SECONDARY MARKET TRANSACTIONS IN GOVERNMENT SECURITIES – NOTIONAL SHORT SALE

WHY THIS NOTIFICATION?

Earlier, market participants undertaking ‘notional’ short sale are not permitted to use securities from their HTM/AFS/HFT portfolio for delivery against the short sale.

WHAT WAS THE NOTIFICATION?

 It has now been decided that market participants undertaking ‘notional’ short sale need not compulsorily borrow securities in the repo market

 While the short selling entity may ordinarily borrow securities from the repo market, in exceptional situations of market stress (e.g. short squeeze), it may deliver securities from its own HTM/AFS/HFT portfolios

 If securities are delivered out of its own portfolio, it must be accounted for appropriately and reflect the transactions as internal borrowing. All ‘notional’ short sales must be closed by an outright purchase in the market.

 It may be ensured that the securities so borrowed are brought back to the same portfolio, without any change in book value.

 The short selling entity must adhere to the extant regulations and accounting norms governing sale or valuation of securities in its portfolios.

 The bank may frame a Board approved policy for this purpose.

WHAT ARE HELD TO MATURITY (HTM) PORTFOLIOS?

 Held to Maturity investments are investments made by the bank. which it intends to hold till maturity. Only debt securities can be classified as HTM because they have a definite maturity.

A HTM investment is reported on balance sheet at its amortized cost.

WHAT ARE AVAILABLE FOR SALE (AFS) PORTFOLIOS?

 Available for Sale portfolios have debt securities that are bought into the portfolio with the intention to sell before reaching the maturity. Banks have the freedom to decide on the extent of investment under AFS category.

 Investment made under AFS category will be marked to market at quarterly or at more frequent intervals.

 The net depreciation under this category should be recognised and the net appreciation under these if any, should be ignored.