6 multinational banks flag Feb. 7 holiday, say move puts them at big risk

Few outside the financial markets felt that the decision to declare February 7 a public holiday to mourn the disappearance of Lata Mangeshkar exposed the stock market to significant risk, as exchanges opted to keep their stores open even then. that the banks and the foreign exchange market were closed.

Brokers had to knock on different doors to arrange funds, mutual funds were caught in a regulatory dilemma, and many transactions by foreign portfolio investors could not be confirmed. The stress and difficulties of institutions, market intermediaries and custodians have now been explained with six major multinational banks writing a joint letter on April 6 to NSE Clearing Limited – the institution responsible for clearing and settling all transactions on the NSE.

The legendary singer passed away on February 6, following which the government of Maharashtra declared a public holiday on February 7 (Monday) while the Reserve Bank of India announced that it would be a bank holiday and settlement for government securities, money and money markets under the negotiable regime. Instrument Act.

“Many MFs have not been able to organize funds”

“But there was a sudden crisis because Monday was not declared a public holiday for the stock market. So payments for trades that took place on Thursday had to take place on Monday, and margins and confirmation Friday trades were to be done on the same day as Also there was no confirmation on quite a few REIT (Foreign Portfolio Investor) trades The whole problem could have been avoided if the exchanges, as well as banks, had also declared Monday a public holiday,” one market person said.

These six banks are JP Morgan, Deutsche Bank, Citi, BNP Paribas, Standard Chartered and HSBC. For weeks they debated among themselves whether to issue such a letter, but eventually moved on because the system was unwittingly placed in a vulnerable position and such “forced vacation” triggering events could be repeated in the future. coming.

On such occasions, they have requested that banks as well as stock exchanges declare holidays so that payments, margins and trade confirmations can seamlessly transition to the next day. More so, the Securities and Exchange Board of India (Sebi) shortening the settlement cycle to “T+1” (or trading plus one day) from “T+2”.

“…Many MF (mutual fund) schemes were unable to arrange funds in the absence of non-availability of money market regulation and had to contact Sebi’s MF division to understand if the borrowing would be construed as a violation of the market as they are not allowed to borrow for investment purposes While some MFIs were in a positive net cash position, they had patterns with a negative cash balance at the end of the day and an associated regulatory risk,” says the letter from foreign banks that act as custodians for REITs and local institutions like MFs and insurance companies.

Money market funds are allowed to borrow to meet the repayment and payment of dividends, but not to invest, in accordance with the regulations.

Discussions held

Several market intermediaries held discussions with clearing house officials throughout Sunday night to provide an update on the situation. “On Feb. 7, REITs could not sell dollars to raise rupees using Chennai or Delhi bank offices because the foreign exchange market does not exist outside of Mumbai,” a senior brokerage official said. .

The letter points out that “the commercial confirmation of the February 4 trades was also fraught with risk and there were several rounds of discussions with the clearing house on how to proceed with the confirmation process in the absence of margin availability. Although there was verbal confirmation of non-applicability of tip margin penalties, there was no clear direction from the clearinghouse in this regard. had to use their own judgment to confirm or not and we understand that many institutional transactions had to go for hand delivery”.

In hand-delivery transactions, the risk arising from mismatches and lack of confirmation passes from custodians to brokers. “There are always days in a year that are public holidays but the exchange is open for trading. There is no problem because the systems are adjusted accordingly in advance. But it was a situation unprecedented because the software systems had already entered end-of-life “for Thursday and Friday, and according to the process, the next stage of transactions for Thursday and Friday was to take place on Monday morning,” said a banker.

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