cbs: for corporate bond market making

Sebi has released a consultation paper on corporate bond (CB) market making. Issuance has increased significantly in recent times, but the bulk of CBs continue to be privately placed and held to maturity, hampering transparency and market efficiency. A thriving secondary market for COs would strengthen liquidity, lead to better price discovery, and therefore lower the cost of debt.

The document calls on Sebi-registered securities brokers and investment bankers to act as market makers in CBs and provide quotes both ways. He suggests that stock markets offer incentives, such as reduced transaction fees, to boost CB secondary market activity. But at the same time, surely we need to induce an active repo market for credit bonds, to allow routine selling and redemption. It should be noted that the Union budget for 2019-2020 suggested a tripartite repo market for corporate debt securities by allowing AA rated bonds as collateral. Also note that there are inherent structural incentives for borrowers to prefer bank financing in the cash lending system, for example no deterrence for unused working capital limits. But we need to avoid the opacity inherent in bank lending and instead opt for the arm’s length financing and deep credit scoring offered by a vibrant ML market. However, there are still glaring rigidities in the CB market.

Note the non-signature of any Global Master Repo Agreement, and the unavailability of guaranteed settlement in CB, very different from that of government securities. Hence the need for a liquid market for insurance products for CBs, read credit default swaps. In addition, the Reserve Bank of India (RBI) must surely allow the use of credit bonds in its liquidity management operations, in the short term market to begin with.

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