New DVP system proposed to avoid settlement risks of govt-approved securities

FE Team | Published: November 09, 2007 00:00:00 | Updated: February 01, 2018 00:00:00

FE Report
A new electronic 'delivery versus payment' (DVP) system has been proposed aiming to avoid settlement risks of the government-approved securities in the secondary bond market.
Under the proposed settlement system, the government securities will be transferred electronically through the Bangladesh Bank after confirmation of a deal by both parties.
Currently, the central bank transfers the securities to the buyers from the seller's accounts manually after confirmation of a deal under the existing DVP system.
The proposal came at a meeting of the primary dealers (PDs), held at conference hall of the Bangladesh Bank (BB) Thursday. The visiting consultant of the International Monetary Fund (IMF), T Rabi Sankar, who is also Deputy General Manager of the Reserve Bank of India (RBI), the central bank of India, attended the meeting.
The IMF consultant presented a keynote paper at the meeting proposing re-issuance of existing government bonds aiming to bring dynamism in the secondary bond market.
"We have discussed the proposed DVP system at the meeting to provide an idea about such settlement system of the government securities to the PDs," a BB senior official told the FE.
The central bank introduced the DVP system to gear up the settlement process of government securities in the secondary market.
During the meeting, the PDs explained their positions about the proposed re-issuance of existing government bonds and DVP system, the sources added.
"We have discussed the advantages and disadvantages of the issues. Finally it will depend on the government decisions," a senior treasury official of a private commercial bank, who is also responsible for PD job, told the FE.
Earlier, the central bank selected nine PDs - eight banks and a non-banking financial institution (NBFI) - to handle government-approved securities in the secondary bond market and issued guidelines for them.
The central bank has already amended the guidelines for PDs allowing commission and liquidity support to activate the secondary bond market.
Under the amended guidelines, the bank and non-bank PDs will underwrite minimum 12 per cent and 4.0 per cent respectively of the auction amounts for the fiscal year 2007- 08 until further notice.
"The PDs will be paid the underwritten commission at a rate that may be determined by the government from time to time," the central bank said in its amended guidelines, issued recently.
The PDs will subscribe to and underwrite primary issues and make secondary trading deals with two-way price quotations.
A PD will not short-sell any particular issue and will not hold a short position in secondary dealings. The PDs will not act as inter-bank or inter-dealer brokers as specified in the guidelines.
Currently, four government bonds - 5-year, 10-year, 15-year and 20-year -are being traded in the markets.