Clearing and Settlement of trades in Corporate Bonds through Clearing Corporations

SEBI vide Circular SEBI/IMD/DOF-1/BOND/Cir-4/2009 dated October 16, 2009 has announced that all trades in corporate bonds between specified entities, namely, mutual funds, foreign institutional investors/ sub-accounts, venture capital funds, foreign venture capital investors, portfolio mangers, and RBI regulated entities as specified by RBI shall necessarily be cleared and settled through the National Securities Clearing Corporation Limited (NSCCL) or the Indian Clearing Corporation Limited (ICCL). This will be applicable to all corporate bonds traded Over the Counter (OTC) or on the debt segment of Stock Exchanges on or after December 01, 2009. However, the provisions of this circular shall not be applicable to trades in corporate bonds that are traded on the Capital Market segment/ Equity Segment of the Stock Exchanges and are required to be settled through clearing corporations/ clearing houses of Stock Exchanges.

History

In December 2005, the High Level Expert Committee on Corporate Bonds and Securitization submitted its report recommending the development of the corporate bond and securitization markets in India. The Government had set up this committee to look into legal, regulatory, tax and market design issues in the development of the corporate bond and securitization markets.

In February 2006, Finance Minister in his Budget speech of 2006-07 announced that the Government has accepted the recommendations of the Report of the High Level Expert Committee on Corporate Bonds and Securitization and that steps would be taken to create a single, unified exchange traded market for corporate bonds.

In December 2006, Government issued clarifications on regulatory jurisdiction over corporate bond market as the confusion over the same was attributed to be a reason for slow progress in implementation of the High Level Expert Committee’s recommendations. After hearing the views of RBI and SEBI and perusing the provisions in SCRA, SEBI Act and the RBI Act, Finance Minister said that the necessary clarifications may be provided to RBI and SEBI so that they could implement expeditiously the announcement in the Budget that steps would be taken to create a single, unified exchange traded market for corporate bonds.

In order to implement the Union budget proposal on creation of a unified platform for trading of Corporate Bonds, SEBI vide circular No. SEBI/CFD/DIL/ BOND/1/2006/12/12 dated December 12, 2006 authorized Bombay Stock Exchange Limited (BSE) to set up and maintain a corporate bond reporting platform to capture all information related to trading in corporate bonds as accurately and as close to execution as possible. In January 2007, BSE started its reporting platform to capture information related to trading in corporate bond market. In March 2007, SEBI permits NSE also to set up and maintain a reporting platform on the lines of BSE. In March 2007, NSE starts its reporting platform for corporate bonds and starts disseminating information as desired by SEBI.

In April 2007, SEBI permitted both BSE and NSE to have in place corporate bond trading platforms to enable efficient price discovery and reliable clearing and settlement facility in a gradual manner. To begin with, the trade matching platform shall be order driven with essential features of OTC market. It is also announced that eventually a system of anonymous order matching shall be established. BSE and NSE were advised to make use of the existing infrastructure available with them for operating the trade matching platforms for corporate bonds with necessary modifications. The exchanges were also advised that on the stabilization of the trade matching system, they may move to an anonymous order matching system for trading of bonds within an appropriate period of time. Accordingly, both the exchanges will indicate to SEBI an expected date on which they could move to anonymous order matching system for trading in corporate bonds. With the introduction of anonymous order matching platform, the clearing and settlement facility would be provided by BSE and NSE with a multilateral netting facility for trades executed on the platform. It is also simultaneously decided that orders executed through trading platforms of either BSE or NSE need not be required to be reported again on the reporting platforms. SEBI also advised that the stock exchanges may provide their services for clearing and settlement of corporate bonds traded or the entities trading in listed corporate debt securities may settle their trades bilaterally.

More details on development in the Corporate Bonds are available here.
A copy of the Circular is available here.