As per a new directive of the Insurance Regulatory and Development Authority (IRDA) which has put all the insurers to a quandary, the buying and selling of sovereign securities can only happen on anonymous trading screens.
“Several insurance companies have approached IRDA. We feel IRDA should issue some clarification. This is a very strict directive… It would be very difficult for insurance companies to do business without a broker to screen directly,” said a K. CFO Life Company told ET.
IRDA has also stipulated that when using intermediaries for trades in equities and corporate bonds, no broker should manage more than 5% of the total volume in secondary market transactions. The insurance regulator has included these terms in the ‘Master Circular on Investments’ while reviewing the first set of instructions issued in 2016.
About half of insurance companies’ portfolios are held in sovereign papers and other state-backed securities. Out of around 100 government bonds, around 5-6 are liquid papers.
IRDA in its ‘Master Direction’ issued on October 27, 2022 has clearly stated that “all secondary market trading in Government securities shall be conducted through NDS-OM only.” Negotiated Dealing System – Order Matching (or, NDS-OM), powered by the Reserve Bank of India (RBI), is a faceless trading platform where orders are matched without revealing the identity of the buyer or seller.
“But in the absence of proper bid-ask quotes from brokers, getting the right price for illiquid papers will be a challenge.
The second directive to spread business among a large number of brokers may force companies to enlist less skilled brokers. The regulator’s intention may be to reduce transaction costs and bring in more transparency. But, it cannot help if a trader is unable to locate the fine quotes which usually come from brokers,” another senior industry executive told ET. Most of us feel that IRDA should be revisited Must watch and change the circular,” said the person.
In trades executed on the NDS-OM platform, the Clearing Corporation of India (CCIL) acts as the central counterparty which provides guaranteed clearing and settlement for transactions in money, government securities, foreign exchange and derivatives (such as currency forward and interest rate swaps). provides work. ,
For a handful of liquid securities that have ready buyers, the execution and settlement of trades usually happens smoothly on the NDS-OM screen. However, about 25-30% of deals by insurers are ‘voice trades’ – where a trader calls a broker or an entity (which will be a buyer or seller) to get a quote and then trades on NDS-OM . The buyer and seller simultaneously perform punching in the order. Alternatively, the two institutions may enter into a bilateral deal, involving a broker who issues a contract note and reports it on the stock exchange. Here also trade information is given on NDS-OM.
Insurance industry bodies are expected to send their representations soon, seeking more time to implement the directive, amending the language of the circular regarding distribution of trade volumes to government trades as well as to brokers. Another person said, “Today, an insurance company usually uses 8-10 brokers. With a limit of 5%, the number of brokers needs to be increased to 20.”
As per the IRDA directive, the total volume of business including debt and equity granted to each listed broker will be monitored on a three-month basis to ensure that any empaneled broker does not exceed the limit of 5% of the total actual secondary market. is not more. Transactions through brokers, up to that particular period.
The Insurance Act, 1938 requires a life insurer to invest his controlled funds in accordance with section 27A and a general insurer to invest his total assets in ‘approved investments’ as per section 27B. The Act further requires a life insurer to hold not less than 50% and a general insurer to hold a minimum of 30% in approved securities, including investments in Government of India securities.