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New valuation norms for bond holdings soon

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MUMBAI: Banks and bond market traders are set to change the way they value their bond holdings on a daily basis as a fallout of regulatory intervention following some questionable practices when prices crashed in the December quarter, said two people familiar with the developments.

The Fixed Income and Money Market Dealers Association, which sets the rules of the game in the bond markets, would soon say that daily closing prices would reflect the weighted traded price for the last thirty minutes of trading rather than the last traded price, said those people who did not want to be identified.

Another suggestion includes that minor trades like for Rs 5 crore or even marginally higher trades be ignored for computing since they could distort the valuations.

FIMMDA CEO DVS Prasad confirmed that some suggestions are being taken but denied that it’s linked to the December trade. “We keep on receiving suggestions. It may not be specific to this incident. Whatever we have to implement will have to be approved by our board and then the RBI before being implemented,” Prasad said.

Once this is done, it would be in line with the foreign exchanges and equity markets which take the last half hour’s weighted average price for valuing assets. “FIMMDA has been asking traders for suggestions on how best to value these investments after the December fiasco,’’ said a member of FIMMDA who did not want to be identified. “So far the consensus is that we should move to a weighted average traded price in the last half hour of trade rather than the last dealt price. This suggestion has to be okayed by the RBI.”

A sharp jump in the prices of bonds towards the close on December 29, the last accounting day for the quarter, drew the ire of the Reserve Bank of India as it suspected that such a movement was not witnessed under normal circumstances for years. This many in the market believed was to reduce accounting losses for bond holders who were staring at losses after the yields on government bonds surged 87 basis points in the quarter. A basis point is 0.01 percentage point. Subsequently, the RBI directed FIMMDA, which sets prices of bonds for official purposes, to lower the prices of select securities, dashing hopes of banks looking to reduce losses in their bond portfolio. At one stage the yields in this fiscal had surged as much as 100 basis points inflicting losses on holders. Bond yields and prices move in opposite directions.

“The suggestion it seems is to go with the weighted average price. But then there are also some other suggestions like that outlier trades of Rs 5 crore or Rs 10 crore should be ignored while looking at the average because it could distort the picture. And if there has been a sharp 30 paise jump in the last few minutes, a half an hour average is not the right way to look at it,” said the second person aware of the suggestions.

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