SEBI Allows Mutual Funds To Invest in Repo Transactions on Commercial Papers, And Certificates OF Deposits

SEBI Allows Mutual Funds To Invest in Repo Transactions on Commercial Papers, And Certificates OF Deposits

In an effort to stimulate the expansion of the corporate bond market, Sebi authorized mutual funds to make investments in repo operations in instruments that include Commercial Papers and Certificates of Deposit on Thursday.

Furthermore, the capital markets supervisor stated in a circular that mutual funds are restricted from participating in repo transactions involving corporate debt securities rated "AA" or above. Securities are sold in repo transactions, which are additionally referred to as sale repurchase agreements, with the seller committing to purchasing them back at another time. The tool is used to raise short-term funds.

Sebi stated that the credit rating associated with exposure on repo operations would be the same as that of the assets themselves on a look-through foundation for several reasons, including prospective risk classification matrix, liquidity ratios, and risk-o-meter. In the case of transactions whereby a clearing organization assures settlement, the exposure is not going to be considered for determining participation limits for single issuers, group issuers, and sectors.

The Securities and Exchange Board of India (Sebi) stated that the new clause would take effect immediately. Last month, Sebi proposed allowing NBFCs, insurance firms, and mutual funds to participate directly in the tri-party repo sector for corporate bonds in order to increase volatility in the secondary marketplace for corporate bonds.

"For the purpose of considering credit rating for exposure on repo agreements for various purposes, especially for Potential Risk Class (PRC) matrix, ratios of liquidity, Risk-o-meter, and so on," Sebi stated.

The market regulator further stated that for operations where a Clearance Corporation assures settlement, the risk should not be considered when determining single issuer, group issuer, and sector-level limitations. Market participants anticipate that this action will boost system liquidity.

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