The Reserve Bank of India (RBI) has issued guidelines to execute repo in corporate bonds which would be effective from March 1, 2010. Repos in corporate debt securities will be for a minimum period of one day and a maximum period of one year, the RBI said in a release adding that only listed corporate debt securities which are rated ‘AA’ or above by the rating agencies can be used for repo.

The central bank stated that scheduled commercial bank, excluding RRBs, primary dealers, non-banking financial company, financial institutions such as Exim Bank, Nabard, NHB and SIDBI, mutual fund registered with the Securities and Exchange Board of India (Sebi), housing finance company registered with the NHB, insurance company registered with the Insurance Regulatory and Development Authority (Irda), will be eligible for repo transactions in corporate debt securities.

“Participants can enter into repo transactions in corporate debt securities in the OTC market,” the RBI said.

All repo trades in corporate bonds will be settled via clearing platform of stock exchanges and will be settled either on T+1 basis or T+2, the central bank said. All repo trades will have to be reported within 15 minutes of the trade on the FIMMDA reporting platform.

The RBI also said the amount borrowed by the banks through corporate bond repo will be included as part of its demand and time liability and will attract CRR and SLR as per the provisions.

A margin of 25% or more can be decided by participants on the term of the repo and participants may refer to rating-haircut matrix published by FIMMDA, the central bank said. “Over a period, we believe the spread between the government securities and corporate bonds would come down. However, for now we cannot say anything about the yields or volumes as a lot depends on the rate hikes, which is widely expected,” said S Srinivasa Raghavan, vice-president & head of treasury with IDBI Gilts.

Central Bank of India CMD R Sridhar said the move by RBI will obviously improve the liquidity and marketability of bonds held by banks. “Large number of banks are active on corporate bond market and they are looking for such instruments. There pressures on managing liquidity more profitably than what the government securities markets can ensure,” he said.

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