The market regulator Securities and Exchange Board of India (SEBI) on Tuesday said that for arriving at the price level of securities, the waterfall approach would be used for the evaluation of debt securities and money market.
Under the waterfall approach, all traded securities are valued based on the traded yields and are subject to the identification of outlier trades by the agencies evaluating. Volume Weighted Average Yield (VWAY) for trades in the last hour of trading is to be used as the base to assess the government securities, including treasury bills.
Furthermore, SEBI said that the Association of Mutual Funds in India (AMFI) would issue valuation guidelines. This was said after considering the significance of polling in the process of evaluation under the waterfall approach. Also, mutual funds will be given some responsibilities under this approach.
The valuation agencies are given the liberty to choose the mutual funds to participate in the polling process. This was decided by keeping in mind the factors such as portfolio holding of mutual funds and the diversification of poll submitters. The identified mutual funds are mandated to appear for the polling process.
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If any mutual fund fails to participate in the polling process on the polling day, then a detailed reason for the same must be submitted, which would be made available during inspections conducted by the market watchdog. The minimum number of polls to be accounted for the evaluation along with the format of polling will be specified.
Individually, debt securities and money markets will be categorised as ‘below investment grade’ if the long-term ratings given by a rating agency is less than BBB- or if the short-term rating is less than A3.
Debt securities or money markets will be classified as ‘default’ if the principal or interest is not received on the day, the amount has been due, or when such securities are lowered to ‘default’ grade by a rating agency.
With respect to the aforementioned guidelines, the mutual funds must inform the credit rating and valuation agencies of any instances of non-receipt of principal or interest amount, be it full or partial, with regard to any security.
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