FPIs resist mandatory 10% debt trade on RFQ

In a consultation paper floated on 5 July, the Securities and Exchange Board of India (Sebi) said the move would ensure enhanced transparency in the bond market and improve liquidity. RFQ is a centralized trading platform launched by the stock exchanges. However, since foreign funds operate in more than one country, they typically use global trading platforms such as Bloomberg, Marketaxess and Tradeweb to place their fixed income bets.

In response to Sebi’s consultation paper, FPI lobby group Asia Securities Industry and Financial Markets Association (ASIFMA) said mandating foreign funds to use platforms like RFQ won’t increase liquidity in debt markets, adding improving ease of access to the debt market for FPIs instead will attract more flows.

Debt markets function differently compared to equities. If an investor wants to deal in shares of listed firms, the transaction can happen only through stock exchange platforms. However, in debt markets, secondary transactions are predominantly over the counter (OTC) where the potential buyer and seller bilaterally negotiate the prices.

An email sent to Sebi remained unanswered.

“Mandating the routing of a certain percentage of FPI trades through the RFQ platform of stock exchanges will not increase the liquidity of India’s corporate bond market,” ASIFMA said in a six-page response to Sebi’s consultation paper.

The letter said that requiring FPIs to route a specified percentage of their trades through the RFQ platform of stock exchanges means they will have to monitor and track their trades to comply with this requirement and this would be an additional burden – in terms of additional costs and expenses – and another reason for not investing in India’s not-so-liquid corporate bond market.

The FPI body also cited the example of China’s Bond Connect Scheme. In 2017, China created an investment channel through which foreign investors could trade in China Interbank Bond Market (CIBM). The platform essentially helps foreign funds to buy Chinese bonds from Hong Kong.

“We believe that focusing on a way to integrate or connect the local stock exchange RFQ platform(s) with global trading platforms commonly used by global institutional investors would fast track FPI investments in India’s corporate bond market and be an efficient win-win for all stakeholders.” ASIFMA said.

Sebi has already made it mandatory for homegrown mutual funds to mandatorily buy 25% of their secondary market bonds from the RFQ platform while portfolio managers are required to buy at least 10% of their fixed income purchases from the RFQ platform. Alternative Investment Funds (AIFs) and stock brokers are also required to buy a minimum 10% of their secondary market bonds from the RFQ platform.

In the consultation paper, Sebi observed that during FY23, merely 4.5% trades made by FPIs in debt markets came through the RFQ platform.

“Thus, to increase the liquidity on exchange platform and to enhance the transparency and disclosure pertaining to investments by FPIs in corporate bonds, it may be appropriate to mandate FPIs to carry out a certain percentage of their transactions in RFQ platform, which may be reviewed,” Sebi said in its discussion paper.

Updated: 27 Jul 2023, 11:08 PM IST