Commercial Paper (CP)
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30.13 Commercial Paper (CP) is an unsecured money market
instrument issued in the form of a promissory note. Corporates, primary dealers
(PDs) and the all-India financial institutions (FIs) that have been permitted
to raise short-term resources under the umbrella limit fixed by the Reserve
Bank of India are eligible to issue CP. CP can be issued for maturities between a minimum of 7 days and a maximum up to one year from the date of issue.
Certificate of Deposit (CD)
30.14 Certificate of Deposit (CD) is a negotiable money market
instrument and issued in dematerialised form or as a Usance Promissory Note,
for funds deposited at a bank or other eligible financial institution for a
specified time period. Banks can issue CDs for maturities from 7 days to one a
year whereas eligible FIs can issue for maturities 1 year to 3 years.
30. What is Money Market?
30.1 While the Government securities market generally caters to
the investors with a long term investment horizon, the money market provides
investment avenues of short term tenor. Money market transactions are generally
used for funding the transactions in other markets including Government
securities market and meeting short term liquidity mismatches. By definition,
money market is for a maximum tenor of up to one year. Within the one year,
depending upon the tenors, money market is classified into:
i. Overnight market - The tenor of transactions is one
working day.
ii. Notice money market – The tenor of the transactions is from 2 days to 14 days.
Iii. Term money market – The tenor of the transactions is from 15 days to one year.
ii. Notice money market – The tenor of the transactions is from 2 days to 14 days.
Iii. Term money market – The tenor of the transactions is from 15 days to one year.
What are the different money market instruments?
30.2 Money market instruments include call money, repos, Treasury
bills, Commercial Paper, Certificate of Deposit and Collateralized Borrowing
and Lending Obligations (CBLO).
Call money market
30.3 Call money market is a market for uncollateralized lending
and borrowing of funds. This market is predominantly overnight and is open for
participation only to scheduled commercial banks and the primary dealers.
Repo market
30.4 Repo or ready forward contact is an instrument for borrowing
funds by selling securities with an agreement to repurchase the said securities
on a mutually agreed future date at an agreed price which includes interest for
the funds borrowed.
30.5 The reverse of the repo transaction is called ‘reverse repo’
which is lending of funds against buying of securities with an agreement to
resell the said securities on a mutually agreed future date at an agreed price
which includes interest for the funds lent.
30.6 It can be seen from the definition above that there are two
legs to the same transaction in a repo/ reverse repo. The duration between the
two legs is called the ‘repo period’. Predominantly, repos are undertaken on
overnight basis, i.e., for one day period. Settlement of repo transactions
happens along with the outright trades in government securities.
30.7 The consideration amount in the first leg of the repo
transactions is the amount borrowed by the seller of the security. On this,
interest at the agreed ‘repo rate’ is calculated and paid along with the
consideration amount of the second leg of the transaction when the borrower
buys back the security. The overall effect of the repo transaction would be
borrowing of funds backed by the collateral of Government securities.
30.8 The money market is regulated by the Reserve Bank of India.
All the above mentioned money market transactions should be reported on the
electronic platform called the Negotiated Dealing System (NDS).
30.9 As part of the measures to develop the corporate debt market,
RBI has permitted select entities (scheduled commercial banks excluding RRBs
and LABs, PDs, all-India FIs, NBFCs, mutual funds, housing finance companies,
insurance companies) to undertake repo in corporate debt securities. This is
similar to repo in Government securities except that corporate debt securities
are used as collateral for borrowing funds. Only listed corporate debt
securities that are rated ‘AA’ or above by the rating agencies are eligible to
be used for repo. Commercial paper, certificate of deposit, non-convertible
debentures of original maturity less than one year are not eligible for the
purpose. These transactions take place in the OTC market and are required to be
reported on FIMMDA platform within 15 minutes of the trade for dissemination of
information. They are also to be reported on the clearing house of any of the
exchanges for the purpose of clearing and settlement
iii. Stock Exchanges
8.6 Facilities are also available for trading in Government
securities on stock exchanges (NSE, BSE) which cater to the needs of retail
investors.
9. Who are the major players in the Government Securities market?
Major players in the Government securities market include
commercial banks and primary dealers besides institutional investors like
insurance companies. Primary Dealers play an important role as market makers in
Government securities market . Other participants include co-operative
banks, regional rural banks, mutual funds, provident and pension funds. Foreign
Institutional Investors (FIIs) are allowed to participate in the Government
securities market within the quantitative limits prescribed from time to time.
Corporates also buy/ sell the government securities to manage their overall
portfolio risk.
6. What is Liquidity Adjustment Facility (LAF)?
LAF is a facility extended by the Reserve Bank of India to the
scheduled commercial banks (excluding RRBs) and primary dealers to avail of
liquidity in case of requirement or park excess funds with the RBI in case of
excess liquidity on an overnight basis against the collateral of Government
securities including State Government securities. Basically LAF enables
liquidity management on a day to day basis. The operations of LAF are conducted
by way of repurchase agreements (repos and reverse repos – please refer to
paragraph numbers 30.4 to 30.8 under question no. 30 for details) with RBI
being the counter-party to all the transactions. The interest rate in LAF is
fixed by the RBI from time to time. Currently the rate of interest on repo
under LAF (borrowing by the participants) is 6.25% and that of reverse repo
(placing funds with RBI) is 5.25%. LAF is an important tool of monetary policy
and enables RBI to transmit interest rate signals to the market.
a. 19. What is the role of the Clearing Corporation of India Limited
(CCIL)?
The CCIL is the clearing agency for Government securities. It acts
as a Central Counter Party
(CCP) for all transactions in Government securities
by interposing itself between two
counterparties. In effect, during settlement,
the CCP becomes the seller to the buyer and
buyer to the seller of the actual
transaction. All outright trades undertaken in the OTC
market and on the NDS-OM
platform are cleared through the CCIL. Once CCIL receives the
trade
information, it works out participant-wise net obligations on both the
securities and
the funds leg. The payable / receivable position of the
constituents (gilt account holders) is
reflected against their respective
custodians. CCIL forwards the settlement file containing
net position of
participants to the RBI where settlement takes place by simultaneous
transfer
of funds and securities under the ‘Delivery versus Payment’ system. CCIL also
guarantees settlement of all trades in Government securities. That means,
during the
settlement process, if any participant fails to provide funds/
securities, CCIL will make the
same available from its own means. For this
purpose, CCIL collects margins from all
participants and maintains ‘Settlement
Guarantee Fund’
6. What is Liquidity Adjustment Facility (LAF)?
LAF is a facility extended by the Reserve Bank of India to the
scheduled commercial banks (excluding RRBs) and primary dealers to avail of
liquidity in case of requirement or park excess funds with the RBI in case of
excess liquidity on an overnight basis against the collateral of Government
securities including State Government securities. Basically LAF enables
liquidity management on a day to day basis. The operations of LAF are conducted
by way of repurchase agreements (repos and reverse repos – please refer to
paragraph numbers 30.4 to 30.8 under question no. 30 for details) with RBI
being the counter-party to all the transactions. The interest rate in LAF is
fixed by the RBI from time to time. Currently the rate of interest on repo
under LAF (borrowing by the participants) is 6.25% and that of reverse repo
(placing funds with RBI) is 5.25%. LAF is an important tool of monetary policy
and enables RBI to transmit interest rate signals to the market.
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