Markets regulator SEBI may allow primary dealers (PDs) and banks to play the role of market makers in public issues of corporate bonds by allowing them to give two-way quotes in a screen-based trading system, two people familiar with the development said.
Financial sector regulators - the Securities and Exchange Board of India, the Reserve Bank of India and the Insurance Regulatory and Development Authority -- have met a few times this month to discuss the proposal, they said preferring anonymity. "Sebi wants to allow market making in corporate bonds as it will bring more liquidity in the secondary market, which, in turn, will help in better price discovery," said a regulatory official.
"Market makers will have to give quotes for buying and selling through an electronic trading platform," he added. The government and the Reserve Bank of India are pursuing measures to deepen the bond market as the banking system and the insurance industry are falling short of fulfilling the task of funding infrastructure projects.
Although, the topic has been discussed for nearly two decades, the central bank has been wary of pushing ahead. Last week, deputy governor Subir Gokarn also called for moves to make the bond market more vibrant. "It is a positive development, however, as it happened in government securities, market making by primary dealers has not been very meaningful in terms of adding liquidity to the market," said Ashish Vaidya, executive director, trading, UBS.
"In case the RBI decides to extend backstop facility to banks and PDs, where will the credit risk fall in case of a default scenario? As of now, RBI does not have a stance of taking credit risk," he said. Primary dealers are mandated to play the role of market makers in the government bonds market. But the market for government bonds is far more liquid than the corporate bonds and there is no credit risk since the government can print money and repay even if it goes broke.
Experts are concerned that market making in corporate bonds may be more complicated since there is an element of credit risk involved in bonds issued by companies. "It will be useful for the issuers as it assures some kind of liquidity post listing," said B Prasanna, MD and CEO, I-Sec Primary Dealership. "We need a trading screen before market making is allowed."
Even the regulator has been raising the question of risk. "The question is, who will provide credit enhancement?" said HR Khan, deputy governor, RBI, earlier this month. "Banks cannot because they are already exposed to risk on lending. We can't think of partial credit enhancement, but there are operational issues."
source: ET
Financial sector regulators - the Securities and Exchange Board of India, the Reserve Bank of India and the Insurance Regulatory and Development Authority -- have met a few times this month to discuss the proposal, they said preferring anonymity. "Sebi wants to allow market making in corporate bonds as it will bring more liquidity in the secondary market, which, in turn, will help in better price discovery," said a regulatory official.
"Market makers will have to give quotes for buying and selling through an electronic trading platform," he added. The government and the Reserve Bank of India are pursuing measures to deepen the bond market as the banking system and the insurance industry are falling short of fulfilling the task of funding infrastructure projects.
Although, the topic has been discussed for nearly two decades, the central bank has been wary of pushing ahead. Last week, deputy governor Subir Gokarn also called for moves to make the bond market more vibrant. "It is a positive development, however, as it happened in government securities, market making by primary dealers has not been very meaningful in terms of adding liquidity to the market," said Ashish Vaidya, executive director, trading, UBS.
"In case the RBI decides to extend backstop facility to banks and PDs, where will the credit risk fall in case of a default scenario? As of now, RBI does not have a stance of taking credit risk," he said. Primary dealers are mandated to play the role of market makers in the government bonds market. But the market for government bonds is far more liquid than the corporate bonds and there is no credit risk since the government can print money and repay even if it goes broke.
Experts are concerned that market making in corporate bonds may be more complicated since there is an element of credit risk involved in bonds issued by companies. "It will be useful for the issuers as it assures some kind of liquidity post listing," said B Prasanna, MD and CEO, I-Sec Primary Dealership. "We need a trading screen before market making is allowed."
Even the regulator has been raising the question of risk. "The question is, who will provide credit enhancement?" said HR Khan, deputy governor, RBI, earlier this month. "Banks cannot because they are already exposed to risk on lending. We can't think of partial credit enhancement, but there are operational issues."
source: ET
