SEBI Introduces Mark-to-Market Valuation for Repo Transactions by Mutual Funds
The Securities and Exchange Board of India (SEBI) has now clarified that the repurchase, or repo, transactions carried out by mutual funds will now follow new regulations on the basis of valuation. Securities used for such repo transactions would now be valued on a mark-to-market basis starting January 1, 2025. This will look to bring greater uniformity in the valuation of money market and debt instruments.
The decision comes following concerns about regulatory inconsistency due to the different methods used in the market for valuation. With this new framework, SEBI intends to standardize the valuation process and eradicate the possibility of regulatory arbitrage.
Currently, repo transactions including tri-party repo (TREPS) with tenure of up to 30 days are valued on a cost-plus accrual basis. Under the new rules, these transactions will also be marked-to-market, bringing them in line with other money market and debt instruments.
Further, a new directive states that every repo transaction, except over night repos, as well as money market and debt security will be valued by valuations agencies. This ensures market value determination for the market through consistent and transparent methodology for the valuation of securities.
In a repo transaction, one party sells securities under an agreement to buy them back later. This process is commonly used for short-term capital raising. The new mark-to-market valuation will apply to all money market and debt securities, including floating-rate securities. These will be valued based on the average security-level prices provided by valuation agencies.
A new security, if not yet held by any mutual fund, can be valued based on the purchase yield or price on the date of allotment or purchase if the security does not have security-level prices available from valuation agencies.
Earlier this year, SEBI permitted mutual funds to invest in repo transactions including Commercial Papers (CPs) and Certificates of Deposit (CDs). The intent behind it was to push the growth of the corporate bond market. Repo transaction, on the other hand, can only be done by mutual funds when such corporate debt security is highly rated, more than “AA”.
This change in valuation methodology should be expected to improve the transparency and increase consistency for bringing higher efficiency within the repo market, thus benefiting both investors and market participants.
