Financial markets regulator SEBI on Wednesday released a circular in which the minimum limit on trading of corporate bonds and commercial papers on RFQ platform has been increased.
Mutual Funds will soon require to trade at least 25 pc of corporate bonds and 10 pc of commercial papers via RFQ arrangement organised by exchanges.
What is RFQ platform?
RFQ stands for Request for Quote. RFQ platform is a separate arrangement made by the exchange for market participants to settle deals with one another. It was introduced with a motive to make over the counter dealings more reliable and translucent.
In this arrangement, the seller requests other potential buyer members to quote their prices. RFQ platform is a digitized version of over the counter transactions.
With the help of this platform, the quote sought by the seller, bid offered by the potential buyer and other terms and conditions agreed upon by them are stored in the system. This gives a transparent trail of transactions for over the counter deals.
Proposed action and its applicability
The Board is planning to increase the threshold for minimum value of trades that mutual funds execute under RFQ arrangement. SEBI has targeted two instruments namely, Corporate Bonds and Commercial Papers.
As per the new norms, a minimum one-fourth of total value of Corporate Bonds and one tenth of total value of Commercial Papers in the secondary market shall be traded through RFQ platform. This new norm shall be made applicable from 1st of December, 2021.
The Board has further clarified by issuing a circular that Inter Scheme Transfer (IST) trades shall stay out of the context of new rules. Having said that, any trade of Corporate Bonds or Commercial Papers made via IST shall override the revised rules.
Currently, only 10 pc value of corporate bonds in the secondary market are required to be traded from RFQ platform. There is no mandate regarding trading of commercial papers currently. Mutual Funds can freely trade 100% of commercial papers in the secondary market.
NSE had launched the RFQ platform last year before the pandemic in February 2020. The Exchange reports the dealings taking place on RFQ platform to Corporate Bond Reporting and Integrated Clearing & Settlement (CBRICS) and then NSE Clearing shall make the settlement.
SEBI revised the minimum trading requirement of corporate bonds and commercial papers on the RFQ platform.
Currently, only 10 pc of corporate bonds in the secondary market are required to be traded via RFQ arrangement. This has been increased to 25 pc.
In case of commercial papers, there is no such limit at present but the new limit has been set at 10 pc.
These revised rules shall apply from 1st of December, 2021.
Inter Scheme Transfer trades are not included in the new norms released by SEBI.
Who can participate in the dealings on the RFQ platform?
The regulated bodies, listed companies, institutions, Export-Import Bank of India (EXIM Bank), National Bank of Agriculture and Rural Development (NABARD), Small Industries Development Bank of India (SIBDI), National Housing Bank (NHB), and other entities as and when permitted by the exchange are eligible to take part in the dealings on RFQ platform.
Which securities are allowed to be traded over the RFQ platform?
Mostly the debt market instruments such as Government securities, Corporate bonds, Treasury bills, Commercial papers, etc. are allowed to be traded over RFQ platform. Though the exchange can specifically include any other security in the list of RFQ tradable instruments as and when it deems fit.
Are RFQ platforms provided by both, NSE and BSE?
Yes, both National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) provide RFQ platforms for digitised over the counter transactions between market participants.