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Sebi asks open-ended debt MF schemes to carry 10% liquid belongings

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Mumbai: Securities and Exchange Board of India has mandated all open-ended debt schemes to carry at the very least 10% of their internet belongings in liquid belongings.

Liquid belongings would come with money, authorities securities, T- payments and repo on authorities securities, the regulator stated in a round on Friday. It has excluded fund classes comparable to in a single day, liquid, gilt, and gilt fund with 10-year fixed length from this norm.

The norms on holding liquid belongings will likely be efficient from February 1,2021, whereas the stress testing could be efficient from December 1,2020.

The regulator’s resolution asking debt schemes to carry a minimal liquid securities or money is to make sure that mutual funds are in a position to meet redemption pressures when the bond market freezes. Franklin Templeton Mutual Fund needed to shut down six debt schemes as a result of it was left with little liquid securities to satisfy 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,” stated 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 nervous that debt funds, investing in non-government securities, have disproportionate publicity to those illiquid papers.

Chari stated the transfer can’t be solely attributed to the Franklin fiasco.

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

Sebi stated on Friday liquid belongings shouldn’t be included for figuring out the scheme traits of the open-ended debt schemes.

The regulator has additionally mandated all open-ended debt schemes besides in a single day schemes to conduct stress testing.

Sebi has shaped a panel to provide options on holding liquid belongings 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 stated.

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