In order to augment the liquidity risk management framework for all open ended debt schemes, the Securities and Exchange Board of India (“SEBI”) vide a circular issued on November 6, 2020, has devised norms for the holding of liquid assets in open ended debt schemes and stress testing of open-ended debt schemes. The provisions are as follows:

1. All open ended debt schemes (except Overnight Fund, Liquid Fund, Gilt Fund and Gilt Fund with 10 (ten) year constant duration) shall hold at least 10% (ten percent) of their net assets in liquid assets. SEBI has clarified that ‘liquid assets’ shall include cash, government securities, T-bills and repo on government securities.
2. These liquid assets shall not be included in determining the scheme characteristics as specified in previous SEBI circulars dated October 6, 2017, and December 4, 2017.
3. In case the exposure in such liquid assets/securities fall below the 10% (ten percent) threshold, the Asset Management Companies (“AMCs”) shall ensure compliance before making any further investments.
4. These norms shall be effective from February 01, 2021.

SEBI had previously mandated stress testing of Liquid Funds and Money Market Fund Schemes, vide a circular dated April 30, 2015. Based on the recommendations of the Mutual Fund Advisory Committee (“MFAC”), it was decided to mandate all open ended debt schemes (except for overnight scheme) to conduct stress testing. Further, AMCs shall stipulate the guidelines to carry out stress testing for the debt schemes mentioned in this circular. These provisions shall be effective from December 01, 2020.

SEBI has also set up a committee to deliberate on the provisions contained in this circular and provide recommendationsss on the basis of which the norms regarding holding of liquid assets and methodology of stress testing may undergo change.

Please find a copy of the circular here.

This update has been contributed by Suchita Ambadipudi (Partner) and Pranav Valiathan Pillai (Associate).