In a move that would create liquidity in bond markets, the Reserve Bank of India (RBI) issued draft guidelines for issuers of repurchase agreements (repos) for corporate bonds. Investors’ risk appetite is expected to increase with the introduction of repos. The central bank is seeking comments on the proposals and then likely will formalise them in a few months.
The repurchase agreements would range from a term of one day to a year. During the repurchase period, the buyer of the security will not be allowed to sell the security. The repurchase agreements would be settled through clearing houses. For instance, any buyer of securities will transfer the funds through his or her bank account to a transitory account with the clearing house, which in return, will transfer the securities from the seller’s account to the buyer’s account and release these funds from the transitory account.
Such a settlement procedure is put in place to lower the settlement risk. However, the investors will remain prone to market risk because their buy or sell orders will not get matched every time. In such cases, the money or the bond will be returned back to them. Going forward, this market risk will also get eliminated via the introduction of a centralized guarantee for all transactions that get done through such a mechanism. All repurchase transactions would be performed on an over-the-counter basis.
According to the draft guidelines, only listed company bonds with a Double A rating or above will be allowed to participate in the repurchase transactions. Short-term instruments such as commercial paper, certificates of deposit and non-convertible bonds of less than one-year maturity will not be allowed for repurchase transactions. Bonds issued by government or other entities as specified by the RBI will also be excluded from such repo transactions.
Please click on the following link to view the RBI’s draft guidelines: Draft Guidelines on Repo in Corporate Debt Securities
Gregg D. Killoren
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