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Negotiated Dealing System (NDS)

A fully electronic trading platform that is instituted and operated by the Reserve Bank of India (RBI)

What is the Negotiated Dealing System (NDS)?

The Negotiated Dealing System (NDS) is a fully electronic trading platform that is instituted and operated by the Reserve Bank of India (RBI) with the mandate of facilitating the issuance and secondary trading of government-issued securities and other types of money market instruments.

 

Negotiated Dealing System

 

In February 2002, the Reserve Bank of India established the fully electronic Negotiated Dealing System, following the trend set by many other financial exchanges. The NDS was intended to be a more efficient alternative to physical security certificates and manual trading for government securities.

The Central Government of India issues bonds, treasury bills, and State Development Loans from the NDS platform.

 

The Negotiated Dealing System (NDS) Explained

The Negotiated Dealing System (NDS) was implemented in 2002 by the Reserve Bank of India, with the aim of improving the efficiency and liquidity of the fixed income market within India. The RBI’s move follows other central banks that use electronic systems for managing the issuance and secondary sale of government securities and money market accounts. The systems improve transparency, increase overall efficiency, and lower costs.

Before the NDS was implemented, most of India’s government securities were traded manually through telephone orders and physical paperwork. Buyers and sellers would place trades over the telephone, submit transfer forms, and issue physical checks to settle trades with the RBI. Clearly, it was an inefficient system, given that many of the world’s central banks in the developed world already made the switch to fully electronic trading platforms earlier.

The NDS initially was used for the issuance of government securities in the primary market. However, in August 2005, the Reserve Bank of India introduced the Negotiated Dealing System-Order Matching system (NDS-OM), which was an electronic, platform-based, anonymous, order-matching trading system for dealing in government securities on the secondary market.

The system was implemented to bring greater transparency and liquidity to secondary market transactions, while simultaneously allowing members of the NDS to place bids and offers directly on the NDS-OM platform.

Secondary market trading is essential to providing liquidity to government-issued securities. Enhancing the liquidity and secondary market activity was a vital step for the RBI to improve the attractiveness of their bonds, treasury bills, money-market accounts, and other securities.

 

Characteristics of the NDS

 

1. Membership

The NDS-OM platform comprises two types of members:

  1. Direct members
  2. Indirect members

Direct members hold accounts directly with the Reserve Bank of India and can settle trades directly through trades on the NDS-OM platform.

Indirect members do not hold accounts with the RBI and must settle indirectly through NDS-OM direct members who hold accounts with the Reserve.

 

2. Modules

The NDS comes in two modules that are designed for different types of institutions. The modules are:

  1. Primary market module
  2. Secondary market module

The primary market module is a primary auction system that is for the initial listing of federal and state securities and treasury bills. The module enables members to submit their bids on auctions fully electronically and receive trading reports.

The secondary market module is an over-the-counter (OTC) trading platform that is cleared over the phone but is required to be reported to the NDS secondary market module. The inputted data is transferred to the Clearing Corporation of India Ltd., which proceeds to complete the trade through clearing and settlement.

 

Benefits of the NDS

The benefits for the Reserve Bank of India are as follows:

  • Liquidity: Government securities are much more liquid and easily tradeable.
  • Attractiveness: Government securities are more attractive to investors.
  • Legitimacy: The legitimacy of the RBI is improved from a global perspective.
  • Efficiency: Trading speed, clearing, and settlement are faster and cost less.

 

The benefits to investors are as follows:

  • Ease of access: More investors can easily access and buy or sell government securities.
  • Cost: The cost of brokers and other trading services is reduced.
  • Direct investing: Investors can manage their own securities and investment portfolios more easily.
  • Convenience: It is much more convenient, as trades can be made from anywhere through the access of the internet.

 

Related Readings

CFI is the official provider of the global Certified Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:

  • Liquidity
  • Marketable Securities
  • Securities Investor Protection Corporation (SIPC)
  • Trading Mechanisms

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