Repo in Corporate Debt: New Settlement & Haircut Norms

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RBI/2010-11/268 IDMD.PCD. 22/11.08.38/2010-11 November 9, 2010 To All Market Participants Ready Forward Contracts in Corporate Debt Securities As part of the measures to develop the corporate bond market, repo transactions were permitted in corporate debt securities vide the Directions issued through the Notification No IDMD.DOD. 04/11.08.38/ 2009-10 dated January 8, 2010 . 2. As announced in the Second Quarter Review of the Monetary Policy 2010-11 ( paragraph 70 ), the Directions have been reviewed taking into consideration the market feedback and it has been decided as under: The repo trades in corporate debt securities are permitted to be settled on T+0 basis in addition to the existing T+1 and T+2 basis under DvP I (gross basis) framework. The minimum haircut , applicable on the market value of the corporate debt securities prevailing on the date of trade of 1st leg, which was earlier stipulated as 25 per cent, has been revised as under: Rating AAA AA+ AA Minimum haircut 10 % 12% 15% The above haircuts are minimum stipulated haircuts where the repo period is overnight or where the remargining frequency (in case of longer tenor repos) is daily. In all other cases, the participants may adopt appropriate higher haircuts. The Directions (Repo in Corporate Debt Securities (Amendment) Directions 2010) issued in this regard vide IDMD.PCD.21/11.08.38/2010-11 dated November 9, 2010 are enclosed . The modifications will be effective from December 1, 2010. Yours faithfully, ( K K Vohra ) Chief General Manager RESERVE BANK OF INDIA INTERNAL DEBT MANAGEMENT DEPARTMENT 23rd FLOOR CENTRAL OFFICE FORT MUMBAI 400 001 Mumbai, November 09, 2010 Repo in Corporate Debt Securities (Amendment) Directions, 2010 In exercise of the powers conferred by Section 45 W of the Reserve Bank of India Act, 1934 and in partial modification of the notification No IDMD.DOD. 04/11.08.38/2009-10 dated January 8, 2010 , the Reserve Bank hereby makes the following amendments in the Repo in Corporate Debt Securities (Reserve Bank) Directions, 2010 dated 8th January 2010 (hereinafter referred to as the said Directions) namely: 2. (i) In Paragraph 8 of the said Directions, for sub paragraph (a) the following shall be substituted: “(a) All repo trades in corporate debt securities shall settle on a T+0 or T+1 or T+2 basis under DvP I (gross basis) framework“ (ii) In Paragraph 10 of the said Directions, for sub paragraph (a) the following shall be substituted: “(a) A rating based haircut as under (or higher as maybe decided by the participants depending on the term of the repo and the remargining frequency) shall be applicable on the market value of the corporate debt security prevailing on the date of trade of 1st leg.” Rating AAA AA+ AA Minimum haircut 10 % 12% 15% 3. These Directions may be referred to as the Repo in Corporate Debt Securities (Amendment) Directions 2010 and the modifications made therein shall be effective from December 01, 2010 (H R Khan) Executive Director Ref. 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Reproduced for reference with acknowledgment — Source: Reserve Bank of India · RBI/2010-11/268 · issued 09 Nov 2010. The plain-English explanation above is BankPulse’s own independent summary.

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