**Summary:**
This Securities and Exchange Board of India (SEBI) circular (SEBI/HO/IMD/DF3/CIR/P/2020/229) dated November 06, 2020, addresses norms regarding the holding of liquid assets and stress testing for open-ended debt schemes. To enhance liquidity risk management, all open-ended debt schemes, with the exception of Overnight Funds, Liquid Funds, Gilt Funds, and Gilt Funds with a 10-year constant duration, must hold a minimum of 10% of their net assets in liquid assets, defined as Cash, Government Securities, T-bills, and Repo on Government Securities. These liquid assets will not be considered when determining scheme characteristics. Asset Management Companies (AMCs) must ensure compliance with this requirement before making further investments if the exposure to liquid assets falls below the mandated threshold.
Furthermore, the circular mandates stress testing for all open-ended debt schemes, excluding overnight schemes. AMCs are required to establish guidelines for conducting these stress tests, similar to the stipulations outlined in SEBI circular No. CIR/IMD/DF/03/2015 dated April 30, 2015.
A committee has been formed to further deliberate on the subject of the circular and provide recommendations, which may lead to changes in the norms regarding holding liquid assets and the methodology of stress testing.
The provision regarding liquid assets (para 1) is effective from February 01, 2021, while the provision regarding stress testing (para 2) is effective from December 01, 2020.
This circular is issued under Section 11(1) of the Securities and Exchange Board of India Act, 1992, and Regulation 77 of SEBI Mutual Funds Regulation, 1996, to protect investor interests and regulate the securities market.
For further information, contact Bithin Mahanta, General Manager, at 022-26449634 or bithinm@sebi.gov.in.
Key Entities Referenced
Securities and Exchange Board of India: Regulatory body for securities markets in India, responsible for issuing the circular.
Asset Management Companies: Companies that manage mutual funds and other investment portfolios.
Association of Mutual Funds in India: Industry association of mutual funds in India.
Mutual Fund Advisory Committee: A committee whose recommendations are considered for mandating stress testing of open ended debt schemes
Securities and Exchange Board of India Act 1992: The act that confers powers to SEBI
SEBI Mutual Funds Regulation, 1996: Regulation that confers powers to SEBI
Gilt Fund: Type of open ended debt schemes that are exempt from holding liquid assets
Liquid Fund: Type of open ended debt schemes that are exempt from holding liquid assets
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Securities and Exchange Board of India
CIRCULAR
SEBI/HO/IMD/DF3/CIR/P/2020/229 November 06, 2020
All Mutual Funds/
Asset Management Companies (AMCs)/
Trustee Companies/Boards of Trustees of Mutual Funds/
Association of Mutual Funds in India (AMFI)
Sir/ Madam,
Subject: Norms regarding holding of liquid assets in open ended debt
schemes & stress testing of open ended debt schemes
1. In order to augment the liquidity risk management framework for all open
ended debt schemes, defined in SEBI circulars
SEBI/HO/IMD/DF3/CIR/P/2017/114 dated October 6, 2017 and
SEBI/HO/IMD/DF3/CIR/P/2017/126 dated December 4, 2017, the following
has been decided:
a. All open ended debt schemes (except Overnight Fund, Liquid Fund,
Gilt Fund and Gilt Fund with 10 year constant duration) shall hold at
least 10% of their net assets in liquid assets. For this purpose, ‘liquid
assets’ shall include Cash, Government Securities, T-bills and Repo
on Government Securities.
b. The liquid assets specified at para 1(a) above shall not be included
for determining the scheme characteristics of the open ended debt
schemes as specified in SEBI circulars
SEBI/HO/IMD/DF3/CIR/P/2017/114 dated October 6, 2017 and
SEBI/HO/IMD/DF3/CIR/P/2017/126 dated December 4, 2017.
c. In case, the exposure in such liquid assets / securities falls below the
threshold mandated at para 1(a) above, the Asset Management
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Securities and Exchange Board of India
Companies (AMCs) shall ensure compliance with the above
requirement before making any further investments.
2. SEBI vide circular No. CIR/IMD/DF/03/2015 dated April 30, 2015 mandated
Stress Testing of Liquid Funds and Money Market Fund schemes. Based
on the recommendations of Mutual Fund Advisory Committee (MFAC), it is
decided to mandate all open ended debt schemes (except overnight
scheme) to conduct stress testing. Further, on similar lines of Para 2 of
aforementioned circular dated April 30, 2015, AMC shall stipulate the
guidelines to carry out stress testing for the aforementioned debt schemes.
3. A committee has been set up to deliberate on the subject of the circular and
give its recommendations. The recommendations will be evaluated and
based on the same the norms regarding holding of liquid assets and
methodology of stress testing may undergo change.
4. The provisions at para 1 above shall be effective from February 01, 2021
and the provision at para 2 above shall be effective from December 01,
2020.
5. This circular is issued in exercise of the powers conferred under Section 11
(1) of the Securities and Exchange Board of India Act 1992, read with the
provision of Regulation 77 of SEBI (Mutual Funds) Regulation, 1996 to
protect the interests of investors in securities and to promote the
development of, and to regulate the securities market.
Yours faithfully,
Bithin Mahanta
General Manager
Tel no.: 022-26449634
Email: bithinm@sebi.gov.in
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