Executive Summary:
The Securities and Exchange Board of India (SEBI) introduces a swing pricing framework for open-ended debt mutual fund schemes, excluding overnight, gilt, and gilt with 10-year maturity funds, effective March 1, 2022. The framework includes partial swing during normal times and mandatory full swing during market dislocation for high-risk schemes. AMFI is tasked with prescribing parameters and guidelines within three months.
Key Points / Main Content:
Swing Pricing Framework:
* Applicable to open-ended debt mutual fund schemes, excluding overnight, gilt, and gilt with 10-year maturity funds.
* Hybrid framework: partial swing in normal times, mandatory full swing during market dislocation for high-risk schemes.
Swing Pricing - Normal Times:
* AMFI to prescribe broad parameters for swing pricing thresholds.
* AMCs can use additional parameters based on scheme characteristics.
* AMCs decide on swing pricing applicability and factor quantum, disclosed in the SID.
* Implementation during normal period is considered a Fundamental Attribute Change.
Swing Pricing - Market Dislocation:
* AMFI to develop guidelines for recommending market dislocation to SEBI.
* SEBI determines market dislocation based on AMFI's recommendation or suo moto.
* Mandatory for high-risk open-ended debt schemes during declared market dislocation.
* High-risk schemes defined by riskometer and PRC Matrix classifications.
* Minimum swing factors apply based on credit and interest rate risk (Table 1).
* Incorporation of mandatory swing factor provisions in offer documents required within three months (not considered a Fundamental Attribute Change unless optional swing factor or higher than specified is used).
Other Aspects:
* Both incoming and outgoing investors receive NAV adjusted for the swing factor.
* AMCs must disclose swing pricing framework details in SIDs with illustrations.
* Swing pricing applies to all unitholders at PAN level, with a Rs. 2 lakh redemption exemption per scheme.
* AMCs must have board-approved swing pricing policies and procedures.
* Scheme performance is computed based on unswung NAV.
* Disclosures of NAV adjusted for swing factor and performance impact are required in SIDs and annual reports, if applicable.
Applicability:
* Effective from March 1, 2022.
* AMFI to prescribe parameters within three months of the circular date.
Impact Analysis:
Mutual Funds / Asset Management Companies (AMCs):
* Impact: Must implement the swing pricing framework, adjust NAV calculations, enhance disclosures, and develop/update internal policies.
* Action Required: Establish swing pricing policies and procedures, incorporate necessary clauses in SIDs, monitor fund flows and market conditions, and ensure compliance with AMFI guidelines.
Trustee Companies / Boards of Trustees of Mutual Funds:
* Impact: Oversight of AMC's implementation and compliance with the swing pricing framework.
* Action Required: Approve AMC's swing pricing policies and procedures, and monitor their effectiveness.
Association of Mutual Funds in India (AMFI):
* Impact: Responsible for defining parameters, guidelines, and recommending market dislocation to SEBI.
* Action Required: Prescribe broad parameters for swing pricing thresholds and develop guidelines/parameters/model for recommending market dislocation to SEBI within three months.
Investors:
* Impact: NAV of investments may be adjusted based on swing pricing during both normal and market dislocation periods.
* Action Required: Understand the swing pricing framework, its potential impact on NAV, and monitor scheme disclosures.
Key Entities Referenced
Securities and Exchange Board of India: The regulatory body issuing the circular regarding swing pricing for mutual funds.
Association of Mutual Funds in India: Industry association responsible for prescribing parameters and guidelines related to swing pricing.
Mutual Fund Advisory Committee: Committee whose deliberations contributed to the decision to introduce swing pricing.
SEBI Mutual Fund Regulations, 1996: The regulatory framework under which mutual funds operate in India, frequently referenced in the circular.
Swing pricing framework: The main subject of the circular, a mechanism to adjust the NAV of mutual fund schemes based on fund flows.
Scheme Information Document: Document that AMCs have to update with swing pricing clauses
Bithin Mahanta: General Manager at Securities and Exchange Board of India, and the author of the circular.
Securities and Exchange Board of India Act 1992: Act under which the circular is issued
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Securities and Exchange Board of India
CIRCULAR
SEBI/HO/IMD/IMD-II DOF3/P/CIR/2021/631 September 29, 2021
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: Swing pricing framework for mutual fund schemes
SEBI floated a consultation paper on introduction of swing pricing framework for
mutual fund schemes. Pursuant to the feedback received on the said
consultation paper and subsequent deliberations in the Mutual Fund Advisory
Committee (MFAC), it has been decided to introduce swing pricing framework
for open ended debt mutual fund schemes (except overnight funds, Gilt funds
and Gilt with 10-year maturity funds).
Under this framework, to begin with, the swing pricing framework will be made
applicable only for scenarios related to net outflows from the schemes. The
framework shall be a hybrid framework with:
a. a partial swing during normal times and
b. a mandatory full swing during market dislocation times for high risk open
ended debt schemes.
I. Swing pricing for normal times
a. For normal times, the swing pricing framework is stipulated as under:
i. AMFI shall prescribe broad parameters for determination of
thresholds for triggering swing pricing which shall be followed by the
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Securities and Exchange Board of India
AMCs. AMFI shall also prescribe an indicative range of swing
threshold to the industry for normal times.
ii. Additionally, AMC may be allowed to have other parameters, if it
desires so, considering the nature and characteristics of the mutual
fund scheme.
iii. For normal times, AMCs shall decide on the applicability of swing
pricing and the quantum of swing factor depending on scheme
specific issues.
iv. All of the above shall be disclosed by the AMC in its Scheme
Information Document (SID).
b. AMCs may, if they desire so, implement the swing pricing framework for
normal period, after incorporating clauses pertaining to the same in their
SIDs and the same shall be considered as a Fundamental Attribute Change
of the scheme in terms of regulation 18(15A) of SEBI (Mutual Fund)
Regulations, 1996.
II. Swing pricing for market dislocation
a. For the purpose of determining market dislocation, AMFI shall develop a set
of guidelines/parameters/model for recommending the same to SEBI. 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.
b. Subsequent to the announcement of market dislocation, the swing pricing
framework shall be mandated only for open ended debt schemes (except
overnight funds, Gilt funds and Gilt with 10-year maturity funds) in terms of
para B of the Annexure to the SEBI circular
SEBI/HO/IMD/DF3/CIR/P/2017/114 dated October 6, 2017, which:
i. have High or Very High risk on the risk-o-meter in terms of SEBI
circular SEBI/HO/IMD/DF3/CIR/P/2020/197 dated October 5,
2020 (as of the most recent period at the time of declaration of
market dislocation);
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Securities and Exchange Board of India
and
ii. classify themselves in the cells A-III, B-II, B-III, C-I, C-II and C-III
of Potential Risk Class (PRC) Matrix in terms of SEBI circular
SEBI/HO/IMD/IMD-II DOF3/P/CIR/2021/573 dated June 7, 2021
as tabulated below.
c. A minimum swing factor as under shall be made applicable to the schemes
mentioned at para II(b) above and the NAV will be adjusted for swing factor.
Table 1
Minimum swing factor for open ended debt schemes*
Max Credit Risk of
scheme→
Class A(CRV** Class B (CRV Class C
>=12) >=10) (CRV <10)
Max Interest Rate Risk
of the scheme ↓
Class I: (MD<=1 year) Optional Optional 1.5%
Class II: (MD<=3
years) Optional 1.25% 1.75%
Class III: Any Macaulay
duration 1% 1.5% 2%
*: Scheme can levy higher swing factor, based on pre-defined parameters, redemption
pressure and current portfolio of the scheme subject to a cap on swing factor to be
decided by AMC.
**CRV: Credit Risk Value
d. All the open ended debt schemes (except overnight funds, Gilt funds and
Gilt with 10-year maturity funds) mentioned at para II(b) above shall
incorporate the provision pertaining to mandatory swing factor as stipulated
at Table 1 above in their offer documents within a period of three months
from the date of this circular and the same will not be considered as a
Fundamental Attribute Change of the scheme in terms of regulation
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Securities and Exchange Board of India
18(15A) of SEBI (Mutual Fund) Regulations, 1996. However, optional swing
factor or higher than as specified in Table 1 above shall be considered as
Fundamental Attribute Change of the scheme in terms of regulation
18(15A) of SEBI (Mutual Fund) Regulations, 1996.
III. Other aspects pertaining to swing pricing
a. 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.
b. All AMCs shall make clear disclosures along with illustrations in the SIDs
including information on how the swing pricing framework works, under
which circumstances it is triggered and the effect on the NAV for incoming
and outgoing investors.
c. Swing pricing shall be made applicable to all unitholders at PAN level with
an exemption for redemptions upto Rs. 2 lacs for each mutual fund scheme
for both normal times and market dislocation.
d. AMCs shall have laid down policies and procedures pertaining to swing
pricing which are approved by board of AMC and Trustee.
e. The scheme performance shall be computed based on unswung NAV.
f. Disclosures pertaining to NAV adjusted for swing factor along with the
performance impact shall be made by the AMCs in following format in their
SIDs and in scheme wise Annual Reports and Abridged summary and the
same may be disclosed on their website prominently only if swing pricing
framework has been made applicable for the said mutual fund scheme:
Sr Period of Scheme Unswung Swing Whether
No. applicability of name NAV factor optional or
swing pricing applied mandatory
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Securities and Exchange Board of India
IV. Applicability
a. This circular shall be applicable with effect from March 1, 2022.
b. AMFI shall prescribe broad parameters specified at para I(a)(i) above within
a period of three months from the date of this circular.
c. 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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