Sebi introduces mark-to-market valuation of repo transactions by mutual funds
Markets regulator Sebi on Tuesday decided to introduce new analytical metrics for repurchase or repurchase transactions by mutual funds, where the securities used in such transactions will be measured on a mark-to-market basis.
The new analytical metrics are intended to have uniformity in the valuation method for all capital markets and credit facilities and to address unintended regulatory concerns that may arise as a result of the valuation method adopted.
The new framework will come into effect from January 1, 2025, said the Securities and Exchange Board of India (Sebi) in its announcement.
In its circular, Sebi said it has decided that “repo rate transactions involving TREPS with a tenor of up to 30 days will also be rateable on a market-to-market basis”.
Currently, repo transactions including tri-party repo (TREPS) with a tenor of up to 30 days are valued on the basis of cost and accrual. In addition, the rating of all repo transactions, except overnight repos, in addition to the rating of money market and debt securities, will be obtained from rating agencies.
In repo transactions, also known as a repo or repurchase agreement, securities are sold when the seller agrees to buy them back at a later date. The instrument is used to raise short-term capital.
Sebi said that all money market securities and debt securities, including floating rate securities, will be valued on the basis of the average price of the security grade obtained from the rating agencies.
In case the security level prices given by the rating agencies are not available for a new security (currently not held by any mutual fund), that security can be valued at the purchase price/value on the date of allotment/purchase.
In June, Sebi allowed mutual funds to invest in repo transactions in securities such as Commercial Papers and Certificates of Deposit in a bid to boost the growth of the corporate bond market. Mutual funds may participate in repo transactions only in “AA” and higher rated corporate debt securities.
