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.

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;

3. An underlying charge on securities held in custody (with CCIL) for the amount borrowed/lent.

Eligibility :
The membership of CBLO segment is extended to banks, primary dealers, mutual funds, financial institutions and insurance companies, who are members of the NDS. The borrowing members are required to open Constituent SGL (CSGL) Account with CCIL for depositing securities which are offered as collateral for the borrowing.

Eligible Securities :
The eligible securities are Central Government securities including Treasury Bills with a residual maturity period of more than six months.

Borrowing Limits :
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. The securities are subjected to Mark-to-Market valuation and necessary haircuts. The post hair-cut Mark-to-Market value is the limit, which, in effect, denotes the drawing power up to which the members can borrow funds. 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.

Auction Market :
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).

1. MIBOR

2. MIBOR + 50 bps

3. MIBOR - 50 bps

4. No cap specified.

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. After the Auction market session, CCIL initiates auction matching process based on uniform yield principle. 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.

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.

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. The matched deals are novated and CCIL assumes the role of the central counter party and guarantees settlement of transactions. CBLO obligation is generated by netting of trades in the same CBLO for the Normal market whereas the obligation for CBLOs for the Auction market is worked out on gross basis. Accordingly, 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.

1. Shortage of Funds :
   The shortfall in funds takes place when the members buy CBLOs and do not meet the obligation, and also members who fail to meet funds obligation on redemption of CBLOs (repayment of borrowed amount) on maturity. In such cases, CCIL will meet the shortage by utilising the lines of credit extended by the member banks and complete the settlement. CCIL then initiates the default handling process by withholding the CBLOs receivable by the lenders (defaulting members). In case of failure by the borrower to meet the redemption proceeds on maturity of CBLOs, the underlying securities are not released to the borrowers till the funds are replenished. In case of eventual default, CCIL liquidates the underlying securities/CBLOs and adjust the proceeds towards the shortfall and penal charges.

2. Shortage of CBLOs :
   The shortage in CBLOs takes place when the members sell CBLOs without having the concerned CBLOs in their account. In case of CBLO shortfall, CCIL withholds the funds receivable by the defaulting members and creates CBLOs to the extent of CBLO shortfall quantity by using the withheld funds and credit the same to the concerned buyers' CBLO account. Alternatively, CCIL opts for Close-out process by reducing the CBLO shortfall quantity proportionately from the buyers (lenders) receivable position in the concerned CBLOs.

RBI's Regulatory Provisions :
Reserve Bank of India in its Mid Term Review of Monetary and Credit Policy for the year 2002 - 2003 has mentioned about the introduction of CBLO as a money market instrument and of issuance of detailed operating instructions separately in this regard. RBI vide its letter No. MPD.227/07.01.279/2002-03 dated December 20, 2002 has decided to permit CBLO developed by CCIL with the following norms:

1. Nature of the Instrument :
   CBLO would be treated as a money market instrument. There will be no restrictions on the minimum denomination as well as lock-in period for its secondary market transactions. The regulatory provisions for CBLO will be the same as those applicable to other money market instruments.

2. Term of the Instrument :
   CBLO may have original maturity period between one day and upto one year.

3.  

   1. Issue and Trading Norms:

      • CBLO shall be issued in electronic book-entry form only.

      • The rate at which CBLO is issued and traded in the secondary market will be decided by market participants.

      • CBLO could be traded in the secondary market without any lock-in period.

      • CCIL will provide the trading platform for trading CBLOs to the satisfaction of the market participants.

      • Dissemination of traded prices to all market participants as also to RBI will also have to be enabled by CCIL.

   2. Borrowing Limits :
      Borrowing limits for members will be fixed by CCIL at the beginning of the day taking into account the securities deposited by borrowers in their CSGL account with CCIL. The securities will be subjected to necessary hair-cut after marking them to market. The limits so derived in effect will denote the drawing power upto which the members can borrow funds. Lenders will deposit cash to meet initial margin requirements that are designed to take care of the settlement risk.

4. Reserve Requirements :
   Cash Reserve Ratio (CRR) / Statutory Liquidity Ratio (SLR): The treatment of CBLO in regard to CRR and SLR will be as follows.

   CRR :
   Since CCIL would be the central counter party for both borrowers and lenders, the status of CCIL would have implications for applicability of CRR. As CCIL is considered as a non-bank institution, transactions in CBLO will attract CRR even though the actual borrowers and lenders of the transaction are banks. However, in order to develop CBLO as a money market instrument, it has been decided to give a special exemption from CRR for transactions in CBLO subject to the bank maintaining minimum CRR of 3 percent.

   SLR :
   Securities lodged in the Gilt Account of the bank maintained with CCIL under CSGL facility remaining unencumbered at the end of any day will be reckoned for SLR purposes by the concerned bank. For this purpose, CCIL will provide a daily statement to banks/RBI listing the securities lodged/utilized/remaining unencumbered.

   The statutory pre-emptions relating to CRR and SLR will of course have no applicability to institutions like PDs, Mutual Funds, Insurance companies, DFIs, etc.

5. Valuation of Collaterals :
   Securities in the Gilts Account of the participant for CBLO can be from any of the three categories, viz., 'Held to Maturity', 'Available for Sale', and 'Held for Trading'. While CBLO will involve movement of securities from the SGL account of a participant to its own Gilt Account with CCIL on a value free transfer basis, there is no transfer of ownership involved. Since the securities will continue to remain in investment portfolio of the participant even when encumbered, there will be no change in valuation of such securities. The CBLO arrangement envisages earmarking specified value of securities (based on the borrowings under CBLO). The intent of earmarking such securities will be accomplished through a suitable agreement.

6. Risk Weight :

   Market Risk : Since CBLO is fully collateralized by government securities, the risk weight as applicable to government securities for market risk would be applicable to CBLO.

7. Accounting Norms :
   The accounting treatment of CBLO would be as applicable to any money market instruments/transactions. For detailed accounting entries, please refer to 'Accounting Guidelines'.

8. Valuation :
   BLOs outstanding on the balance sheet date may be valued on the same basis as discounted instruments of similar nature and tenor.

The membership of CBLO segment will be initially extended to NDS members and the membership will be subsequently extended to non-NDS members comprising NBFCs, Corporates and others. The borrowing members will open Constituent SGL (CSGL) Account with CCIL for lodgement of securities which will be used as collateral for borrowing. Lenders will deposit cash to meet initial margin requirements that are designed to take care of the settlement risks.

Members of CCIL's CBLO Segment are required to maintain margin contributions in relation to their borrowing and/or lending obligations at any point of time.

Cash collateral contributions for this Segment are received in CCIL's Current Account maintained with Reserve Bank of India, Mumbai. Security collaterals are received and maintained in CCIL's dedicated Constituent SGL (CSGL) Account maintained with Reserve Bank of India, Mumbai.

Composition :
Collaterals are received in the form of both cash and securities. Cash contributions are currently reckoned only towards members' initial margin obligations. Security contributions are currently reckoned only towards computation of members' borrowing limits.

Collaterals - Cash :
Members desirous of making cash contributions towards their initial margin obligations are required to intimate CCIL about the same using a prescribed format. Cash contributions from members are received by means of their cheques drawn on their Current Account with Reserve Bank of India, Mumbai. These are expected to be held in multiples of INR 100,000.00. Relative cheques are deposited at CCIL counters within cut-off timings prescribed for the purpose. Member SGF balances are updated by CCIL upon receipt of relative funds into its Current Account with RBI. Transaction Reports and Holding Reports are electronically delivered to the concerned members along with other daily business reports.

Members seeking to withdraw from their collateral cash contributions are required to send a prior written notice to CCIL about the same using a prescribed format within cut-off timings prescribed for the purpose. Withdrawals requests shall be processed and permitted after taking into account concerned member's outstanding trade obligations Withdrawal payments are made by CCIL by means of their cheques drawn on its Current Account with Reserve Bank of India, Mumbai. Relative cheques are delivered to concerned Members on relative value date at CCIL counters after their collateral cash balances have been suitably reduced. Transaction Reports and Holding Reports are electronically delivered to the concerned members along with other daily business reports.

Collateral - Securities :
All transfers of securities to and/or from CCIL by its members are carried out on a "Value Free of Payment" basis. Members desirous of making securities contributions towards their Borrowing Limits are required to intimate CCIL about the same using a prescribed format. Security contributions from members are tendered using SGL Transfer Form III duly signed by the concerned member as a "Seller". These forms are deliverable at CCIL counters by members within cut-off timings prescribed for the purpose. CCIL shall lodge these Forms with Reserve Bank of India, Mumbai after counter-signing them as a "Buyer". Member SGF balances are updated by CCIL upon receipt of relative securities into its CSGL Account with Reserve Bank of India. Transaction Reports and Holding Reports are electronically delivered to the concerned members along with other daily business reports.

Members seeking to withdraw from their security contributions are required to send a prior written notice to CCIL about the same using a prescribed format within cut-off timings prescribed for the purpose. Withdrawals requests shall be processed and permitted after taking into account concerned members' outstanding trade obligation. Security withdrawals are effected to members by credit to their SGL Account with Reserve Bank of India, Mumbai on relative value date after their balances have been suitably reduced. Transaction Reports and Holding Reports are electronically delivered to the concerned members along with other daily business reports.

Members are entitled to substitute their securities holdings after giving prior notice as prescribed by CCIL. Members are required to comply with relative deposit and withdrawal procedures specified for the same. Transaction Reports and Holding Reports are electronically delivered to the concerned members along with other daily business reports upon completion of the process.

Corporate Actions and Benefits :
All corporate actions on member SGF holdings are serviced through the electronic funds transfer mechanism of Reserve Bank of India. Relative funds are remitted to the Current Accounts of concerned members with separate individual electronic advices to members.

Cash Collaterals - Interest Payment :
Members are not entitled to any interest on their cash contributions towards initial margin on individual holdings upto INR 100,000.00. In respect of members holding cash collateral contribution in excess of Rs. 100,000.00, CCIL pays interest to such members at quarterly rests (at the end of every calendar quarter) on 90% of their average cash balances during the relative period (in excess of Rs. 100,000.00) @ 100 basis points below the weighted average 91 Day Treasury Bills' cut off yields at the last three primary auctions held before the relevant interest payment date. The benchmark instrument to which such interest is pegged as well as spread between the yield on the benchmark instrument and the interest rate paid by CCIL may be changed at the sole discretion of CCIL from time to time.

SGF - Securities - Interest Payment :
Periodic coupon payments received in respect of Members' SGF security contributions (held in the form of dated securities) are passed on to concerned Members by CCIL immediately upon receipt of relative interest from Reserve Bank of India.

List of Eligible Securities : CCIL prescribes a list of securities that are eligible for margin contributions by members.

CCIL's risk exposure in the CBLO segment emanates mainly on two counts-:

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

2. 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. These collaterals are subjected to hair-cuts and are revalued on a daily basis. Any shortfall in the value of collateral (to meet outstanding borrowing) is collected through end of the day margin calls.

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). If the rates have moved adversely in the mean time, such defaulter member needs to compensate for the loss suffered. 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.