CODE OF CONDUCT FOR USING RBIS NEGOTIATED DEALING SYSTEM

ORDER MATCHING (NDS-OM) Dated October 1st 2011 (updated as on

December 31, 2012)

[The contents of the code are also applicable to Voice-Based deals done and
reported on PDO NDS i.e. Over the Counter (OTC) Market]

This Code should be adhered to by all SGL/CSGL account holders while

executing trades on NDS-OM and in the OTC Market, vide RBI Circular
IDMD.DOD.No,06/10.25.66/2012-13 dated 6.12.12

Preamble:
The Negotiated Dealing SystemOrder Matching System (NDS-OM), hereinafter
referred to as the System is an anonymous electronic order matching platform, owned
by RBI. The System was launched on August 1, 2005. The system facilitates secondary
market trading in all kinds of Central Government Securities, State Government
Securities, Special Securities and Treasury Bills. The system is hosted and maintained
by the Clearing Corporation of India Limited (CCIL) for and on behalf of RBI.

The System users place their bids and offers on the NDS-OM screen. The system
matches all bids and offers on price/time priority or yield/time priority that is, within the
orders of the same price or yield (as applicable), it matches the oldest order first. For
example, if, for 7.80 % Government Security 2021, there are two bids of Rs. 5 crore
each at price Rs 96.50, one put at 9.30 am, and another at 9.45 am, the bid at 9.30 am
will get priority for matching or for executing the trade of a seller who wants to sell at the
bid price. As soon as the order placed at 9.30 am has been filled/executed/dealt upon/
matched, the bid placed at 9.45 am gets the priority. In case there is a bid for a price
higher than Rs 96.50 at 9.45 am, the higher price, though put at a later time, would get
priority. Similar time priority logic applies for offers /sell orders with the lowest price/yield
offered always getting the highest priority.

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The system ensures complete anonymity among participants as counterparty
information is not available to any of the system participants. The System operates in a
straight through processing (STP) environment viz., all trades concluded on the system
flow directly to CCIL for settlement. CCIL acts as the central counterparty (CCP) for
settlement of all trades concluded on the system subject to its Bye Laws, Rules and
Regulations.
Access to the system is available only to those entities that have been granted
membership by RBI. Others can access it through any of the system members with
whom the former hold their gilt and fund accounts.

The system ensures complete anonymity about participants and, therefore, ensures fair
pricing. The anonymity of the system gives an opportunity to the larger players to
execute their orders without the prices moving adversely against them.

The system provides both pre-trade and post-trade information and on real-time basis.
This ensures transparency and better price discovery as against the voicemarket
(direct or brokered), where there could be a time delay in information dissemination.

Trading happens in standardized lot size of Rs. 5 crore, and in multiples of Rs. 5 crore,
providing enough liquidity in the system.

To facilitate trading in small lot sizes of less than Rs. 5 crore, a separate 'odd lot'
segment - with the minimum trading lot size being only Rs. 10,000/ (for dated
securities) and Rs. 25000/- (for Treasury Bills) is also available in the system.
Participants get to know the depth of the market as the system shows the order depth in
terms of number and total amount of sell/buy orders for each security.

The trade details (time stamp, name of the security, quantity traded, price, and yield)
are disseminated through the NDS-OM webpage hosted on CCILs website
http://www.ccilindia.com/OMHome.aspx.

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The System has inbuilt security features (pop-ups) which a User has to pass through
before a Buy or Sell order is placed on it. Each pop-up, gives sufficient warning to the
User reminding him about the nomenclature of the security, clean price, YTM etc, based
on the data input by the User.

The system has a user hierarchy structure which decides role based access privileges
to the system i.e., whether a user has dealing rights or not or whether the user is a back
office or mid office user in which case he would not enjoy dealing rights. Even for a
dealer, the system facilitates various controls such as only bids or only offers operate
only on the proprietary book or on the client book or both. These decisions are to be
input by the respective Head of Treasury in the system based on specific internal
requirements.

Heads of Treasuries/Chief Dealer can also set the maximum Single Order Limit in
respect of each Dealer. Apart from acting as a prudent internal risk control mechanism,
this feature also helps in minimizing errors in inputting the quantity. The Head of
Treasury also has the option to allow/disallow a Dealer to short sale.

Code of conduct for usage of NDS OM system:

This Code of Conduct, hereinafter referred to as the Code, seeks to lay down
directives to the users of NDS-OM system, so that the anonymity, ease of dealing and
settlement, provided by the System are not mis-utilised for misleading or misinforming
the market, and deals resulting into large losses or undue enrichments are not
undertaken. Floating Rate Bonds, Treasury Bills and Cash Management Bills are
kept out of this Code for the present.

1. Heads of Treasuries (HoTs) should ensure that users accessing the system are
duly authorized. Procedures laid down to prevent unauthorized access to the
system (User ID, passwords) etc should be properly followed to prevent abuse of
the system.

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2. New Dealers, authorized to use the System should be trained for at least 15
days, before being allowed to handle the System. Users are required to acquaint
themselves with the NDS-OM guidelines and related RBI guidelines/procedures.

3. Users of the system shall observe high standards of integrity and just and fair
principles of trading while trading either on their own account or on behalf of their
clients.

4. Users are required to use the security features inbuilt in the system. They should
appreciate the features such as highspeed trading and STP for settlement
which the system provides, and the fact that by ignoring the in-built security
features, the users are susceptible to committing costly (sometimes in lakhs of
rupees) mistakes.

5. Any loss arising out of trades executed by ignoring the system alerts and the
internal filters would have to be borne by the user/entity.

6. Bids/Offers placed on the System, should be free from market manipulation and
fraudulent practices. Examples of such bids and offers are :

i) The practice of entering into arrangements for sale or purchase of a

Government security where there is no change in beneficial interests or
market risk or where the transfer of beneficial interest or market risk is
only between parties who are acting in concert or collusion.
ii) Deliberately trying to manipulate the prices of infrequently traded
securities at quarterly/annual closing dates.
iii) Deliberately putting wide bids and offers on the NDS- OM for the
frequently traded securities, such that the party buying or selling at the
price displayed commits a Big-Figure mistake.

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(Example: A security has last traded at Rs. 90.56. If the next offer is put at Rs. 91.56 or
Rs. 91.57 by a seller or next bid is placed at Rs. 89.55 or Rs. 89.56 either deliberately
or erroneously, any party doing a trade at such prices would be committing a big-figure
mistake.)

Explanation:

a) In the above example, if the market continues to trade one big figure higher or
lower, after the first big figure change deal,(on account of some market event), the
subsequent deals would not be considered as big figure error deals .

b) Placing a wide bid/offer at the start of the day, though within the price band
applicable for the day would not constitute as misleading the market to commit Big
Figure mistakes.
(However, Market Makers are expected to open the market with narrow bids and
offers, unless there is an event warranting wider spreads within the price-band set. At
the same time Market Takers are expected to be more cautious while dealing at
opening prices, which are wide)

Procedure for reversal of trades done on NDS-OM:

(i) Big-Figure Mistakes : Some illustrative examples of big-figure mistakes are as

under :

An offer is put at Rs.91.56 or Rs.91.57 for a security that was last traded
at Rs.90.56. Once the offer is hit by mistake without realizing the change
in the big figure, it would be considered as a Big-figure mistake by the
buyer. The market, however, reverts to bids and offers at around Rs.
90.56 after the erroneous trade.
A security was last traded at Rs. 96.50, and the next bid is placed at Rs
95.52. If the bid is hit by a seller by mistake without realizing the change in

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 the big figure, such mistakes would be considered as, big-figure
mistakes. The market reverts to bids and offers around Rs.96.50 after the
erroneous trade.

(ii) A bid or offer placed within the yield band set under the code of conduct, (either
side of FIMMDAs previous days closing price) at the start of the day, would not
constitute a Big-Figure mistake, as markets can gap, at such times.

The Code enjoins upon the users not to deliberately put such wide bids and offers
from the ongoing market rates (on the NDS- OM) that can lead other users to commit
Big-figure mistakes. In case big-figure mistake trades get executed, the following
procedure should be adopted to ensure that no undue enrichment and/or losses
occur to either of the counterparties:

a. The party which notices the big-figure error, (irrespective of whether the
party has lost or gained due to the big figure error) should immediately
inform FIMMDA about such a deal. On being informed about the name of
the counterparty, the off-market deal should be reversed as early as
possible.

b. As far as possible, a reversal deal should be put through on the same

day, on the PDO-NDS, for the same security, same amount (face value),
and at the same price. In case this is not possible; the difference should
be settled in cash the next day.

c. Both the counterparties should inform FIMMDA about the reversal

transaction on the same day latest by 6.00 pm. In respect of cash
settlement on the next day, the same should be informed to FIMMDA at
the earliest, but not later than the market closing hours on the same day.

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(The above reversal methodology is suggested, as erroneous trades done on the NDS-
OM can be reversed only through PDO NDS. On the other hand, such erroneous
deals, if done over the Voice based system should be corrected before reporting on
the PDO-NDS)

7. Use of internal filters: The System provides for price filters/Single Order
Limit/Short Sale checks to be put in place, in each individual terminal of a
Dealer. Any loss arising out of ignoring/overriding the filter would have to be borne
by the user entity.

8. Placement of Internal Filters ( IF) on the System/ Setting the Trading Range
for the Day : At the start of the day, a maximum IF of 20 bps (for Government
Securities) or 25 bps (State Development Loans (SDLs), Oil Bonds and Special
Bonds) for Bids/Offers for the day, should be placed over the previous days
FIMMDA closing valuation yields of all securities (example: If the closing
valuation Yield of 8.15% GS 2022, is 8.18 on December 11, 2012, an IF of 20
bps would be at 7.98 8.38 for December 12, 2012).The IF would also set the
Yield band/range for the day. In the previous example, the IF being at 7.98
8.38, the market should not move beyond this range for 8.15% - 2022, on
December 12, 2012).

Further More:

a. The Yield Based band will not be applicable on Monetary Policy and
Union Budget announcement day.

b. The Yield-Based bands will not be applicable for odd lots (single trade
ticket size less than Rs 5 crores).

c. For Government of India securities, the market should observe a yield

band of 20 bps on either side of the closing yield as shown in FIMMDAs
previous days end of the day valuation sheet.

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 d. In the case of State Development Loans (SDLs), Oil Bonds and Special
Bonds a uniform yield - based band of 25 bps on either side of the
previous days FIMMDAs valuation of each individual SDL will be
applicable. Procedure for calculation of SDL, Oil and Special Bonds is
explained under Important Note.

e. On SDL Auction days, after the auction results are announced, the market
may observe a yield-based band of 25 bps on either side of the auction
cut-off yield during the remaining part of the trading day. (Explained further
under Important Note)

f. On G.Sec Auction days, after the auction results are announced, the
market may observe a yield-based band of 20 bps on the YTM of the
auction cut-off price, during the remaining part of the trading day.

As there are NO HARD FILTERS for OTC deals done outside the NDS-OM system,
market participants should abide by a system of SELF-DISCIPLINE and ensure
meticulous compliance, with the Yield-Based price bands.

Important Note:

Bands for dealing in State Development Loans and Special Securities (other than Oil
Bonds):

i. The closing prices of SDL/SPECIAL SECURITIES for daily valuation

purposes and trading bands for the subsequent days will not be related.
ii. While for Valuation purposes, the prices of SDL/SPECIAL SECURITIES will
be calculated by adding 25 bps to the relevant tenor closing G.Sec Par-
Yield for the day (until this is revised after discussions with the wider market
participants), the Trading Band will be arrived at based on the last
SDL/SPECIAL SECURITIES auction, provided the aggregate amount
accepted is at least Rs 1500 crores, and at least 3 states have been
auctioned.

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A. For SDL/Special Securities which are not traded (minimum single Rs 5
crore lot deal) or for which there have been only Odd-Lot trades on any
particular day:

The methodology for arriving at the Trading Band Spread for

SDL/Special Securities over and below the relevant tenor closing G.Sec
Par-Yield of the previous day would be as follows:

STEP 1: The weighted average of the weighted average yields of the

SDL/SPECIAL SECURITIES auction (provided the auction is for 3 states
and minimum Rs 1500 crore accepted auction amount), will be calculated.

STEP 2: The G.Sec Par Yield curve will be generated at the cut-off
timing for submission of bids (currently at 12 noon) of the day the
SDL/SPECIAL SECURITIES auction is held.

STEP 3: The spread between the G.Sec Par Yield and the Weighted
Average of the weighted average yields will be arrived at by subtracting
the result of Step 2 from Step 1.

(Example, if Step 1 gives 8.88% as the weighted average from the

auctions and the 12 noon 10 year Par-Yield is 8.16%, the spread
arrived at would be 72 basis points. This spread will remain constant
across the yield curve and for all days until the results of the next
SDL/SPECIAL SECURITIES auction for minimum Rs 1500 crores and 3
states, is announced.)

STEP 4: The spread arrived at would be added to the relevant tenor

G.Sec par-yields of each individual SDL/SPECIAL SECURITIES to give
the Base Yield to be used for arriving at the Trading Bands for the
respective SDL/SPECIAL SECURITIES, immediately following the
auction, as also for subsequent days, until another SDL/SPECIAL
SECURITIES auction takes place. {Example1: If the 10 year G.Sec par-
yield is 8.18% and the Spread is 72 bps, the Base Yield for a 10 year

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 SDL/SPECIAL SECURITIES would be 8.90% (8.18+0.72). Example 2: If
the 5 year G.Sec par-yield is 8.17%, the spread of 72 bps would remain
constant, and the Base Yield for 5 year SDL/SPECIAL SECURITIES
would be 8.89% (8.17+0.72); similar procedure will be adopted along the
yield curve).

STEP 5: The Trading Band for any tenor SDL/SPECIAL SECURITIES

would be (+)/(-) 25 bps over and below the Base Yield for the respective
tenor SDL/SPECIAL SECURITIES {Example 1: For a 10 year SDL/
SPECIAL SECURITIES where the Base Yield is 8.90%, the Trading
Bands would be 9.15% (8.90+0.25) and 8.65% (8.900.25);

Example 2: For a 5 year SDL/SPECIAL SECURITIES, where the Base-

Yield is 8.89%, the Trading Bands would be 9.14% (8.89+0.25) and
8.64% (8.89-0.25)}.

B. For SDL/SPECIAL SECURITIES which are Auctioned, provided minimum

accepted amount Rs. 1500 crores and 3 states Auctioned Same
procedure as outlined in (A) above; the 10 year G.Sec par- yield at the
cut-off timing for submission of bids (currently at 12 noon) of the auction
day will apply for calculating the Trading Bands, for the Auctioned
Securities. For all other SDL/SPECIAL SECURITIEs, the trading bands
would be calculated for each SDL/SPECIAL SECURITIES, depending on
the respective tenor Base Yield at the cut-off timing for submission of bids
for the auction.
C. For SDL/SPECIAL SECURITIES which are traded for at least a minimum
single lot of Rs 5 crores on any day, including post Auction trades

For those SDL/SPECIAL SECURITIES , which trade with a minimum volume of Rs 5

crores on the previous day, the Trading Band applicable would be (+)/(-) 25 bps of
the previous days traded yield Trading bands for Government securities and State
Development Loans/Special Securities with residual maturities less than 365 days:

Trading Band for Oil Bonds:

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 The Trading Band for Oil Bonds is calculated in the following manner:

On any trading day if an oil bond is traded for a minimum of 5 trades and for a
total of not less than Rs 25 Crores (all trades between the trading band), the
trading band for the particular bond for the following day will be +/- 25bps of the
Closing Yield.

If the above conditions are not met, the trading band for an Oil Bond on any day
will be +/- 25 bps of the FIMMDA Closing Valuation (which is 25 bps over the
corresponding G.sec Par yield) of the previous day.

The trading band methodology of other Special Securities like fertilizer bonds, FCI
bonds, and SBI bonds etc, will be same as mentioned above, similar to the SDLs.

There will be no Trading Bands for securities with residual maturity of less than 365
days. However, genuine Big-Figure mistakes should be avoided, and if committed
would need to be reversed.

Under normal circumstances, market participants should not breach the Yield
band/range during the course of the day, either on the NDS-OM or on the PDO-
NDS.

Individual users are free to set lower filters, lower for successive or opening trades, to
avoid Big-Figure mistakes and undue losses/undue enrichment. This facility is
already available on the NDS-OM.

Note: All SGL account holders providing gilt account facility, should instruct their clients
(Gilt Account Holders) not to place requests with the custodians for purchase/sale of
Government securities at prices outside the days price band

In case of extra-ordinary circumstances warranting a wider Yield band/range, the

yield band may be relaxed in consultation with RBI.

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In case of a genuine mistake resulting in breaching the yield-band for the day, both the
buyer and seller should inform FIMMDA of the mistake committed in breaching the
yield-band.

The Head of Treasury should be responsible for the internal discipline of ensuring that
the internal filter is not breached under normal circumstances.

Violation of Code of Conduct:

As any violation of Code of Conduct would be viewed seriously, it is expected that all
users will strictly adhere to the Code of Conduct in letter and spirit.

The above code of conduct is mutatis mutandis (with the necessary

modifications) applicable to all transactions done and reported on PDO-NDS.

The above Code incorporates the following Code of Conduct related Circulars issued
after 1.10.2011:
i. FIMCIR/2011-12/46 dated 24.02.2012
ii. FIMCIR/2011-12/53 dated 13.03.2012
iii. FIMCIR/2012-13/03 dated 27.04.2012
iv. FIMCIR/2012-13/07 dated 17.07.2012

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