SEBI has proposed introducing new valuation metrics for repo transactions. The market regulator said securities used in repo transactions should be marked to market.
Currently, fund houses use cost plus accrual strategy to price repo transactions.
Repo transactions involving corporate debt securities, commercial paper (CP) and certificates of deposit (CD) are permitted in mutual funds.
In a repo transaction, one party sells an asset to another party at one price and agrees to buy back the same or a different part of the same asset from the other party at a different price in the future. For example, if a fund needs Rs 1 crore for 10 days, it can do a repo by keeping a corporate bond, CP or CD as collateral and avail this short-term loan at the prevailing market rate from another fund.
Sharing the rationale, the regulator said the value of a security such as commercial paper may change more in the event of bad news about the entity issuing the security if it is valued on a mark-to-market basis, where market forces may affect its value in a very short period of time than in the case of accrual valuation, when its value is determined on the basis of accrued interest.
SEBI said its objective is to curb this unintended regulatory arbitrage by pricing repo transactions in such securities on a mark-to-market basis. This step also aims to bring the valuation of repo transactions in line with the valuation of money and debt markets, SEBI said.
You can submit your comments on these proposals until November 14, 2024 by clicking on this link.
Do you like what you read?
Log in to get instant access to this article and many more articles on business growth, success stories and industry updates.
Don’t worry…it’s FREE!