Guidelines for Accounting of Repo / Reverse Repo Transactions-Clarification

 Guidelines for Accounting of Repo / Reverse Repo Transactions-Clarification

RBI/2010-11/551

IDMD No./29 /11.08.043/2010-11

May 30, 2011

To All RBI regulated entities 

(Commercial Banks, Co-operative Banks, Primary Dealers, Financial Institutions, RRBs and NBFCs)

Dear Sir/Madam,

Guidelines for Accounting of Repo / Reverse Repo Transactions-Clarification

Please refer to our circular RBI/2009-2010/356 IDMD/4135/11.08.043/2009-10 dated March 23, 2010. The para 7 of the circular under reference states that “to obviate the disputes arising out of repo transactions, the participants should enter into bilateral Master Repo Agreement as per the documentation finalized by Fixed Income Money Market and Derivatives Association of India (FIMMDA)”.

2. We have received queries from market participants whether the Master Repo Agreement finalised by FIMMDA is mandatory for repo transactions in Government Securities settled through CCIL. In this regard, it is clarified that the Master Repo Agreement finalised by FIMMDA is not mandatory for repo transactions in Government Securities settling through a Central Counter Party (CCP) [eg. Clearing Corporation of India Limited (CCIL)], having various safeguards like haircut, MTM price, margin, Multilateral netting, closing out, right to set off, settlement guarantee fund/ collaterals, defaults, risk management and dispute resolution/ arbitration etc. However, Master Repo Agreement is mandatory for repo transactions in Corporate Debt Securities, which is settled bilaterally without involving a CCP.

3. All other terms and conditions of the above mentioned circular will remain unchanged.

Yours faithfully,

(K K Vohra)

Chief General Manager

________

Note : circular RBI/2009-2010/356 IDMD/4135/11.08.043/2009-10 dated March 23, 2010 is mentioned below:

Guidelines for Accounting of Repo / Reverse Repo Transactions

RBI/2009-2010/356

IDMD/4135/11.08.43/2009-10

March 23, 2010

To All RBI regulated entities (Commercial Banks, Co-operative Banks, Primary Dealers, 

Financial Institutions, RRBs and NBFCs)

Dear Sir,

Guidelines for Accounting of Repo / Reverse Repo Transactions

Please refer to our Circular IDMC.3810/11.08.10/2002-03 dated March 24, 2003 setting out uniform guidelines for accounting of repo/reverse repo transactions.  These guidelines captured the character of repo/reverse repo transaction as outright sale and outright purchase as per the market convention prevailing then.  The Reserve Bank of India (Amendment) Act, 2006 (Act No. 26 of 2006) provides a legal definition of 'repo' and 'reverse repo' (vide sub-sections (c) and (d) of section 45 U of Chapter III D of the Act) as an instrument for borrowing (lending) funds by selling (purchasing) securities with an agreement to repurchase (resell) the securities on a mutually agreed future date at an agreed price which includes interest for the funds borrowed (lent).  Accordingly, to bring such transactions onto the balance sheet in their true economic sense and enhance transparency, the accounting guidelines have been reviewed and the draft guidelines were put in the public domain on November 14, 2008 for comments to be received by December 15,  2008. The guidelines, revised in the light of the feedback received, are set out below.

2.  Applicability of the accounting guidelines: The revised accounting guidelines will apply to market repo transactions in government securities and corporate debt securities.  These accounting norms will, however, not apply to repo / reverse repo transactions conducted under the Liquidity Adjustment Facility (LAF) with RBI.

3. Market participants may undertake repos from any of the three categories of investments, viz., Held For Trading, Available For Sale and Held To Maturity.

4. The economic essence of a repo transaction, viz., borrowing (lending) of funds by selling (purchasing) securities shall be reflected in the books of the repo participants, by accounting the same as collateralized lending and borrowing transaction, with an agreement to repurchase, on the agreed terms.   Accordingly, the repo seller, i.e., borrower of funds in the first leg, shall not exclude the securities sold under repo but continue to carry the same in his investment account (please see the illustration given in the Annex) reflecting his continued economic interest in the securities during the repo period.  On the other hand, the repo buyer, i.e., lender of funds in the first leg, shall not include the securities purchased under repo in his investment account but show it in a separate sub-head (please see the Annex).  The securities would, however, be transferred from the repo seller to repo buyer as in the case of normal outright sale/purchase transactions and such movement of securities shall be reflected using the Repo/Reverse Repo Accounts and  contra entries. In the case of repo seller, the Repo Account is credited in the first leg for the securities sold (funds received), while the same is reversed when the securities are repurchased in the second leg.  Similarly, in the case of repo buyer, the Reverse Repo Account is debited for the amount of securities purchased (funds lent) and the same is reversed in the second leg when the securities are sold back.

5. The first leg of the repo transaction should be contracted at the prevailing market rates. The reversal (second leg) of the transaction shall be such that the difference between the consideration amounts of first and second legs should reflect the repo interest.

6. The accounting principles to be followed while accounting for repo / reverse repo transactions are as under:

(i) Coupon /Discount

1. The repo seller shall continue to accrue the coupon/discount on the securities sold under repo even during the repo period while the repo buyer shall not accrue the same.
2. In case the interest payment date of the security offered under repo falls within the repo period, the coupons received by the buyer of the security should be passed on to the seller of the security on the date of receipt as the cash consideration payable by the seller in the second leg does not include any intervening cash flows.

(ii) Repo Interest Income / Expenditure

After the second leg of the repo / reverse repo transaction is over,

1. the difference between consideration amounts of the first leg and second leg of the repo shall be reckoned as Repo Interest Income / Expenditure in the books of the repo buyer / seller respectively ; and
2. the balance outstanding in the Repo Interest Income / Expenditure account should be transferred to the Profit and Loss account as an income or an expenditure . As regards repo / reverse repo transactions outstanding on the balance sheet date, only the accrued income / expenditure till the balance sheet date should be taken to the Profit and Loss account. Any repo income / expenditure for the remaining period should be reckoned for the next accounting period.

(iii) Marking to Market

The repo seller shall continue to mark to market the securities sold under repo transactions as per the investment classification of the security. To illustrate,  in case the securities sold by banks under repo transactions are out of the  Available for Salecategory, then the mark to market valuation for such securities should be done at least once a quarter. For entities which do not follow any investment classification norms, the valuation for securities sold under repo transactions may be in accordance with the valuation norms followed by them in respect of securities of similar nature.

7. Accounting Methodology

The accounting methodology to be followed along with the illustrations is given in Annexes I and II.  Participants using more stringent accounting principles may continue using the same principles. Further, to obviate the disputes arising out of repo transactions, the participants should enter into bilateral Master Repo Agreement as per the documentation finalized by Fixed Income Money Market and Derivatives Association of India (FIMMDA).

8. Classification of Accounts

Banks shall classify the balances in Repo A/c under Schedule 4 under item I (ii) or I (iii) as appropriate. Similarly, the balances in Reverse Repo A/c shall be classified under Schedule 7 under item I (ii) a or I (ii) b as appropriate. The balances in Repo interest expenditure A/c and Reverse Repo interest income A/c shall be classified under Schedule 15 (under item II or III as appropriate)  and under Schedule 13 (under item III or IV as appropriate) respectively.  The balance sheet classification for other participants shall be governed by the guidelines issued by the respective regulators.

9.  Disclosure

The following disclosures should be made by banks in the “Notes on Accounts’ to the Balance Sheet:

10.   Treatment for Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR)

(i)  Government securities:

The regulatory treatment of market repo transactions in Government securities will continue as hitherto, i.e., the funds borrowed under repo will continue to be exempt from CRR/SLR computation and the security acquired under reverse repo shall continue to be eligible for SLR.

(ii) Corporate debt securities:

In respect of repo transactions in corporate debt securities, as already advised vide IDMD.DOD.05/11.08.38/2009-10 dated January 8, 2010,

1. The amount borrowed by a bank through repo shall be reckoned as part of its Demand and Time Liabilities (DTL) and the same shall attract CRR/SLR as per the provisions of the Master Circular DBOD.Ret.BC.45/12.01.001/2009-10 dated September 18, 2009.
2.  The borrowings of a bank through repo in corporate bonds shall be reckoned as its liabilities for reserve requirement and, to the extent these liabilities are to the banking system, they shall be netted as per clause (d) of the explanation under section 42(1) of the RBI Act, 1934. Such borrowings shall, however, be subject to the prudential limits for inter-bank liabilities prescribed vide circular DBOD.BP.BC.66/21.01.002/2006-07 dated March 06, 2007.

11.   Effective Date

The revised accounting principles for market repo will be applicable from April 01, 2010.  The outstanding repo/reverse repo transactions would however, continue to be accounted as hither to, till maturity. 

Yours faithfully

(Sanjay Hansda)

Director