A repo platform boost for corporate bonds

The National Stock Exchange and the Bombay Stock Exchange have launched electronic platforms for tripartite repurchase agreements (repo) in corporate bonds, which is expected to improve the liquidity of, and investor appetite for, these securities.

The Reserve Bank of India (RBI) had introduced repos in corporate bonds way back in 2010, but response has been lukewarm because of non-availability of guaranteed settlement and an electronic dealing platform.

Typically, repos facilitate swift conversion of bonds into cash, which helps investors manage liquidity without having to sell, and thus improve liquidity.

“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.”

In the absence of repos, market makers need to hold a large inventory of bonds to provide liquidity to the secondary market. This raises the cost of market-making and hampers the role of market makers.

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