SEBI Introduces Mark-to-Market Valuation for Mutual Fund Repo Trades
The markets regulator, Sebi, has decided to implement new valuation standards for repurchase (repo) transactions by mutual funds, requiring securities involved in these transactions to be valued on a mark-to-market basis.
The new valuation metrics are designed to standardize the valuation methodology for all money market and debt instruments, while also addressing concerns about potential regulatory arbitrage that could result from varying valuation approaches.
The new framework will come into effect from January 1, 2025, the Securities and Exchange Board of India (Sebi) said in its circular.
In its circular, Sebi said it has decided that the "valuation of repurchase (repo) transactions including TREPS with tenor of up to 30 days shall also be valued at mark to market basis".
At present, repo transactions including tri-party repo (TREPS) with tenor of up to 30 days are valued on cost-plus accrual basis.
Further, the valuation of all repo transactions, except for overnight repos, in addition to the valuation of money market and debt securities, will be obtained from valuation agencies.
In repo transactions, also referred to as repurchase agreements, securities are sold with the seller agreeing to repurchase them at a later date. This instrument is commonly used to raise short-term capital.
Sebi said that all money market and debt securities, including floating rate securities, will be valued at average of security level prices obtained from valuation agencies.
In case security level prices given by valuation agencies are not available for new security (which is currently not held by any mutual fund), then such security can be valued at purchase yield/price on the date of allotment/ purchase.
In June, Sebi permitted mutual funds to invest in repo transactions involving securities like Commercial Papers and Certificates of Deposit to promote the growth of the corporate bond market. However, mutual funds are allowed to participate in repo transactions only with corporate debt securities rated "AA" or higher.
