The Securities and Exchange Board of India’s (Sebi’s) proposal to increase transparency in the corporate bond market has been received well by market participants. However, they would like remedial measures to be implemented in a phased manner in order to enable smooth migration.
Sebi Chairman C B Bhave had said at a recent conference that the regulator was formulating a road map to bring over-the-counter (OTC) transactions in corporate bonds under clearing entities such as banks, Stock Holding Corporation of India (SHCIL) and Clearing Corporation of India (CCIL).
“Sebi is seeking the Reserve Bank of India’s (RBI’s) view to provide funding facility and decide on margins that could be imposed for trading in corporate bonds,” Bhave had said.
| CASH COUNTER Trends in corporate bond trades (in Rs cr) | ||
| Platform | 2007-08 | 2008-09 |
| BSE | 41,187 | 35019.97 |
| NSE | 31,453 | 42542.02 |
| FIMMDA | 23,479 | 55363.56 |
| Total | 96,119 | 1,48,746.90 |
| Source: Sebi | ||
Clearing houses are quite keen on starting this facility as well. CCIL Managing Director Syed Shahabuddin said, “We as a payment and settlement system are committed to deliver. As and when RBI approaches us, we will proceed as per feasibility.”
Market players are of the opinion that these moves will certainly help market volumes grow exponentially. According to Manish Sabharwal, Chief Executive Officer (CEO), ICAP India, “At present, settlements in OTC are done in a manner where pricing and settlement are ruled by the larger party involved in a transaction. Once a clearing entity comes into picture, counter-party risks will also be reduced.”
Besides these, market players say, this move will help in better price discovery and increase their profitability.
At present, most of the trades in corporate bonds take place in the OTC market where there is no central party to guarantee settlements. As a result, foreign investors have stayed away from such transactions.
With rising clarity in transactions, proper margins can be put as well. “Participants may be asked to put some security or cash in fixed amounts as margins with the clearing house for trading in corporate bonds,” explained Parijat Agrawal, Head-Fixed Income at SBI Mutual Fund.
Market participants feel that as proposed by the Patil Committee, the settlement process should be based initially on delivery versus payment I (DVP I) to address the counter-party settlement risk on a trade-by-trade basis, but without a margin. Margins could be imposed in the next phase, they say.
In the OTC market, prices are quoted over the phone to a participant, who has no way to verify if the price being quoted is the actual market price.
With a centralised trading screen, traders will get to know about the pricing mechanism, which will lead to a better price discovery, as in the case of government securities.
Corporate bond trades are currently reported to the Bombay Stock Exchange (BSE), the National Stock exchange (NSE) and the Fixed Income, Money Market and Derivatives Association of India (FIMMDA).
