by Jessica Murdock
Regulatory Move Aims to Standardize Repo Valuation Methods
New Delhi, Nov 27, 2024: The Securities and Exchange Board of India (Sebi) has announced a new framework for valuing repurchase (repo) transactions by mutual funds, introducing a mark-to-market basis for securities used in such transactions. This move is part of Sebi’s ongoing efforts to ensure uniformity in the valuation of money market and debt instruments while addressing concerns about potential regulatory arbitrage due to differing valuation methodologies.
New Valuation Method to Take Effect from January 1, 2025
According to the circular issued by Sebi on Tuesday, the new valuation system will apply to repo transactions, including Tri-party Repo (TREPS), with tenors of up to 30 days. Under the current system, these transactions are valued based on a cost-plus-accrual approach. The revised method will be implemented starting January 1, 2025, marking a significant change in the way mutual funds handle short-term debt securities.
Securities Valued by Agencies Under New Framework
The new framework also stipulates that, except for overnight repos, all repo transactions will require valuation by approved agencies. This will include money market and debt securities, which will be valued at the average of security-level prices obtained from such agencies. In cases where a security has not yet been held by any mutual fund and does not have a security-level price from a valuation agency, it may be valued based on its purchase yield or price at the time of allotment or purchase.
Impact on Money Market and Debt Securities
The revision in valuation standards extends beyond repo transactions to cover all money market and debt securities, including floating-rate securities. This move is expected to enhance the transparency and consistency of valuations across the mutual fund industry, further aligning it with global standards.
Encouraging Growth in Corporate Bond Market
In a bid to support the corporate bond market, Sebi also allowed mutual funds to invest in repo transactions involving corporate debt securities such as Commercial Papers and Certificates of Deposit (CDs) in June. However, only those securities rated “AA” and above are eligible for repo transactions. This initiative aims to boost the liquidity and depth of the corporate bond market while providing mutual funds with a tool to raise short-term capital efficiently.
