Sebi introduces swing pricing to protect debt mutual fund investors

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In a circular on Wednesday, the regulator said initially the mechanism will be made applicable only for during net outflows

Topics
SEBI | Mutual Funds

Chirag Madia  |  Mumbai 

Last Updated at September 29, 2021 20:10 IST

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

In a circular on Wednesday, the regulator said initially the mechanism will be made applicable only for during net outflows.


Swing pricing is a mechanism use to ensure that the long term investors in a 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 leads to fall in net asset value (NAV), impacting those who remain invested. Swing pricing allows a fund house to adjust the NAV of a scheme during large outflows in such a way that there is little or no erosion in value and the investors redeeming doesn’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 the Association of in India (Amfi) to determine thresholds for triggering the swing pricing mechanism. In addition, fund houses will be allowed to introduce other parameters considering the nature and characteristics of scheme.

To determine the market dislocation, Amfi will recommend a set of guidelines to 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.

Swing pricing mechanism shall be mandated only for open-ended debt schemes that have high or very high risk on 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.

“When swing pricing framework is triggered and swing factor is made applicable (for normal time or market dislocation, as the case may be), both the incoming and outgoing investors shall get net asset value (NAV) adjusted for swing factor,” said Sebi.

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

This framework shall be applicable with effect from March 1, 2022.

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First Published: Wed, September 29 2021. 20:10 IST