Sebi rolls out swing pricing to protect debt mutual fund investors

Sebi rolls out swing pricing to protect debt mutual fund investors

The Securities and Exchange Board of India (Sebi) has introduced the concept of ‘swing pricing’ to protect investors in debt (MFs) in the event of a market dislocation or large redemptions.

In a circular issued on Wednesday, the regulator said initially the mechanism will be made applicable only during net outflows. This framework shall be applicable with effect from March 1, 2022.

Swing pricing is a mechanism used to ensure that long-term investors in debt schemes are not adversely impacted during big-ticket redemptions, typically by large investors.

At times, a fund house is forced to liquidate their good quality papers to meet redemption requests. This sparks a fall in net asset value (NAV), impacting those who remain invested. Swing pricing allows a fund house to adjust the NAV of a scheme at times when there are large outflows in such a way that there is little or no erosion in value and the redeeming investors don’t get any unfair advantage.

“The framework shall be a hybrid framework with a partial swing during normal times and a mandatory full swing during market dislocation times for high risk open-ended debt schemes,” the circular said.

has directed industry body Association of in India (Amfi) to determine thresholds for triggering the mechanism. In addition, fund houses will be allowed to introduce other parameters.

The market regulator will define ‘market dislocation’ based on Amfi’s recommendation or take a suo moto call. Once market dislocation is declared, it will be notified by that swing pricing will be applicable for a specified period.

Sebi rolls out swing pricing to protect debt mutual fund investors

Swing pricing mechanism shall be mandated only for open-ended debt schemes that have high or very high risk on the risk-o-meter. For example, under Class I, if Macaulay Duration is less than or equal to one year and if credit risk value of the scheme is more than or equal to 12 the swing factor will be optional. While under Class III, schemes having any Macaulay Duration, but credit risk value of the scheme is less than 10—swing would be 2 per cent.

Swing pricing framework will be introduced for open ended debt schemes barring overnight funds, gilt funds, and gilt with 10-year maturity funds.

Dear Reader,

Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.

We, however, have a request.

As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.

Support quality journalism and subscribe to Business Standard.

Digital Editor

Source link