InvestorQ : What does Shut Period mean when it comes to the government bonds market?
Chandralekha Desai made post

What does Shut Period mean when it comes to the government bonds market?

Rashi Mehra answered.
1 year ago

‘Shut period’ means the period for which the securities cannot be delivered. During the period under shut, no settlements/delivery of the security that is under shut will be allowed. The main purpose of having a shut period is to facilitate the servicing of the securities, i.e., finalizing the payment of the coupon and the redemption proceeds, and to avoid any change in ownership of securities during this process. Currently, the shut period for the securities held in SGL accounts is one day.

Delivery versus Payment (DvP) is the mode of settlement of securities, wherein the transfer of securities and funds happens simultaneously. This ensures that unless the funds are paid, the securities are not delivered, and vice versa. The DvP settlement eliminates settlement risk in transactions. There are three types of DvP settlements, namely, DvP I, DvP II, and DvP III, which are explained below.


The securities and funds legs of the transactions are settled on a gross basis, i.e., the settlements occur transaction by transaction without netting the payables and receivables of the participant.


In this method, the securities are settled on a gross basis whereas the funds are settled on a net basis, i.e., the funds payable and receivable of all transactions of a party are netted to arrive at the final payable or receivable position, which is then settled.


In this method, both the securities and the funds legs are settled on a net basis, and only the final net position of all the transactions undertaken by a participant is settled. The liquidity requirement in a gross mode is higher than that of a net mode since the payables and receivables are set off against each other in the net mode.