Repo market may allow in foreigners

Pongpen Ruengvirayudh, senior director of the Financial Markets Operations Group of the Bank of Thailand (BOT), said the relaxation would help improve the country's repo market, because transactions would become more vigorous. The most active players in the repo market are currently the BOT's primary dealers, which hold a total of 327 contracts with partners.

"We're considering allowing non-residents to step into the market after seeing they've bought large numbers of bonds," she said.

Foreign investors may also be allowed to do US-dollar/baht deals in the repo market, as well as baht/baht transactions. For example, foreign full branches could borrow baht in the market with US government bonds as collateral.

Pongpen said the rules would be relaxed with "cautious consideration", in order to prevent any speculative investment in the market.

Funds are now flowing in both directions without any speculation despite the removal of the central bank's 30-per-cent reserve requirement and relaxation of some related rules.

Meanwhile, the central bank plans to encourage Thai corporations to enter the repo market after it succeeds in attracting financial institutions to begin active repo dealing.

Pongpen said companies holding cash or liquid assets could benefit largely from the repo market. They could reap high returns in line with the policy interest rate, compared with deposit interest rates.

Moreover, the market could become a secured investment channel for risk management, because the companies will be subject to the Deposit Protection Act from August. Lenders will take bonds as collateral from debtors with mark-to-market revaluation.

"They could diversify their risks by putting their money into the repo market, which is considered a win-win situation," she said, adding that the more players there were in the market, the smaller the impact on the financial system if any player struck problems. After the BOT shut down its repurchase market and abolished any obstacles to the private repo market, most players have moved to the private market.

Transactions in the interbank market have also declined 30-40 per cent. However, some players, including commercial banks and corporations, remain in the sell-and-buy-back channel, which is less secure than the repo market. So far this year, trading volume in the private repo market has amounted to Bt260.15 billion, compared with Bt281.6 billion for all of last year. Volumes in the sell-and-buy-back channel of the interbank market totalled Bt120.3 billion and Bt2.2 trillion, respectively.

"Progress in the private repo market is satisfactory, but there is a chance the market could expand more rapidly, because the banks have not yet joined the market to the extent of their ability," she said.

Siam Commercial Bank is the most active player in the repo market, with 80 agreement contracts, followed by HSBC with 50 and the Government Savings Bank with 35. Banks must sign agreement contracts with their trading partners before trading.

Pongpen said the BOT would not become involved in setting up money brokers, who would play an intermediate role by matching up demand and supply in the market. She believes money brokers will appear when it is worth their while, which will provide a final boost to transactions in the market.