SEBI allows MFs to invest in ‘AA’ rated corporate repos

Posted By: ndeeney

Market regulator SEBI has allowed mutual funds to invest in repos of corporate debt securities rated AA and above, besides commercial papers and certificate of deposits.

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, it said.

Boosting liquidity

With an aim to boost liquidity in the secondary market for corporate bonds, SEBI last month came out with a proposal to enable direct participation by clients in the tri-party repo segment for corporate bonds.

The proposal will facilitate direct participation in repo transactions in corporate bonds by entities which cannot take direct membership of the stock exchange, clearing corporation such as NBFCs, insurance companies and mutual funds.

SEBI has suggested for facilitating transactions directly between clients and the limited purpose clearing corporation (LPCC) in the tri-party repo segment as well as to enabling contribution by such clients directly to the Core SGF (Settlement Guarantee Fund).

In order to strengthen the risk management system of the LPCC to meet the contingencies arising on account of possible failure of the clients/ participants as well, it is essential that the contribution

Active repo market

The regulator noted that an active repo market is an essential pre-condition for improving liquidity in the corporate bond market. This is mainly because active players, especially market makers, are in a position to provide finer two-way quotes, if they are able to finance their inventory of bond holdings through an active repo market.

However, in the corporate bond market repo is mostly inactive with only a few transactions executed and that too in the bilateral repo market. There is no traction in the tri-party repo market despite the segment being in existence on stock exchanges since 2018.

One of the primary reasons for lack of traction on the tri-party repo platform could be that the stock exchanges or clearing corporations do not have a well-funded settlement guarantee fund to absorb the counter-party risk as well as the credit risk of the underlying associated with repo transactions.

wealthcreationinvesting.com is not an investment advisor and is not registered with the U.S. Securities and Exchange Commission or the Financial Industry Regulatory Authority. Further, owners, employees, agents or representatives of wealthcreationinvesting.com are not acting as investment advisors and might not be registered with the U.S. Securities and Exchange Commission or the Financial Industry Regulatory.

The sender of this email makes no representations or warranties concerning the products, practices or procedures of any company or entity mentioned or recommended in this email, and makes no representations or warranties concerning said company or entity’s compliance with applicable laws and regulations, including, but not limited to, regulations promulgated by the SEC or the CFTC. The sender of this email may receive a portion of the proceeds from the sale of any products or services offered by a company or entity mentioned or recommended in this email. The recipient of this email assumes responsibility for conducting its own due diligence on the aforementioned company or entity and assumes full responsibility, and releases the sender from liability, for any purchase or order made from any company or entity mentioned or recommended in this email.

The content on any of wealthcreationinvesting.com websites, products or communication is for educational purposes only. Nothing in its products, services, or communications shall be construed as a solicitation and/or recommendation to buy or sell a security. Trading stocks, options and other securities involves risk. The risk of loss in trading securities can be substantial. The risk involved with trading stocks, options and other securities is not suitable for all investors. Prior to buying or selling an option, an investor must evaluate his/her own personal financial situation and consider all relevant risk factors. See: Characteristics and Risks of Standardized Options.

The information presented in this site is not intended to be used as the sole basis of any investment decisions, nor should it be construed as advice designed to meet the investment needs of any particular investor. Nothing in our research constitutes legal, accounting or tax advice or individually tailored investment advice. Our research is prepared for general circulation and has been prepared without regard to the individual financial circumstances and objectives of persons who receive or obtain access to it. Our research is based on sources that we believe to be reliable. However, we do not make any representation or warranty, expressed or implied, as to the accuracy of our research, the completeness, or correctness or make any guarantee or other promise as to any results that may be obtained from using our research. To the maximum extent permitted by law, neither we, any of our affiliates, nor any other person, shall have any liability whatsoever to any person for any loss or expense, whether direct, indirect, consequential, incidental or otherwise, arising from or relating in any way to any use of or reliance on our research or the information contained therein. Some discussions contain forward looking statements which are based on current expectations and differences can be expected. All of our research, including the estimates, opinions and information contained therein, reflects our judgment as of the publication or other dissemination date of the research and is subject to change without notice. Further, we expressly disclaim any responsibility to update such research. Investing involves substantial risk. Past performance is not a guarantee of future results, and a loss of original capital may occur. No one receiving or accessing our research should make any investment decision without first consulting his or her own personal financial advisor and conducting his or her own research and due diligence, including carefully reviewing any applicable prospectuses, press releases, reports and other public filings of the issuer of any securities being considered. None of the information presented should be construed as an offer to sell or buy any particular security. As always, use your best judgment when investing.

Disclaimer: Past performance is no guarantee of future performance. This product is for educational purposes only. Practical application of the products herein are at your own risk and wealthcreationinvesting.com, its partners, representatives and employees assume no responsibility or liability for any use or mis-use of the product. Please contact your financial advisor for specific financial advice tailored to your personal circumstances. Any trades shown are hypothetical example and do not represent actual trades. Actual results may differ. Nothing here in constitutes a recommendation respecting the particular security illustrated.