Adisak Teeramasvanich, HSBC's head of balance sheet management, said the unlocking of the tax restriction would be one of the key drivers for the market to take off.

Bank of Thailand senior director Pongpen Ruengvirayudh also supported the tax decrease as the central bank has tried to push the private repo market for the last two years. However, transactions have been minimal, due to the tax barrier, documentation problems and the lack of understanding of this financial instrument by players and investors.

The Cabinet recently approved the tax decrease amendment and it is now pending for the Royal Gazette.

The central bank has operated as the matchmaker for the repo market since 1980. Last year, it announced that it would close down its operation as matchmaker by the end of 2007 and encouraged the private sector to operate transactions by themselves.

After the announcement, the Thailand Securities Depository set up a collateral management unit to assess the value of collateral assets for all players.

In a bid to encourage more players on the market, the Securities and Exchange Commission (SEC) will offer hearings for asset management firms in April about how restrictions capped them from joining the repo market, said Ekapon Sawaengsri, SEC senior assistant director.

Currently, asset management firms can act as the lender to their repo parties. If the repo party's collateral assets are government bonds, the amount of lending is unlimited. If the collateral assets are debentures issued by commercial banks, the amount of lending is capped at not more than 20 per cent of the company's assets under management (AUM).

If the collateral assets are corporate bonds, the amount of lending must not be over 15 per cent of the AUM.

This regulation must comply with the fact that if the asset management firm has already invested in the borrower's company, the amount of lending accumulated with the amount of investment must not be over the limit.

If an asset manager lends bonds, the amount of lending must not be over 25 per cent of the AUM.

The SEC has not allowed asset management companies to short bonds.

Ratchakritpong Ekrangsun, executive vice president of KGI Securities' fixed income department, said that currently lenders in the private repo market could receive a return of around one per cent higher than the one-month fixed deposit the banks offer.

"It's highly secured with attractive returns. It's one of the investors' choices for the best interest of their investment," said Ratchakritpong.

KGI Securities late last year aimed to be the market leader in the private repurchase market with Bt2-4 billion trading transactions per day. Currently, trading is around 1.5 billion per day and around 70 per cent of its customers are securities firms and retail investors.

Meanwhile, the BOT plans to put the three-year maturity of floating rate bonds on auction on March 9. Later, it will issue floating rate bonds with more than one year's maturity.

The bonds' interest rate will correspond with the six-month rate of Bangkok Interbank Offered Rate, which is currently 4.9 per cent.

Piyarat Setthasiriphaiboon

 The Nation