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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

Call money market

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

introduction of "Collateralised Borrowing and Lending Obligation (CBLO)", a product developed by

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

participants can borrow and lend funds.

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

option/privilege to transfer the authority to another person for value received


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


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

provide guaranteed settlement facility for transactions in government securities, money

marketinstruments, and foreign exchange.


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

eligible to borrow and lend in the CBLO market.

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.





The borrowing members are required to open CSGL accont with ccil for depositing securities which

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


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

of interest is less than the call money as it is secured.

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

at which the lender is willing to lend appears on the screen .


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

which the borrower is willing to pay).


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

Normal market from the subsequent day onwards.

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

will credit CBLOs to the respective buyer member's CBLO account.


There are two kinds of defaults in this market:

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

credits the same to the concerned lender of those funds.

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

in the CSGL account.


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

minimum CRR of 3%.

SLR : Unencumbered securities in the CSGL account can be taken by the concerned bank for the

SLR purpose by the concerned bank at the end of each day.

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.


CBLO’S offer a number of advantages to the Indian market:

1) Access is open to a wider range of participants than the conventional interbank market . 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


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

the development of the market.

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

involment of CCIL as gurantor of each transaction .

5)The screen based trading provides transparency and maintains anonymity of counter parties that is

presently lacking in the money market operations.

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 .

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

and the credit market

In the recent months, the trading volume in the CBLO segment has been higher than the combined

trading volume of the overnight call and market repo.

Activity in Money Market Segments

Year/ Month Call Market Repo CBLO Total (2 to 4)

Apr-09 10,910 20,545 43,958 75,413
May-09 9,518 22,449 48,505 80,472

Jun-09 8,960 21,694 53,553 84,207

Jul-09 7,197 20,254 46,501 73,952

Aug-09 7,569 23,305 57,099 87,973

Sep-09 8,059 27,978 62,388 98,425

Oct-09 7,888 23,444 58,313 89,645

Nov-09 6,758 22,529 54,875 84,162

Dec-09 6,651 20,500 55,338 82,489

Jan-10 6,411 14,565 50,571 71,547

Feb-10 6,809 19,821 63,645 90,275

Mar-10 8,812 19,150 60,006 87,968

Apr-10 8,187 20,319 50,891 79,397

May-10 8,393 17,610 42,274 68,277
CBLO: Collateralised Borrowing and Lending Obligation

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

surplus cash in the CBLO market

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

banks, corporates provident funds etc

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

the market is devoid of counter party risk.

7) Data on real time: The CBLO market data are available on-line which can be readily used without

any lead/lag effect instrument in compiling data.

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

boost its acceptability


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


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

points equals 1 per cent) in just a day.

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

Source: RBI , Money Market Operations

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-:

a. Risk of default by a borrower in repayment on maturity of a CBLO

b. Risk of failure by a lender to meet its obligations to make funds available or by a borrower to

accept funds by providing adequate security.

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

from members against their deposit of Government Securities as collaterals.

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

obligation by day end (at the time of settlement).

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

deals is released on settlement of such deals.

Thus , the CBLO market has grown phenomenally by encouraging a greater range of market

participants and providing tremendous flexibility to the user.


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