What changed
RBI revised the minimum haircut for repo transactions in corporate debt securities: for AAA-rated securities from 10% to 7.5%, for AA+ from 12% to 8.5%, and for AA from 15% to 10%. Additionally, repo is now permitted on Commercial Papers, Certificates of Deposit, and Non-Convertible Debentures with original maturity of less than one year, without listing requirement but with applicable rating criteria.
What it means for you
Lower haircuts reduce the cost of funding for banks and market participants using corporate debt as collateral, potentially boosting repo activity and liquidity in the corporate bond market. The inclusion of short-term instruments like CPs and CDs broadens the collateral pool, offering more flexibility for liquidity management. Banks can now use these instruments more efficiently for short-term funding, but must ensure appropriate higher haircuts for longer-tenor repos or non-daily remargining.
What you must do
- Update internal systems and risk models to reflect the new minimum haircuts for AAA (7.5%), AA+ (8.5%), and AA (10%) for overnight or daily-remargined repos.
- Review and expand eligible collateral lists to include CPs, CDs, and NCDs with original maturity under one year, ensuring rating requirements are met.
- Train treasury and risk teams on the revised guidelines and ensure compliance with the effective date of January 8, 2013.
- For longer-tenor repos or non-daily remargining, adopt higher haircuts as appropriate and document the rationale.
Who it affects
All market participants including banks, primary dealers, mutual funds, insurance companies, and corporates engaged in repo transactions, Treasury departments managing liquidity and collateral, Risk management teams setting haircut policies
What are the new minimum haircuts for repo in corporate debt securities?
For overnight repos or those with daily remargining, the minimum haircut is 7.5% for AAA-rated, 8.5% for AA+, and 10% for AA-rated securities. For other tenors or remargining frequencies, participants must apply higher haircuts.
Which new instruments are now eligible for repo under these guidelines?
Commercial Papers (CPs), Certificates of Deposit (CDs), and Non-Convertible Debentures (NCDs) with original maturity of less than one year are now eligible, without listing requirement but subject to rating criteria.
When do these revised guidelines take effect?
The amendments are effective from January 8, 2013, as per the Repo in Corporate Debt Securities (Amendment) Directions, 2013.