SEBI allows MFs to participate in repo transaction through corporate bonds

SEBI has allowed fund houses to do repo transactions on corporate debt securities, commercial papers (CPs) and certificate of deposits (CDs).

In a repo, one party sells an asset to another party at one price and commits to repurchase the same or another part of the same asset from the second party at a different price at a future date. For instance, if a fund house wants Rs.1 crore for 10 days, they can do repo transaction by keeping corporate bonds, CPs or CDs as collateral and avail this short-term loan at a prevailing market rate from another fund house.

SEBI clarified that fund house can use corporate bonds having credit rating of at least ‘AA’ for repo transactions.

Industry experts believe that this will help fund houses deal with redemption pressure and settle transaction in corporate bond markets.

Earlier in 2021, SEBI has allowed the MF industry to set up Limited Purpose Clearing Corporation (LPCC). This LPCC was expected to clear and settle repo transactions in corporate debt securities. The current development is in the direction to increase usage of LPCC.