In its attempt to deepen the corporate debt market, the Securities and Exchange Board of India (Sebi) is considering a framework to bring transactions in over-the-counter (OTC) products such as corporate bonds under the domain of clearing entities.
Addressing a seminar organised by the Federation of Indian Chambers of Commerce and Industry (Ficci) here On Thursday, Sebi Chairman C B Bhave said it may have to take OTC products through clearing entities to avoid any discrepancy.
At present, OTC products are traded between two independent parties without going under the scanner of exchanges or a central clearing house. By bringing the products under the clearing entities, the regulator wants to ensure that transactions and settlements in OTC products are done in an orderly fashion. This would also reduce the interval between pay-in and pay-out processes.
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Sashi Krishnan
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However, Bhave added that before doing this, the regulator needed to study the pricing and trading practices adopted in these transactions so that proper margins could be imposed on these products
The market regulator has approached the Reserve Bank of India (RBI) to see if the central bank’s funding facility can be used to settle OTC transactions in the corporate bond market.
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Bhave explained that the presence of clearing entities in OTC transactions would give clarity on the flow and whereabouts of the funds.
At present, as the funds parked in OTC sit idle for a considerable time, it becomes difficult for market participants and the regulator to ascertain the real use of the fund during the period between the pay-in and pay-out processes.
A clearing entity, in this case RBI, would be able to hold this idle fund to help transparent settlements in OTC transactions.
Though no deadline has been set for this regulation, Bhave said that the regulator has taken the initial steps to bring more transparency and the market has responded well.
The market regulator is also looking at speeding up the settlement process in the primary market. “When settlements in the secondary market can be done on a T+2 basis, why can’t it be possible in the primary market as well. We will look into this issue to reduce the settlement timelines in the primary market as well in order to mitigate risks,” said Bhave.
Commenting on the financial crisis and bulky pull-outs by foreign institutional investors (FIIs) in India, Bhave felt that FIIs, which entered India on a leveraged basis, had to sell off to meet redemption pressures in their own countries.
On the corporate governance issues that have arisen because of the Satyam scandal, Bhave said it was unfair for others to put the blame entirely on Indian laws as the Hyderabad-based IT company had its American Depository Receipts listed in the US and was audited by an internationally acclaimed auditor.