The Securities and Exchange Board of India (SEBI) has broadened the definition of “liquid assets,” aiming to enhance liquidity options for financial institutions and promote overall market stability. This revised framework includes units of overnight and liquid mutual fund schemes, and repurchase agreements (repos) on corporate bonds. These assets, known for their quick conversion into cash without significantly affecting their value, are now recognized as essential financial buffers.

Understanding the Changes

Overnight and Liquid Mutual Fund Schemes

  • Overnight Mutual Funds: Open-ended debt funds investing in securities maturing within a single day, offering high liquidity and low risk.
  • Liquid Mutual Funds: Debt funds investing in short-term instruments maturing in less than 91 days, providing quick access to funds and high liquidity.

Role of Clearing Corporations

SEBI’s guidelines align with its May 2024 circular on acceptable collateral for Clearing Corporations (CCs). The haircut on units of the growth plan of overnight mutual fund schemes has been reduced from 10% to 5%, making these funds a more attractive collateral option and improving CCs’ liquidity positions.

Inclusion of Repo on Corporate Bonds

Repos facilitate short-term borrowing and lending, offering a secure way for entities to manage surplus funds. SEBI’s inclusion of corporate bond repos as liquid assets supports the development of the corporate bond market and enhances liquidity.

Rationale Behind the Expansion

SEBI’s decision aligns with global trends to promote liquidity and risk management. This broader definition protects investors’ interests and ensures market stability, reflecting the need for flexible liquidity definitions in today’s fast-paced financial environment.

Conclusion

SEBI’s expanded definition of liquid assets strengthens market stability and resilience. This change is expected to boost confidence, increase transactions in mutual funds and repos, and maintain a balanced financial environment.

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