RBI revises accounting rules for bond repos

Bringing more transparency in bond deals,the Reserve Bank of India on Tuesday said accounting guidelines for repurchase agreements...

Bringing more transparency in bond deals,the Reserve Bank of India RBI on Tuesday said accounting guidelines for repurchase agreements repos in bonds would treat such transactions as a legal sale or purchase,rather than two independent buy and sell deals. The guidelines will apply to repo transactions in government bonds and corporate debt and not to the repo and reverse repo transactions under the RBI8217;s liquidity adjustment facility,the central bank notification said.

8220;The revision in the accounting norms would bring such transactions on to the balance sheet of the repo participants in its true economic sense,thus enhancing transparency,8221; said the central bank in a notification. The new accounting guidelines for repos will be effective from April 1,the RBI said.

The new guidelines replace the guidelines issued in March 2003 which treated 8216;repo8217; as a combination of two independent sale/purchase transactions as per the legal provisions prevailing then. 8220;The accounting norms now propose to capture the economic essence of 8216;repo8217; as a collateralised lending/ borrowing transaction that is structured as a legal sale/ purchase of securities as recognised by the RBI Amendment Act,2006,8221; it said.

The revised accounting guidelines will apply to market repo transactions in government securities and corporate debt securities. These accounting norms would,however,not apply to repo/reverse repo transactions conducted under the Liquidity Adjustment Facility LAF with the RBI. The securities sold under repo would continue to be reflected in the investment account of the repo seller and would be subject to the usual mark to market valuation discipline. Accordingly,the repo buyer would not reflect the securities acquired under repo in his investment account. The movement of securities should be accounted for in the books of the counterparties by showing it as contra entries for the sake of greater transparency.

The regulatory treatment of market repo transactions in government securities will continue as hitherto,i.e.,the funds borrowed under market repo will continue to be exempt from CRR/SLR computation and the security acquired under market reverse repo will continue to be eligible for SLR. The applicability of the CRR/SLR norms for repo transactions in corporate bonds will,however,be as per the earlier guidelines.