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SEBI Allows MFs to Participate in Repo Transactions and Issues Framework for Upstreaming of clients’ funds by SBs & CMs to CCs

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MFs can now participate in repos on Commercial Papers, Certificate of DepositsIn June 2023, the Securities and Exchange Board of India (SEBI) allowed Mutual Funds (MFs) to invest/participate in repo transactions in securities such as Commercial Papers and Certificate of Deposits (CDs) to improve the growth of the corporate bond market.

  • SEBI issued a circular over modification of the previous guidelines and introduces new provisions for MFs and asset management companies to participate in repo transactions.

Key Provisions:

i.As per the new guidelines, the MFs are now allowed to participate in repo transactions only on corporate debt securities rated ‘AA’ and above and Commercial Papers (CPs) and CDs.

ii.In case of transactions where settlement is guaranteed by a clearing corporation, the exposure would not be considered for the purpose of determination of investment limits for the single issuer, group issuer and sector level limits.

iii.The credit rating of exposure on repo transactions would be considered on a look-through basis for various purposes, including the potential risk class (PRC) matrix, liquidity ratios, and risk-o-meter.

iv.As per the circular of SEBI, the new provision would come into force with immediate effect.

Note – SEBI has issued the instruction in the exercise of powers conferred under Section 11 (1) of the SEBI Act, 1992, read with the provisions of Regulation 77 of SEBI (Mutual Funds) Regulations, 1996.

What is Repo Transaction?

A repurchase agreement, or “repo,” is a short-term agreement to sell securities in order to buy them back at a slightly higher price.

Repo transactions are also known as a repo or sale repurchase agreement in which the securities are sold with the seller agreeing to buy them back at a later date. The instrument is used for raising short-term capital.

A debt security is a debt instrument that could be bought or sold between two parties and has basic terms defined, such as the notional amount (the amount borrowed), interest rate, and maturity and renewal date.

-SEBI Issues Framework for Upstreaming of clients’ funds by SBs & CMs to CCs

SEBI has issued a framework for upstreaming of clients’ funds received by Stock Brokers (SBs) and Clearing Members (CMs) to Clearing Corporations (CCs) to safeguard the investors’ funds and improve their confidence.

Upstreaming of funds:

i.As per the framework, SBs and CMs should not retain client’s funds and must be upstreamed to CCs every day on End of Day (EOD) basis.

ii.The clients’ funds should all be upstreamed by SB/CMs to CCs only in the form of either cash, a lien on Fixed Deposit Receipts (FDR), or a pledge of units of  Mutual  Fund  Overnight  Schemes (MFOS).

  • The rule will come into effect on July 1 2023.

Downstreaming/Withdrawal of funds: 

i.When the client makes a request to SBs/CMs, for withdrawal of fund they, in turn, should raise a request to CCs before the stipulated cut-off time. Following this, CCs will release the funds.

  • The CC should try to release the cash as soon as possible but within 2 hours from the time requested.
  • The clients may request release of funds to SBs/CMs at any time during the day.

ii.SB/CMs could also request for the release of funds even if the client did not come up with a request, such events are when the clients have unpaid obligations, loss due to sale of unpaid securities, loss, statutory levies, brokerage charges, other charges like DP charges or funds to be released to clients on account of regulatory requirements such as running account settlement.

About Securities Exchange Board of India(SEBI):
Chairperson -Madhabi Puri Buch
Headquarters – Mumbai, Maharastra
Establishment – 12 April 1992