Mumbai: The Reserve Bank of India (RBI) wants to track the activities in the commercial papers (CPs) and certificates of deposit (CDs) markets for transparency and better price discovery.
CPs and CDs are short-term instruments with maturity varying from three months to one year. Normally, they are floated to raise money to meet asset-liability mismatches or working capital needs.
Yet another reason behind this is the recent Securities Exchange Board of India (Sebi) directive to mutual funds on valuing these papers by daily trade price, instead of their historic value.
Graphic: Yogesh Kumar/Mint
“All money market and debt securities, including floating rate securities, with residual maturity of over 91 days shall be valued at weighted average price at which they are traded on the particular valuation day,” a 2 February note of the markets regulator said.
This has put fund managers in a fix as there is hardly any information on the secondary market transactions of these papers. The mutual funds industry is the biggest buyer of these papers for their liquid funds schemes.
Money market mutual funds are popular debt schemes where banks and company treasuries park their surplus money. They account for 10% of the Rs7 trillion assets managed by the Indian mutual funds industry. Now all such funds would need to value their investments at their trading price.
Only when such securities are not traded on a particular day, they will be valued in accordance with the norms laid down by industry lobby group Association of Mutual Funds of India, Sebi said. The regulation will come into effect from 1 July.
RBI has asked the Fixed Income Money Markets and Derivatives Association (Fimmda) to build a trading and reporting platform for these money market instruments that banks and corporations float, according to sources familiar with the matter. Fimmda represents market participants and aids the development of the bond, money and derivatives markets.
If the platform becomes ready by 1 July, that will take away all ambiguities regarding the valuation norms, according to a liquid fund manager with a foreign bank who did not want to be named because the news on the proposed trading platform is not in the public domain as yet.
The outstanding volume of the CDs in mid-December was Rs2.48 trillion and that of the CPs was Rs90,305 crore, as per RBI data. The rate of interest at which these CDs were issued ranged from 3.60% to 6.75%, depending on the rating and credit profile of the issuer. For CPs, the interest rates ranged between 3.72% and 10.00%.
Both CPs and CDs are traded but the secondary market trade data is not reported at all. According to a bond dealer, RBI could ask the Bombay Stock Exchange and National Stock Exchange to make it mandatory for traders to report the daily trade volume, in the absence of any dedicated platform for trading such instruments.
When these instruments are issued to raise money, brokers, registered with exchanges, report to the exchanges. They also report those secondary market transactions in which they are involved, but the bipartite deals or private placements where brokers are not involved are not reported.
According to bond dealers, the secondary market trade is largely conducted over the phone and the issuer has to get quotes from several buyers before finalizing the coupon. The daily transaction volume in this segment is about Rs200-250 crore and is gaining traction, they said.
The exact nature of secondary market trades, volumes and yields are largely unknown except to buyers and sellers of such instruments. Traders do not want to share information about these over-the-counter (OTC) derivatives products, rendering an opaqueness in the pricing of such instruments.
“It will lend a lot of transparency in the rates dealt in the markets. There is no uniform rate in these instruments and if you are not careful, you end up paying more,” said Harihar Krishnamoorthy, head of treasury at FirstRand Bank India.
According to Arvind Sampath, director, rates trading at Standard Chartered Bank, the RBI move could be in sync with the global practice of bringing OTC products traded in the exchanges and greater dissemination of information on these products. This may not have been prompted by a desire to regulate the market, which is small compared with other OTC products such as interest rate swaps and currency forwards, which have an outstanding trading volume of Rs35 trillion and Rs23.3 trillion, respectively, constituting 85% of the derivatives markets.