The move aims to encourage Thailand's financial market to adopt international standards. Players in the private repo market will be able to borrow or lend directly with bonds as collateral and the BOT will play a key role as an intermediary, to match demands for those who want liquidity and those seeking a return on lending.

A BOT source said the central bank wants to heighten competitiveness among players in the money market before financial liberalisation.

"The central bank wants them to manage liquidity by themselves instead of seeking the BOT's assistance. But if they cannot match demands, they can come to the central bank as a last resort," the source said.

The central bank has invited members of the repo market to meet on September 25 to inform them of its framework of monetary policy reform.

Cancellation of the BOT's repo market is part of the central bank's established policy. Last year it reduced trading sessions on its repo market from two at the start of the market to only one in the afternoon.

A banking industry source said banks would find greater difficulty in financial management when using the private repo market because they must plan and handle cash flows two days in advance. Currently, they can borrow or lend on the repo market immediately.

Players in the market will also need to collect a higher number of the bonds to prepare for falling short of liquidity. Foreign full branches will be affected, largely because they don't have large bond holdings, the source said.

The central bank has been encouraging development of the private repo market for two years, but it is much less popular than the central bank's repo market.

Moreover, there were a lot of obstacles in the private market, including its clearing system and English-language contracts, the bank source said.

However, the BOT informed banks last year about its plans to close down its repo market in a bid to force them to prepare for the change. Some obstacles have also been solved. For example, the Thai Bond Dealers' Club has set up a new clearing system.

The bank source said players would easily match their demands because they knew which banks were in need of liquidity and those that had an amount of liquidity.

The central bank continues to rely on primary dealers to handle liquidity in the market and to keep the 14-day repurchase rate as the key policy interest rate.

According to the BOT, the private repo market will restructure the money market as well as developing the debt market. It wants to further encourage long-term borrowing with collateral and to increase liquidity in the secondary bond market. The financial institutions will be the market makers, making short sales of bonds and borrowing bonds via transactions on the market. They will be able to enhance yields from lending bonds.

Anoma Srisukkasem

The Nation