Fund houses are seeking clarity on the accounting treatment from SEBI
Mumbai: Mutual fund houses have sought clarity from SEBI regarding mark to market (MTM) norms and accounting procedure to be followed for participating in repos of corporate debt securities.
SEBI recently allowed fund houses to participate in ‘AAA’ rated corporate debt securities with a 10% cap on exposure of the net assets of the scheme. However, fund managers have not been able to take opportunity of the new facility due to lack of clarity regarding operational issues.
The November 11 circular stated that the cumulative gross exposure through repo transactions in corporate debt securities along with equity, debt and derivatives shall not exceed 100% of the net assets of the concerned scheme.
“It is a good move by SEBI. We are not sure on certain parts of the regulation. We are holding consultations with SEBI and custodians in order to find out what will be the accounting treatment, calculation of AUM and who will bear the mark to market exposure. This product will not take off unless there is some clarity. I am sure not a single deal has taken place since the circular was issued,” said a fund manager.
“Mutual funds can raise money from repos in the event of a liquidity shortage. Technically we should not mark MTM. It should not impact our NAV. There is no clarity on the margin on the pricing of securities,” says Arvind Chari, Fund Manager, Fixed Income at Quantum AMC.
Killol Pandya, Head - Fixed Income, Daiwa concurs. “SEBI has defined a floor for haircut but we want to know if there will be a cap when we actually do it. We don’t know how this facility stands against what SEBI permits a mutual fund to borrow from its banker to meet redemptions which is an overdraft facility. There is no conflict but there is a lack of general clarity,” said Killol.
RBI has set the hair-cut at 10 % (AAA), 12% (AA+) 15% (AA) depending on the credit rating of bond. Some market participants feel that this haircut is steep and which is why the repo corporate bond market has not taken off in a big way. Consider that a bond issued by a borrower has a face value of Rs. 100 backed by an ‘AAA’ credit rating. In this case, 10% haircut is applicable. Hence the borrower will receive Rs. 90 during buyback and so on. The borrower does not receive the entire value of a bond as the haircut margin gets deducted from the face value. Higher the rating less would be hair cut and vice versa.
Currently, mutual funds buy repos of government securities by lending cash to primary dealers or banks. After the maturity of a repo the primary dealer gives the money back (which is the face value and interest rate on repo) to a mutual fund. RBI’s circular states that the repos in corporate debt securities should have a maturity period of one day and to one year. They are traded in the OTC market.
RBI’s guidelines on repos in corporate debt came into effect from March 1, 2010 and were subsequently amended in December 2010. Investors raise short term funds by using corporate bonds as collateral with a repurchase agreement under this facility.
Participants are required to report their repo trades in corporate bonds within 15 minutes of the trade on the Fixed Income Money Market and Derivatives Association of India (FIMMDA) corporate bond repo reporting platform (CBRRP).
RBI has enabled primary dealers, banks, NBFCs, state owned financial institutional, housing finance company, mutual funds and insurance firms to participate in repos of corporate bonds.
