RBI joins hands with SEBI and IRDA to develop Securities lending as alternative to Bank Finance

Reserve Bank of India (RBI) is currently working with Securities and Exchange Board of India (Sebi), Pension Fund Regulatory and Development Authority (PFRDA), & Insurance Regulatory and Development Authority (Irda) to develop an interest rate market where mutual funds, pension, & insurance funds could participate in securities lending to deepen market-based finance & develop an alternative to bank finance.

Insurance & pension funds, mutual funds have significant holdings of Govt securities that could be used to lend to short-sellers. This would avoid short-squeeze incident we saw a couple of years back, apart from generating income for these entities.

“We are working with regulators to develop a securities lending product that could enable these entities to participate in securities lending,” BP Kanungo, Deputy Governor, Reserve Bank of India (RBI) recently said at Fixed Income Money Market and Derivatives Association of India (FIMMDA) meeting in Moscow. Fixed Income Money Market and Derivatives Association of India (FIMMDA) is a representative body of participants in the fixed income market in India.

According to Kanungo, the Indian financial sector which mostly has been a bank-based one needs to develop a robust fixed income market to bring in market discipline, to augment bank finance & indeed free up bank finance for uses that cann't access the market directly.

Development of the fixed income market has been an important objective of the Reserve Bank of India, the Govt, the Securities and Exchange Board of India (SEBI) & other regulators these many years. Significant progress has been made, yet a lot remains to be achieved.

The Banking regulator is also currently looking at refurbishing some regulations on the treatment of cash margins as deposits, payment of interest on such margins, posting of collateral abroad to enable participants to move to global margining standards.

The risk management at the market level is pretty robust, with central counterparty settlement, exchange-traded products, trade repositories, legal entity identifier.

But there is the scope of improvement at entity-level as far as financial institutions are concerned, which will be tested with the introduction of new accounting standards. Some other aspects of regulation – treatment of cash margins as deposits, payment of interest on such margins, posting of collateral abroad – are all under examination to enable participants to move to global margining standards.

Kanungo further said in the next 5 years, the demand for bonds will significantly outstrip the supply.

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