What is a Collateralized Borrowing and Lending Obligations (CBLO)?
Collateralized Borrowing and Lending Obligations (CBLO) is a money market instrument that represents an obligation between a borrower and a lender.
CBLO is an obligation by the borrower to return the money borrowed, at a specified future date, an authority to the lender to receive the money lent, at a specified future date with an option/ privilege to transfer the authority to another person for value received.
CBLOs are designed for short-term borrowing and lending transactions in the money market.
The term, the interest rate, and the specifics of the CBLO are often all negotiable between the two parties.
The instrument works like a bond where the lender buys the CBLO and a borrower sells the money market instrument with interest.
A CBLO is much like a Treasury bill or very short term market instrument; the primary difference is a CBLO entails collateral in the transaction.
Must read: Definition and Types of Money Market Instruments
Must read: Money Market : Classification, Instruments, Significance, Advantages and Disadvantages
Must read: Difference between Money Market and Capital Market
What is the purpose of Collateralized Borrowing and Lending Obligations (CBLO)?
CBLOs allow short-term loans to be secured by financial institutions, helping to cover their transactions. To access these funds, the institution must provide eligible securities as collateral—such as Treasury Bills that are at least six months from maturity.
What does a Collateralized Borrowing and Lending Obligations (CBLO) include?
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.
Repayment of loans is guaranteed in CBLO
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.
Who operates CBLOs in India?
CBLOs are operated by the Clearing Corporation of India Ltd. (CCIL) and the Reserve Bank of India (RBI).
Financial institutions eligible for CBLO
Types of financial institutions eligible for CBLO membership include insurance firms, mutual funds, nationalized banks, private banks, pension funds, and private dealers.
Maturities for CBLOs
The typical maturities for CBLOs may range from one day to one year, though the most common maturities are in the overnight to about one week.
Types of Collateral Accepted in CBLOs
CBLOs typically use high-quality collateral, with government securities being a common choice. The specific collateral requirements may vary depending on the market and the clearinghouse involved in the transaction. The use of high-quality collateral enhances the safety and reliability of CBLOs.
CBLOs are Tradable in the Secondary Market
CBLOs are often tradable in the secondary market, which adds to their liquidity. Investors who hold CBLOs can buy or sell them before their maturity date, allowing them to manage their investments more effectively based on changing market conditions.
Can Individuals Participate in CBLO Transactions?
CBLOs are primarily designed for institutional participants, and individual investors typically do not directly participate in CBLO transactions. They are more commonly used by financial institutions and organizations to manage their short-term funding and investment needs.
CBLOs vs other Short-Term Money Market Instruments
CBLOs share similarities with other short-term money market instruments like Treasury bills and commercial paper. However, they differ in terms of collateralization, as CBLOs specifically use collateral to secure transactions.
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PRACTICE QUESTIONS
QUES . With reference to the Indian economy, “Collateral Borrowing and Lending Obligations” are the instruments of: UPSC 2024
(a) Bond market
(b) Forex market
(c) Money market
(d) Stock market
Ans (c)
