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The money market is the market for financial assets that are close substitutes of money .It is a
market for short-term funds and instruments having a maturity period of one or less than one year.It
is not a single market but a collection of markets for several instruments.It is a need based market
where demand and supply of money shape the market.Thus , a money market provides a balancing
mechanism to even out the demand for and supply of short term funds.
An efficient money market provides liquidity . Perhaps the biggest advantage and the most
attractive feature of the money market is liquidity.. This means that if an investor wants to liquidate
a money market position, he or she will have very little trouble turning the funds into cash.
Money market provides a stable source of funds to banks and encourages the development of non
bank intermediaries .
Treasury bills
Commercial papers
Certificates of deposits
Commercial bills
RBI, in its Mid-Term Review of Monetary and Credit Policy for the year 2002-03, announced the
CCIL, as a money market instrument and subsequently issued detailed operative guidelines for the
product. CBLO is a discounted instrument issued in electronic book entry form for the maturity
period ranging from one day to one year. CCIL provides a dealing platform through which market
What is a CBLO?
1. An obligation by the borrower to return the money borrowed, at a specified future date;
2. An authority to the lender to receive money lent, at a specified future date with an
INTRODUCTION OF CCIL
The Clearing Corporation of India Ltd. (CCIL) was set up in April, 2001 for providing exclusive
clearing and settlement for transactions in Money, GSecs and Foreign Exchange. The prime
objective has been to improve efficiency in the transaction settlement process, insulate the financial
system.
The Clearing Corporation of India Ltd. (CCIL), the clearing agency, operates a market for
CBLOs—a form of tripartite repo (approved by the RBI) that allows market participants to create
borrowing facilities by placing collateral securities (government bonds and treasury bills) at the
CCIL. Borrowers can then bid for funds (up to their collateral’s value less a discount margin)
through the CBLO system—a transparent, electronic order book. CBLOs are an innovative
technique unique to India, developed to supplement and possibly supplant the bilateral repo
market. Established in 2001, CCIL is India's first exclusive clearing and settlement institution to
Intially the membership of cblo segment was extended to banks , primary dealers , mutual funds,
financal institutions and insurance companies that are the members of negotiated dealing system
.The range of the participants has been widening overtime. By January 2004 , the non NDS members
like corporates , cooperative banks, non bank financial companies , pension funds and trusts are also
The borrowing members are required to open Constituent SGL (CSGL) Account with CCIL for
depositing securities which are offered as collateral for the borrowing . The eligible securities are
Central Government securities including Treasury Bills with a residual maturity period of more than
six months.
WORKING OF CBLO :
are offered as collateral for borrowing and lending funds . These securities are Central Government
securities including Treasury Bills with a residual maturity period of more than six months.
The borrowing limit for the members is fixed daily at the beginning of the day taking into account
the securities deposited by them in the CSGL account . . Lenders in the Auction market and both
borrowers and lenders in the Normal market are required to deposit initial margin in the form of
Cash, computed at the rate of 0.50% on the total amount borrowed/lent by the members.
The securities are valued according to the market value of the securities . Borrowers can avail funds
upto the extent of the market value of the securities offered as collateral. The cblo is an obligation by
the borrower to return the borrowed money at a specified future dateand an authority to the lender to
receive money lent with an option or privilege to transfer authority to another person for value
received.
CBLO is a discounted instrument issued in an electronic book entry form . Both the borrowers and
lenders indicate their requirement which includes the amount , maturity and the rate at which they
want to lend or the offer rate that is proposed by the borrower and the bid rate proposed by the
lender. The rate of interest depends upon the demand and supply of money in the market . The rate
Hence each lender and borrower independently enters their requirements into the online trading
system . The best offer is the highest rate at which the borrower is willing to borrow and the best bid
Members have the flexibility to access the auction market and normal market for borrowing of
funds. Based on the borrowing limits fixed by CCIL, members indicate their borrowing requirement
mentioning the amount, maturity and the cap rate before commencement of the auction session. i.e.
from 10.30 A.M. to 11.00 A.M. Presently members are permitted to borrow and lend funds on
overnight basis indicating the cap rate/s which is/are as under (a cap rate is the maximum rate upto
NORMAL MARKET
Members who are unable to complete their borrowings in the Auction market, may access the
Normal market for borrowing funds to the extent of their available borrowing limit. Besides, the
members can use the Normal market for trading in CBLOs, to sell the CBLOs in their account to
meet their funds requirement instead of waiting till maturity. Such members submit selling offers
indicating the amount and rate. Like-wise, members intending to buy CBLOs (lend funds) submit
their bids specifying the amount and rate for a particular CBLO. The matching of bids and offers
takes place on the basis of Best Yield - Time Priority. Normal market session is open from 9.00
A.M. to 3.00 P.M. on weekdays except Saturday i.e. from 9.00 A.M. to 1.30 P.M.
CCIL accepts the borrowing requests subject to availability of limit and places the borrowing
amount on the specified auction windows. The lenders willing to lend submit their bids directly on
the respective auction window indicating the amount and the rate during the auction session which is
open from 11.15 A.M. to 12.15 P.M. The lenders have the flexibility to modify/cancel their bids
during the auction session while borrowers are not permitted to revise/cancel their offers.
The successful borrowers and lenders are notified regarding borrowing and lending of funds by them
through the dealing system and the lenders who hold CBLOs are permitted to trade in CBLOs in the
After the trading session, all the matched deals of both the Auction and Normal markets are taken up
for processing and settlement . The settlement is on T+0 basis. CCIL assumes the role of the central
counter party and guarantees settlement of transactions . CCIL debits the members' CBLO accounts /
borrowing limit to the extent of their final CBLO payable obligations. The securities to the extent
used as collateral for CBLO borrowing are blocked in the CSGL account of the borrowers. There
will be no transfer of securities to the lenders but lenders interest in the underlying securities is
recognized through documentation. Then, the funds obligation for each member is netted across all
the matched deals of the concerned member in the Auction and Normal market. The net funds
obligation comprising the member-wise payable and receivable position is sent electronically to RBI
for effecting debits and credits in the members' current accounts through the settlement account of
CCIL with RBI. After effecting funds transfer between members' current accounts, RBI sends funds
settlement confirmation to CCIL. After receiving confirmation of fund settlement from RBI, CCIL
KINDS OF DEFAULT
SHORTAGE OF FUNDS : The shortage of funds can take place from both the sides i.e. either the
lender doesn’t meet the obligation on the day of trade or the borrower fails to meet the obligation on
redemption at the time of maturity. In both the cases ccil acts as a counter party and completes the
settlement . It initiates the default handling process by withholding the securities receivable by the
lenders . When the borrower defaults , then the underlying securities are not released to the borrower
till the funds are replenished . Thus it liquidates the securities and adjusts the proceeds towards the
shortfall .
SHORTAGE OF CBLO : The shortage occurs when the members borrow without having sufficient
borrowing limit in their account . In this case , ccil withholds the funds receivable by the defaulting
members and creates securities to the extent of its shortfall by using the withheld funds. It then
CCIL MINIMIZES RISK :CCIL addresses risk relating to transaction and settlement by
adoptingstrict membership norms . It restricts membership only to those entities that meet the
minimum eligibility criteria .They can borrow amount equivalent to the vlue of securities deposited
REGULATORY PROVISION :
CRR : For the development of cblo as a money market instrument , RBI has given a special
exemption from CRR for transactions in CBLO subject to condition that the bank maintains a
SLR : Unencumbered securities in the CSGL account can be taken by the concerned bank for the
COLLATERALS : There is no change in the valuation of the securities as the encumbered securities
continue to remain in the portfolio of the participant . There is no transfer of ownership involved.
ADVANTAGES OF CBLO:
participants include domestic and foreign banks , mutual funds , provident funds , insurance
companies and primary dealers . The main requirement on participants are that they have a CSGL
account.
2)CBLO transactions are novated by CCIL meaning that , CCIL conducts risk management and is
able to gurantee transactions- in fact , the number of failures has been very small .
3)The RBI grants exemptions from following cash reserve ratio and SLR requirements to encourage
4)An important advantage of CBLO over repos is that the instrument is tradable , allowing a
borrower to reserve the position and repay before the term expires and CBLO are secure because the
5)The screen based trading provides transparency and maintains anonymity of counter parties that is
6)Since CBLO operates for a longer period than the call market there is an easy access to funds.For
eg. If a bank suddenly comes to know that it has to make an advance and the operation time of call
market is over then the bank can resort to CBLO for funds .
Thus , we see that CBLO is an alternative to call money, allowing participants to borrow and lend
funds against securities , volume of trade in the former is constantly growing with time .
CBLO – THE EMERGENCE OF NEW BENCHMARK RATE
Given the quantum rise in the volumes of the collateralised borrowing and lending obligations
(CBLO) market, clearing agency Clearing Corporation of India Ltd (CCIL) has proposed) to
examine the feasibility of using CBLO bid/offer rates as the benchmark for the interest rate swap
In the recent months, the trading volume in the CBLO segment has been higher than the combined
However, the call money market is accessible only to the banking sector and is not available to the
mutual fund players and the insurance companies and hence they deploy a sizable proportion of their
The CBLO has all the following characteristics that are indispensable for determination of a
benchmark rate.
1) Liquidity : Good liquidity is the fundamental requirement for a benchmark instrument and the
same is measured in terms of turnover in that instrument . The liquidity in CBLO market is high .
2) Accessibility: The market is not restricted to any particular segment and it is open to all categories
viz., banks financial institutions, primary dealers insurance companies, mutual funds co-operative
3) Transparency: CBLO trades are executed on an anonymous, electronic order driven matching
system which disseminates market statistics on-line thus ensuring high transparency in transactions.
4) Acceptability: CBLO product is approved by RBI as money market instrument and the product is
also approved by Insurance Regulatory authority. Ministry of Finance has also allowed investment
in CBLOs by non governmental provident funds. The CBLO market commands wide acceptability
among Indian money market participants which is reflected in its high volume.
5) Availability for different tenors: CBLO maturities are available for various tenors ranging from
overnight up to ninety days. RBI has allowed the maturity of CBLO upto one year.
6) Credit Risk: In fact there is no credit risk available in CBLO market as all the transactions are
backed by collaterals like Central Government securities and Cash Settlement of all the trades in
CBLO . Market is fully guaranteed by the Clearing Corporation of India Limited (CCIL) and hence
7) Data on real time: The CBLO market data are available on-line which can be readily used without
All the above factors have instilled confidence in the market participants to take cue from CBLO
market to quote rates in other markets like call and repo It is a promising sign for the CBLO market
to become a viable benchmark rate and improvement in liquidity of CBLO instrument would further
Banks, particularly Government owned, are borrowing against their surplus holding of government
securities at a lower rate under Clearing Corporation’s Collateralised Borrowing and Lending
Obligation (CBLO) mechanism and deploying the funds at a higher rate with RBI.
The rate differentials existing between these two markets provide scope for arbitrageurs .
Let us assume that the banks have surplus securities i.e. even after meeting slr requirements , it still
has some unencumbered securities in possession . The banks can use these securities to borrow from
the cblo market having lower interest rate and lend to a market having higher interest rate.Thus , the
bank earns arbitrage profit equal to the difference between the two interest rate . If the bank borrows
Rs. 150 croresat 4.9% and lends the amount at 5.6% in a day then he earns a profit of 70 basis
points.
Consider this: If a bank had borrowed on Monday against its surplus government securities holding
at the weighted average interest rate of 2.72 per cent under CBLO and parked the funds at RBI’s
Reverse Repo (R/R) window at 3.25 per cent, it stands to make a gain of 53 basis points (100 basis
There has been an increasing shift towards borrowing in the CBLO market . The trading advantages
of the CBLO system has increased the acceptability and attractiveness of CBLO
The above graph shows the cblo rates at a lower rate than call and repo rates.
CBLO - Risk Management Process
CCIL's risk exposure in the CBLO segment emanates mainly on two counts-:
b. Risk of failure by a lender to meet its obligations to make funds available or by a borrower to
As the repayment of borrowing under CBLO is guaranteed by CCIL, it should have enough
security to meet any eventuality of a default by the borrower. To take care of this risk, all
borrowings are fully collateralised. This process is managed through setting up of a Borrowing Limit
CCIL may be exposed to risks due to a member not honouring his obligation from a trade done
during a day. A member may undertake to either lend or borrow but may fail to honour such an
As CCIL extends guarantee for settlement of all CBLO transactions, to ensure that this risk is
adequately taken care of, CCIL collects Initial Margin from the member in respect of its deals. As
the risk for any such deal would continue up to the settlement of the deal, Initial Margin collected on
Thus , the CBLO market has grown phenomenally by encouraging a greater range of market
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