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SEBI introduces swing pricing in debt funds

The swing pricing – partial for normal times and full swing pricing for times of market dislocations- will be implemented from March 1, 2022.

September 29, 2021 / 06:44 PM IST

To protect the interests of debt fund investors from large redemptions by other investors, Securities Exchange Board of India (SEBI) has introduced swing pricing in bond funds. The regulator has announced the swing pricing framework for bond funds units except overnight funds, gilt funds and gilt funds with 10 year maturity schemes.

SEBI had floated a consultation paper on swing pricing in July 2021. After incorporating the feedback on the consultation paper and deliberations in the Mutual Fund Advisory Committee (MFAC) the regulator has decided to implement the swing pricing only on the redemptions of Rs 2 lakh and more from the scheme at a PAN level. The swing pricing – partial for normal times and full swing pricing for times of market dislocations- will be implemented from March 1, 2022.

What is swing pricing?

The swing pricing rules will ensure that long term investors in a debt schemes will not be affected by some large investors redeeming their investments. In bond market, sometimes due to low liquidity, the fund houses are forced to liquidate their investments to meet redemptions. This leads to a sharp drop in the scheme’s net asset value (NAV). In short, those who exit prematurely benefit. Others who continue to stay invested, have to be content with a reduced NAV.

Association of Mutual Funds in India has been asked to define broad parameters for determination of thresholds for triggering swing pricing and an indicative range of swing threshold for normal times. The asset management companies (AMC) are allowed to have additional parameters for the same. It is up to the discretion of the mutual fund house to opt for the swing pricing in normal times. If the AMC desires to implement swing pricing in normal times, then the AMC need to make necessary amendments in scheme information document and the same will be treated as a change in fundamental attribute of the scheme.

SEBI has further asked AMFI to develop a model for determining the market dislocation. “SEBI will determine ‘market dislocation’ either based on AMFI’s recommendation or suo moto. Once market dislocation is declared, it will be notified by SEBI that swing pricing will be applicable for a specified period,” the circular said.

Will all schemes implement swing pricing?

Mandatory swing pricing will be applicable to open ended bond funds with high to very high risk as per risk-o-meter of the scheme and classify themselves in the high potential risk class matrix at the time of market dislocation. The swing factor recommended by SEBI range from 1.5 percent to 2 percent for schemes depending on their risk positioning.

The fund houses are asked to incorporate SEBI prescribed swing factors in the respective schemes’ offer document. Such a change will not be treated as change in fundamental attribute of the scheme. But if a fund house chooses to apply higher swing factor than that prescribed by SEBI, then the same will be treated as a change in fundamental attribute.

SEBI has further asked the fund houses to explain how the swing factor will work in the scheme information document. The fund houses are further told to put in place policies and procedures pertaining to swing pricing. “When swing pricing framework is triggered and swing factor is made applicable (for normal time or market dislocation, as the case may be), both the incoming and outgoing investors shall get NAV adjusted for swing factor,” said the circular.

Scheme performance however will be computed based on unswung NAV.
Moneycontrol PF Team
first published: Sep 29, 2021 06:44 pm

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