12 Mar, 2014,
Lower year-end market liquidity has resurrected the practice of "holding period return" in the domestic certificate of deposit market, a financial manoeuvering in which mutual funds connect with cash-rich entities to tide over redemption pressure with the help of intermediaries.
Five market participants ET spoke with confirmed the existence of such trades, which may be flouting some norms and increasing the risk for investors. The financial mechanism — also known as "parking "parking" or "river crossing" — is generally seen towards the end of a financial year and involves four parties: the issuer of CDs, the ultimate subscribers , cash-rich entities such as banks and companies that provide parking space, and the intermediaries.
"This typically happens every financial year end," said Dhirendra Kumar, CEO of the mutual fund portal Value Research. "It is an institutional madness because everybody thinks alike." Between January and March, 3-month CD Rates have spiked 50-75 basis points both in the 3-month and 1-year maturity brackets, as banks aggressively raise money to shore up their deposits ahead of the year-end .
At the same time, mutual funds, the biggest buyers of CDs, face redemption pressure in their liquid funds from lenders that need money to expand credit. At this point, some intermediaries or brokers connect a few cash-rich entities, be it banks or corporates, which extend funding support to MFs by temporarily buying the three-month CDs at typically 9.60-9 .90% range at the fag end of March quarter from issuers.
In early April, CDs are sold by the financing entities to MFs at a predetermined price. The price is derived in such a manner that the financing institute gets 22-23 % annualised return for a period of five-seven days. Those reverse trades are reported in the FIMMDA trading platform.