Sebi proposes measures to boost liquidity in the corporate bond market

Seeking to boost liquidity in the secondary market for corporate bonds, markets regulator Sebi submitted a proposal on Friday to allow direct participation of clients in the segment of tripartite repos for corporate bonds.

The proposal will facilitate direct participation in corporate bond repo operations by entities that cannot be direct members of the stock exchange, clearing companies such as NBFC, insurance companies, mutual funds, etc.

In his consultation paper, Sebi suggested facilitating transactions directly between clients and the Limited Purpose Clearing Corporation (LPCC) in the tripartite repo segment, as well as allowing such clients to contribute directly to the Core SGF (Settlement Guarantee Fund).

“In order to strengthen the risk management system of the LPCC to deal with contingencies arising from possible bankruptcies of clients/participants as well, it is essential that the contribution to the Core SGF can also be made by clients/participants directly in cases where the clearing member is not involved in the tripartite repo operations,” Sebi said.

The proposals would facilitate easier participation by market participants, thus ensuring higher volumes in the corporate bond repo market. This, in turn, will only serve to boost liquidity in the secondary market for corporate bonds, he said.

The Securities and Exchange Board of India (Sebi) has requested comments on the proposals until May 29.

The regulator noted that an active repo market is an essential precondition for improving liquidity in the corporate bond market. This is primarily because active players, especially market makers, are in a position to offer finer two-way quotes if they can fund their inventory of bond holdings through an active repo market.

However, in the corporate bond market, the repo is mostly dormant and only a few trades are executed and that is also in the bilateral repo market. There is no traction in the tripartite repo market despite the fact that the segment has existed on the stock exchanges since 2018.

One of the main reasons for the lack of traction on the tripartite repo platform could be that stock exchanges or clearing houses do not have a well-funded Settlement Guarantee Fund (SGF) to absorb counterparty risk, as well as the credit risk of the underlying associated with repo operations.