REITs: Global banks handling REIT transactions approach RBI as T+1 approaches

Mumbai: Major multinational banks managing funds from foreign investors told the Reserve Bank of India (RBI) last week to act as a “buyer of dollars of last resort” or relax the rule of exposure for banks as the Indian stock market prepares to transition to a shorter settlement cycle from late February.

Faster trade settlement would require these banks, which are the custodians of Foreign Portfolio Investors (REITs), to convert foreign currency remitted by REITs into Indian rupees in the evening when bank trading floors and corporate treasuries are empty. and the money and forex markets become illiquid. . In such a situation, custodian banks would have no choice but to place dollars (they are unable to convert in the market) with their head office – a transaction that could violate large exposure regulations introduced by RBI. Last year.

“Ideally, the banks would want RBI to step in to buy the dollars from them using a special facility in the evening. But, if the regulator is unwilling to do this, they should exclude the dollar funds for equity settlement from the large exposure framework. “, an industry source told ET. This was conveyed to RBI on January 11 in a joint communication from six foreign banks – JP Morgan Chase, Citi, Deutsche Bank, Standard Chartered, BNP Paribas and HSBC – which, together hold 75-80% of foreign portfolio investment in the country.

Currently, trades on Indian exchanges are settled within two days of execution – a mechanism described as T+2 (an abbreviation for trade plus 2 days). Capital market regulator Sebi announced that the settlement cycle would be brought forward by one day (to T+1) from February 25 on a gradual basis. With this, a stock buyer would receive securities in a demat account and a stock seller would receive funds in a bank account just one day after a trade is executed.

Under the existing T+2 settlement, trades are confirmed at T+1, giving REITs and custodians ample time to trade the FX market to convert the dollar at T+1 – the next day when the market is liquid. However, in a shorter T+1 cycle, the trade must be confirmed and the funds must be settled on the evening of the same day (i.e. T) that the trade takes place. For this, the REIT must either pre-arrange funds – which would make India a pre-funded market where additional money is in the REIT accounts – or convert dollars to rupees on the evening (of T) after the closing of the stock market.

“Since a pre-funded market would increase the cost for REITs, they would prefer to book forex on the evening of T or in the early hours of T+1. From now on, exchange clearing companies want the trade to be confirmed before 7:30 p.m. (of day T), which can be delayed for a few hours. However, if this must be done the same evening, the depositary bank must enter into agreements with another bank to obtain rupees. But if no other bank does not is there to buy dollars and RBI does not open a window to buy dollars and provide rupees, so the custodian bank has to generate rupees internally, but the “unsold” dollar would be in the hands of the head office of the bank custodian and that would violate the exposure limit,” said a banker.

According to a February 21 RBI regulation, a bank cannot expose itself to more than a quarter of its Tier 1 capital (i.e. its own funds and free reserves) to a single counterparty. Since the Indian branch of a foreign bank and its head office are considered two separate regulatory entities by RBI, the dollars belonging to the head office are included in the exposure of the Indian branch of the foreign bank to the parent company at the stranger. Thus, in their letter to RBI, the custodian banks proposed that late-night USD funds received from REITs for equity settlement actions should not be part of the exposure.

“The custodians have also asked RBI to extend the hours of the interbank cash market and the TREPS and CROMS markets (opportunities for banks to borrow rupees against securities). long in the currency futures markets could give banks another option to hedge currency risk, for this RBI and Sebi need to make a decision jointly,” said another official of a securities market intermediary.

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