More reforms likely for debt market in FY16

Credit Default Swaps could be relaunched and steps to enhance liquidity in corporate bonds may be announced

This financial year, 2015-16, seems set to be one of debt market reform. Experts believe there are many positive steps in the offing after the already announced measures.

The Street believes credit default swaps (CDS) could be relaunched, steps to enhance liquidity in corporate bonds might be announced and a full-fledged and screen-based trading system for corporate bonds could be put in place.

In the Reserve Bank of India's (RBI) bi-monthly monetary policy review last week, it had spoken of  formulating a scheme for market making by primary dealers in semi-liquid and illiquid government securities. "A similar step could perhaps be taken by asking merchant bankers in corporate bonds to provide liquidity. Today, once the bonds get sold, these merchant bankers no longer provide liquidity to the market," said R Sivakumar, head of fixed income and products, Axis Mutual Fund.

RBI also announced steps to boost retail participation in government securities. These include a web-based solution for all mid-segment and retail investors who have gilt accounts to participate in the G-Sec market, and providing them direct access to both primary and secondary market platforms without any intermediary. For this, alternate channels of distribution in G-sec would be created, RBI said.

“Retail participation in G-secs will take a long time, as fixed deposit rates are more attractive. There is scope for reforms in the corporate bond market. For instance, it is critical to have a full-fledged screen-based trading system for bonds," said S Prabhu, head of fixed income at IDBI Federal Life Insurance.

Currently, secondary market activity in corporate bonds is negligible when compared with G-sec volumes. Besides, though CDS made its debut in 2011, the instruments failed to take off. CDS are instruments where the buyer receives credit protection, while the seller of the swap guarantees the creditworthiness of the security.

“The CDS market is needed because those who invest in corporate bonds are exposed to interest rate and credit risks. We might also see reissue of bonds by companies, so that there is more liquidity in the market,” said K P Jeewan, head of fixed income, Karvy Stock Broking.

According to Nirakar Pradhan, chief investment officer of Future Generali India Life Insurance, the corporate bond market also needs a more transparent settlement mechanism.