Two years on, limited-purpose clearing corp to see light of the day

AMC Repo Clearing set to begin ops later this month; move to boost debt market liquidity

A limited-purpose clearing corporation (LPCC) backed by the Securities and Exchange Board of India (Sebi) and funded by asset management companies (AMCs) is set to become operational by the third week of June after over two years of its incorporation, said people in the know.

Known as AMC Repo Clearing (ARCL), the LPCC has onboarded over 125 issuers for the initial stage of operation. Since ARCL has now obtained the final approvals from the Reserve Bank of India (RBI), it will start offering clearing and settlement services for all tri-party repo in corporate debt securities to boost liquidity and participation.

“The ARCL has started mock-testing on the National Stock Exchange (NSE) platform from Monday and the plan is to make it operational by the second or the third week of June. All infrastructure for the initial stage is ready and there has been encouraging response from issuers,” said a source.

The platform will help all regulated entities — such as AMCs, insurance companies, market makers, and short-term traders — take positions and manage their risks in listed corporate bonds and debentures (non-convertible debt securities), commercial papers, and certificates of deposit.

Sources said during the initial stage, only debt securities rated ‘AA’ and above and issued after May 2023 would be accepted. Further, the issuers will have to contribute half a basis point (or 0.005 per cent) of the new issuance value towards the core settlement guarantee fund corpus of ARCL until maturity. 

It is estimated that the initial core settlement guarantee fund for ARCL could be in the range of Rs 40-45 crore.

“This is a platform for all regulated entities with bonds rated ‘AA’ and above — short-term financing facilitates trading by short-term traders and deployment of excess funds for better yields. ARCL is starting with plain vanilla bonds as underlying eligible collaterals. However, some market-linked bonds, perpetual bonds, AT1 bonds, and floating-rate issues will be excluded to maintain stability in the initial phase,” added another source.

ARCL, which is a central counterparty, was incorporated in April 2021 to develop the corporate debt market and increase liquidity in the market.

ARCL has been given in-principle recognition by the markets regulator under Stock Exchanges and Clearing Corporations Regulations. However, its launch got delayed due to inter-regulatory complexities and clearances from various departments of the RBI, said people in the know.

ARCL will also provide risk management, along with a guarantee mechanism for all trades executed on NSE under tri-party repo in corporate debt securities.

A tri-party repo contract is where a third entity acts as an intermediary between the borrower and lender to facilitate services like collateral selection, payment and settlement, custody and management during the life of the transaction.

ARCL is promoted by mutual fund (MF) houses with an initial capital of Rs 150 crore. This is being provided by AMCs in proportion to the assets under management of open-ended debt-oriented MF schemes for 2020-21.

Industry experts said that MFs will be able to deploy their extra cash through the ARCL platform into overnight bonds or other such short-term debt securities to gain better yields.

At its last board meeting, Sebi Chairperson Madhabi Puri Buch had indicated that the LPCC was operational within months. Parallelly, the markets regulator had also given its go-ahead for establishing a Rs 33,000-crore backstop emergency fund for debt MFs to enhance secondary market liquidity.

Along with the formation of a corporate debt market development fund which will act in case of a major liquidity crisis or credit event, Sebi has initiated several steps to boost the corporate debt securities market.

Earlier this year, the markets regulator had allowed alternative investment funds (AIFs) to participate in the credit default swaps (CDS) market as protection for buyers and sellers — a segment that would help AIFs hedge risks.

Sebi already has allowed MFs to participate in CDS, but due to restrictive terms and other limitations, volumes have failed to pick up over the past decade.

Deepening the Debt market

•  Sept 2020:  Sebi board approves setting up of LPCC for repo transac­tions in debts
•  Feb 2021:  Sebi issues guidelines for AMCs contributing to share capital of ~150 crore
•  Apr 2021: ARCL gets incorporated as the LPCC
•  Mar 2023:  Regulator extends recognition to ARCL for another year
•  Apr-May 2023:  Clearances granted by various departments of RBI
•  5 June 2023: Mock tests begin on the NSE platform