Collateralized Borrowing and Lending Obligation (CBLO) Money Market | JAIIB & CAIIB
In this post, we are going to talk about the CBLO which falls under the IIBF prescribed syllabus of its 2 flagship courses i.e. JAIIB i.e. Junior Associate of the Indian Institute of Bankers & CAIIB i.e. Certified Associate of the Indian Institute of Bankers (CAIIB) for the upcoming MAY / JUNE 2024 Exams.
Collateralized Borrowing and Lending Obligation (CBLO)
Financial institutions often need liquidity or ready cash to meet their transactions. Usually, the repo facility of the RBI gives one-day loans to scheduled commercial banks. Another mechanism is the Call Money Market where financial institutions can avail loans from one day to fourteen days.
In the same way, quick money or short-term money can be obtained by financial institutions from the Collateralized Borrowing and Lending Obligations Market.
What is CBLO Market?
The Collateralized Borrowing and Lending Obligation (CBLO) market is a money market segment operated by the Clearing Corporation of India Ltd (CCIL). In the CBLO market, financial entities can avail short-term loans by providing prescribed securities as collateral. In terms of functioning and objectives, the CBLO market is almost similar to the call money market.
You can also check out the linked YOUTUBE Video on CBLO to better understand the topic.
The uniqueness of CBLO is that lenders and borrowers use collateral for their activities. For example, borrowers of fund have to provide collateral in the form of government securities and lenders will get it while giving loans. There is no such need of collateral under the call money market.
Who are the participants in the CBLO market?
Institutions participating in CBLO are entities that have either no access or restricted access to the inter-bank call money market. Still, institutions active in the call money market can participate in the CBLO market. Nationalized Banks, Private Banks, Foreign Banks, Co-operative Banks, Insurance Companies, Mutual Funds, Primary Dealers, Bank cum Primary Dealers, NBFC, Corporate, Provident/ Pension Funds etc., are eligible for CBLO membership. These institutions have to avail a CBLO membership to do activities in the market.
Instrument under the CBLO market
Collateralized Borrowing and Lending Obligation (CBLO) is the instrument in the CBLO market. It is a discounted instrument available in the electronic book entry form for the maturity period ranging from one day to one year.
The CCIL provides the Dealing System through Indian Financial Network (INFINET) and Negotiated Dealing System for participating in the market.
In the CBLO market, members can borrow or lend funds against the collateral of eligible securities. Eligible securities are Central Government securities including Treasury Bills and other securities as specified by the CCIL. Borrowers in CBLO have to deposit the required amount of eligible securities with the CCIL. For trading, the CCIL matches the borrowing and lending orders (order matching) submitted by the members. Borrowers have to pay interest to the lenders in accordance with the bid.
How a CBLO Works?
Clearing Corporation of India Ltd. (CCIL) and the Reserve Bank of India (RBI) operate this CBLO market. Financial institutions can use CBLOs to secure short-term loans, helping to cover their transactions. These funds can only be accessed if the institution provides collateral, such as a Treasury Bill with a maturity date of at least six months.
As with bonds, CBLOs are purchased by lenders and sold by borrowers with interest. CBLO offers loans and borrowings for a variety of maturities, from overnight to one year, with full collateralization. As part of the CBLO, the borrower is required to repay the debt at a specified future date and the lender is authorized to receive the money at that time. In addition, a lender can transfer his authority to another person in exchange for value received.
Since the CCIL guarantees loan repayment, all borrowing is fully collateralized. In the event that the borrower or lender does not make available funds, the collateral offers protection against default risk. CCIL must be entrusted with the custody of the collateral valued at the required amount. In order to facilitate trades, the CCIL matches borrowing and lending orders submitted by its members after receiving the deposit.
Requirements for a CBLO
SUBMISSION OF BIDS: Members who are willing to lend have to submit their bids in the CBLO auction market, which opens from 11:15 AM to 12:15 PM IST. The bids have to be including the amount and the rate and they can be altered or canceled at any time during the open session.
Borrowers, although, cannot edit the CBLO offers they have submitted. After the auction session closes at 12:15 PM IST, the CBLO bids and offers in the system are matched, and successful borrowers and lenders get notified.
LOT SIZE: The minimum lot size for the CBLO auction market = Rs.50,00,000 and the multiple lot size = Rs.5,00,000.00. Members who do not get success in their bids, can submit their bids or offers in the CBLO normal market (open on weekdays from 9:00 AM to 3:00 PM and Saturdays from 9:00 AM to 1:30 PM).
CBLO NORMAL MARKET: The minimum and multiple lot sizes for CBLO normal market are Rs.5,00,000. It takes T + 0 time for the matched deals (Offer & bids) on the auction & normal markets to process and settle.
So, this was about the CBLO. The topic described here is more than sufficient for the upcoming JAIIB & CAIIB Exams 2024.
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