SEBI has decided to introduce a new valuation matrix for repo transactions by mutual funds.
Markets regulator Sebi on Tuesday decided to introduce a new valuation matrix for repurchase or repo transactions by mutual funds, wherein the securities used in such transactions will be valued on a mark-to-market basis.
The purpose of the new valuation matrix is to ensure uniformity in valuation methodology for all money market and debt instruments as well as to address concerns of unwanted regulatory arbitrage arising out of different valuation methodologies adopted.
The Securities and Exchange Board of India (Sebi) said in its circular that the new framework will come into effect from January 1, 2025.
In its circular, SEBI said it has decided that “repurchase (repo) transactions including TREPS with a tenure of up to 30 days will also be assessed on a mark to market basis”.
Currently, repo transactions including Tri-Party Repos (TREPS) with tenors of up to 30 days are valued on a cost-plus accrual basis. Further, apart from valuation of money market and debt securities, valuation of all repo transactions other than overnight repo will be obtained from valuation agencies.
In a repo transaction, also known as a repo or sale repurchase agreement, securities are sold and the seller agrees to buy them back at a later date. The instrument is used to raise short-term capital.
Sebi said that all money market and debt securities, including floating rate securities, will be valued on the average of security level prices obtained from valuation agencies.
If the security level prices given by the valuation agencies are not available for the new security (which is not currently held by any mutual fund), such security may be valued at the purchase yield/price on the date of allotment/purchase.
In June, SEBI allowed mutual funds to invest in securities such as commercial papers and certificates of deposit in repo transactions to boost the growth of the corporate bond market. Mutual funds can participate in repo transactions only in corporate debt securities rated “AA” and above.