On Tuesday, 26 November 2024, SEBI, the stock market regulator announced a new valuation methodology for the repo transactions. The market watchdog introduced the Mark-to-market valuation metric for the repurchase agreement transactions or repo transactions which are carried on by the mutual fund houses. From now onwards, as per the SEBI guidelines, these transactions will be valued on a mark-to-market basis.
What is Repo Transaction?
Repo transactions or repurchase agreement transactions by mutual fund houses revolve around the sale of securities with a seller agreement to buy them back at the specified future date. This is mainly used for raising short-term capital by the corporates.
How will this new valuation method affect the process?
The new repo valuation method is here to bring uniformity in the entire method of valuation of different money market instruments and debt market instruments. This will also take care of the issues of unintended regulatory arbitrage, which may pop up because of multiple valuation methodologies adopted by mutual fund houses.
This new valuation methodology will be effective from 1 January 2025. However, one thing to keep in mind here is that this method is for repo transactions by mutual funds, which includes TREPS with a tenure of 30 days or lower. Presently, these transactions are valued on the cost-plus accrual basis method.
Money Market And Debt Instruments
The mark-to-market valuation will be applicable on repo transactions excluding overnight repos. Along with these, the repo valuation of debt and money market instruments including floating rate securities have to be obtained from the valuation agencies.
SEBI commented that money market and debt instruments’ values would be determined as the average of securities level prices that the valuation agencies offer. If the securities level prices are not available with the agencies for the new securities, which aren’t held by the mutual funds, then purchase yield or price on the date of allotment method can be used.
SEBI’s other amendments
Another important thing to affect the market is that SEBI in June allowed mutual funds to invest in these repurchase agreements transactions of commercial papers, and certificates of deposits for growing the corporate bond market. However, now mutual fund houses can only deal in repo transactions of ‘AA’ and above-rated corporate debt securities.
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