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SEBI has proposed the introduction of new valuation metrics for repo transactions. The market regulator said that securities used in repo transactions should be valued on a mark-to-market basis.
Currently, fund houses use cost plus accrual strategy to value repo transactions.
In mutual funds, repo transactions are allowed on corporate debt securities, commercial papers (CPs) and certificates of deposits (CDs).
In a repo transaction, 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 a 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.
Sharing the rationale, the regulator said that the value of a security like commercial paper can change more in case of bad news about the entity issuing the paper if it is valued on a mark-to-market basis where market forces can affect its value in a very short time than if it is valued on a cost per accrual basis where its value is decided on the basis of interest accrued.
SEBI said that it aims to reduce this unintended regulatory arbitrage by doing valuation of repo transactions in such securities on a mark-to-market basis. This step also aims to make the valuation of repo transactions in line with valuation of money market and debt instruments, said SEBI.
You can submit your comments on these proposals by November 14, 2024 by clicking on this link.
