Collateralized Borrowing and Lending Obligation is a fully collateralized and secured instrument for borrowing and lending money. It is a money market instrument approved by the RBI and is backed by government securities as collaterals. CBLO creates an obligation on the part of the borrower to repay the money borrowed along with interest on a predetermined future date and provides a right to the lender to receive the money lent along with the interest on a predetermined future date. CBLO was introduced as a product for the purpose of those entities who had been phased out of the call money market and on whom restrictions had been placed on borrowing or lending in the call money market. CBLO can be issued for a maximum tenor of one year but the CBLO instruments that are generally available for trading are those with maturity of next seven business days and three month end dates. Membership to CBLO segments is given to NDS members as well as non-NDS members. The entities eligible for NDS membership are Nationalized banks, foreign banks, cooperative banks, Financial institutions, insurance companies, mutual funds, primary dealers, pension funds etc.
Borrowing Limit and Initial Margin
The amount that the members can borrow is determined by the mark to market values of securities and hair-cuts applicable on the securities deposited by the members in the CBLO segment. The maximum amount that the members can borrow is upto the borrowing limit which includes all the amounts which have already been borrowed and are outstanding at that point in time. Members are also required to deposit initial margin which is generally in the form of cash(minimum of Rs 1 lakh)and government securities. By depositing additional government securities or cash as collaterals members can enhance their borrowing limit or initial margin.
CBLO dealing system is maintained by ClearCorp Dealing Systems(India) Ltd.(CCDS), a fully owned subsidiary of CCIL. Auction Market Only NDS members having settlement account at RBI have access to auction market while Associate members do not have access to auction market. Members can borrow and lend funds on overnight basis indicating the amount they want to borrow and maturity and the cap rate which is linked to CIBOR before the commencement of the auction session. CCDS approves the borrowing request of the members subject to the availability of the borrowing limits. At the end of the auction market process CCDS initiates the auction matching process which is based on Uniform Yield Principle to determine the successful borrower or lender. Normal Market The CBLO normal market is available to both CBLO(NDS) members and Associate members. Members need to deposit cash and/or securities prior to starting the CBLO dealing operations. The borrowing limit that is made available to the members depends on the cash/securities deposited with the CCIL for that purpose in the CBLO segment. The borrowing and lending orders are matched on yield time priority.
Clearing and Settlement
CBLO operates on a Straight through Processing(STP) environment.The trades received are novated and netted for settlement.For each settlement date a simple obligation is generated for each member by netting trades received for settlementon that business date with redemption obligations for the same date.For those members who either do not maintain a current account with the RBI or are not allowed to operate that current account for secondary market transactions, a single obligation called CBLO funds obligations is settled at settlement bank.For those members who maintain a current account with the RBI and are allowed to settle secondary market transactions in those accounts, funds settlement is achieved in RBI account for those members.
Risks relating to trading and settlement are addressed in various ways by CCIL.For instance , membership is restricted only to those entities who meet the minimum eligibility criteria in accordance with the stringent membership norms adopted by the CCIL.Also the borrowing limit for members is determined base on mark to market valuation of the securities deposited by them and by applying a appropriate hair-cut.The securities in the CSGL account are also subjected to daily valuation and any decline in the market value of the securities as compared to the amount borrowed is collected from the members.Initial Margin is also collected form the members.CCIl acts as a central counterparty to all CBLO trades and guarantees settlement of CBLO trades.When members fail to meet the funds obligation on the day of settlement funds shortfall can take place.IN such situations CCIL meets the shortages and then starts the default handling process by withholding the CBLO receivable by the defaulting members.For example, when the borrower fails to meet the redemption proceeds on maturity of the CBLO, the underlying securities of such members are withheld while the funds are deposited along with the charges.In case of eventual default, CCIL liquidates the underlying securities and adjusts the proceeds towards shortfall and other charges.
The CBLO Market
Month wise CBLO volumes from 20th Jan, 2003 to 31st Mar, 2004
Volumes in CBLO were initially very low when it was first introduced in Jan 2003 but the volumes grew very quickly in 2004 and in Mar 2004 the total volume was Rs 31329 crore.Although the CBLO was slow to pick up due to the market participants being seemingly averse to change, it now dominates the money market with most of the activity in the money market occurring in CBLO.The monthly volumes went up from 67.5 crore in Jan 2003 to 31329 crore in Mar 2004 with the daily volumes increasing from 6 crore in Jan 2003 to above Rs 2000 crore in Mar 2004.The number of active members in the CBLO segment in July 2003 were 30 and 52 in Jan 2004 and therefore the increase in volumes could be partly attributed to the increase in the number of active members. The CBlO volumes have also increased steadily from 852 crore in 2002-03 to 8824784.2 crore in 2008-09.These statistics indicate that CBLO has managed to gain a sizeable share of money market transactions and has been consolidating its position over the years.Also the regulatory initiatives by the RBI imposing ceilings on the non-bank entities in participating in the call money market has forced them to move away from the call market to the CBLO market which also led to the increase in volumes in the CBLO market.
Category wise share in CBLO turnover during the period 20th Jan, 2003 to 31st Mar, 2004
Mutual funds and co operative banks benefited most from CBLO features.Becuse the call money market is open only to banks and primary dealers, mutual funds had little option but to deploy their money in CBLO and repo overnight market to manage their liquid funds.Therefore the CBLO market became an attractive destination for mutual funds to deploy their money available in the form of cash.Cooperative banks also benefited from CBLO market and found it more beneficial to borrow and lend in the CBLO market.Also since CCIL is the counterparty to each trade, cooperative banks were able to trade on par with other NDS members and get competitive rates.The public sector banks accounted for 14.70% while the primary dealers accounted for 13.01%.The private sector banks and insurance companies accounted for the balance of the turnover.It can also be seen that the share of non-bank entities which were not allowed to participate in the call money market is 46.46% as they gained access to a safe avenue to deploy their short term funds.
Inter-Category Participation in CBLO Market during the period 20th Jan, 2003 to 31st Mar, 2004
It can be seen that the major borrowers were the Co-operative banks, Public Sector banks and primary dealers with their share in overall borrowing of 36.37%, 28.07% and 25.58% respectively.Mutual Fund was the major lender with a share of 84.26% followed by insurance companies and Co-operative banks with share of 7.645 and 5.91%. It can be seen that in CBLO borrowing segment, compared to 2003-04, in 2008-09 the share of Co-operative banks has decreased to only 4% and that of Primary dealers to just 5% while the share of Public Sector banks has increased from 28.07% to 42%. In the CBLO lending segment for 2008-09 compared to 2003-04, the share of mutual funds has decreased from 84.26% to 70.62% while the share of financial institutions has increased from .245% to 14.06% while that of public sector banks has increased from 1.33% to 8.67%.
Comparison between CBLO, REPO and CALL in Money Market
Average Trade Volumes
The real impact of CBLO on the money market can be seen from the fact that since its inception in January 2003, CBLO's now accounts for nearly 60% of the total money market in recent times. On the other hand other instruments such as REPO and CALL have seen massive decrease in volumes especially in CALL which accounts for just 10% of the total market. The chart below indicates the trend in market share for these 3 instruments in terms of average trade volumes of money market Market Share of average trade volumes of money market Average trade volumes of money market (Rs crore) The chart clearly shows that in recent past the uses of CBLOs have increased and there has been a decrease in use of CALL in the money market. Thought there was a small decrease in use of CBLOs during the recessionary phase however since then it has been looking up. In comparison to low volumes of nearly 300 Cr initially to the huge volumes of nearly 70,000 Cr in CBLO are of one of the major indicator of the success of CBLOs in the money market. Thus the CBLO market, which started in 2003, has stabilized and in terms of trading value it has surpassed the Repo market since March'05 and now combined volume of Repo and overnight call is lower than the CBLO volume.
Rate Movement in Call, Repo and CBLO Markets
Since the borrowings under CBLO are fully collateralised, logically the spread between REPO and CBLO should be close to zero. Rather CBLO provides more flexibility and hence rates in CBLO segment should be lower than that of the Repo market. The chart above shows the movement of daily weighted average rates in the overnight Call, Repo and CBLO market for the initial period when CBLO was just launched. It may be observed that the CBLO rates, rates have taken a middle path between the call and repo rates during the period between January 2003 and October 2003. The reason for this could be attributed to the presence of a few numbers of active members in CBLO coupled with lesser volumes. However, from the month of November 2003, the CBLO rates have aligned with the repo rates with increase in the number of participants. The trend in the rates have remained almost similar in the recent past with CBLO rates either being between Repo and Call or just lower than Repo, as now CBLO is an established market with large number of participants and huge volumes. The trend in the chart below shows how there has been huge decrease in the rates during the period of economic crisis for all the markets. The rates have reached a low of around 2.97% also during the peak period of the global economic crisis. Besides this, the spread between CBLO and other markets is almost zero with rates for CBLO being slightly lower due to more flexibility and transparency in the markets Movement in Money Market rates
Assessing the impact of CBLO on other money market instruments using Regression Analysis
For our analysis we have used data from the period Jan 20,2003 when CBLO was introduced to July 31,2004.We have used weekly volume data from Saturday to Friday for this period for LAF, Call, Repo and CBLO.The chart below shows the movement is weekly market volumes of the various segments during this period. It can be seen from the graph that call market volumes which remained almost constant till Oct,2003 started declining thereafter while the CBLO volumes started increasing from Jan 2004 onwards.After the non-bank entities like mutual funds joined the CBLO segment form Jan 2004, volumes have been increasing steadily. Methodology: We have tried to determine the relationship among CBLO, LAF, Call and Repo in terms of their trading volumes and for this purpose we have used weekly trading values for each segment.We have used the multiple regression equation
Log(CBLO)t = ?0 + ?1log(LAF)t + ?2log(Call) + ?3log(Repo) + errort
for this purpose.Logs of all the dependent and independent variables have been used in which log(CBLO) represents log of CBLO weekly volume and similarly for the independent variables.A similar equation has been estimated for each of the other segments like Call and Repo.
Results and Conclusions
Model 1: OLS, using observations 1-80 Dependent variable: lCBLO Heteroskedasticity-robust standard errors, variant HC1 Coefficient Std. Error t-ratio p-value const -3.72811 5.09377 -0.7319 0.46648 lLAF 0.597274 0.107464 5.5579 <0.00001
lCall -1.18554 0.325223 -3.6453 0.00049
lRepo 1.68467 0.177669 9.4821 <0.00001
R-squared 0.848924 Adjusted R-squared 0.842306 Model 2: OLS, using observations 1-80 Dependent variable: lRepo Heteroskedasticity-robust standard errors, variant HC1 Coefficient Std. Error t-ratio p-value const 7.43748 1.8206 4.0852 0.00011
lLAF -0.146593 0.0437716 -3.3490 0.00126
lCall 0.142557 0.148539 0.9597 0.34024 lCBLO 0.340914 0.0356992 9.5496 <0.00001
R-squared 0.703578 Adjusted R-squared 0.691877 Model 3: OLS, using observations 1-80 Dependent variable: lCall Heteroskedasticity-robust standard errors, variant HC1 Coefficient Std. Error t-ratio p-value const 10.9016 1.11869 9.7450 <0.00001
lLAF -0.00183859 0.0268031 -0.0686 0.94549 lRepo 0.0994866 0.112626 0.8833 0.37984 lCBLO -0.167425 0.0310693 -5.3888 <0.00001
From Model 1 we note that CBLO volumes are significantly related with all of LAF, Call and repo volumes at the 1% significance level.The coefficients on LAF, Call and Repo represent the elasticity of LAF, Call and Repo volumes with respect to CBLO volumes.The coefficient on log(Call) is negative meaning that a 1% decrease in call weekly volume increases CBLO weekly volume by 1.18554%.This is what we should expect as the call market restrictions have resulted in the market participants moving out of the call market into the CBLO market which has contributed to the increase in CBLO volumes.CBLO has a positive relationship with LAF and Repo. For a 1% increase in repo volumes the CBLO volumes increase by 1.68467%. From Model 2 we see that Repo weekly volumes have a significant relationship with only LAF and CBLO weekly volumes at the 1% significance level.It has a positive relationship with CBLO as the factors that tend to favour the CBLO market also favour the Repo market. From Model 3 we see that Call weekly volumes have a significant relationship with only CBLO weekly volumes at the 1% significance level.For a 1% increase in CBLO weekly volume the Call weekly volume decreases by 0.167425%. Therefore from the results we can conclude that CBLO volumes have a negative relationship with the Call volumes and positive relationship with the repo volumes as indicated by the significance levels. We also did an event study to see whether the introduction of the new product had any impact on the overnight call market or not.For this we used the data on the overnight call market weekly volumes for the period 4 Jan 2002 to 23 July, 2004.We we used the equation
Log(Call)t = ?0 + ?1log(Call)t-1 + ?2Dummyt + errort
The dummy variable takes the value 0 for periods before the CBLO was introduced and 1 for the period after the introduction of the CBLO. Model 4: OLS, using observations 2-134 (T = 133) Dependent variable: l_Call_VolumeRs HAC standard errors, bandwidth 3 (Bartlett kernel) Coefficient Std. Error t-ratio p-value const 4.96731 1.04573 4.7501 <0.00001
Dummy -0.341943 0.0858867 -3.9813 0.00011
l_Call_Volume_1 0.569396 0.0903287 6.3036 <0.00001
R-squared 0.679982 Adjusted R-squared 0.675058 We found that the dummy variable is significant at the 1% significant level indicating that the introduction of the CBLO did have an impact on the call market.Also the sign of the coefficient on the dummy variable is negative which means that with the introduction of the CBLO the volumes in the call market declined.
CBLO as a benchmark rate of the future
For any well-functioning market, a perfect benchmark rate is a necessity because of two major reasons. One is investors take their positions based on this rate and second is that derivatives market almost wholly depend on benchmark rate because of the estimation of future cash flows. Indian debt markets use various benchmarks like Overnight Index Swaps, MIBOR, MIOIS, Treasury Bill rate and the long term rates like Bank rate. The Long term benchmark rates are based on the gilts. This is a very good choice for a benchmark because of liquidity, volume and transparency. But there have been numerous problems with the short term benchmarks. One widely used benchmark till now for money market has been the MIBOR. The major issue with the use of MIBOR is that it is a polled rate. MIBOR is calculated by asking some specific players at the start of a day about what rate they will be ready to trade on that day. The results are polled and average is taken and termed as MIBOR. The traders have no commitment to their daily stated rate. They can change it freely over the course of the day and most of them do change it. So being a polled rate, MIBOR is viewed of as more of a speculative rate and so the money market needs a new efficient benchmark. CBLOs have emerged as a very attractive and viable choice as the future money market rate. The various reasons are explained below Liquidity: As already discussed in the previous section, where the various money market instruments like repo, call money and CBLOs were compared; CBLOs have grown in volumes at a tremendous pace eating into the repo market majorly and also the call money market. With such high volumes, the CBLO should be the next natural first choice. Liquidity is such an important factor because money market's major function includes supporting the bond market and this can be done only when liquidity is high Availability for various tenors: CBLOs are available from 1 day to a year. So this feature makes it easy to construct yield curves without many approximations. Credit Risk: CBLOs practically have zero credit risk because they are completely collateralized by cash and securities. In addition, the CCIL is the central counterparty to all transactions ensuring definite performance for one side if the other defaults. High transparency: All the transactions in the CBLO market are done electronically in an anonymous order driven matching system. The statistics and data are shown online in real time which provides a high degree of transparency and confidence. Actual rather than polled: The CBLO system works on CCBID and CCBOR. All these rates are got at the start of the day and order matching is done and majority of the trades are finished in the beginning of the day itself. So the rate at which the market is trading can be taken as a benchmark rate rather than the polled or derived system. Volatility: The expectation of an average investor is that a less volatile rate should be chosen as the benchmark. But the truth is that more volatility implies more response to information which reduces the arbitrage opportunities. Again, as shown in the previous section CBLO volatility is considerably higher than the call and repo rates. All these factors prove that CBLO can successfully be adapted as the benchmark rate in the future.
We can see that CBLO, introduced by the CCIL has had an impact on the Indian money market, especially the call market.Although the volumes were slow to pick up initially as is the case with any new product but with the passage of time volumes in the CBLO segment began to pick up as the market participants became aware of its utility.The restrictions imposed by the RBI on the non-bank entities also contributed to the increase in volumes in CBLO market as market participants began to shift from the call market to CBLO.CBLO also provides tremendous flexibility to the users which a repo does not provide.Therefore the volumes in CBLO segment have been constantly increasing since its launch and it now dominates the Indian money market.
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