Sebi proposes swing pricing for open-ended debt mutual funds

New Delhi, July 19: Sebi on Monday proposed introducing a swing pricing mechanism for open ended mutual fund debt schemes as part of efforts to ensure fairness in treatment of investors, especially during times of market dislocation.

The regulator has suggested partial swing during normal times and a mandatory full swing during times of market dislocation. The suggestion is aimed at ensuring fairness in treatment of entering, exiting and existing investors in mutual fund schemes, particularly during market dislocation, Sebi said in a consultation paper.

Generally, swing pricing refers to a process for adjusting a fund’s net asset value to effectively pass on transaction costs stemming from net capital activity to the investors concerned. In a liquidity-challenged environment, quoted bid/ask spreads and overall trading cost can widen and may not be representative of the executed prices that can be achieved in the market.

A proposal is to mandate swing pricing for high risk open ended debt schemes during market dislocation as they carry high risk securities compared to other schemes which possibly have higher costs of liquidation.

“Mandating swing pricing during market dislocation will lead to better predictability, transparency and effectiveness of the said mechanism,” Sebi said.

In subsequent phases, Sebi will examine the applicability of swing pricing mechanism to equity schemes, hybrid schemes, solution oriented schemes and other schemes.

Swing pricing should be made applicable to all unitholders with an exemption for redemptions up to `2 lakh for all unitholders and up to `5 lakh for senior citizens at a mutual fund level. This is in order to keep retail investors and senior citizens insulated from the applicability of swing pricing to a certain extent.