Sebi to prescribe stress tests, liquid holdings for debt mutual funds

 The Securities and Exchange Board of India (Sebi) on Tuesday said it would soon issue guidelines that mandate all debt mutual fund schemes to hold a certain percentage of liquid assets in their schemes, including government securities and treasury bills.

This is aimed at improving liquidity in all schemes and would help schemes to meet sudden redemption pressures, chairman Ajay Tyagi said addressing the mutual fund industry at the Association of Mutual Funds in India’s (Amfi’s) 25th annual general meeting. Liquid and overnight funds already have such provisions in place.

In June, a Reserve Bank of India paper had suggested that debt mutual funds should be asked to invest a certain amount in assets such as government bonds and treasury bills as a buffer against sudden redemption requests.

Tyagi said the regulator will set up an expert committee to frame a stress testing methodology for all open ended debt mutual fund schemes. In 2014, Amfi had come out with best practice guidelines on stress testing that was applicable to liquid funds and money market schemes.

“Recently, there were requests by mutual funds to allow them to include g-secs and t-bills in the core asset allocation of credit risk funds, corporate debt funds and banking & PSU debt funds to meet the heightened redemption request. While the same was allowed as a temporary measure, Sebi is setting up an expert committee to frame a stress testing methodology encompassing liquidity, credit, and market risks for all open ended debt mutual funds, and to design a framework to determine the minimum asset allocation required in liquid assets taking into account the type of investors, outcome of stress testing, and minimum redemption during gating,” said Tyagi.

The regulator is also mulling creating a backstop facility for corporate bonds, a mechanism which will allow entities to buy bonds that have no takers commercially and sell them later or find other ways to dispose of them. The entities may be required to have skin in the game, to ensure there is no moral hazard.

Tyagi also said that it had taken feedback from Amfi and would soon come up with a solution to deal with issues that had cropped up after its circular on multicap funds.

The regulator highlighted the fact that the industry’s penetration beyond top 30 cities had remained stagnant at 15-17 per cent over the last five years, and it needed to do more to address this.