sebi: Sebi asks open-ended debt MF schemes to hold 10% liquid assets

Mumbai: Securities and Exchange Board of India has mandated all open-ended debt schemes to hold at least 10% of their net assets in liquid assets.

Liquid assets would include cash, government securities, T- bills and repo on government securities, the regulator said in a circular on Friday. It has excluded fund categories such as overnight, liquid, gilt, and gilt fund with 10-year constant duration from this norm.

The norms on holding liquid assets will be effective from February 1,2021, while the stress testing would be effective from December 1,2020.

The regulator’s decision asking debt schemes to hold a minimum liquid securities or cash is to ensure that mutual funds are able to meet redemption pressures when the bond market freezes. Franklin Templeton Mutual Fund had to shut down six debt schemes because it was left with little liquid securities to meet outflows.

“Over the last four years, in the chase for yield and returns, many funds started investing a higher proportion in lower rated assets, further compromising the liquidity of the portfolio,” said Arvind Chari,Head – Fixed Income & Alternatives, Quantum Advisors. “When the industry receives large redemptions, which happens regularly, these debt funds are unable to sell assets and thus resort to fire-sales or borrow to meet redemptions. Since the industry is unlikely to stop inflows into funds, the regulator has been forced to ensure that debt fund portfolios become more liquid by forcing them to hold liquid assets.”

The regulator has been worried that debt funds, investing in non-government securities, have disproportionate exposure to these illiquid papers.

Chari said the move cannot be solely attributed to the Franklin fiasco.

“This was an industry wide problem, which has now been tried to remedy through regulation,” he said.

Sebi said on Friday liquid assets should not be included for determining the scheme characteristics of the open-ended debt schemes.

The regulator has also mandated all open-ended debt schemes except overnight schemes to conduct stress testing.

Sebi has formed a panel to give suggestions on holding liquid assets and stress testing.

“The recommendations will be evaluated and based on the same the norms regarding holding of liquid assets and methodology of stress testing may undergo change,” Sebi said.

Source link

Show More

Related Articles

Back to top button