DvP-III

When you buy or sell a Government Security away from the stock exchanges, the trade still has to settle: securities move one way, money the other. India does this through the Reserve Bank of India, using accounts each member keeps with the RBI, not through a stock exchange's own clearing house.

The workbook names the specific settlement mode used for this: Delivery versus Payment System-III, or DvP-III. In this mode, both the securities and the funds obligations of every member are netted before settlement, so instead of paying and delivering trade by trade, each member ends up with one net securities position and one net funds position for the day.

Three things happen together under DvP-III:

1. Netting. Securities and funds are settled on a net basis — the workbook's own words — cutting the number of movements sharply compared with settling every trade individually.
2. A guaranteed counterparty. CCIL (Clearing Corporation of India Ltd) becomes the central counterparty (CCP) to every trade through novation — it becomes seller to every buyer and buyer to every seller — and guarantees settlement of trades on the settlement date.
3. A fixed cycle. All outright secondary market transactions in G-Secs settle on a T+1 basis. RBI has, however, permitted FPIs to settle OTC secondary market G-Sec transactions on either T+1 or T+2, provided the trade itself is reported on the trade date.

The workbook names a different mode for a different market: OTC corporate bond trades settle bilaterally on DvP-I through a clearing corporation, after being reported within 15 minutes of execution, on a T+0 to T+2 cycle. The workbook does not spell out what distinguishes DvP-I from DvP-III beyond naming each for its own market — DvP-I for corporate bonds, DvP-III for G-Secs — so that finer distinction should not be assumed beyond what is stated here.

A primary dealer sells Rs 50 crore face value of a 10-year GOI bond to a bank in the OTC secondary market on Monday. Both report the trade the same day.

Under DvP-III, the bank does not simply hand over Rs 50-crore-worth of funds against this one trade. Its obligations from all its G-Sec trades that day — this one and every other — are netted into a single funds figure and a single securities figure. If the bank also happened to sell Rs 20 crore of a different G-Sec to a third party the same day, its net securities position for settlement is the difference between what it must deliver and what it must receive.

Settlement itself happens on Tuesday (T+1), with CCIL standing as the central counterparty to both the bank and the primary dealer, so neither party is exposed to the other's possible default. Had the seller instead been a foreign portfolio investor, RBI's rule would let it settle on Wednesday (T+2) instead, provided the trade was reported to the exchange on Monday itself.

Chapter 1 (Introduction to Interest Rate, Interest Rate Instruments and Fixed Income Market), in the section on clearing and settlement of Government Securities, names DvP-III, the T+1 cycle, the FPI T+1/T+2 option and CCIL's novation role together. Chapter 7 (Clearing, Settlement and Risk Management of IRD) repeats CCIL's DvP-III role when describing central counterparties. Expect a direct-recall question on the settlement cycle (T+1, or T+2 for FPIs) and on what CCIL does as CCP.

• DvP-III nets both securities and funds. It is not simply "T+1 settlement" — the netting is the defining feature the workbook names.
• T+1 is the general rule; T+2 is an FPI-specific option, not a general alternative available to all participants.
• The FPI T+2 option is conditional on trade-date reporting. The workbook is explicit that this must be ensured.
• DvP-III is for G-Secs; DvP-I is what the workbook names for OTC corporate bonds. Do not assume the workbook explains the numbering scheme beyond that — it does not.
• CCIL becomes counterparty to both sides through novation. Neither the original buyer nor the original seller is left facing the other's credit risk.