January 11, 2007 (LBO) – Primary dealers have welcomed a Central Bank decision to use a locally developed messaging system to transact small deals in the government debt market which will cut costs and make it cheaper to service small clients. Primary dealers would be allowed to use local messaging through the wide area network connecting them to the Central Bank instead of the international SWIFT system for transactions below two million rupees, starting next month.
After the Central Bank started the Real Time Gross Settlement (RTGS) system, and scripless trading of government securities, transaction messaging had be routed through the SWIFT system, where each message had to be paid for in Euros.
â€œThe problem with SWIFT is that it is expensive, says Ajith Fernando CEO of the government securities primary dealer, Capital Alliance.
“You pay something like 10 euro cents for every message you send, which is quite a lot when you consider the number of transactions you do a day.â€
The Central Bank Governor Nivard Cabraal said some transactions were also believed to be taking place outside the approved procedure, which could be a threat to the system.
“This may have been particularly due to the fact that using SWIFT was considered to be an expensive method of transferring data,” Governor Cabraal said in the course of delivering a policy announcement last week.
â€œThe Central Bank has introduced a low cost method of transferring data using the Wide Area Network connecting them [primary dealers] with the Central Bank. Accordingly, all primary dealers are now urged to use this method to ensure retail transactions are not proceeded outside this system,â€ he said.
The SWIFT transaction system is a tried and tested system and is secure, but it may be an over kill especially for small transactions.
â€œItâ€™s fine for a transaction that crosses borders,” says Fernando.
“If you are dealing with a bank in New York, SWIFT is a good method. But when Iâ€™m dealing with a company two doors next to me, it doesnâ€™t seem very sensible to send my message all the way to Belgium and back.â€
Primary dealers say the new move will bring down costs and make it more cost effective to service smaller investors.
Before the introduction of scripless trading there was a shortage of small denomination bills to sell to small savers.
But because of the high messaging costs a primary dealer tended to lose money when selling a 10,000 or even a 100,000 bill, so there was little incentive to promote government securities among small savers. Dealers say the Central Bank system could be used even for larger deals after fully testing it with smaller transactions, adding that countries like India which have much larger markets with millions of transactions have their own messaging system because of the cost involved with using international systems.