Securities and Exchange Board of India (SEBI) has issued a circular regarding the participation of mutual funds in repo transactions on corporate debt securities. This circular modifies previous guidelines and introduces new provisions for mutual funds and asset management companies.
Under the modified circular, mutual funds are now allowed to participate in repo transactions on listed AA and above rated corporate debt securities, as well as commercial papers (CPs) and certificate of deposits (CDs). The credit rating of exposure on repo transactions will be considered on a look-through basis for various purposes, including the potential risk class (PRC) matrix, liquidity ratios, and risk-o-meter. Additionally, for transactions with settlement guaranteed by a Clearing Corporation, the exposure will not be considered for determining investment limits.
These changes aim to provide mutual funds with greater flexibility and opportunities to optimize their investment strategies. By allowing participation in repo transactions on corporate debt securities, mutual funds can enhance their liquidity management and potentially improve their risk-adjusted returns. The modified guidelines also streamline the treatment of credit ratings and ensure consistency in assessing the underlying securities’ credit quality.
Securities and Exchange Board of India
Circular No. SEBI/HO/IMD/IMD PoD-2/P/CIR/2023/85 Dated: June 8, 2023
All Mutual Funds (MFs)/
Asset Management Companies (AMCs)/
Trustee Companies/ Board of Trustees of Mutual Funds/
Association of Mutual Funds in India (AMFI)
Sub: Participation of Mutual funds in repo transactions on Corporate Debt Securities
1. SEBI vide circular no. CIR/IMD/DF/19/2011 dated November 11, 2011 and CIR/IMD/DF/23/2012 dated November 15, 2012 allowed mutual funds to participate in repo transactions on corporate debt securities.
2. In partial modification to the above circulars, the following has been decided:
2.1. The Mutual Funds can participate in repos on following corporate debt securities:
2.1.1. Listed AA and above rated corporate debt securities
2.1.2. Commercial Papers (CPs) and Certificate of Deposits (CDs)
2.2. For the purpose of consideration of credit rating of exposure on repo transactions for various purposes including for Potential Risk Class (PRC) matrix, liquidity ratios, Risk-o-meter etc., the same shall be as that of the underlying securities, i.e., on a look through basis.
2.3. For transactions where settlement is guaranteed by a Clearing Corporation, the exposure shall not be considered for the purpose of determination of investment limits for single issuer, group issuer and sector level limits.
2.4. All other conditions mentioned in the abovementioned circulars shall remain the same.
3. The provisions of this circular shall come into force with immediate effect.
4. This circular is issued in exercise of powers conferred under Section 11 (1) of the Securities and Exchange Board of India Act, 1992, read with the provisions of Regulation 77 of SEBI (Mutual Funds) Regulations, 1996, to protect the interests of investors in securities and to promote the development of, and to regulate the securities market.
Deputy General Manager