STRIPS stands for Separate Trading of Registered Interest and Principal Securities. “STRIPS” are distinct, separate securities that are created from the cash flows of a Government security and shall consist of – (i) Coupon STRIPS, where the single cash flow of the STRIPS represents a coupon flow of the original security (ii) Principal STRIPS, where the single cash flow of the STRIPS represents the principal cash flow of the original security. Thus, Stripping is a process of converting periodic coupon payments and principal of an existing Government Security into tradable zero-coupon securities, which will usually trade in the market at a discount and are redeemed at face value. For instance, stripping a five-year Government Security would yield 10 coupon securities (representing the coupons), maturing on the respective coupon dates and one principal security representing the principal amount, maturing on the redemption date of the five[1]year security. Stripping of a security shall thus result in Coupon STRIPS for all outstanding coupon payments and one Principal STRIP for the redemption payment. Each STRIP accordingly becomes a ZCB since it has only one cash flow at maturity. Individual STRIPS (Coupon as well as Principal) will have a face value of Rs.100.
ISIN
Each STRIP shall be a distinct Government Security and shall have a separate and distinct International Securities Identification Number (ISIN). Normally, ISIN for Government Securities are assigned at the time of auction of the securities. However, in the case of STRIPS, as these securities are created at the request of the participant, ISIN as well as nomenclature for STRIPS are created automatically based on a predefined algorithm All Coupon STRIPS with the same maturity date shall have the same ISIN, regardless of the underlying security from which the interest payments were stripped, and coupon STRIPS of the same cash flow shall be fungible (interchangeable). The ISIN of Coupon STRIPS shall be different from the ISIN of Principal STRIPS, even if they have the same maturity date, and shall not be fungible
Nomenclature for Coupon STRIPS
GSDDMONYYYYC; where GS=Government Security, DDMONYYYY=date of maturity of the STRIPS and C=Coupon STRIP. (Ex. A coupon STRIP maturing on March 25, 2011 would be written as GS25MAR2011C)
Nomenclature for Principal STRIPS
x.xx%GSDDMONYYYYP; where x.xx is the coupon of the parent security from which the principal STRIP has been generated, GS=Government Security, DDMONYYYY=date of maturity of the STRIPS and P=Principal STRIPS. (Ex. A principal STRIP generated from, say, 7.99%2019 maturing on 02 July 2019 will be written as 7.99%GS02JUL2019P)
Other characteristics
STRIPS will be reckoned as eligible Government Securities for SLR purposes and retain all the characteristics of Government Security. They will be eligible securities for market repo as well as repo under LAF of RBI but with appropriate haircut. Short sale of STRIPS shall not be permitted.
Pricing of STRIPS
Each individual STRIP will be priced as a ZCB g-sec. The transaction price of each such STRIP can be arrived by discounting the cash flow of a particular maturity (either Coupon or Principal flow) with the agreed ZC yield for that maturity. Further, the same can be expressed as price per Rs. 100 FV of each STRIP. (Source: isecpd)