IRDA directive to shun brokers for gilt trades baffles insurers

Insurance companies, a significant investor group in the financial markets, have been told by the regulator that they can no longer cut deals with brokers for trading in government securities.

According to a new directive by The Insurance Regulatory and Development Authority (IRDA) that has sent all insurers into a tizzy, buying and selling of sovereign securities can only happen on the anonymous trading screen.

"Several insurers have reached out to IRDA. We think IRDA should issue some clarification. It's too harsh a directive... insurance companies will find it very difficult to directly trade thinly-traded securities on screen without a broker," the CFO of a life company told ET.


IRDA has also laid down that while using intermediaries for trades in equities and corporate bonds, no broker should handle more than 5% of the total volume in secondary market transactions. The insurance regulator has inserted these conditions in the 'Master Circular on Investments' while reviewing the earlier set of directives which were issued in 2016.

Close to half the portfolio of insurers are held in sovereign papers and other state-backed securities. Of the 100-odd government bonds, about 5-6 are liquid papers.

IRDA, in the 'Master Directive' released on October 27, 2022, has categorically said that "all secondary market trading in government securities shall be placed via NDS-OM only." The Negotiated Dealing System - Order Matching (or, NDS-OM), operationalised by the Reserve Bank of India (RBI), is a faceless trading platform where orders are matched without revealing the identity of the buyer or the seller.

"But it would be a challenge in getting the right price for illiquid papers in the absence of proper bid-ask quotes from brokers.


The other directive on spreading trades across a larger number of brokers could force companies to empanel less efficient brokers. The intention of the regulator may be to lower transaction cost and bring in greater transparency. But, it may not help if a trader is unable to fish out fine quotes which typically come from brokers," another senior industry official told ET. "Most of us feel IRDA should take a relook and tweak the circular," said the person.

In trades executed on the NDS-OM platform, the Clearing Corporation of India (CCIL) acts as the central counterparty providing guaranteed clearing and settlement functions for transactions in money, government securities, foreign exchange and derivatives (like currency forwards and interest rate swaps).

For the handful of liquid securities, for which there are ready takers, the execution and settlement of trades usually take place smoothly on the NDS-OM screen. However, about 25-30% of the deals by insurers are 'voice trades' - where a trader calls a broker or an institution (which would be the buyer or the seller) to obtain quotes and then put through the trade on NDS-OM with the buyer and the seller simultaneously punching in the orders. Alternatively, two institutions can strike a bilateral deal, involving a broker which issues a contract note and reports it on the stock exchange. Here too, the trade is reported on NDS-OM.

The insurance industry bodies are expected to send in their representations soon, asking for more time to implement the directive, modification of the language of the circular with regard to government trades as well as on the distribution of trade volumes to brokers. "Today, an insurance company typically uses 8-10 brokers. With a 5% cap, the number of brokers has to be increased to 20," said another person.

According to the IRDA directive, the total volume of the business including debt and equity given to each empanelled broker shall be monitored on a rolling three months basis to ensure that none of the panel brokers exceeds the limit of 5% of the total actual secondary market transactions through brokers, up to that particular period.

The Insurance Act, 1938 requires a life Insurer to invest his controlled funds as per Section 27A and a general insurer to invest his total assets as per Section 27B in 'approved investments'. The Act further requires a life insurer to hold not less than 50% and a general insurer to hold a minimum of 30% in approved securities, which includes investment in GOI securities.