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Marginal Standing Facility (MSF) - a new concept

What is Marginal Standing Facility ? / Definition of Marginal Standing Facility - RBI (we give below details in plain language for non bankers) :-

RBI in its Monetary Policy announced on 03rd May, 2011 that it will soon be introducing Marginal Standing Facility (MSF). Later on RBI announced that MSF scheme has become effective from 09th May, 2011.

Marginal Standing Facility Rate : Under this scheme, Banks will be able to borrow upto 1% of their respective Net Demand and Time Liabilities". The rate of interest on the amount accessed from this facility will be 100 basis points (i.e. 1%) above the repo rate. This scheme is likely to reduce volatility in the overnight rates and improve monetary transmission.

In the policy statement RBI has also declared "The stance of monetary policy is, among other things, to manage liquidity to ensure that it remains broadly in balance, with neither a large surplus diluting monetary transmission nor a large deficit choking off fund flows."

What is Marginal Standing Facility - RBI circular ? (The below details are for Bankers, who needs the technical language):-

The Marginal Standing Facility Scheme has been introduced on the lines of the existing Liquidity Adjustment Facility – Repo Scheme (LAF – Repo). The salient features of the Scheme are as under:

1. Effective Date

This facility will be effective from May 9, 2011.

2. Eligibility

All Scheduled Commercial Banks having Current Account and SGL Account with Reserve Bank, Mumbai will be eligible to participate in the MSF Scheme.

3. Tenor and Amount

Under the facility, the eligible entities can avail overnight, up to one per cent of their respective Net Demand and Time Liabilities (NDTL) outstanding at the end of the second preceding fortnight. But for the intervening holidays, the MSF facility will be for one day except on Fridays when the facility will be for three days or more, maturing on the following working day. In the event, the banks’ SLR holdings fall below the statutory requirement up to one per cent of their NDTL, banks will not have the obligation to seek a specific waiver for default in SLR compliance arising out of use of this facility in terms of notification issued under sub section (2A) of Section 24 of the Banking Regulation Act, 1949.

4. Timing

The Facility will be available on all working days in Mumbai, excluding Saturdays between 3.30 P.M. and 4.30 P.M.

5. Rate of Interest

The rate of interest on amount availed under this facility will be 100 basis points above the LAF repo rate, or as decided by the Reserve Bank from time to time. (as on 22.8.2011-- 9%)

6. Discretion to Reserve Bank

The Reserve Bank will reserve the right to accept or reject partially or fully, the request for funds under this facility.

7. Mechanics of operations

i) The requests will be submitted electronically in the Negotiated Dealing System (NDS). Eligible members facing genuine system problem on any specific day, may submit physical requests in sealed cover in the box provided in the Mumbai Office, Reserve Bank of India, to the Manager, Reserve Bank of India, Securities Section, Public Accounts Department (PAD), Mumbai Office by 4.30 P.M.

ii) The NDS provides for submission of single or multiple applications by the member. However, as far as possible only one request should be submitted by an applicant.

iii) The MSF will be conducted as "Hold-in-Custody" repo, similar to LAF - Repo.

iv) On acceptance of MSF requests, the applicant’s RC SGL Account will be debited by the required quantum of securities and credited to Bank’s RC SGL Account. Accordingly, the applicant’s current account will be credited with the MSF application amount. The transactions will be reversed in the second leg. In case the second leg falls on a holiday, the reversal date will be the next working day.

v) The MSF transactions between Reserve Bank and counter parties which would involve operation of the RC SGL Account would not require separate SGL forms.

vi) Pricing of all securities including Treasury Bills will be at face value for MSF operations by Reserve Bank. Accrued interest as on the date of transaction will be ignored for the purpose of pricing of securities.

7. Minimum request size

Requests will be received for a minimum amount of Rs. One crore and in multiples of Rs. One crore thereafter.

8. Eligible Securities

MSF will be undertaken in all SLR-eligible transferable Government of India (GoI) dated Securities/Treasury Bills and State Development Loans (SDL).

9. Margin Requirement

A margin of five per cent will be applied in respect of GoI dated securities and Treasury Bills. In respect of SDLs, a margin of 10 per cent will be applied. Thus, the amount of securities offered on acceptance of a request for Rs.100 will be Rs.105 (face value) of GoI dated securities and Treasury Bills or Rs.110 (face value) of SDLs.

10. Settlement of Transactions

The settlement of all applications received under the MSF Scheme will take place on the same day after the closure of the window for acceptance of applications.

Refer: (Policy Rates)


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