MUMBAI: To ring-fence small traders from incurring unexpected and enormous losses during risky bond marketplace situations, markets regulator Sebi is considering a ‘liquidity buffer’ for all liquid finances. Such schemes will have to maintain the buffer so that they've something to fall again on in case of a unexpected spike in redemptions. Sources mentioned the buffer’s construction can be very similar to statutory liquidity ratio (SLR) for banks, and liquidity protection ratio (LCR) for non-banking finance companies (NBFCs).
A working committee set up through the regulator, which incorporated marketplace individuals, is proposing this mechanism to Sebi’s mutual fund advisory committee. The group wants the buffer in order that traders, particularly retail and small ones, are largely insulated from losses in bonds held through liquid finances in case of negative credit score events.
Top Sebi officers are sure about this type of proposal, a marketplace supply mentioned. Currently, across 40 finances homes, an annual average of Rs 4.five lakh crore is invested in liquid finances.
“If the advice is approved through Sebi, all liquid finances will probably be required to compulsorily invest some percentage in their AUM (assets under control) in zero-risk debt tools like executive bonds and treasury expenses. In case of redemption power, these sovereign tools might be sold quickly, which will protect the fund from a misery sale of alternative holdings which might be much less liquid than the ones held within the liquidity buffer,” a supply mentioned.
“The portion of the AUM that are meant to be held in these tools to create the liquidity buffer is but to be finalised. But it’s expected to be round banks’ SLR, which is these days set at 19%,” the supply mentioned. A Sebi spokesperson declined to remark if the regulator was once bearing in mind the sort of proposal.
Banks in India are mandated to hold some amount of money, executive securities, gold and a few different RBI-approved tools to fulfill the central bank’s liquidity buffer requirement, known as SLR. Recently, with NBFCs facing a critical liquidity crunch, the RBI changed the liquidity buffer laws for these companies in favour of having an LCR.
If Sebi also decides to go ahead with a liquidity buffer for liquid finances, it will be the 2d regulator to act abruptly to plug a loophole within the MF trade that had lately turned painful for numerous traders. Fund managers say this type of transfer may come at a small price on returns, however it will make liquid finances more secure. “A few foundation issues (100bps = 1 percentage level) lower returns is an insignificant price to pay for more safety,” a fund manager mentioned.
Usually during a negative development within the bond marketplace — like a default or delay in fee of interest on bonds through a big company — non-sovereign bonds lose worth quickly and in addition develop into illiquid. This results in a fall in net asset values (NAVs) of fixed source of revenue finances, particularly liquid finances. Large traders most often have a head get started during such events in redeeming, which leads to a drop in NAVs and leaves small traders with losses. It’s for shielding these small traders that Sebi is considering a liquidity buffer for liquid finances.
A working committee set up through the regulator, which incorporated marketplace individuals, is proposing this mechanism to Sebi’s mutual fund advisory committee. The group wants the buffer in order that traders, particularly retail and small ones, are largely insulated from losses in bonds held through liquid finances in case of negative credit score events.
Top Sebi officers are sure about this type of proposal, a marketplace supply mentioned. Currently, across 40 finances homes, an annual average of Rs 4.five lakh crore is invested in liquid finances.
“If the advice is approved through Sebi, all liquid finances will probably be required to compulsorily invest some percentage in their AUM (assets under control) in zero-risk debt tools like executive bonds and treasury expenses. In case of redemption power, these sovereign tools might be sold quickly, which will protect the fund from a misery sale of alternative holdings which might be much less liquid than the ones held within the liquidity buffer,” a supply mentioned.
“The portion of the AUM that are meant to be held in these tools to create the liquidity buffer is but to be finalised. But it’s expected to be round banks’ SLR, which is these days set at 19%,” the supply mentioned. A Sebi spokesperson declined to remark if the regulator was once bearing in mind the sort of proposal.
Banks in India are mandated to hold some amount of money, executive securities, gold and a few different RBI-approved tools to fulfill the central bank’s liquidity buffer requirement, known as SLR. Recently, with NBFCs facing a critical liquidity crunch, the RBI changed the liquidity buffer laws for these companies in favour of having an LCR.
If Sebi also decides to go ahead with a liquidity buffer for liquid finances, it will be the 2d regulator to act abruptly to plug a loophole within the MF trade that had lately turned painful for numerous traders. Fund managers say this type of transfer may come at a small price on returns, however it will make liquid finances more secure. “A few foundation issues (100bps = 1 percentage level) lower returns is an insignificant price to pay for more safety,” a fund manager mentioned.
Usually during a negative development within the bond marketplace — like a default or delay in fee of interest on bonds through a big company — non-sovereign bonds lose worth quickly and in addition develop into illiquid. This results in a fall in net asset values (NAVs) of fixed source of revenue finances, particularly liquid finances. Large traders most often have a head get started during such events in redeeming, which leads to a drop in NAVs and leaves small traders with losses. It’s for shielding these small traders that Sebi is considering a liquidity buffer for liquid finances.
Sebi mulls buffer to shield investors in liquid funds
![Sebi mulls buffer to shield investors in liquid funds]()
Reviewed by Kailash
on
June 04, 2019
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