Reserve Bank of India (RBI) has taken two key steps to develop corporate bond market in the country. One among them is that these bonds are made eligible for repo (repurchase agreements) transactions in the money market.
The repo deals can be struck on commercial papers (CPs), certificates of deposit (CDs) and non-convertible debentures (NCDs) of less than a year of original maturity, according to a notification by the RBI.
The other step is the permission to trade credit default swaps (CDS) on unlisted but rated corporate bonds even for issues other than infrastructure companies.
According to the notification, the CDS would be permitted on securities with original maturity up to one year like CPs, CDs and NCDs with original maturity less than one year as reference or deliverable obligations.
RBI also allowed users to unwind their CDS bought position with original protection seller at mutually agreeable or Fixed Income Money Market and Derivatives Association of India (FIMMDA) price.
If no agreement is reached, then unwinding has to be done with the original protection seller at FIMMDA price, RBI said.
The minimum haircut applicable on the market value of the corporate debt securities prevailing on the date of trade of the first leg has also been revised.
For ‘AAA’, which signifies the highest security, it has been revised from 10 per cent to 7.5 per cent. In the case of ‘AA’, the revision is from 12 per cent to 8.5 per cent and for ‘AA’, it is from 15 per cent to 10 per cent.
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