote Platforms^[1] (RFQ) is an electronic platform wherein multilateral negotiations take place in a centralised online trading platform. It is a sophisticated system which provides a straight-through clearing and settlement process. In response to providing a centralised trading platform for debt securities, the BSE and NSE have launched RFQ platforms in addition to the existing trade execution and settlement process, as it will help bring transparency in the Over Counter deals (OTC).

Basic features of the Request for Quote platform

The essential features of RFQ are:

• It is a system or interface which invites or gives quotes on an electronic platform.
• An initiator is a participant who seeks quotes, whereas a responder is a participant who responds to the quote request for the initiator.
• A participant may ask another participant for a quote of any eligible securities.
• The quote can be placed to:
• An identified counterparty in one-to-one (OTO) mode
• All the participants in One to Many (OTM) mode
• The platform provides the participants with a range of options from various quotes and to respond to the selected quote. It also includes quoted yield, mutually agreed price, deal term etc.

Effective date of the circular

This circular shall be effective from 1^st January 2023.

Type of securities eligible for trading in Request for Quote Platforms   

The securities which are eligible for being traded in the RFQ are:

• Non- Convertible Debentures
• Securitised Debt instruments
• Municipal Debt instruments
• Commercial paper
• Certificate of Deposit
• Government Securities
• State Development Loans
• Treasury bills
• Any other recognised instrument

Mutual fund and Portfolio Management Services to trade in Request for Quote platforms

The Request for a Quote platform is a participant model. It allows listed corporate bodies, regulated entities, institutional investors and all eligible financial institutions to register, access and transact on the platforms. Henceforth, to increase or improve the liquidity on the Request for Quote platforms, SEBI has allowed Mutual Fund and Portfolio Management Services to undertake their secondary market trade in corporate bonds through the Request for Quote trade platform. Keeping in view of this step, the Insurance Regulatory and Development Authority of India has also prescribed a similar option to all its insurers.

Stock brokers are allowed to bid on behalf of their Clients on Request for Quote Platforms.

Based on the recommendations received from the market participants, SEBI has realised the need to increase the participation of the Stockbroker in the corporate bond market. To facilitate this objective, it is decided by SEBI that stock brokers are allowed to place or seek bids on the Request for Quote platform on behalf of their client.

Directions for Stock Exchanges

The other directions issued under the circular are:

• The stock exchanges shall maintain property infrastructure so participants can access the platform.
• The stock exchanges shall periodically issue circulars that will govern the operational modalities.
• The Stock exchanges shall place this circular on the website and inform the same to SEBI-registered stock brokers.
• The stock exchanges shall amend their bye-laws, rules and regulations to implement this circular.
• The stock exchanges shall communicate to SEBI at such intervals.

Conclusion

The SEBI has introduced the Request for Quote Platforms to provide a better market structure for debt securities. To maintain the debt securities market at par with the equity markets, the regulatory authority has allowed stock brokers, Mutual Funds and Portfolio manager services to deal in corporate bond securities in the Request for Quote platform. Since the dealing in the debt securities market is negotiated bilaterally, the need to bring transparency in the Over the Counter trade is imperative. Therefore, to increase the transactions in the stock exchanges through the RFQ platform, it is made mandatory to modify their bye-laws, rules and regulations.

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