Debt market brokers to get a slice of gilt again

Debt market brokers, who have been out of the government securities business since the launch of negotiated dealing systems by the Reserve Bank of India (RBI), may now have something to cheer about.

The central bank will allow banks to deal with brokers for their derivatives market deals in the debt market. The broker will serve as an intermediary in the deal by finding the buyer and the seller for a brokerage fee, but with a rider.

In line with the RBI's instruction for the equity market transactions, banks should diversify the broker base instead of concentrating the business on a select group.

Earlier this year, the RBI had allowed primary dealers to use brokers for derivatives market trades. Usually, banks get engaged in derivative transactions for hedging the interest rate and exchange rate exposure through swaps. Overnight interest rate swaps (OIS) and Mumbai inter-bank forward (Mifor) are the instruments for hedging .

Since corporations are not allowed to trade but can only hedge their exposure through derivatives, volumes are not much, said a banker.

While OIS is used quite often by banks to hedge, Mifor has, of late, lost sheen, following the recent RBI directive asking banks not to hedge their rupee exposures through the foreign currency benchmark.

Corporates, which had borrowed in dollars, swapped the currency exposures in yen, assuming the yen interest rates to remain stable.

However, since the dollar-yen movements became volatile with changing perception for interest rate expectations for the yen, most of the corporates lost in the transactions.

Similarly, some banks, which raised funds as part of their tier-II subordinate debt during the end of the financial year, also entered into such swaps.

This was to swap the fixed rate liability in rupees to foreign currency floating interest rate in the yen, assuming the yen to remain soft. However, the outlook changed and most of them lost in the process.

On the other hand, the corporate frenzy to raise money through ECBs (external commercial borrowings) has also died down with the US interest rates going up.

This has also affected the Libor (London inter-bank offered rate), which is the international interest rate benchmark for overseas borrowings. Mifors are usually used for pricing such deals as the Indian foreign exchange market does not have rates for dollars booked beyond a year.