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

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.