SEBI introduces swing pricing to protect debt mutual funds

SEBI introduces swing pricing to protect debt mutual funds

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

In a circular issued on Wednesday, the regulator said that initially this arrangement would be applicable only during net withdrawals. This framework will come into effect from March 1, 2022.

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

Many a times, a fund house is forced to exhaust its good quality papers to meet the redemption requests. This has resulted in a fall in the Net Asset Value (NAV), affecting those staying invested. Swing pricing allows a fund house to adjust the NAV of a scheme at a time when there are large outflows in such a way that there is little or no erosion in value and no unfair advantage to the redeeming investors. Get.

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

SEBI has directed industry body Association of Mutual Funds in India (Amfi) to set thresholds for triggering the mechanism. Apart from this, fund houses will be allowed to introduce other parameters.

The market regulator will define or take suo moto cognizance of ‘market disorder’ based on the recommendation of AMFI. Once the market volatility is declared, it will be notified by SEBI that the swing pricing will be applicable for a specified period.

The swing pricing mechanism will be mandatory only for open-ended debt schemes having high or very high risk on the risk-o-meter. For example, under Class I, if the Macaulay tenure is less than or equal to one year and if the credit risk value of the plan is greater than or equal to 12, the swing factor will be optional. Whereas under Tier III, schemes with any Macaulay tenure but the credit risk value of the scheme is less than 10 – the swing will be 2 per cent.
A swing pricing framework will be introduced for open-ended debt schemes except overnight funds, gilt funds and gilts with 10-year maturity funds.

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