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Reforms in pipeline to deepen bond market: Sebi chief


New Delhi: Sebi chief Ajay Tyagi on Thursday said several reforms are in the pipeline to deepen the bond market, including creating a set of “market makers” and setting up a backstop facility to purchase investment grade debt securities in stressed as well as normal times. Market makers are entities that quote both a buy and a sell price for corporate bonds in order to create liquidity in the secondary market for such bonds.

The other major reform in the pipeline is setting up of a Limited Purpose Clearing Corporation for repo in corporate bonds, Tyagi said at an event organised by industry body CII.

As per trends in the corporate bond market, around 97-98 per cent of the corporate bonds are issued through the private placement route and around 90 per cent of the issuances are of ‘AA’ and above ratings.

Trading in the secondary market lacks depth and is largely dominated by mutual funds.

“We need more public issuances; issuances of relatively lower rated bonds; and increased depth in the secondary market with many more players,” Sebi chief said.

The Securities and Exchange Board of India (Sebi) has taken certain initiatives and some more are in the pipeline.

The measures taken by the regulator include limiting the number of ISINs (International Securities Identification Numbers) in a year, mandating certain minimum borrowing through bonds for large borrowers and introducing RFQ (Request for Quote) platform to improve pre and post-trade transparency.

“Reforms in the pipeline include setting up of a Limited Purpose Clearing Corporation for repo in corporate bonds, creating a backstop facility to purchase investment grade debt securities in stressed and normal times, and enabling a set of intermediaries acting as market makers in the bond market,” Tyagi said.

The backstop facility will function as an entity on standby and is envisaged to facilitate liquidity in the corporate bond market and to respond quickly to stress situations, similar to the mechanisms available in the developed markets globally.

The facility will help in bringing liquidity and stability to the corporate debt market, address risk aversion during times of stress specially for securities rated below AAA, help in building confidence of market participants in the secondary market and create liquidity options for investors at large.

With the market currently skewed significantly towards higher rated bonds, having a credit enhancement mechanism to enable lower rated issuers to access the bond market becomes critical, Tyagi said.

Further, he said that another important need is for developing a credible Credit Default Swaps (CDS) market to facilitate transfer and management of credit risk in an effective manner.

Tyagi also called for unification of the government bond and corporate bond markets, which will enable the trading of such securities on the same platform, thereby utilising common infrastructure for trading, clearing, settlement and holding of securities.

The bond market in india is dominated by Government Securities (G-Secs). Corporate bonds are generally priced on the basis of G-Secs of comparable maturity. It is desirable that the two markets are unified, wherein, trading, clearing and settlement takes place on one platform, he added.

In a unified bond market structure, all the Market Infrastructure Institutions (MIIs) involved in trading of these products — exchanges, depositories, and clearing corporations — would face the same regulatory regime, follow same standards and be inter-operable.

Apart from increasing competition amongst the MIIs, such a move would facilitate ease of trading as the market participants would face uniform rules of the game and improve efficiency.

“The idea behind this suggestion is to have increased investor participation in the bond market, including individual investors; convenience to investors in acquiring and holding bonds similar to any other security; and improving transparency and price discovery in secondary market,” Tyagi said.

According to him, the recent surge in individual investors’ participation in markets offers an opportunity to harness their investment potential in the bond market.



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