In the wake of significant risk aversion and subsequent illiquidity witnessed in corporate bond markets in March-April this year, SEBI permitted debt mutual funds to include G-Secs and T-Bills in the core asset allocation of credit risk funds, corporate debt funds and banking and psu debt funds. The aim of this temporary measure was to help debt schemes meet the high volume of redemption requests.
In this context, SEBI Chairman Ajay Tyagi said today that the market regulator is setting up an expert committee to design a framework to determine the minimum liquid assets required in all open-ended debt schemes.
“SEBI is 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; and to design a framework to determine the minimum asset allocation required in liquid assets, taking into account the nature of scheme’s assets, type of investors, outcome of stress testing, minimum redemption requirement during gating, etc,” SEBI Chairman Ajay Tyagi said in an address at the 25th AGM of AMFI.
In the interim, SEBI would be stipulating a minimum holding of liquid assets by all debt-oriented schemes. And the market regulator will take into account the recommendations made by the Mutual Fund Advisory Committee, Tyagi said.
The SEBI Chairman pointed out that another issue that got highlighted was the possible impact of large redemptions on remaining unit holders of a scheme. In case of any scheme witnessing large redemption requests and with not so liquid instruments as assets, there are high chances that more liquid assets get liquidated first and the scheme is then progressively left with a relatively more illiquid portfolio.
“This benefits exiting investors at the cost of those who continue to stay particularly in case of stressed situations. The proposed expert committee will also examine liquidity risk management tools such as ‘Swing pricing / Anti-dilution levy’,” said Tyagi.
Tyagi explained that tools like ‘Swing pricing / Anti-dilution levy’ will be effective in passing on transaction costs to the transacting investors. The tools will apply to both the incoming and outgoing investors, thereby protecting the interest of existing investors.
Tyagi recognised that there is a “pressing need” to increase liquidity in the corporate bond market to ensure smooth functioning of the debt mutual funds. In this context, SEBI is examining the setting up of a ‘Back-stop facility,’ an entity 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. SEBI is of the view that this will instill greater confidence among market participants in corporate bonds, especially in below AAA investment grade bonds.
