Sebi proposes measures to boost liquidity in corporate bond market

With the aim of enhancing liquidity in the secondary market for corporate bonds, market regulator Sebi on Friday came out with a proposal to enable direct participation by clients in the three-party repurchase sector of corporate bonds.

The proposal will facilitate direct participation in corporate bond repurchase transactions by entities that cannot have direct membership in the stock exchange and clearing companies such as NBFCs, insurance companies, mutual funds, etc.


In its advisory paper, SEBI proposed facilitating transactions directly between clients and the Limited Purpose Clearing Corporation (LPCC) in the three-party buy-back sector as well as enabling the contribution of these clients directly to the Core SGF (Settlement Guarantee Fund).

“In order to strengthen the risk management system of the LPCC to also meet contingencies arising from possible failure of clients/participants, it is necessary that the contribution to Core SGF is also made by clients/participants directly in cases where the clearing member is not involved in triangular repo transactions. “.

The proposals will facilitate easier participation of market participants, thus ensuring larger volumes in the corporate bond buyback market. This, in turn, would only enhance liquidity in the secondary market for corporate bonds, she said.

The Securities and Exchange Board of India (SEBI) sought comments on the proposals until May 29.

The regulator noted that an active repurchase market is an essential precondition for improving liquidity in the corporate bond market. This is mainly because active players, especially market makers, are in a position to provide more accurate two-way quotes, if they are able to fund their stock of bond holdings through an active buyback market.

However, in the corporate bond market, the repo is mostly inactive with only a few transactions executed and this is also in the binary repo market. There is no momentum in the 3rd party repo market even though this segment has been on the exchanges since 2018.

One of the main reasons for the lack of traction on the 3rd party repo platform could be that the exchanges or clearing houses do not have a well-funded Settlement Guarantee Fund (SGF) to absorb counterparty risk as well as credit risk related to the principal associated with repo transactions.