Sebi introduces swing pricing in debt funds

Mechanism will kick in at times of market dislocation

The Securities and Exchange Board of India has introduced the concept of ‘swing pricing’ to protect investors in debt mutual funds (MFS) in the event of a market dislocation or large redemptions. In a circular issued on Wednesday, the regulator said initially the mechanism will be made applicable only during net outflows.

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 a market dislocation or large redemptions.

In a circular issued on Wednesday, the regulator said initially the mechanism will be made applicable only during net outflows. This framework shall be applicable with effect from March 1, 2022.

Swing pricing is a mechanism used to ensure that long-term investors in 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 sparks a fall in net asset value (NAV), impacting those who remain invested. Swing pricing allows a fund house to adjust the NAV of a scheme at times when there are large outflows in such a way that there is little or no erosion in value and the redeeming investors don’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 Association of Mutual Funds in India (Amfi) to determine thresholds for triggering the mechanism. In addition, fund houses will be allowed to introduce other parameters.

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 the risk-ometer. 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.

Swing pricing framework will be introduced for open ended debt schemes barring overnight funds, gilt funds, and gilt with 10-year maturity funds.

Swing pricing framework will be introduced for open ended debt schemes barring overnight funds, gilt funds, and gilt with 10year maturity funds