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SEBI has introduced new valuation metrics for repo transactions. The market regulator has directed fund houses to value repo transactions including treasury bill repurchase (TREPS) having maturity of up to 30 days on a mark-to-market basis.
So far, fund houses use cost plus accrual strategy to value repo transactions.
SEBI said, “In order to have uniformity in valuation methodology of all money market and debt instruments and to address the concerns of unintended regulatory arbitrage that may arise due to different valuation methodology adopted, it has been decided that the valuation of repurchase (repo) transactions including TREPS with tenor of upto 30 days shall also be valued at mark to market basis.”
This step aims to make the valuation of repo transactions in line with valuation of money market and debt instruments, said SEBI.
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.
SEBI further said that such a valuation has to be approved or obtained from valuation agencies. In case security level prices given by valuation agencies are not available for a new security (not held by any MF) then such security should be valued at yield/price on the date of allotment/purchase.
