10 Trading Corporate Bonds on RFQ Platform: A Comprehensive Guide to SEBI's New Mandate for Alternative Investment Funds

Key Takeaways:

- AIFs must conduct at least 10% of their monthly corporate bond trades on the RFQ platform.

- Transactions between AIFs on the RFQ platform must be executed in 'one-to-one' mode.

- The new guidelines aim to enhance transparency and promote fair trading practices in the corporate bond market.

- SEBI's move is part of its ongoing efforts to strengthen the regulatory framework for AIFs and protect investor interests.

Detailed Narrative:

The Securities and Exchange Board of India (SEBI) has introduced a significant regulatory change for Alternative Investment Funds (AIFs) operating in the corporate bond market. In a bid to enhance transparency and promote fair trading practices, SEBI has mandated that AIFs must undertake at least 10% of their total secondary market trades in corporate bonds by value in a month through the Request for Quote (RFQ) platform.

The RFQ platform is a regulated trading platform that facilitates the buying and selling of corporate bonds. By requiring AIFs to conduct a portion of their trades on this platform, SEBI aims to foster greater transparency and efficiency in the corporate bond market. This move is part of SEBI's ongoing efforts to strengthen the regulatory framework for AIFs and protect the interests of investors.

Under the new guidelines, AIFs must execute transactions with other AIFs on the RFQ platform in 'one-to-one' mode. This means that the trade will be executed directly between the two AIFs, without involving other market participants. However, if an AIF initiates a trade in 'one-to-many' mode, and the trade is executed with another AIF, it will be counted as a 'one-to-many' mode transaction and not a 'one-to-one' mode transaction.

The introduction of these guidelines is a significant step towards enhancing transparency and promoting fair trading practices in the corporate bond market. By mandating the use of the RFQ platform, SEBI aims to create a more level playing field for all market participants and ensure that trades are executed in a transparent and efficient manner.

FAQs:

Q1: What is the RFQ platform?

A1: The Request for Quote (RFQ) platform is a regulated trading platform that facilitates the buying and selling of corporate bonds. It allows market participants to request quotes from multiple counterparties and execute trades in a transparent and efficient manner.

Q2: Why has SEBI introduced this requirement for AIFs?

A2: SEBI has introduced this requirement to enhance transparency and promote fair trading practices in the corporate bond market. By mandating the use of the RFQ platform, SEBI aims to create a more level playing field for all market participants and ensure that trades are executed in a transparent and efficient manner.

Q3: How much of their corporate bond trades must AIFs conduct on the RFQ platform?

A3: AIFs must undertake at least 10% of their total secondary market trades in corporate bonds by value in a month through the RFQ platform.

Q4: How will transactions between AIFs on the RFQ platform be executed?

A4: Transactions between AIFs on the RFQ platform must be executed in 'one-to-one' mode, meaning that the trade will be executed directly between the two AIFs, without involving other market participants.

Q5: What is the significance of this move by SEBI?

A5: This move by SEBI is part of its ongoing efforts to strengthen the regulatory framework for AIFs and protect the interests of investors. By enhancing transparency and promoting fair trading practices in the corporate bond market, SEBI aims to create a more robust and efficient financial ecosystem.

Key Precedents:

1. SEBI Circular No. SEBI/HO/AFD/PoD/P/CIR/2023/017 dated February 01, 2023:

This circular is the primary reference for the new guidelines regarding AIFs' transactions in corporate bonds through the RFQ platform. It outlines the specific requirements and modalities for AIFs to conduct a portion of their corporate bond trades on the RFQ platform.

2. Chapter XXII of Master Circular for issue and listing of Non-convertible Securities, Securitised Debt Instruments, Security Receipts, Municipal Debt Securities and Commercial Paper dated July 07, 2023:

This Master Circular provides guidance on the execution of trades on the RFQ platform, including the 'one-to-one' and 'one-to-many' modes. It serves as a reference for the specific modes of execution applicable to transactions between AIFs on the RFQ platform.

In the detailed narrative and FAQs, I have accurately included the verbatim names and exact section/rule numbers referenced in the original article, while ensuring that the content is presented in a fresh and engaging manner, without directly referencing the original article.

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Here's AIF Master Circular's verbatim Chapter 10

Chapter 10 - Transaction in Corporate Bonds through Request for Quote (RFQ) platform bv AIFs{31}

10.1. AIFs shall undertake at least 10% of their total secondary market trades in Corporate Bonds by value in a month by placing/seeking quotes on the RFQ platform.

10.2. Further, in terms of Chapter XXII of Master Circular for issue and listingof Non- convertible Securities, Securitised Debt Instruments, Security Receipts, Municipal Debt Securities and Commercial Paper dated July 07, 2023 quotes on RFQ platform can be placed to an identified counterparty (i.e. ‘one-to-one’ mode) or to all the participants (i.e. ‘one-to-many’ mode). In this regard, it is clarified that all transactions in Corporate Bonds wherein AIF(s) is on both sides of the trade shall be executed through RFQ platform in ‘one-to-one’ mode. However, any transaction entered by an AIF in Corporate Bonds in ‘one-to- many’ mode which gets executed with another AIF, shall be counted in ‘one-to- many’ mode and not in ‘one-to-one’ mode.

Note:-

{31}SEBI Circular No. SEBI/HO/AFD/PoD/P/CIR/2023/017 dated February 01, 2023