SEBI proposes measures to boost liquidity in corporate bond market, releases consultation paper

The Securities and Exchange Board of India (SEBI) on Friday has come out with a proposal for enabling direct participation by clients in the tri-party repo segment for corporate bonds.

This is being done with an aim to boost liquidity in the secondary market for corporate bonds. The market regulator has sought comments on the proposals till May 29.

The proposal will facilitate direct participation in repo transactions in corporate bonds by entities which cannot take direct membership of the stock exchange, clearing corporation such as NBFCs, insurance companies, mutual funds, etc.

SEBI, in its consultation paper, has suggested for facilitating transactions directly between clients and the Limited Purpose Clearing Corporation (LPCC) in the tri-party repo segment as well as to enabling contribution by such clients directly to the Core SGF (Settlement Guarantee Fund).

"In order to strengthen the risk management system of the LPCC to meet the contingencies arising on account of possible failure of the 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 tri-party repo transactions," Sebi said.

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

The regulator noted that an active repo market is an essential pre-condition for improving liquidity in the corporate bond market. This is mainly because active players, especially market makers, are in a position to provide finer two-way quotes, if they are able to finance their inventory of bond holdings through an active repo market.

In the corporate bond market, however, repo is mostly inactive with only a few transactions getting executed and that too in the bilateral repo market. There is no traction in the tri-party repo market despite the segment being in existence on stock exchanges since 2018.

One of the primary reasons for lack of traction on the tri-party repo platform could be that the stock exchanges or clearing corporations do not have a well-funded settlement guarantee fund (SGF) to absorb the counterparty risk as well as the credit risk of the underlying associated with repo transactions.