Explained: Trading of Repo in Corporate Debt Securities

‘Corporate Debt Security’ means non-convertible debt securities, which create or acknowledge indebtedness, including debentures, bonds, and such other securities of a company or a body corporate constituted by or under a Central or State Act, whether constituting a charge on the assets of the company or body corporate or not, but does not include debt securities issued by Government or such other persons as may be specified by the Reserve Bank, security receipts and securitized debt instruments.

The following underlying collaterals are eligible for repo in Corporate Debt Securities:

(i)Listed corporate debt securities of original maturity of more than one year which are rated ‘AA’ or above by the rating agencies registered with the Securities and Exchange Board of India (SEBI), that are held in the security account of the repo seller, in demat form. (ii) Commercial Papers (CPs), Certificates of Deposit (CDs), and Non-Convertible Debentures (NCDs) of original maturity up to one year which are rated A2 or above by the rating agencies registered with SEBI.(iii) Bonds that are rated ‘AA’ or above, by the rating agencies registered with SEBI or internationally recognised rating agencies, and which are issued by multilateral financial institutions like the World Bank Group (e.g., IBRD, IFC), the Asian Development Bank or the African Development Bank and other such entities as may be notified by the Reserve Bank of India from time to time.

Trading of Repos in corporate debt securities shall be for a minimum period of one day and a maximum period of one year. The Participants shall enter into repo transactions in corporate debt securities in the OTC market. All repo trades shall be reported within 15 minutes of the trade on the reporting platform of Clearcorp Dealing Systems (India) Ltd. (CDSIL).

The valuation of the above securities is arrived at the market value of the corporate debt security, the participants undertaking repo in corporate bonds may refer to the credit spreads published by the FIMMDA. (FIMMDA stands for The Fixed Income Money Market and Derivatives Association of India (FIMMDA). It is an Association of Commercial Banks, Financial Institutions, and Primary Dealers. FIMMDA is a voluntary market body for the bond, Money, and Derivatives Markets). Trading is done on a rating-based minimum haircut as prescribed by the Reserve Bank of India (or higher as may be decided by the participants depending on the term of the repo and the remargining frequency) and shall be applicable on the market value of the corporate debt security prevailing on the date of 1st leg of repo trade. Presently, the minimum haircut prescribed is 7.5%, 8.5%, and 10% based on ratings of AAA/A1, AA+ /A2+, and AA/A2 respectively.

Settlement of Repo transactions in corporate debt securities shall be settled through the clearing house of the National Stock Exchange (NSE), i.e., the National Securities Clearing Corporation Limited (NSCCL), the clearing house of the Bombay Stock Exchange (BSE), i.e., Indian Clearing Corporation Limited (ICCL), and the clearing house of the MCX-Stock Exchange, i.e., MCX-SX Clearing Corporation Limited (CCL), as per the norms specified by NSCCL, ICCL and CCL from time to time.

The settlement of securities shall be either on a T+0, T+1, or T+2 basis under the DvP I (gross basis) framework. On the date of reversal of repo trades, the clearing houses shall compute the obligations of the parties and facilitate settlement on a DvP-I basis. The security acquired under repo shall not be sold by the repo buyer (lender of the funds) during the period of repo.

As per Repo in Corporate Debt Securities (Reserve Bank) Directions, 2015, the following entities are eligible to undertake ready-forward contracts in corporate debt securities. 

i. Any scheduled commercial bank excluding RRBs and LABs;

ii. Any Primary Dealer authorised by the Reserve Bank of India;

iii. NBFCs registered with RBI including Government companies as defined in sub-section (45) of section 2 of the Companies Act, 2013 which adhere to the prudential norms prescribed for NBFCs by the Department of Non-Banking Regulation, Reserve Bank of India.

iv. All-India Financial Institutions, namely, Exim Bank, NABARD, NHB and SIDBI;

v. India Infrastructure Finance Company Limited (IIFCL);

vi. Any scheduled urban cooperative bank subject to adherence to conditions prescribed by the Reserve Bank of India;

vii. Other regulated entities, subject to the approval of the regulators concerned, viz., Any mutual fund registered with the Securities and Exchange Board of India; Any housing finance company registered with the National Housing Bank; and Any insurance company registered with the Insurance Regulatory and Development Authority.

viii. Any other entity specifically permitted by the Reserve Bank.

Note: Participants shall follow the capital adequacy guidelines/instructions for repo transactions in corporate debt securities issued by the Reserve Bank of India or the regulators concerned. The details of corporate debt securities lent or acquired under repo or reverse repo transactions shall be disclosed in the “Notes on Accounts” to the Balance Sheet. The amount borrowed by a bank through repo in corporate debt securities shall be reckoned as part of its Demand and Time Liabilities (DTL) and the same shall attract CRR/SLR. The participants shall enter into a bilateral Master Repo Agreement as per the documentation finalized by the FIMMDA.

Source: RBI website