Mumbai, March 30, 2018

Valuation will be based on the weighted average price of the last half hour of trading on the last trading day of every quarter against the last traded price earlier

In a bid to prevent the possibility of manipulation in the prices of securities, especially government securities (G-Secs), on the last trading day of a quarter, the Reserve Bank of India has changed the methodology used by debt market players, including banks and primary dealers, for their valuation.

As per a central bank directive, security/bond valuation will be based on the weighted average price of the last half-an-hour of trading on the last trading day of every quarter against the last traded price earlier.

The methodology as to how the bonds are valued is crucial for mark-to-market (MTM) purposes. MTM entails recording the price or value of a security to reflect the current market value rather than the book value.

“Earlier, the last traded rate on the last working day of a quarter used to be taken for valuation. So, one could always manipulate the trade.

“Now, the weighted average rate in the last 30 minutes of trading on the last working day of a quarter will be the rate that will be taken for the purpose of MTM,” said a top public sector bank official.

Emphasising that this move is to normalise any aberration, the banker quoted above explained that the RBI has made the change so that there is no manipulation of the last trade by a cartel of banks.

Three categories

Banks classify their investment in securities under three categories — held to maturity (HTM), Available For Sale (AFS), and Held For Trading (HFT). Investments in the HTM category need not be marked to market as they are held till maturity.

Investments in the AFS category are marked to market at quarterly or at more frequent intervals. Securities are classified under the AFS category if a bank intends to sell them before maturity. Net depreciation, if any, is provided for, while net appreciation, if any, is ignored.

Investments in the HFT category have to be sold within 90 days of investment and are marked to market at monthly or at more frequent intervals and provided for as in the case of those in the AFS category.

A chief dealer with a public sector bank said: “The Fixed Income Money Market and Derivatives Association of India suggested this (change in methodology) as there will be more transparency.

“If somebody wants to have a good valuation and hits even one trade at a high price, it will distort the yield of the entire portfolio. Following the change, manipulation will be difficult.”

[The Hindu Business Line]