The Reserve Bank of India (RBI) introduced draft directions in December 2020 on call, notice and term money markets with “the objective of bringing consistency across products in terms of issuers, investors and other participants” and to “rationalize existing regulations covering different money market products”. Following feedback from market participants in April 2021, the RBI issued master directions on call, notice and term money markets. Call money means borrowing or lending in unsecured funds on an overnight basis; notice money is borrowing or lending in unsecured funds for up to fourteen days, and term money is borrowing or lending in unsecured funds for more than fourteen days and up to one year.
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Call, notice and term money markets were regulated by the RBI’s 2016 master directions, which applied to scheduled commercial banks, co-operative banks and primary dealers. These directions were extended to payments banks and small finance banks in 2018, and to regional rural banks in 2020. The 2021 master directions consolidate all previous instructions, and specifically permit scheduled commercial banks, payment banks, small finance banks, regional rural banks, co-operative banks and primary dealers to participate in call, notice and term money markets, both as borrowers and lenders.
While the 2021 directions are largely in line with the 2016 version, key changes have been introduced. While there are similar prudential limits for borrowing transactions in the call, notice and term money markets, a participant can now decide prudential limits in respect of lending transactions within the regulatory framework prescribed by the RBI with the approval of its board of directors. The 2021 directions permit cancellation and termination of call money, notice money, and term money transactions. While call, notice or term money transactions should ordinarily not be cancelled, a notice or term money transaction can now be terminated before maturity at a mutually agreed price. Any cancellation or termination is required to be reported on the Negotiated Dealing System-CALL (NDS-CALL) platform, the electronic trading platform for execution and reporting of transactions in call, notice and term money markets, within fifteen minutes of such action.
The 2021 directions permit the RBI or any person authorised by the RBI to publish anonymised data related to transactions in call, notice and term money markets. The RBI may, among other sanctions, prohibit any violator from dealing in call, notice and term money markets transactions for up to one month, after giving it the opportunity to defend itself. The RBI may publish such action.
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As in the 2016 directions, participants are free to decide the interest rates for call, notice and term money markets transactions. Participants must follow standard market practices, methodologies and documentation prescribed by the Fixed Income Money Market and Derivatives Association of India and the RBI in respect of call, notice and term money transactions.
Participants in call, notice and term money markets are also required to join the NDS-CALL platform. Call, notice and term money markets transactions, other than those executed on the NDS-CALL platform, have to be reported to the NDS-CALL platform within 15 minutes of execution by the counterparties to the transactions or by the relevant electronic trading platform. The RBI may call for additional information from those involved in such transactions. Call, notice and term money transactions must be executed in over the counter markets, including the NDS-CALL platform or any electronic trading platform authorised by the RBI. Market opening for call, notice and term money transactions is from 9:00 am to 5:00 pm each business day.
Critics may argue that the changes are not substantial and inconsequential. However, including an expanded set of participants in a consolidated framework, and relaxing some controls on call, notice and term money markets transactions, such as permitting cancellations, is an acknowledgement by the RBI of the growing maturity of the financial sector. It also illustrates the RBI’s drive to systematise a patchwork of regulations. The 2021 directions are a welcome step in the right direction.
Sawant Singh and Aditya Bhargava are partners at Phoenix Legal. Sristi Yadav, an associate, also contributed to this article
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