The money market is divided into mainly two segments:

1. Asset market: It is involved in the purchase and sale of short-term instruments such as commercial papers, certificates of deposit, treasury bills, and cash management bills.

2. Borrowing and lending market: It involves borrowing and lending funds with or without collateral. It includes call money, notice money, term money, market repo, tri-party repo, and corporate bond repo.

Under the borrowing and lending segment, call money, notice money, and term money does not have any collaterals. At the same time, the repo market, i.e., market repo, triparty repo, and corporate bond repo, carries the collaterals for any borrowing and lending requirements.

The repo market plays a vital role in the money market segment to enable a liquid and cost-effective secondary market for financial instruments such as corporate bonds.

Regulators have been highlighting from time to time the need to develop an efficient repo market for corporate bonds, to increase liquidity in the secondary corporate bond market.

The Reserve Bank of India has allowed corporate bond repo since 2010, but the response was tepid due to the non-availability of guaranteed settlement and trading platforms.

The Reserve Bank of India has notified the introduction of tri-party repo in its August 2017 directions. With the launch of electronic platforms in 2018 by the National Stock Exchange and BSE for tri-party repo in corporate bonds, the deals in corporate bond repos picked up gradually

Corporate Bond Repo

A repo is a sale of securities along with an agreement to repurchase the securities at a specific price and a date. Tri-party repo is a type of repo contract where the third entity is involved in facilitating collateral selection, payment, settlement, custody, and management of the repo deal during the life of the transaction.

A corporate bond repo is a tri-party repurchase agreement that enables borrowers and lenders to place corporate debt securities as collateral in exchange for short-term funds for a specific period and at a price as the parties decide.

The Reserve Bank of India is the governing body for repo markets in India. For Corporate Bond Repo, the Securities and Exchange Board of India and the Reserve Bank of India jointly regulate it.

The central bank is responsible for the market repo and reverses repo transactions in corporate debt. However, if the transactions are carried out through stock exchanges, the trading and settlement process will be determined by the Securities Exchange Board of India.

The maturity is overnight to 1 year and has a minimum order value of ₹10 million and multiples thereof.

The trading of corporate bond repo deals is conducted in the over-the-counter market or on electronic trading platforms of stock exchanges and the F-TRAC platform.

F-TRAC is the system that facilitates the reporting of Repo deals on corporate bonds as the Clearing Corporation of India Ltd manages collaterals.

Authorized clearing houses of stock exchanges do the settlement of these repo deals and all corporate bond repo tri-party trades are settled on a T+0 or T+1 basis.

The stock exchanges provide a Tri-party Repo Market platform and offer basket repo that would facilitate the borrowing and lending of funds against baskets comprising multiple securities.

The stock exchanges would match the best borrow order with the best lend order. The best borrow order in the basket repo would be one which seeks to borrow at the highest repo rate. The best lend order in the basket repo would be one that seeks to lend at the lowest rate.

The operating range on the stock exchanges would be +/- 100 basis of the applicable base rate, the Reserve Bank of India's Repo Rate. The exchanges will consider factors such as movement in the price of the underlying securities, repo rate on government securities, and liquidity trends in the market while deriving the price bands for corporate bond repo.

On the F-TRAC platform, the repo transaction based on commercial paper, certificates of deposit, and corporate bonds is also reported daily.

Eligibility

The eligible securities for corporate bond repo deals are any listed corporate bonds or debentures, commercial papers, certificates of deposit, and units of debt exchange-traded funds.

Only institutional participants are allowed to carry out repo transactions, such as corporates, regulated entities, all India Financial Institutions, or any other entity approved by the regulators.

The third party involved in repo deals for corporate debt is generally called a Tri-party agent. The regulators have allowed eligible tri-party agents with prior authorisation to act as a third party in repo deals.

The central bank has permitted scheduled commercial banks, recognised stock exchanges, and clearing corporations of stock exchanges as eligible tri-party agents. Other regulated entities by the Reserve Bank of India or Securities and Exchange Board of India can also act as tri-party agents if they meet specific regulatory criteria such as regulatory approval, financial parameters, and required system infrastructure, among others.

Benefits & Risks

Repo in corporate bonds is an essential tool for deepening the corporate bond market. It can enhance market efficiency by enabling participants to efficiently buy and sell bonds, thereby promoting price discovery and increasing market liquidity.

Corporate bond repo transactions can be used to manage risks, such as interest rate risk, by allowing market participants to borrow or lend bonds based on their specific risk profile.

This repo in corporate bonds also offers market participants an alternate source of funding for short-term, thereby reducing the reliance on the traditional source of funding such as bank loans.

Despite all the benefits, the corporate bond repo market has yet to take off like repo in government securities which is the most liquid market segment in India owing to the lack of one dedicated trading platform, central counterparty, and high margin requirements for repo.

The Securities and Exchange Board of India is trying to facilitate the setting up of a repo clearing corporation. The development of repo and derivative markets for a corporate bond can improve the overall liquidity in the corporate bond market in India.

Sources: Reserve Bank of India,Securities and Exchange Board of India,Fixed Income Money Market and Derivatives Association of India,National Stock Exchange,Bombay Stock Exchange,Clearing Corporation of India Ltd