Clearing Corps Repo Variant Hits A Cul-De-Sac

Clearing Corporation India Ltd's (CCIL's) plan to introduce collateralised lending and borrowing product (CLBP) -- a new repo variant -- has hit a road block with the Reserve Bank of India (RBI) treating this as a security and only the stock exchanges are allowed to deal with such products.

Since CCIL is not a stock exchange, the regulator is unlikely to give its green signal to the instrument in its current form.

Under Section 18A of the Securities Contract Act (SCA) only a stock exchange can have an over the counter forward contract product like the one CCIL has proposed to launch.

However, CCIL officials said the new instrument is not a security. "It is not a derivative product either. It is simply a variant of the repo contract. At best, this multipartite contract can be considered as a hybrid money market instrument. Hence CCIL, even though it is not a stock exchange should be allowed to launch it," they said.

The proposed instrument christened as CLBP is a tri-lateral repo transaction with CCIL acting as the third party. It will play the role of an intermediary or the common counter-party to both the parties (borrowers as well as lenders) in the inter-bank repo market. It will lend money to borrowers against securities and offer the same to participants who are willing to lend.

Once the product is launched, CCIL will offer two-way quotes. The advantage of the proposed instrument is that the borrowers can repay loans even before it matures and get back its securities from the CCIL.

In the existing system, they can pay back only after tenure of the deal is over. The RBI has been focusing on development of the repo market and reducing the financial intermediaries' dependence on the overnight call market. The new product is expected to give a leg up to the repo market.