SEBI asks Mutual Funds to adopt waterfall approach for money market, debt securities valuation
The market regulator SEBI(Securities and Exchange Board of India) has asked mutual fund houses to follow the waterfall approach for the valuation of money market and debt securities to bring uniformly and consistency in valuation. Based on traded yields, all traded securities would be valued and By the valuation agencies, these are subjected to identification of outlier trades, under this approach.
Besides, the regulator has come out with a framework relating to the valuation of inter-scheme transfers and barred the use of own trades for valuation.
If the long term rating of the security issued by a credit rating agency (CRA) is below BBB- or if the short term rating of the security is below A3 it is said that the money market or debt security will be classified as below investment grade.
A money market or debt security will be classified as “default” if the interest and/or principal amount has not been received on the day such amount was due or when such security was downgraded to “default” grade by a CRA.
In the case of default, mutual funds will have to promptly inform the valuation agencies and the CRAs any instance of non-receipt of payment of interest and principal amount in any security.
A waterfall approach shall be followed for the valuation of money market and debt securities for arriving at security level pricing said Securities and Exchange Board of India(SEBI), in a circular that was on Tuesday.
Debt securities funds invest in fixed income securities like bonds and treasury bills whereas A money market fund, in market parlance, is an open-ended mutual fund that invests in short-term debt securities like treasury bills and commercial paper.
Principles that need to be adopted under the waterfall approach, for arriving at the security level prices, the regulator said that all traded securities shall be valued based on traded yields, subject to identification of outlier trades by the valuation agencies.
The securities and exchange board of India (SEBI) said that volume-weighted average yield (VWAY) for traders in the last one hour of trading will be used as the basis for the valuation of government securities including treasury bills. And valuation of all other money market debt securities including all government securities not traded in the last one hour shall be done based on VWAY of all traders during the day.
For the valuation of money market and debt securities, the Association of Mutual Fund (AMFI) was asked to ensure that valuation agencies have a documented waterfall approach.
SEBI asked AMFI to issue a framework on polling by valuation agencies and on the responsibilities of mutual funds in the polling process, as part of the approach, By considering the importance of polling in the valuation process.
By considering all the factors such as diversification of poll submitters and portfolio holding of the mutual funds the valuation agencies will identify the mutual funds who will participate in the polling process on a particular day.
Mutual funds, who are identified by the valuation agencies, will have to necessarily participate in the polling process. However, in case any fund does not participate in the polling process, detailed reason for the same will have to be recorded and made available during Sebi inspections.
SEBI said that the detailed rationale for each instance of deviation will be recorded by AMC. If in case an asset management company (AMC) decides to deviate from the valuation price given by the valuation agencies.
With regard to the use of own trade for valuation, SEBI noted that various instances have come to notice wherein mutual funds have used their own trades of relatively small quantity in order to value the entire holding of such security.
For valuation of debt and money market securities and for IST (inter-scheme transfers). The regulator said that mutual funds will use their own trades, in order to address possible misuses.
With respect to IST, SEBI said that AMCs will have to seek prices for IST of any money market or debt security irrespective of maturity, from the valuation agencies. Then, AMFI, in consultation with valuation agencies will decide a TAT(turn-around-time), within which IST prices will be provided by the agencies.
If prices from the valuation agencies are received within the pre-agreed TAT, an average of the prices so received will be used for IST pricing. In price from only one valuation agency is received within the agreed TAT, that price may be used for IST pricing.
On the website of AMFI and AMCs Securities And Exchange Board Of India (SEBI) has extended the present timeline up to 11 PM for uploading the net asset values of all the schemes except Fund of Fund schemes(FOFs), In order to enable consideration of all trades during a day for valuation.
While making any change to terms of an investment, which may have an impact on valuation, Securities And Exchange Board Of India (SEBI) said that mutual funds will report the same to the valuation agencies immediately.