SEBI Wants Tighter Risk Management For Liquid, Money Market Schemes

The market regulator is looking to tighten risk management framework for liquid and money market schemes of mutual funds.

“We’re working with the industry body AMFI (Association of Mutual Funds of India) and mutual funds on the issue of volatility in inflow and outflow in liquid schemes,” said Ajay Tyagi, chairman of the Securities and Exchange Board of India, while addressing the media after a meeting of the regulator’s board in Mumbai today. “We're in discussions for risk management and will come out with a policy soon.”

Liquidity and money market schemes have witnessed significant volatility in inflow and outflow in the last few months primarily due to overnight funds being parked in the money market.

The industry has been working with SEBI to strengthen systems especially after the recent liquidity crisis (due to a string of defaults by the IL&FS group), said A Balasubramanian, chief executive officer of Birla Sun Life Asset Management Company. “We’re looking at the root of the problem to come up with regulations.”

After the recent classification of debt and equity schemes by the market regulator, a new classification of overnight funds was introduced under debt schemes in which insurance and corporate companies could park money overnight in money market operations and earn returns. This fund flow is very volatile and creates daily liquidity pressure, said Balasubramanian.

Daily inflow and outflow accounts for anywhere between 12-20 percent of the total assets under management of liquid funds, or nearly Rs 50,000-60,000 crore, enters and exits these schemes daily, said Balasubramanian.

The challenge mutual funds face is money is coming into liquid and money market schemes for overnight deployment whereas the assets backing the scheme have a tenure of 60-70 days. This creates risk on the portfolios requiring liquid and money market schemes to have mark to market on an accrual basis.

“We’re looking at risk management measures such as minimum holding period for liquid and money market funds,” said Balasubramanian. While minimum holding period cannot be imposed we can always have 3-day or 7-day exit load, he said. “It is still under discussions and no decision has been taken yet.”

The industry is also witnessing bank credit to corporates being parked in overnight liquid schemes to benefit from arbitrage in rates.

The regulator and AMFI will have to take measures to ensure the product doesn’t get impacted, given liquid and money market schemes are important sources for liquidity management, Balasubramanian said.