Markets

Investors to benefit from electronic repo platforms:Crisil

Mumbai: Electronic trading platforms by National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) for repos of corporate bonds will improve liquidity and investor appetite for these securities allowing investors to manage asset-liability mismatches more efficiently, rating agency Crisil said.

Repos will facilitate swift conversion of bonds into cash, which will help investors manage liquidity without having to sell their investment and thus improve liquidity, the rating agency said.

“Globally, repos play a critical role in imparting liquidity to corporate bonds, which typically suffer from lower trading ratio relative to government securities,” said Somasekhar Vemuri, Senior Director, CRISIL Ratings. “Repos will also play a critical role of lowering the cost of market-making and that, in turn, should enliven market-making in the secondary market.”

A repo platform will allow investors such as mutual funds, primary dealers, banks and insurers to manage redemptions and secure short-term cash investments. Repos collateralised by high-quality corporate bonds will be a valuable tool for risk-averse end-investors to park temporary cash balances. It will also be another avenue for banks to deploy surplus liquidity, Crisil said.

Without repos, market makers like banks needed to hold a large inventory of bonds to provide liquidity to the secondary market, raising the cost of market-making.

Globally, too corporate bonds are not traded heavily because investors tend to hold them till maturity. “For instance, the trading ratio (daily traded volume divided by outstanding amount of corporate bonds) is just 0.27% in India, 0.12% in China, 0.19% for South Korea, and 1.16% for the US. Higher liquidity in the US is supported by a strong repo market worth $2.3 trillion2. Of this, around 45% employ non-government securities as collateral,” Crisil said.

So far basket repos are only for selected AAA bonds, A1+ rated commercial papers and certificates of deposit. “Over the medium term, the expansion of basket repos to include AA category bonds, in line with the RBI directions, will help deepen the liquidity for AA rated papers as secondary trading in AA rated papers constitutes only one-fifth of the corporate bond trading volumes. Overall, success will be a function of interest shown by banks, primary dealers, NBFCs, financial institutions, mutual funds, insurers, and housing finance companies,” said Ramesh Karunakaran, Director, Crisil Ratings.

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