The Securities and Exchange Board of India (SEBI) Introduces the Swing Pricing Framework for Debt Mutual Fund Plans

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On Wednesday, the Securities and Exchange Board of India (SEBI) is, the regulator of capital markets, has decided to launch a swing pricing procedure for the open-ended debt mutual funds plans. This plan helps when a move that will deter large investors from the sudden redemptions.

The SEBI said in the circular the swing pricing framework will be applicable in only situations related to the net outflows from schemes. The swing pricing mechanism would be a hybrid structure with partial swings during regular and mandatory full swing during market disruption times for the high-risk open-ended debt scheme.

This new swing pricing framework aims to ensure fairness in exiting and entering the existing investors in the mutual fund schemes, particularly during the volatile market. It will take effect starting March 1st, 2022.

Usually, swing pricing is a method of adjusting the net asset value of a fund to successfully pass the transaction costs stemming from the net capital activity to the investors involved.

In the highly volatile market, quoted ask/bid spreads and overall trading costs can be broader and could not indicate the executed expenses achieved in the market.

During the regular times, SEBI said, the AMFI (The regulatory body Association of Mutual Funds in India) will establish broad guidelines for determining thresholds for triggering swing pricing followed by the AMCs (An Asset Management Company).

In regular periods, An Asset Management Company will decide on the scope of swing pricing and the quantum of the swing factor based on particular scheme issues. These states within the SID (Scheme Information Document).

The regulator states that Amfi will create guidelines to recommend the same to SEBI to determine market dislocation. The regulator would determine “market dislocation” based on suo moto or Amfi’s recommendations.

Once the dislocation is declared, it will be notified by the Securities and Exchange Board of India that the swing price will be valid for a specific time.

After the market disruption announcement, the structure of swing price will become implemented only for open-ended debt schemes because they carry high-risk securities compared with the other plans.

SEBI stated that all open-ended debt plans (except the Gilt funds, Gilt with maturity funds of 10 years, and overnight fund) would need to include the clause relating to the obligatory swing factor in their offering documentation within the next three months.

If the swing pricing framework is activated and the swing factor is put into effect (for market dislocation, or regular time as the case may be). The outgoing and incoming shareholders will get with the Net Asset Value (NAV) adjusted to reflect the swing factors, SEBI states.

All AMCs are required to provide clear disclosures coupled with illustrations in the SIDs with details on under which conditions the swing pricing framework triggered, how it works, and its impact on the NAV for both outgoing and incoming investors.

The swing pricing will be available to all unitholders at Presence Across Nation (PAN) level, except for redemptions of up to Rs 2 lakh per mutual fund scheme, for market volatility and regular times.

An Asset Management Company (AMCs) is required to establish procedures and guidelines regarding swing pricing that their Trustee and Board approve. The scheme’s performance is calculated based on the unswung Net Asset Value (NAV).

SEBI further states that disclosures related to the NAV are adjusted to account for the swing factor, and the impact on performance disclosed by AMCs in a format prescribed in their SIDs and annual reports on the scheme abridged summary.

This information can be made available on their website, but only if they have a swing price framework in place for the mutual fund plan.

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