Collaterized Borrowing and Lending Obligations (CBLO) instrument is one with a `haircut'. It has short maturities up to 90 days and is traded with ease in the money market. It helps the development of short-term reference rates in the Inter-bank deals and provides liquidity and depth to the money market. This article deals with the related issues.
Can
it be called a progress, if a cannibal uses a knife
and a fork? This may be a rib-tickling and a witty
question. But, there may not be a more edifying example
to illustrate what `progressive change' is! As could
be deduced very easily, this `change for the better'
would naturally give birth to a manufacturing activity
of producing cutlery, followed by the inevitable financing
or lending maneuvers for that activity. Can it not,
then, be said that this is a kind of change that propels
the economy forward? Also, as a natural corollary, it
would lead to the setting in of `competition' and a
consequent display of a sense of innovation towards
evolution of products, transactions and instruments.
Such an inevitable innovative feature is the order of
the day with regard to the economy of any country.
In
particular, the very core activity of the present day
economy, namely the money market is no exception and
is exhibiting every sign of an evolving economy. The
financial instruments and transactions in the money
market are going through what may be called a `life
cycle'. New instruments crop up in the field as old
ones moulder away into obsolescence.
One
of the latest arrivals in the money market is the Collaterized
Borrowing and Lending Obligations (CBLO). This instrument
is devised by Clearing Corporation of India Ltd. (CCIL).
It has some special features vis-à-vis the normal
routine instruments in the money market such as call
money, notice money, term money, repose and reverse
repose. In the media, CBLO is referred to as an `instrument
with a haircut". This new tonsorial phrase `haircut'
means downward adjustment made for market value and
reduction made for safety margin in valuing the securities
lodged with CCIL, for the purposes of fixing limits
by CCIL for the CBLO transactions. As one of the websites
says, "`haircuts' are taken by Clearing Corporation
to protect it from the potential losses arising out
of a decline in the market value of security". |
