Context:
Banks are borrowing funds from the Tri-Party Repo (TREPS) market at lower rates and parking them in the RBI’s Standing Deposit Facility (SDF) to earn risk-free arbitrage. The weighted average TREPS rate was 5.66%, while the SDF rate stood at 5.75%, offering a 9 basis points spread.
Tri-Party Repo Dealing System (TREPS)
Definition and Functionality
- Full form: Tri-Party Repo Dealing System (TREPS)
- TREPS is a type of repo (repurchase agreement) involving a third-party agent (Tri-Party Agent) who facilitates:
- Collateral selection
- Settlement and payment services
- Custody and lifecycle management
- In TREPS, securities are sold with an agreement to repurchase at a later date at a predetermined price (including interest).
Key Features
- Short-term arrangement: Overnight to a few weeks
- Central Counterparty: Clearing Corporation of India Ltd. (CCIL), which also acts as the Tri-Party Agent
Why Mutual Funds Use TREPS?
- Liquidity Management:
- Ideal for deploying idle cash in the short term
- Offers quick liquidity with minimal risk
- Portfolio Diversification:
- Provides a low-risk fixed-income component
- Helps balance the fund’s risk-return profile
- Regulatory Compliance:
- TREPS investments support SEBI-mandated asset allocation norms
- Aid in tracking and limiting exposure across asset classes
BS
