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TMI BlogValuation of money market and debt securitiesX X X X Extracts X X X X X X X X Extracts X X X X ..... phs 1 and 2 of SEBI Circular No. MFD/CIR No.14/442/2002 dated February 20, 2002 1.1.1.1 In line with the current industry practice, the present definition of traded and non-traded money market and debt securities needs to be updated. Accordingly, traded and non-traded money market and debt securities shall be defined as follows: a. A money market or debt security shall be considered as traded when, on the date of valuation, there are trades (in marketable lots) in that security on any recognized Stock Exchange or there are trades reported (in marketable lots) on the trade reporting platform of recognized stock exchanges or The Clearing Corporation of India Ltd. (CCIL). In this regard, the marketable lots shall be defined by AMFI, in consultation with SEBI. b. A money market or debt security shall be considered as non-traded when, on the date of valuation, there are no trades (in marketable lots) in such security on any recognized Stock Exchange or no trades (in marketable lots) have been reported on any of the aforementioned trade reporting platforms. 1.1.1.2 As the valuation methodology for thinly tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 012 dated February 28, 2012 and Paragraph 1.0 of SEBI Circular No. SEBI/HO/IMD/DF4/CIR/P/2019/41 dated March 22, 2019 a. In partial modification to the aforesaid circulars, the following has been decided: i. All money market and debt securities including floating rate securities, with residual maturity of over 30 days shall be valued at average of security level prices obtained from valuation agencies. ii. In case security level prices given by valuation agencies are not available for a new security (which is currently not held by any Mutual Fund), then such security may be valued at purchase yield on the date of allotment / purchase. 1.1.2.3 Valuation of Government Securities: Reference: Paragraph 6 of SEBI Circular No. MFD/CIR No.14/442/2002 dated February 20, 2002 a. It is clarified that irrespective of the residual maturity, Government Securities (including T-bills) shall be valued on the basis of security level prices obtained from valuation agencies. 1.1.2.4 Valuation of other money market / debt securities, short-term deposits with banks (pending deplo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n for not exercising the put option shall be provided to the Board of AMC and Trustees. 1.1.4 Deletion of various provisions: 1.1.4.1 Considering that valuation has evolved from a matrix based approach to security level pricing, the following provisions in existing circulars stand deleted: a. The phrase The approach in valuation of non traded . account for illiquidity risk under point no. (ii) (b) contained in Guidelines for valuation of securities for Mutual Funds in SEBI Circular No. MFD/CIR/ 8 / 92 / 2000 dated September 18, 2000 b. Paragraphs 3, 4 and 5 of SEBI Circular No. MFD/CIR No.14/442/2002 dated February 20, 2002 c. Paragraph 2 (V) of SEBI Circular No. SEBI/IMD/CIR No.16/193388/2010 dated February 02, 2010 2.0 Waterfall approach for valuation of money market and debt securities: It is decided that for arriving at security level pricing, a waterfall approach shall be followed for the valuation of money market and debt securities. 2.1 AMFI shall ensure that valuation agencies have a documented waterfall approach for valuation of mo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ections. 2.2.5.2 The minimum number of polls to be considered for valuation along-with the operational modalities of polling, shall be specified. 2.2.5.3 AMCs shall have a written policy, approved by the Board of AMC and Trustees, on governance of the polling process. The aforesaid policy shall include measures for mitigation of potential conflicts of interest in the polling process and shall identify senior officials responsible for polling. 2.2.5.4 AMCs shall ensure that participation in the polling process is not mis-used to inappropriately influence the valuation of securities. The officials of the AMC who are responsible for polling in terms of paragraph 2.2.5.3 above, shall also be personally liable for any mis-use of the polling process. 2.2.5.5 AMCs shall maintain an audit trail for all polls submitted to valuation agencies. 2.3 The aforesaid waterfall approach shall form part of the valuation policy of individual AMCs which is uploaded on their respective websites. AMFI shall ensure that the said waterfall approach is also available on the website of the valuation agencies. 3.0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as below investment grade if the long term rating of the security issued by a SEBI registered Credit Rating Agency (CRA) is below BBB- or if the short term rating of the security is below A3. 5.1.1.2 A money market or debt security shall be classified as Default if the interest and / or principal amount has not been received, on the day such amount was due or when such security has been downgraded to Default grade by a CRA. In this respect, Mutual Funds shall promptly inform to the valuation agencies and the CRAs, any instance of non-receipt of payment of interest and / or principal amount (part or full) in any security. 5.1.2 Treatment of accrued interest, future interest accrual and future recovery: 5.1.2.1 The treatment of accrued interest and future accrual of interest, in case of money market and debt securities classified as below investment grade or default, is detailed below: a. The indicative haircut that has been applied to the principal should be applied to any accrued interest. b. In case of securities classified as below investment grade but not default, interest accrua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... illiquid. In due course of time i.e. after the maturity or winding up of the schemes, such investments may be realised by the Mutual Funds. It is advised to distribute such amount, if it is substantial, to the concerned investors. In case the amount is not substantial, it may be used for the purpose of investor education. The decision as to the determination of substantial amount shall be taken by the Trustees of Mutual Funds after considering the relevant factors including number of investors, amount recovered, cost of transferring funds to investors; among others. 6.1.4 In the format of the abridged scheme-wise annual report format prescribed vide SEBI Circular No. SEBI/IMD/CIR No.8/132968/2008 dated July 24, 2008 , under notes to accounts, the term NPA shall be replaced with securities classified as below investment grade or default . 6.1.5 With respect to the notes below the portfolio format prescribed vide SEBI Circular No. MFD/CIR/9/120/2000 dated November 24, 2000 , the modifications shall be as under: a. In point 2, the term NPA shall be replaced with below investment grade or default . ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall be reported to the valuation agencies immediately. 9.1.2 Any extension in the maturity of a money market or debt security shall result in the security being treated as Default , for the purpose of valuation. 9.1.3 If the maturity date of a money market or debt security is shortened and then subsequently extended, the security shall be treated as Default for the purpose of valuation. 9.1.4 Any put option inserted subsequent to the issuance of the security shall not be considered for the purpose of valuation and original terms of the issue will be considered for valuation. 10.0 Valuation and disclosure of upfront fees: 10.1 Guidelines for valuation of any upfront fee (or any other consideration, by whatever name called) received in a Mutual Fund scheme, shall be issued by AMFI, in consultation with SEBI. 11.0 Guidelines for investments in partly paid debentures 11.1 Guidelines for investment by Mutual Funds in partly paid debentures shall be issued by AMFI, in consultation with SEBI. 12.0 Guidelines to be issued by AMFI: 12.1 T ..... 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