SEBI mulls stress tests, swing pricing for MFs

Move to ensure liquidity in debt mutual funds, committee to work on measures, says Chairman Tyagi

The Securities and Exchange Board of India (SEBI) is contemplating policy measures such as stress-testing, minimum asset allocation in liquid assets, and a swing pricing like mechanism to address liquidity issues in debt mutual funds (MFs), said Chairman Ajay Tyagi.

Addressing the 25th AGM of AMFI on Tuesday, Mr. Tyagi said said one of the areas for improvement was to enhance the liquidity of the portfolio of open-ended debt MF schemes.

He said SEBI was facilitating the setting up of an expert committee to frame a stress testing methodology, encompassing liquidity, credit and market risks, for all open-ended debt oriented mutual fund schemes.

The committee would also design a framework to determine the minimum asset allocation required in liquid assets, taking into account the nature of the scheme’s assets, the type of investors, outcome of stress-testing, and minimum redemption requirement during gating.

In the interim, SEBI would be stipulating a minimum holding of liquid assets by all debt-oriented schemes.

Mr. Tyagi said the proposed committee would examine liquidity risk management tools such as swing pricing or anti-dilution levy for passing on transaction costs to the transacting investors. The tools will apply to both the incoming and outgoing investors, thereby protecting the interests of existing investors.

SEBI was pursuing a multitude of measures to not only increase liquidity in secondary markets, but also to enable greater issuances of paper rated below AAA, Mr. Tyagi said.

Repo trading

SEBI was also deliberating on a limited purpose central clearing corporation for guaranteed settlement of tripartite repo trades in all investment grade corporate bonds, including those below AAA rated, to boost repo trading in corporate bonds.

“As major holders of corporate bonds, the MFs, who regularly have buying/selling needs, would be one of the biggest beneficiaries of a liquid market,” the chairman said. “Issuers will also be significant beneficiaries of a liquid and stable market in terms of lower borrowing costs,” he added.

The markets regulator is also examining setting up a backstop facility which can trade in relatively illiquid investment grade corporate bonds and be readily available in times of stress to buy such bonds from various market participants in the secondary market.

Debt MFs should not act like banks while dealing with investors’ money and needed to remember that there was a difference between ‘investing’ and ‘lending’, Mr. Tyagi remarked.

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