In a circular on Wednesday, the regulator said initially the mechanism will be made applicable only for during net outflows
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 mutual funds (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.
Sebi has directed industry body the Association of Mutual Funds 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 Sebi. 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 Sebi 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.
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.
First Published: Wed, September 29 2021. 20:10 IST