What is a Collateralized Borrowing and Lending Obligation - CBLO
A collateralized borrowing and lending obligation (CBLO) is a money market instrument that represents an obligation between a borrower and a lender as to the terms and conditions of a loan. Collateralized borrowing and lending obligations are used by those who have been phased out of or heavily restricted in the interbank call money market.
BREAKING DOWN Collateralized Borrowing and Lending Obligation - CBLO
Collateralized borrowing and lending obligations (CBLOs) is operated by the Clearing Corporation of India Ltd. (CCIL) and Reserve Bank of India (RBI). The CBLO is a money market segment where short-term loans can be secured by financial institutions in order to cover their transactions. To gain access to these funds, the financial institution must provide eligible securities as collateral. Eligible securities for collateral include Central Government securities, such as Treasury Bills, with at least six months left to the maturity date.
Since the repayment of loans is guaranteed by the CCIL, all borrowings are fully collateralized. The collateral provides a safeguard against default risk by the borrower or lender’s failure to make funds available to the borrower. The required value of collateral must be deposited and held in the custody of the CCIL. After the deposit has been received, the CCIL facilitates trades by matching borrowing and lending orders submitted by its members. Members of the CCIL comprise of institutions with little to no access to the interbank call money market in India. Types of financial institutions eligible for CBLO membership include insurance firms, mutual funds, nationalized banks, private banks, pension funds, and private dealers. In order to borrow, members must open a Constituent SGL (CSGL) account with the CCIL which will be used to deposit the collateral.
The CBLO works like a bond in that the lender buys the CBLO, and a borrower sells the money market instrument with interest. The CBLO facilitates borrowing and lending for various maturities, from overnight to a maximum of one year, in a fully collateralized environment. The details of the CBLO include an obligation for the borrower to repay the debt at a specified future date and an authority to the lender to receive the money on that future date. The lender also has the option to transfer his authority to another person for value received.
Members willing to lend must submit their bids in the CBLO auction market which is open from 11:15 a.m. to 12:15 p.m. The bid must include the amount and the rate, and can be modified or canceled at any time during the open session. Borrowers, however, cannot edit their submitted CBLO offers. After the auction session closes at 12:15 p.m., the CBLO bids and offers in the system are matched, and successful borrowers and lenders are notified. The minimum lot size for CBLO Auction market is Rs.50 lakhs and multiple lot size is Rs.5 lakhs. Unsuccessful members in the auction stage can submit their bids or offers in the CBLO normal market which is open on weekdays from 9:00 a.m. to 3:00 p.m. and Saturdays from 9:00 a.m. to 1:30 p.m. The minimum and multiple lot size for CBLO Normal market is Rs.5 lakhs. The matched deals on the auction and normal markets are processed and settled on a T+0 basis. The CCIL assumes the role of the central counter party and guarantees settlement of transactions.