The regulator is also planning to set up an expert panel to frame stress-testing methodology, encompassing liquidity, credit and market risks, for all open-ended debt oriented mutual fund schemes, Sebi chief Ajay Tyagi said Tuesday. “In the interim, taking into account the recommendations made by the Mutual Fund Advisory Committee, Sebi would be stipulating a minimum holding of liquid assets by all debt-oriented schemes,” he said at a mutual fund industry event, addressing its chief executives.
The regulator said that in March-April 2020, significant risk-aversion and subsequent illiquidity was observed in the bond market, especially in AA and below rated papers. This created significant challenges in the form of redemption pressures being faced by debt mutual funds on account of not only normal year-end redemptions, but also Covid-related redemption pressures.
“That experience brought to fore not only the structural issues related to the corporate bond markets, but also revealed some areas of improvement in respect of the practices followed in the mutual fund industry,” Tyagi said.
The expert committee will also examine liquidity risk management tools such as “swing pricing or anti-dilution levy” for passing on transaction costs to the transacting investors. The tools will apply to both the incoming and outgoing investors, thereby protecting the interest of existing investors, Tyagi said.
From March 2015 to August 2020, the asset under management of debt schemes increased from Rs 6.94 lakh crore to Rs 13.89 lakh crore.
Sebi is also planning measures to increase liquidity in secondary markets and to enable greater issuances of paper rated below AAA.
“Sebi is deliberating on having a limited-purpose central clearing corporation for guaranteed settlement of tri-party repo trades in all investment-grade corporate bonds, including those below AAA rated, to boost repo trading in corporate bonds,” Tyagi said. “As major holders of corporate bonds, the mutual funds, who regularly have buying and selling needs, would be one of the biggest beneficiaries of a liquid market. Issuers will also be significant beneficiaries of a liquid and stable market in terms of lower borrowing costs.”
The regulator also said it is examining to set up a backstop facility for corporate bonds, a mechanism that will allow entities to buy bonds that have no takers commercially and sell them later on or find other ways to dispose of them.
Tyagi also said Sebi has received some suggestions from the mutual fund industry on multi-cap funds and it would soon take a call on them.