Sebi mulls buffer to shield investors in liquid funds

Sebi mulls buffer to shield investors in liquid funds

Mumbai, Jun 3: To ring-fence small investors from incurring sudden and huge losses during volatile bond market situations, markets regulator Sebi is contemplating a ‘liquidity buffer’ for all liquid funds. Such schemes will have to maintain the buffer so that they have something to fall back on in case of a sudden spike in redemptions. Sources said the buffer’s structure would be similar to statutory liquidity ratio (SLR) for banks, and liquidity coverage ratio (LCR) for non-banking finance companies (NBFCs).
A working committee set up by the regulator, which included market participants, is proposing this mechanism to Sebi’s mutual fund advisory committee. The group wants the buffer so that investors, especially retail and small ones, are largely insulated from losses in bonds held by liquid funds in case of negative credit events.
Top Sebi officials are positive about such a proposal, a market source said. Currently, across 40 funds houses, an annual average of Rs 4.5 lakh crore is invested in liquid funds.
“If the recommendation is accepted by Sebi, all liquid funds will be required to compulsorily invest some percentage of their AUM (assets under management) in zero-risk debt instruments like government bonds and treasury bills. In case of redemption pressure, these sovereign instruments could be sold quickly, which will protect the fund from a distress sale of other holdings that are less liquid than those held in the liquidity buffer,” a source said.
“The portion of the AUM that should be held in these instruments to create the liquidity buffer is yet to be finalised. But it’s expected to be around banks’ SLR, which is currently set at 19%,” the source said. A Sebi spokesperson declined to comment if the regulator was considering any such proposal.
Banks in India are mandated to hold some amount of cash, government securities, gold and some other RBI-approved instruments to meet the central bank’s liquidity buffer requirement, called SLR. Recently, with NBFCs facing a severe liquidity crunch, the RBI changed the liquidity buffer rules for these companies in favour of having an LCR.