Sebi plans bourse for bonds, derivatives

 The Securities & Exchange Board of India (Sebi) is evaluating a proposal to set up a bourse-dealing exclusively in corporate bonds and fixed income derivatives, it is learnt.

A proposal to this effect has been submitted by ICAP India, which is the subsidiary of the world’s largest inter-dealer broker ICAP plc, intending to focus on wholesale market where institutional clients such as banks, mutual funds, insurance companies and primary dealer can trade directly.

The proposed trading platform of ICAP India would be similar to the negotiated dealing system — the anonymous screen-based trading platform for government securities that is restricted to institutions and monitored by the Reserve Bank of India.  When queried, a Sebi official conceded that they are in receipt of an application which is being examined but no decision has been made as yet.

Currently, bond deals worth only Rs 3,000 crore get reported in exchanges, while a significant number of bilateral deals go unrecorded each day as no brokers are involved in those deals.   At the same time, daily volumes in interest rate swaps — used by institutions to move from fixed to floating intrest rate or vice-versa — is around Rs 10,000 crore. Experts aver that success of a new exchange for fixed income products will depend on the settlement and guarantee infrastructure and the nature of the products and contracts regulators approve.  They even point out that interest rate futures in its present form did not take off.

ICAP India, in which the parent ICAP holds 51 per cent, is an inter-institutional broker in bonds, interest rate swaps and foreign exchange. As per plans, the firm’s 200 clients would be offered membership in the proposed exchange. Other brokers cannot become members of such an exchange. The balance 49 per cent stake in ICAP India is with TeamLease Services CEO Manish Sabharwal and his associates.


If the market regular approves the venture, ICAP plc will have to lower its stake in ICAP India to 49 per cent to fulfill foreign investment norms. “We have put in an application. We are awaiting Sebi’s decision,” Sabharwal said.

Under the new guidelines, Sebi can give exchanges a three-year waiver to comply with the minimum shareholding norms. The regulator has allowed ICAP India to incorporate a company, ICAP Institutional Exchange of India, which aims to offer, subject to regulatory clearances, fixed-income products in the first phase followed by segments in foreign exchange.

The venture will count on the knowledge and expertise of ICAP plc whose daily volumes exceed $1 trillion, of which more than 50 per cent is transacted electronically. In India, corporate bonds and interest rate derivatives are currently transacted primarily by voice brokers in the OTC (over-the-counter) market.

Regulators and law makers across global markets have been pushing for new rules after the banking crisis of 2008. G-20 countries, of which India is a signatory, had said in September 2009 that all standardised OTC derivatives be traded in exchange systems by the end of 2012 and where possible centrally cleared.

It may be noted that a working group comprising representatives of the Committee on Payment and Settlement Systems (CPSS), the International Organization of Securities Commissions (IOSCO), and the European Commission (OTC Derivatives Working Group) has been formed to set out policy options. The market is divided on the subject though but the US Dodd Frank Act and European Commission draft regulations also favour new regulations and transparency for OTC derivatives.

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