How does the when-issued market work?
A”when, as and if issued” (commonly known as ‘when-issued’) security refers to a bond whose issue has been announced but not yet taken place. By inference a when-issued’ market is one where such ‘when-issued’ instruments are traded. In India the ‘when-issued’ market in government securities is expected to take off in few days with transactions taking place on RBI’s Negotiated Dealing System – Open Markets (NDSOM), an on-line trading platform for government securities.
What is the purpose of a ‘when-issued’ market?
Today, a bidder at a government security auction can only second guess what the demand for a bond will be. This uncertainity leads to a volatility whenever there is a large auction. A when-issued market will enable bidders to get an idea of how many investors are interested in buying. Reduced volatility will draw more investors and lead to further development of the bond market.
How does it work?
In a when-issued market trade can take place only from the day an auction of government securities is notified upto the date of the auction. During this period there will be a kind of a book-building with buying and selling of the to-be-issued security going on simultaneously. Once the securites are issued through the auction there will be a settlement of all these buy-sell transactions that has taken place earlier.
How is it different from short-selling?
Short-selling in the equity market is an intra-day proposition since any person who places a sell order has to settle by the end of the day. When-issued is also a limited form of shortselling. Besides the fact that trade takes place only between the date of announcement and the auction date there are a few other restrictions as well. One restriction is that `when-issued’ trading can happen only in those securities that are already in existence. For instance if the government announces the auction of a 10-year bond there can be when-issued trade only if a 10-year bond maturing on the same date as the proposed issue already exists. This ensures that there is no `shortsqueeze’ — a term used to describe a settlement problem faced by short-sellers when he is not able to deliver securities at the time of settlement.
Who can participate in a when-issued market?
Broadly a when-issued market is open to those institutions which participate in the government bonds market. The RBI notification describes the participants as banks, primary ealers or any other entities it notifies. Since institutional trade in government bonds takes place in demat form with RBI acting as the depository, RBI allows only those entites to trade those who can hold goverment securities in d e m a t e r i – alised form. Primary dealers can participate upto 10% of the size of the forthcoming auction. Others can trade for a value upto 5% of the auction. The market is still unsure about to what extent primary dealers will actually go short and whether they will fully utilise the headroom of 10% of issue size allowed and whether all Pds will participate upto 10% of the auction size.
Will it pave the way for further reforms in the debt market?
The guidelines for `when-issued’ securities have come after a decade of discussion. Complete liberalisation, that is participants being allowed naked short sales is still a long way away. The other developments which has taken place in the equity market — the introduction of futures trading — will depend upon the preparedness of the various stock exchanges. The government securities market continues to witness relatively low levels of securities trading and is likely. Dealers hope that volumes will improve with the introduction of a whenissued’ market.